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The Rule of Three


The Rule of Three

The Rule of Three: Surviving and Thriving in Competitive Markets

by Jagdish N. Sheth and Raj Sisodia
Free Press; 1st edition (January 1, 2002)

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About the book

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 center 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

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

More Reviews

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 (LG, 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.

From Library Journal

Market position supposedly dictates business success, but consultants and marketing professors Sheth (Emory Univ.) and Sisodia (Bentley Coll.) here simplify marketing strategy by showing that the reverse is also true: business success determines market strategy. The title premise is that each industry has its “big three” dominant players its Ford, GM, and Daimler-Chrysler, for instance. Of course, because this is very much a study in forensics, the authors are able to fit the facts to the theory. It is far more difficult to play the strategy game in real time, and the “rule of three” is less likely to be operative in an emerging market. Still, with dot-coms reeling after the recent Internet business plague, a book on strategy is all the more welcome especially one that makes considerable use of examples and whose supplemental information should prove to be a valuable resource. Recommended for strong business collections.

From Booklist

Although this is the second book coauthored by Sheth and Sisodia, Sheth has written or coauthored many previous books dealing with marketing. The rule in their book is a Darwinian theory of sorts applied to business, stating that “natural competitive market structures evolve by an analogous selection process that favors the strongest and most efficient companies.” The forces playing a role in the theoretical application are industry consolidation, government intervention, the establishment of de facto standards, and shared infrastructure. To study and analyze a particular market and the forces affecting it, the authors look to the three largest companies in that market. The companies can be divided into “generalist,” with multiple brands that can perform on a global level, and “specialist,” with a single brand. The breakdown of the theory into specifics, market snapshots, and notes, all based on the thorough research and expertise of the authors, makes this a good guide for business leaders, analysts, and students, as well as colleagues in advertising and marketing firms.

Endorsements

A valuable framework for thinking through corporate strategy
The authors bring together an impressive wealth of corporate market histories to present a valuable framework for thinking through corporate strategy. Identifying where a company is in this framework and laying one’s strategies against the suggested rules for that position provides an extremely valuable, thought-provoking, and prescriptive tool for strategy development. If you can’t clearly say that you are headed to be one of the three dominant generalist survivors in a market, or a strong product or market niche player, you will probably be in harm’s way. Wherever you are, The Rule of Three will help you walk through the minefields and around the ditch.

George Fisher, Retired Chairman & CEO, Eastman Kodak Company

 

A Nobel-prize-quality realization of how mature markets work
Sheth and Sisodia present original research and analysis that reveal a Nobel-prize-quality realization of how mature markets work. No corporate leaders can wisely guide their enterprises through the turbulence of contemporary competitive markets without this book as their navigational map.

Professor Jeffrey Sonnenfeld, author of The Hero’s Farewell, Associate Dean, Yale School of Management

 

A thoughtful and solid guide for everyone who intends to stay in business for a long time
These two know what they’re talking about. This is not about a business fad. With a deceptively simple principle, The Rule of Three richly explains the evolution of industry structures and the appropriate strategic responses. It’s built on solid research and powerful insight. I found myself underlining gems on every other page. Whether your company is a full-line generalist or a niche specialist, and especially if it is in the endangered middle, this book is a thoughtful and solid guide for everyone who intends to stay in business for a long time.

Stan Davis, author of Blur and Lessons from the Future

 

One of the most provocative and original business books to come out in years
Sheth and Sisodia have written one of the most provocative and original business books to come out in years. Whether your company functions in your industry as a generalist, a specialist, or is stuck in a ditch, you will find a catalog of strategies for surviving, reviving, or prospering.

Philip Kotler, Northwestern University, Kellogg School of Management

 

A breakthrough book
Every decade or two, a breakthrough book appears to shed light on business dynamics and show leaders a superior way to create value. This is that book. Read it sooner, rather than later.

Dr. William Davidson, CEO, MESA Research


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