Exit strategies are techniques used by companies to abandon products, divisions, or even entire industries. Exit strategies are implemented when a company decides that it is no longer beneficial to remain active in a given market or industry. For example, a company that manufactures men's suits may determine that it wants to jettison its leisure suit division because of declining sales and a vanishing market. Or, a U.S. electronics producer might decide to exit the entire industry because of pressure from less expensive imports. Exit strategies may also be employed by business owners, who must decide at what point and under what circumstances they will cede control of their businesses to others.
Exit strategies have traditionally received little attention in the management field. Instead, most research and management practice has been focused on keeping products and businesses alive, despite exit pressures. The decision to exit has often been viewed as succumbing to failure or "giving up." Nevertheless, attitudes toward exiting began to change in the 1960s and 1970s for several reasons. Importantly, markets became much more competitive and complex than they had been earlier in the century because of increased production capacity and an increasingly global economy. As a result, more companies began to view exiting as a viable and profitable alternative within their overall corporate strategy. Today, experts advise developing one or more exit strategies in the early stages of a business venture, be it a new product, a new company, or a joint venture, so that management can anticipate and recognize warning signs that it may be time to get out.
Evidencing the increased emphasis on exit strategy was research conducted during the mid-1960s through the mid-1970s that analyzed the exit process and created a framework that business decision makers could use to determine when and how to exit. For example, Conrad Berenson posited an exit model in 1963 that identified five categories of criteria used to evaluate a product abandonment decision:
In addition to Berenson's criteria for determining the value of an exit decision was a model developed in 1964 by R.S. Alexander. Among other things, Alexander's model identified six telltale signs that suggest that a firm may have to consider exiting a market: (1) falling sales; (2) deteriorating prices; (3) declining profitability; (4) an increase in the popularity of substitute products, such as margarine instead of butter; (5) obsolescence of a product or idea; and (6) increasing consumption of management resources to keep the product viable. Although Alexander's model was based on relatively simple concepts, it provided a systematic approach for periodically searching for and selecting products, services, or divisions to abandon.
Philip Kotler complemented Berenson's and Alexander's work in 1965. His model incorporated Alexander's six points, but was more detailed. He added such exit impetuses as alternative opportunities, product contribution in relation to other products, and the impact of the product on the company's image or on sales of other products. For example, Kotler pointed out that while a product may still be profitable viewed independently, it may be cannibalizing sales of other products in a company's line or consuming resources that could be used to a greater advantage to promote other products or divisions. Kotler also devised a system for using more and better accounting data to help managers' develop exit strategies.
Other models relating to exit decisions and strategies were developed in the 1970s by researchers such as Robert W. Eckles, Parker Worthington, Edward M. Mazze, and William G. Browne. The primary benefit of most of this research was that it helped to establish more financially quantifiable tools and techniques for determining when and how to exit a market or industry. Those techniques increasingly found application during the late 1970s and early 1980s as domestic market growth in the United States slowed and foreign competition, particularly from Japan, proliferated.
A number of different exit strategy models and theories have been applied by companies seeking to abandon products or industries. In general, they all recognize basic elements of the exit decision process. Of import is the widely accepted product life-cycle theory. That theory holds that most new products (and companies) go through a cycle of (1) introduction and acceptance; (2) growth; (3) maturity; and (4) decline. In some cases a company may choose to exit during an early stage of the cycle because, for example, the product is worth more to another firm, or because it can use its limited resources more effectively elsewhere. But it is usually during the decline phase that an entity must face the fundamental exit decision; should it exit before the product (or company) declines too far, or should it try to revitalize?
In determining whether or not to exit, the company usually takes into account many of the considerations identified in the exit models highlighted above. The decision of whether or not to exit basically boils down to a simple question of profitability: will the company be better off in the long run, from a profit standpoint, if it exits the market or industry. For example, suppose that a food company introduces a new garlic potato chip product. After one year the product fails to meet sales expectations. Even if the new item is losing money the company may decide to continue to sell it for reasons not related to the profitability of that particular product. For instance, it may determine that the cost of alienating customers who like the chip could damage the reputation of other products sold under the same brand name.
Now suppose that the new garlic chip was very successful and exceeded expectations. The company may decide to abandon the product for any number of reasons. For instance, it may determine that the resources required to promote and distribute the product could be used more profitably to promote a new item that is even more successful. Or, it may be able to sell the product to a competitor with a more established distribution network that is willing to pay more for the product than the originator expects to make from it. Likewise, as suggested above, the chip may be cannibalizing market share from the potato chip products that have higher profit margins, thus damaging overall profitability.
Once an organization determines that it should exit a market or industry, it usually faces three basic exit options: sale, spin-off, and employee ownership. The advantage of the first option, an outright sale, is that it allows a company to quickly jettison a product or division and it provides an injection of capital that can be invested elsewhere at a higher return. The typical strategy for selling a product, division, or company is simple: find companies that are structured in such a way that they could make better use of the abandoned subject and solicit bids. In some cases a suitable buyer for an entire operation may not exist. Therefore, a company may choose to liquidate the operation in pieces, simply walk away and absorb the loss, or spin it off.
A company spins off a division by creating a separate company or subsidiary in which it sells shares to a potential buyer. A spin-off amounts to a sale of the operation over a period of time. It is a useful technique when the purchasing company has inadequate resources or is hesitant to buy the entire operation outright. For example, General Electric exited the computer business by spinning its computer division off to Honeywell. Honeywell Information Systems was formed as a joint operation—GE retained 18 percent of the stock, which it sold over a period of three years. In the 1990s this was a common practice for large corporations with subsidiaries that didn't fit well into their main product or service mix, especially when managing the subsidiary at maximum profitability ran counter to the parent company's goals. This might occur, for example, when a subsidiary was made a captive supplier to an affiliated company, rather than competing freely for other business. In some instances the original owner may retain its equity or even eventually buy back the product or operation, although the latter case is quite rare.
A third exit option is selling an operation to employees. The advantage of selling a business or division to employees is that it generates capital for the parent company and places the ultimate responsibility for achieving profitability on the employees. For example, B.F. Goodrich Co. was failing to meet its profit goals in its tire and appliance stores. It felt that it could get a better return on its resources by investing them in its profitable chemical businesses. So, Goodrich sold, or franchised, many of the stores to the managers and employees who ran them, and it invested the capital in its chemical operations to enhance profitability. An interesting result of the exit process was that the profitability of the stores increased because managers suddenly had a personal stake in the success of the business.
A good deal of attention was paid in the 1990s to mechanisms that allow founders and owners of small start-up companies to exit while maximizing their profits. This was a particular concern for the numerous high-tech firms being launched. Entrepreneurial managers are often successful at presiding over their companies during early development and growth, but many aren't equipped to manage the firm as a large enterprise. Among the possible exit strategies were taking the company public and selling out to larger firms in the same or related industries. Many innovative small businesses are increasingly opting for the latter strategy because they find it hard to compete with their large competitors and because large companies have deep pockets to reward the sellers handsomely at relatively low risk to the sellers.
[ Dave Mote ]
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