Entry and Exit Barriers

Entry barrier are any type of factor that prevents entrants from competing in an industry. Exit barriers are any type of factor that keep companies competing in a business, even though they might be earning low or even negative profits. Understanding entry and exit barriers can help in understanding industry attractiveness (profitability and pricing structure) as well as in developing actions to raise or lower the barriers, relative to the company’s interests.

Entry Barriers

1. Structural barriers. Structural barriers exist as a result of differences in the structure between the companies under consideration—the incumbent and the new entrant.
2. Behavioral barriers. Behavioral barriers exist as a result of expected changes in competitive behavior of the incumbents that run counter to the interests of the entrant.

Exit Barriers

1. Specialized assets. Assets highly specialized to the particular business or location have low liquidation values or high costs of transfer or convert.
2. Fixed cost of exit. These include labor agreements, resettlement costs, maintaining capabilities for spare parts, etc.
3. Strategic interrelationships. Interrelationships between the exiting business unit and other business units in the company in terms of image, marketing ability, access to financial markets, shared facilities, etc.
4. Emotional barriers. Management’s unwillingness to make economically justified exit decisions caused by identification with the particular business, loyalty to employees, fear for one’s own career, pride or other reasons.
5. Government and social restrictions. These restrictions involve government denial or discouragement of exit out of concern for job loss and regional economic effects.

Methodology

1. Identification of barriers. Determine the factors that make an industry accessible or inaccessible to new entrants. Determine the factors that would restrict a player’s departure from an industry.
2. Analysis of barrier sizes. Quantify the resources, relationships or scale required to successfully overcome the entry barriers. Determine both direct and residual costs associated with exit.
3. Determination of barrier significance. Compare the levels of resources, skills, technology, etc. against those required to overcome the entry barriers. Determine steps required for incumbents to raise entry barriers. Compare the cost of exit against the benefit. Determine steps required to lower exit barriers.

Strengths

• Easily understood as an explanation of above normal returns in an industry
• Combines several different concepts into one technique for understanding the entire industry
• Strong technique if the barriers can be quantified

Weaknesses

• Not easily translated into impact on price without significant analysis, as many barriers are not easily quantifiable