Dave Carlson - November 14, 2008
Marketing barriers exist in many industries. Two of these barriers are entry and exit barriers. These barriers make it difficult or impossible for some companies to enter or exit an industry (Ward, 2004). Entry barriers are situations that can keep competitors out of an industry, such as licensing requirements and high start-up costs. Exit barriers may prevent companies in an industry from leaving, such as contractual obligations or clean-up costs. A company must carefully consider these barriers when evaluating entering or trying to force a competitor out of a marketing space.
A consideration a firm must accept if trying to force a competitor out of a market are the exit barriers confronting that rival company. Even if a firm is successful at gaining enough market share to force a competitor to operate at a financial loss, the stronger firm may not be able to force the weaker competitor from the market. Even though “it is economically irrational for any company…to stay in an industry if it is unable to achieve its required rate of return” (Ward, 2004, p. 105), there are many reasons why companies do not automatically leave an industry when they are unable to achieve the rate of return expected by owners and shareholders.
To successfully push a competitor out of a market space, a firm must overcome not only the competitor’s business operations, but the significant exit barriers stopping that competitor from exiting the market segment. Ward (2004) suggested that high fixed costs, high costs to close down operations, long-term supply contracts, integrated processes using shared assets, and dedicated assets with no alternative use all may be barriers in some industries. Sometimes a firm can gain new market share only by assisting a competitor overcome market exit barriers.
Ward (2004) highlighted an industry with “ultimate exit barriers” (p. 107). Mining companies may be forced to remain operational even after the business is not economically viable as a for-profit enterprise. Mining companies have high overhead, “dedicated fixed assets with long economic lives and virtually no alternative uses,” (Ward, 2004, p. 108) and face expensive commitments to shut down the mine (mine operators can not just walk away from a large open mine). A stronger mining company that would desire to push a weaker competitor from the mining industry could possibly be successful if they offer to purchase the weaker competitor’s mining rights and equipment.
A company that would face significant exit barriers is General Motors (GM). GM has a staggering financial investment in long-term assets, employs a significant number of people in most communities where it has a presence, and has future commitments to honor vehicle warranties. A viable exit strategy for GM might be for GM to merge with another auto manufacturing company.
Most industries have either entry or exit barriers to some degree. A company that wishes to expand its market share by driving weaker rivals from the market space must consider exit barriers that face that rival company. Spending money to try to force a rival into immovable exit barriers could backfire and cause the firm’s own business to fail. A company must remain aware of all exit barriers in its industry.
Ward, K. (2004). Marketing finance: Turning marketing strategies into shareholder value. Burlington, MA: Butterworth-Heinemann.