Exit Barriers and Vertical Integration

When firms are trapped in an industry by exit barriers, destructive competition and diminished profits result. Mobility barriers can prevent firms from changing their strategic postures so as to serve new customers. Questions concerning exit and mobility barriers are brought together with those concerning vertical integration strategies - the in-house production of goods and services that could be purchased from outsiders - to determine whether and when vertical integration represents an exit barrier. The analysis uses a sample of 192 strategic business units (SBU) from 16 industries. Results indicate that a high degree of internal transfers from upstream sister SBUs raises the heights of exit barriers, and that exit barriers will be higher for firms participating in many stages of vertically related processing than for firms that are not. Firms can lower exit barriers by limiting the degree, stages, and percentage of ownership that characterize their vertical relationships.