Exit Barriers
When businesses want to pursue an opportunity, they often find that they are facing high exit barriers. Exit barriers are any constraints that make it difficult to leave a market and prevent companies from quickly terminating agreements and exiting investments. Exit barriers tend to be particularly high in markets where the investment costs are large and the costs to exit are also high. Knowing and understanding the exit barriers that exist in a market can help companies make informed decisions about whether to pursue a particular venture or not.
Exit barriers occur in any market, but they tend to be more prevalent in regulated industries and highly regulated markets. In regulated markets, companies are usually required to meet complicated legal and regulatory requirements before they can exit the market. This can be very time consuming and expensive. Examples of regulated markets include the energy industry, banking, and government service markets.
Another type of exit barrier is the transfer costs associated with moving from one market to another. Transfer costs can include such things as shipping costs, legal fees to terminate existing agreements, or the costs of entering a new market. These costs can significantly delay the exit or reduce the profits that the company can make from exiting the market.
In addition to transfer costs, a company may also suffer from reputation costs when it exits a market. Reputation costs can arise when a company leaves a market suddenly or without warning. This can result in negative publicity which can make it more difficult for the business to enter another market.
High sunk costs are also an example of an exit barrier. These costs refer to the costs that a company has already incurred in entering a market, such as the cost of constructing a new building or purchasing advertising. When a firm decides to leave a market, those sunk costs need to be offset or must be written off. This can have significant financial implications and make it difficult for the company to exit the market.
Finally, long term contractual arrangements can make it difficult for firms to exit a market. When a company has committed to long term contracts, such as leases or service agreements, they are often difficult to terminate. This can make it difficult and costly for the firm to exit a market.
Exit barriers can prevent companies from seizing business opportunities and can make it difficult to exit markets quickly. Companies should consider the costs of entering a market and the costs of exiting that market. Understanding exit barriers can help companies make more informed decisions when assessing the risks and benefits of pursuing a particular business opportunity.
