Rule of three (economics)
Encyclopedia
The rule of three in Business and Economics is a rule of thumb suggesting that there are always three major competitors in any free market within any one industry. This was put forward by Bruce Henderson of the Boston Consulting Group
in 1976, and has been tested by Jagdish Sheth and Rajendra Sisodia in 2002, analyzing performance data and comparing it to market share. This is an attempt to explain how, in mature markets, there are usually three 'major players' in a competitive market.
The rule of three as put forward by Sheth and Sisodia in 2002 and states that in a mature market, there will normally be three major competitors and several others, who only succeed if they are able to operate in a niche market. They based their studies on a review of a number of markets in North America. They compared market share
to financial performance, and found that small, niche-market
specialists and large, full-line generalists were those who performed best when holding a large market share. They also noticed a section in between the two in which companies performed poorly, which they referred to as “the ditch” (see reference); this is based on the form of the graph of market share versus financial performance as the graph slopes downwards for niche players (1% - 5% market share
) and upwards for full-line generalists (over 10% market share). Sheth and Sisodia use the analogy
of a shopping mall
, in which they propose that there will be three major full-line generalist stores, along with various smaller, product and market specialist shops.
Sheth and Sisodia also make a number of observations with regard to how companies behave in such cases. For instance, the first-ranked player will often be the least innovative in spite of spending the most on R&D. However, the first-ranked player may 'steal' ideas from the third-ranked player.
It may be the case that, if a price war emerges between the first-ranked and second-ranked players, the third-ranked player may end up in “the ditch”, although a new third-rank player would be expected to emerge in due course.
Using a diverse sample of more than 160 US industries, two base-time periods, and numerous performance measures, Uslay, Altintig, and Winsor (2010) empirically tested the rule of three and reported that industries with exactly three generalists outperformed every other industry structure. They also found that micro-specialists, generalists with excessive market share, and firms "in the ditch" without clear strategic strengths tended to underperform others. Their findings provided empirical support for the “Rule of Three”.
Boston Consulting Group
The Boston Consulting Group is a global management consulting firm with offices in 42 countries. It is recognized as one of the most prestigious management consulting firms in the world. It is one of only three companies to appear in the top 15 of Fortunes "Best Companies to Work For" report for...
in 1976, and has been tested by Jagdish Sheth and Rajendra Sisodia in 2002, analyzing performance data and comparing it to market share. This is an attempt to explain how, in mature markets, there are usually three 'major players' in a competitive market.
The rule of three as put forward by Sheth and Sisodia in 2002 and states that in a mature market, there will normally be three major competitors and several others, who only succeed if they are able to operate in a niche market. They based their studies on a review of a number of markets in North America. They compared market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
to financial performance, and found that small, niche-market
Niche market
A niche market is the subset of the market on which a specific product is focusing; therefore the market niche defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that is intended to impact...
specialists and large, full-line generalists were those who performed best when holding a large market share. They also noticed a section in between the two in which companies performed poorly, which they referred to as “the ditch” (see reference); this is based on the form of the graph of market share versus financial performance as the graph slopes downwards for niche players (1% - 5% market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
) and upwards for full-line generalists (over 10% market share). Sheth and Sisodia use the analogy
Analogy
Analogy is a cognitive process of transferring information or meaning from a particular subject to another particular subject , and a linguistic expression corresponding to such a process...
of a shopping mall
Shopping mall
A shopping mall, shopping centre, shopping arcade, shopping precinct or simply mall is one or more buildings forming a complex of shops representing merchandisers, with interconnecting walkways enabling visitors to easily walk from unit to unit, along with a parking area — a modern, indoor version...
, in which they propose that there will be three major full-line generalist stores, along with various smaller, product and market specialist shops.
Sheth and Sisodia also make a number of observations with regard to how companies behave in such cases. For instance, the first-ranked player will often be the least innovative in spite of spending the most on R&D. However, the first-ranked player may 'steal' ideas from the third-ranked player.
It may be the case that, if a price war emerges between the first-ranked and second-ranked players, the third-ranked player may end up in “the ditch”, although a new third-rank player would be expected to emerge in due course.
Using a diverse sample of more than 160 US industries, two base-time periods, and numerous performance measures, Uslay, Altintig, and Winsor (2010) empirically tested the rule of three and reported that industries with exactly three generalists outperformed every other industry structure. They also found that micro-specialists, generalists with excessive market share, and firms "in the ditch" without clear strategic strengths tended to underperform others. Their findings provided empirical support for the “Rule of Three”.