Academic journal article Journal of Managerial Issues

Barriers to Market Exit

Academic journal article Journal of Managerial Issues

Barriers to Market Exit

Article excerpt

Over the past couple of decades, U.S. firms have faced increasing foreign rivalry. For many, increased competition brought the problem of lower market shares. Surely, foreign competition is not the sole reason for declining market shares. Lower market shares can be caused by technological obsolescence, better advertising by competitors, or poorer product quality, to name a few other reasons. The U.S. Automobile and Steel industries have been facing a decline in their sales for a combination of such reasons. The big three auto makers steadily lost ground to the Japanese in the 1970s and 80s. Decline, according to the Product Life-Cycle theory (Porter, 1980), is an inevitable stage in the life of a product which can force many companies to exit from markets. Products and services such as mainframe computers, home personal computers, and cruise lines that were once very high in sales volume are now in decline (Ambrosio, 1993; The Economist, 1995; McDowell, 1996). However, market exit decisions are difficult to make. There are a variety of factors that deter the divestment of product or business. Costs associated with market exit can force firms to operate at lower returns than desired (Harrigan, 1981) and create market entry barriers to keep other firms out of the market (Porter, 1976). Furthermore, barriers to exit can also act as barriers to entry when making market entry decisions if possible future market exit decisions are costly.

Porter (1976) discusses three major types of barriers to exit, namely, economic, strategic, and managerial. Economic barriers refer to the costs associated with selling a business as a unit that will be run by someone else, or dismantling it and then selling. Strategic barriers are created due to the strategic posture of the firm. For instance, a firm following a single business strategy would cease to exist if liquidated. Personal barriers are also a potent force. Managers may perceive severe damage to their image of competence if their business is being divested. This may translate into losing their jobs, or having to take a reduction in pay.

Which of these factors do decision makers really consider while making the exit decision? What is the relative importance of the factors considered? How do these differ across industries? Some researchers have attempted to answer several of these questions, notably Porter (1976) and Harrigan (1981, 1985a). However, the studies conducted so far have relied on some combination of historical databases and interviews. Databases restrict the scope of the research, simply because they may not include all the factors relevant to the issue to be addressed. Using interviews and questionnaires, on the other hand, has been criticized for potential biases in the data (see Arnold and Feldman, 1981; Hyman, 1954; Stahl, 1986; Stahl and Harrell, 1982). The research to date has not been able to include enough of the relevant factors that deter market exit, especially the personal barriers.

This study attempts to identify the determinants of market exit behavior from the literature and find their relative importance to decision makers, using a decision-making exercise (Slovic et al., 1977; Stahl and Zimmerer, 1984). Furthermore, this study examines the differences in the relative importance of barriers to exit in declining versus mature industries.

Literature Review

Market Exit as a Strategy

Up until the 1980s, market exit was not regarded as a strategy, but a helpless response to a failure to compete. This view, however, has changed over the past decade or two, which saw a trend towards leaner businesses that focused their attention on related industries (Lynch, 1980). Since Rumelt's (1974) classification of firms according to their diversification strategy, several studies have shown that related diversified firms, especially those in the related-constrained (closely related business units owned by a firm) category, are more profitable and less risky. …

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