The Rule of Three: Surviving and Thriving in Competitive Markets [Hardcover]

Jagdish Sheth (Author), Rajendra Sisodia (Author)

Book Description

Publication Date: January 1, 2002

Years in the making and sweeping in scope, this major work explains how in every industry three major players emerge to dominate the market, with the balance filled by specialist niche players, and how this determines business strategy. In an indispensable guide to predicting trends in mergers, competition and profitability, Jagdish Sheth and Rajendra Sisodia offer crucial insights for businesses large and small. Based on extensive studies of market forces, they show that the vast majority of industries follow a distinct pattern and ultimately fall under the influence of 'the rule of three.' Evidence suggests that three full-line, volume driven competitors eventually emerge to capture between seventy and ninety percent of a given market. Documenting how markets evolve into two complementary sectors, generalists, which cater to a large, mainstream group of customers at both the high and low ends of the market, and any company caught in the middle is likely to be swallowed up or destroyed. Sheth and Sisodia show how most markets resemble a shopping centre with specialty shops anchored by large stores. Drawing wisdom from these markets, THE RULE OF THREE offers counterintuitive insights, which inform suggested strategies for the 'Big 3' players, as well as for mid-sized companies that may want to mount a challenge and for specialists who want to flourish

Editorial Reviews

Amazon.com Review

The Rule of Three, by Jagdish Sheth and Rajendra Sisodia, offers an innovative take on corporate development that could help leaders put their own operations into a new context that improves competitive strategies and boosts market performance. Sheth and Sisodia, consultants and marketing professors, base it on their contention that just three major players ultimately emerge in all markets--such as ExxonMobil, Texaco, and Chevron in petroleum, and Gerber, Beech-Nut, and Heinz in baby foods. These giant "full-line generalists" are eventually surrounded by smaller "specialists" who successfully concentrate on niche products (such as high-end audio gear) or niche markets (like fashions for professional women), along with midsized "ditch-dwellers" who struggle to reach an audience in between (like second-tier airlines that compete with goliaths on price and regionals on service). The authors examine this pattern of market evolution and the "radical disruption" that can occur when technology or regulation changes or a new entry "succeeds in altering the rules" (as Starbucks did by sneaking up on coffee's Big Three). Appendices present helpful examples of the way this has shaken out in various industries. --Howard Rothman

From Publishers Weekly

Business school professors Sheth (Emory University) and Sisodia (Bentley College) argue forcefully that competitive forces, free of government interference or other special circumstances, will inevitably create a situation where three companies and only three will dominate any given market. Whether it's U.S. fast food restaurants (McDonald's, Burger King and Wendy's) or South Korean chipmakers (Goldstar, Hyundai and Samsung), three large firms hold most of the market share. To be successful, everyone else is forced to specialize either by product or market segment. Sure, there are the "Big Two" in U.S. soft drinks, and there really aren't three dominant advertising agencies but these are the exceptions that prove the rule. Markets, the authors explain, are inherently efficient, and efficiency's favorite number is three: two companies would lead to monopoly pricing or mutual destruction, while four guarantees consistent price wars. For managers who follow this logic, the implications are clear. Companies faced with three established competitors may want to battle them indirectly by specializing. Sheth and Sisodia also discuss strategies firms should pursue if they are one of the three major players in a field: e.g., the market leader should be a "fast follower" rather than a consistent innovator, while it's the job of the number three firm to create new products to stay competitive. While the writing veers toward the academic, senior managers of all types are bound to be intrigued by these arguments. Agent, Rafe Sagalyn.

Copyright 2001 Cahners Business Information, Inc.

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Product Details

• Hardcover: 288 pages
• Publisher: Free Press; 1st edition (January 1, 2002)
• Language: English
• ISBN-10: 074320560X
• ISBN-13: 978-0743205603
• Product Dimensions: 9.4 x 6.1 x 1.2 inches
• Shipping Weight: 1 pounds
• Average Customer Review: 4.5 out of 5 stars  See all reviews (6 customer reviews)
• Amazon Best Sellers Rank: #616,890 in Books (See Top 100 in Books)

Customer Reviews

Most Helpful Customer Reviews

28 of 29 people found the following review helpful:

5.0 out of 5 stars Strategic Hypotheses from an Industry Structure Perspective, January 1, 2002

By 

Donald Mitchell "Jesus Loves You!" (Thanks for Providing My Reviews over 110,000 Helpful Votes Globally) - See all my reviews
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This review is from: The Rule of Three: Surviving and Thriving in Competitive Markets (Hardcover)

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 how Starbucks has made progress against the traditional coffee suppliers (Maxwell House, Folger's, and Nestle) by providing more accessible, better quality coffee at a higher price. The main opportunity to strengthen the book would have been to discuss this point with more examples and in more detail.

I also enjoyed the discussion of how specialist companies can be lured into chasing unprofitable market share, and falling by the wayside as a result.

Many authors with an empirical theory like this one would try to avoid talking about situations where one company has almost all the market share (such as occurs in personal computer software), or two companies get almost all the business (as in commercial airframe manufacturers), or even four (as often occurs in Europe and Japan). The authors actually strengthened their main point by examining those exceptions to their rule, and showing the influences that made these results occur.

As someone who is interested in uncontrollable forces that can influence industry structure, I thought that the focus here was good although much simpler than the detailed lists that Professor Michael Porter provides.

