Market exit and the potential for resource redeployment: Evidence from the global retail sector

Authors: Timothy B. Folta and Timo Sohl

Strategic Management Journal, Vol. 42, No 12, 2273-2293, December, 2021

This study develops a framework providing guidance in examining when exit decisions might be driven by resource redeployment versus divestment. Exploratory analyses of the global retail sector show patterns largely consistent with conventional explanations of exit through divestment. We also provide the first large-scale empirical evidence consistent with redeployment motives of exit. In particular, by focusing on the potential for redeployment of fixed assets (i.e., physical stores) across portfolio businesses, results show that market exit is more likely when there are combinations of lower resource adjustment costs, higher external transaction costs, and positive inducements. Under the same conditions, we also document a strong correlation between the number of fixed assets of an exiting business and the growth in fixed assets of its surviving siblings. Managerial Summary: It is increasingly recognized that multibusiness firms have flexibility advantages over single-business rivals, because they have the option to redeploy resources across businesses. This flexibility is purported to inspire quicker exit from markets, even if empirical evidence is lacking. We test this conjecture on 3,082 retail chains across 106 countries and find evidence consistent with this view—each additional related sibling in a country raises the hazard of country exit by 11% relative to retail chains without siblings. Since it is difficult to distinguish whether exit occurs through resource redeployment or divestment, we identify a set of unique determinants for each exit mode. Our theoretical framework and empirical findings help managers reconcile when to exit using internal resource markets versus external markets.