Posted by: hmchang | October 16, 2007

Business: Exit Barrier

It is interesting to know that, in additional to a traditional entry barrier, there’s something called an “Exit Barrier.” The Lincoln Electronics Company case study might be a good example: they need a lot of specialized and expensive equipments to produce the end products. It is hard to transfer those equipments for other usages and it is also hard to train workers to work on other product lines. Thus, as a company, they will need to retain in the same/similar market to survive — and that creates an exit barrier.

Both entry and exit barrier was illustrated well by Mr. Potter. Different industries have different entry/exit barrier characteristics. As an incumbent, it is good to raise the entry barrier while lowering the exit barrier. Nevertheless, technology changes may drastically change how that industry works — like Internet shopping has increase the use of mailing channel and lowering in-store purchase — the best strategy is still to react fast.

I recalled that such conversation do exist in IC foundry. Intel, IBM and other companies used to integrate their design efforts with the foundry as a “Integrated Design Manufacturer (IDM)” model. Due to higher cost of building a fab and also increasing barrier to close a fab (due to equipment, employee, etc …) , they may eventually seek capacity from a foundry company such as TSMC and UMC. Eventually, every IDM will become foundry-lite. I would argue such industry is of high entry barrier and exit barrier.

In accounting term, equipments will depreciate but I think employees will be the hard part to deal with. Creating working opportunity is definitely something we want, but laying off is generally a hard decision — especially if you are laying off your friend. After all, I think entry/exit barrier is just one of the ways to characterize an industry but may not be the only reason we choose to enter that industry or not. It’s a new world and people will need to adapt, and company also need to adapt to fast changing world. If a company can continue to innovate and encourage employee to learn, I don’t think exit barrier will be a significant problem — at least not for a startup.


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