Having understood these points, I encourage you to think through how you could use these forces against the current market leaders. As the book suggests, the leaders' efficiencies and size make them vulnerable to nimble competitors offering new business models that serve customers and stakeholders in more ways than by lowering costs. Like the cataclysmic event that killed off the dinosaurs, new business models can doom the existing leaders to being poorly fit for the new environment.

Look for the ultimate competitive advantage!

5 of 5 people found the following review helpful:

5.0 out of 5 stars The best tool to predict a company's future in this economy., August 3, 2003

By 

Harinath Thummalapalli (Austin, TX United States) - See all my reviews
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This review is from: The Rule of Three: Surviving and Thriving in Competitive Markets (Hardcover)

The future looks very uncertain to all of us - no matter what company we are in: big or small, none of us has been spared from this mass anxiety that started in 2001. The old saying 'what goes up must come down' became true after 10 years of the best boom time in America. But will 'things have to eventually turn around' come true? Of course it will, but it would seem that in the process a lot of companies will not survive (as has already been witnessed in the last 2 years). So rather than worrying about when things will turn around, it may be more prudent to focus on figuring out which companies will survive these extremely difficult and trying times.

The book is very deep and I am still in the process of digesting all the material. But I was so moved by the very powerful and sound theory presented in the book that I wanted to share my views immediately and hence this review. So bear with me as the terms I use aren't exactly the ones used in the book. I am using them to help me communicate these ideas faster and more effectively.

This book offers some incredible insight into the fundamental way in which businesses and consumer markets interact. And in the process it provides vital clues that could be used to assess what companies will survive. There are only 8 chapters in this book and a conclusion along with 3 appendices. The first chapter gives some preliminary information on the mechanisms by which consumer markets in free market economies force efficiency increases in the businesses involved. The second chapter addresses the fundamental Rule of Three and why eventually after the dust settles, there can only be three left in an industry - no more and no less.

Chapter 3 broadly categorizes all companies into either Specialists or Generalists and futher defines them into five groups - Full-line Generalists, Portfolio Generalists, Product Specialists, Market Specialists, and Super Nichers. This chapter is especially important as it describes in great detail several of the primary chateristics of both Generalists and Specialists. This is important because it later ties into the successful strategies that must be adopted in order to survive difficult economic times. Chapter 4 shows how companies can get in serious trouble and eventually not survive the difficult times. The authors call this 'The Ditch'.

I wasn't too interested in Chapter 5 which addresses Globalization and the Rule of Three. I still forced myself to read this chapter as I didn't want to miss anything that is used in later chapters. But Chapter 6 and 7 are the ones that everyone has to read! This is where all the secrets lie - the successful strategies one must follow in order to survive this all powerful Rule of Three. Chapter 6 is relevant to the Generalist companies and Chapter 7 is for Specialist companies.

Finally, Chapter 8 introduces the subject of market disruptions - simply speaking how some discontinuous changes in the marketplace (new technologies that can do the same things faster, better, and cheaper - like the Internet) can put someone at immediate risk of failing due to the enormous investment they may already have in terms of time and money in the old technologies.

The authors' conclusion follows these 8 chapters. This is again extremely important as it contains 22 general rules (just a few lines each) that you can't ignore if you are trying to predict where your company future lies. The appendices contain some very good research. For example - the three survivors in all the major industries across the world. As can be expected of a book written by two Ph.D's, there is a very complete reference section at the end of the book where you can check and verify the source data.

There are so many aspects to making a business successful and there are so many books out there on the subject that it is easy to overlook such a critical book as this one. I was fortunate enough to run into this book as a result of my frenzied After Christmas bargain shopping at Amazon where I RANDOMLY selected 30-40 books that were all priced at just a few dollars thinking I can't go wrong even if I find one good book out of three (since the bargain price was a third of the original price). After that it sat on my bookshelf till I recently decided to skim through a few pages of the book. That's when it struck me that this is a landmark book and absolutely essential in predicting the future. I immediately put this book at the top of my reading list and have been devouring it ever since. I consider myself very lucky to find this treasure map of a book. Well, it would be a treasure map only if you are trying to figure out which company is going to survive. Otherwise, you can conveniently skip this book.

4 of 4 people found the following review helpful:

4.0 out of 5 stars An improved paradigm for thinking about markets, December 28, 2005

By 

Nigel Seel (Wells, UK) - See all my reviews
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This review is from: The Rule of Three: Surviving and Thriving in Competitive Markets (Hardcover)

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 avoid their overseas competitors driving them into the global ditch?

Many executives will find Chapters 6 and 7 the most interesting, as they outline strategies for generalists and specialists. Chapter 8 describes a number of cases of disruptive change in the marketplace, but adds little to the analysis of market structure.

Finally, the concluding Chapter lists 22 surprisingly specific aphorisms which summarise the results of the authors' analysis. For example:

· If a market leader has c. 70% of the market, there is no room for a second generalist, but the situation is unstable.

· If the market leader has 50-70% of the market, there is no room for a third generalist, but one will eventually reappear.

· If a market leader has less than 40% of the market, there may be temporary room for a fourth generalist, but the ditch beckons.

· In a downturn, the battle between generalists 1 and 2 can send number 3 into the ditch while specialists remain unaffected.

Overall, a review such as this cannot do justice to the wealth of detail, innumerable examples and the dense scattering of insights found throughout this book. Its weakness is in its very detail, it is sometimes hard to see the wood for the trees, and to extract the underlying theory (and surely there is a deeper theory trying to get out here). Although hardly a page-turner, the material is an essential real-world complement to the theoretical models in the textbooks.