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2020 | OriginalPaper | Chapter

1. What Is the Rule of Three?

Authors : Jagdish Sheth, Can Uslay, Raj Sisodia

Published in: The Global Rule of Three

Publisher: Springer International Publishing

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Abstract

This chapter provides an overview of the Rule of Three. Competitive markets grow, consolidate, and mature, ultimately leading to the emergence of three full-line generalist firms. These volume-driven players must have a minimum efficient scale of at least 10% market share and are accompanied by a number of smaller product or market specialists. The financial performance of full-line generalists gradually improves with greater market share, while the performance of specialists drops off rapidly as their market share increases. In between the generalists and specialists are the companies who exhibit the worst financial performance, stuck in “the ditch.” The best strategy is to stay far away from the ditch. The Rule of Three applies to all stages of a market’s geographical evolution: local, regional, national, and ultimately global. The Rule of Three structure generates optimal operational efficiency in competitive markets and positive impact on all stakeholders. It is an empirical reality that must be factored into the strategy of businesses of all sizes.

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next chapter Strategies for Generalists, Specialists, and Ditch Dwellers

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Of course, not all announced deals will close. A number of recently proposed M&A deals have been challenged by the government such as the $160 billion acquisition of Allergan by Pfizer. President Trump blocked what would have been the largest tech acquisition of all time—Broadcom’s hostile takeover of Qualcomm for $117 billion in March 2018. Similarly, the Chinese government challenged what would have been the second biggest technology acquisition of all time—Qualcomm’s acquisition of NXP Semiconductors for $39 billion and the deal fell apart in July 2018 (#1 Tech M&A honor still belongs to Dell’s acquisition of EMC/VMware for $67 billion in September 2016).

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A specialist with less than 20% margin premium over the generalist may find it hard to survive. In fact, the healthy premium for superniche companies may be as high as 40%.

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As Fig. 1.1 also implies, super-specialists with less than 1% market share underperform larger specialists. This arguably occurs because the brand, customer, and channel equity of the super-specialists are all significantly lower. They also have neither the capability nor the resources to fully capitalize on their innovations and drive the market. “Typically, those that come up with a potential breakthrough innovation are either acquired quickly and get subsumed by a larger company or they quickly grow to become successful and legitimate specialists with more than 1% share and do not stay in this minimal market share range for long” (Uslay, Altintig and Winsor 2010, p. 25).

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For example, both U.S. and EU antitrust commissions afford additional scrutiny and typically block mergers that enable a player to possess more than 40% market share.

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Of course, a conglomerate such as P&G may ship to 100,000 retailers and source from 20,000 vendors so we are referring to primary suppliers at the component/SKU/service level.

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Even for service industries where fixed costs tend to dominate such as the airline industry, a specialist player might choose to lease the physical asset or arrange for the costs of the asset to be linked to usage levels.

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This research was performed in collaboration with Can Uslay, Ekaterina V. Karniouchina, and Z. Ayca Altintig.

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Uslay Can, Z. Ayca Altintig, and Robert D. Winsor (2010), “An Empirical Examination of the “Rule of Three”: Strategy Implications for Top Management, Marketers, and Investors,” Journal of Marketing, 74 (March), 20–39.

This article was selected as the first runner-up for two of the most prestigious awards in marketing: the Harold H. Maynard Award for most significant contribution to marketing theory and thought, and the MSI/H. Paul Root Award for most significant contribution to the advancement of the practice of marketing. Empirical research findings based on the Rule of Three have also been presented in numerous academic conferences all over the world such as the INFORMS Marketing Science Conference (Singapore; Cologne, Germany; Istanbul, Turkey), Corporate Finance Conference (Los Angeles, USA), Marketing Dynamics Conference (Istanbul, Turkey), Global Research Conference on Marketing & Entrepreneurship (Rio de Janeiro, Brazil; London, UK), American Marketing Association Educators’ Conference (Las Vegas, USA), Strategic Management Society Conference (Glasgow, UK), Academy of Marketing Conference (London, UK). One of these presentations was recipient of the 2019 AMA EMSIG Abdul Ali Promising Research Award. Finally, the research findings have been ackowledged in a book about Empirical Generalizations About Marketing Impact published by the Marketing Science Institute.

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For example, Uslay, Altintig, and Winsor (2010) study results were even robust when using different cut-offs to identify generalists, specialists and ditch players. Similarly, Uslay et al. (2017) use relative market share in addition to absolute market share and find full support for the ditch phenomenon and Uslay et al. (2020) replicate and extend these results using market share elasticities.

Title: What Is the Rule of Three?
Authors: Jagdish Sheth
Can Uslay
Raj Sisodia
Publisher: Springer International Publishing
Book: The Global Rule of Three
Print ISBN: 978-3-030-57472-7

Electronic ISBN: 978-3-030-57473-4

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-57473-4_1

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