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The Rule of Three: Surviving and Thriving in Competitive Markets Hardcover – January 1, 2002
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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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Top Customer Reviews
The book's key thesis is that mature markets with three big companies are the most profitable. Two big companies are no good because they will not be innovative. Four big companies are not good because they will not have big enough scale economies. The number 3 is supposed to rule in all industries.
The evidence in the book is qualitative case studies and the book is written in a very informal management style. I would have liked much more rigour, but at least the ideas in the book have largely been validated by a more robust study. In some cases the book is straightout annoying because everything is shoehorned into fitting their rule of three. The book is also annoying because the authors' fact checking is so poor. There was no Nordic Telecom driving the GSM standard. William Hill and Ladbrokes are not publishing houses. They are betting houses. So many detailed facts are wrong. Such sloppiness is not acceptable.
The chapter on the strategy of #1, #2, and #3 is especially well written and interesting. The chapter on the strategy of niche players is poor. The final chapter on disruption is an afterthought and very poor.
Three stars because I think the authors are onto something. Reduction in points for shoehorning and getting so many facts wrong. Recommended if you read a lot in the area.
The reason most CEO's would benefit from reading it is that the book does a good job of summing up what is happening to the markets of industries that are maturing and consolidating. THe authors not only explain this phenomenon but prescribe helpful advice for wherever you find yourself in a consolidating industry. It was worth my time.
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.