Barriers to Exit

Barriers to exit were introduced as a strategic concept by Michael Porter in his 1976 California Management Review article 'Please Note Location of Nearest Exit' and developed further in his 1980 book 'Competitive Strategy.' Porter recognized that while much attention was given to what keeps firms out of industries, equally important was understanding what keeps firms trapped in industries they would prefer to leave. He identified several categories of exit barriers, including specialized assets that have little liquidation value, fixed costs of exit such as severance payments and environmental cleanup obligations, strategic interrelationships between business units, emotional barriers tied to management identity, and government or social restrictions on closure.

The strategic significance of barriers to exit extends well beyond the individual firm. When exit barriers are high across an industry, firms that would otherwise leave continue to compete, maintaining or even expanding capacity despite poor returns. This excess capacity drives prices down further, reducing profitability for all participants. The result is a destructive cycle where the industry becomes increasingly unattractive but firms cannot escape. This dynamic is especially pronounced in capital-intensive industries such as steel, airlines, and petrochemicals, where specialized assets and high fixed costs create formidable exit barriers.

The U.S. airline industry provides a compelling illustration. Throughout the 1980s and 1990s, major carriers like Eastern Airlines, Pan Am, and TWA continued operating long after becoming economically unviable. Their fleets, gate leases, and labor contracts represented billions in specialized assets and obligations that made orderly exit nearly impossible. Even after entering bankruptcy, these airlines often continued flying for years, depressing fares for the entire industry. From 1979 through 2009, U.S. airlines lost $59 billion (in 2009 dollars) on domestic operations, according to economist Severin Borenstein, and the difficulty of permanent exit was one reason the losses persisted.

The steel industry offers another classic case. In the 1970s and 1980s, integrated steel producers in the United States and Europe faced mounting losses from foreign competition but could not easily close plants. Environmental remediation costs, union agreements requiring severance payments, and political pressure from communities dependent on steel employment created powerful exit barriers. U.S. Steel, Bethlehem Steel, and their European counterparts operated money-losing blast furnaces for years before finally managing to restructure or close facilities, often with government assistance.

For strategic planners, barriers to exit demand careful consideration both when entering an industry and when managing an existing portfolio. Before entering a capital-intensive business, executives should evaluate not only the cost of entry but the potential cost of exit if the venture fails. In portfolio management, recognizing that emotional and political barriers to exit are as real as economic ones is essential. Many companies hold onto underperforming divisions far too long because of managerial attachment, internal politics, or concern about reputational damage. Disciplined portfolio management requires confronting these barriers honestly and developing exit plans that account for all categories of cost.