The Rule of Three: Why Only Three Major Competitors Will Survive in Any Market

After thoroughly analyzing local and global industries, Jagdish Sheth and Rajendra Sisodia observe that in most mature markets which can evolve without excessive government interference the remaining players can be subdivided in three categories: 1) Three full-line generalists which usually control 70 to 90 percent of the market; 2) Specialists, product and/or market specialists, which control between 1 to 5 percent of the market; 3) Companies caught in the middle (= the ditch), which share 5 to 10 percent of the market among themselves. Sheth and Sisodia clearly show how a typical industry subject to non-excessive government regulations evolves over time, first locally, then nationally, and finally globally. Growth and efficiency each play their role in shaping such an industry. Generalists and specialists usually do not compete with each other because they target customers with different wants and needs. Sheth and Sisodia demonstrate with much conviction that the companies in the ditch are either undersized full-line companies that were pushed by the wayside following intense competition or overgrown niche players that have tried to grow "too much, too soon." To their credit, Sheth and Sisodia do a great job in identifying the strategies that each of the three full-line generalists can use to further improve their respective competitiveness. Practical examples make these strategies understandable. Likewise, the authors convincingly demonstrate which strategies specialists can use to either become or remain a big fish in a small pond. Finally, Sheth and Sisodia shed light on the disruptive role that technology, regulations, market shifts, and investments can play in shaping an industry. To summarize, The Rule of Three is beneficial not only to corporate leaders, investment banking, consulting, and venture capital, but also to antitrust authorities.

The `Rule of Three' is that in a naturally competitive and mature market, without excessive regulation, the market segregates into three domains. The first domain is defined by three major players, generalists who together control 70-90% of the market. The second domain comprises niche specialists, each a monopoly in a tight product or sub-market category (each specialist typically has a market share of 1-5%, but makes high margins due to its monopoly position). The third domain is termed the ditch. It consists of those companies with 5-10% of the market who lack the scale economies of the first group, or the niche focus of the second. The ditch can lead to bankruptcy or takeover. Consider the example of the shopping mall, anchored by the major department stores, the generalists, but with many niche shops along the mall corridors connecting them, with some of them clearly struggling. The rest of the book elaborates around these themes. Chapter 1 describes how, as a new industry develops, it attracts many entrants ensuring high growth, but low efficiency. After the inevitable shakeout of weaker players, four factors then underpin further market developments: (i) overall standards such as GSM; (ii) an industry-wide cost-structure (e.g. the working through of economies of scale) and shared platform infrastructure such as the Internet; (iii) government intervention to remove barriers to trade; (iv) industry consolidation via mergers and acquisitions Chapter 2 focuses on the oligopolistic generalists - why should there be just three? The authors argue that duopoly is unstable: the two players either attack each other destructively or collude, attracting regulation. With three players, any two can cooperate against the third maintaining a balance of power. So why not four? The authors speculate that consumers value a manageable choice between three suppliers, but that further choice just creates `clutter', confusing the market. However, the dilution of market share with four major players can also lead to instabilities, driving the weakest into the ditch. The authors also warn against the number one player gaining too large a market share: past 40%, regulative scrutiny becomes more intense, the proportion of underperforming customers increases and growth becomes harder. The `Rule of Three' therefore represents a compromise between sufficient competition and sufficient market share, but it can be distorted by factors such as regulated monopoly, major barriers to trade (e.g. in global markets), a high degree of vertical integration impeding consolidation, and a history of monopoly prior to deregulation. In Chapter 3 specialists and generalists are compared, while Chapter 4 examines the ditch - how specialist companies can grow into it by heedless expansion, and how weaker generalists can be pushed into it by more energetic competitors. Chapter 5 looks at Globalisation - as the `Rule of Three' emerges on a global scale, how can national champions

This book increases my ability to weigh my competitors in my industry and give me better tools to position my company against my competitors... Read it you will find it interesting or your company in a big ditch...

This book deserves more than five stars. The Rule of Three is well-documented, easy to read and understand, is filled with practical advice that can be used for many strategic purposes. Regardless of your industry, the size of your business, and your ambitions, you will be well rewarded by the time you spend with this book. It will provide a useful perspective of the sort that you probably have gained from books like The Innovator's Dilemma, The Discipline of Market Leaders, and The New Market Leaders. For a quick overview of the book, I suggest you begin by reading the clear summary of key points on pages 200-202. The idea that most industries will eventually be dominated by three broad-scale suppliers with a few profitable specialists was one I first heard from Bruce Henderson, CEO of The Boston Consulting Group, about 1972. My quick look around at the time showed that this pattern did frequently occur (domestic autos, breakfast cereal, and beer came to mind then). This industry structure is more often present now than it was then due to the massive consolidations through acquisitions and business failures that have happened in the United States and world wide. Since learning about the empirical observation, I have usually seen the point applied to the questions of how a market leader could most effectively put pressure on the third largest company in the industry and vice versa. The Rule of Three goes well beyond that scope. As a result, I was delighted to see that the authors of this fine book have provided extensive empirical documentation of their observations by listing many different industries where this structure occurred, case examples from dozens of old and new industries, and definitions of what can trigger this development. Of particular value to readers will be the detailed descriptions of the strategies that are most likely to succeed and fail, and the most frequent causes of those outcomes. The detailed observations were usually spot on. I only detected a few places where I disagreed with points that were made. For example, EMC was listed in an appendix as being in the computer peripheral industry along with companies that mostly make PC peripherals. I see EMC as mainly competing instead with the likes of IBM, Hewlett-Packard, Fujitsu, Dell and Storage Networks. The authors also argue that the large general competitors usually enjoy a stock-price multiple over the specialist, niche players who have high returns. I would argue that it is usually just the opposite. I thought that the problem of the #4, #5, #6 and so forth general suppliers was well described as falling into "the ditch" where the lowest returns on assets are earned. These companies lack the benefits of being a specialist and the scale of being a leader. Often, they succumb. If they can merge to become or join a top company, then the situation may change.I was pleased to see that the authors described how a company may "change the rules" citing