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An Empirical Examination of the “Rule of Three”

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Absent regulatory restraints or anti-competitive practices, any given industry is expected to evolve and converge toward an optimal structure in which there are three full-line generalists that are volume-driven, numerous successful small specialists that are margin-driven, and high overall industry performance as measured by ROA. Marketers are cautioned not to just grow for the sake of growth, but to consider the state of the market, their standing, and other contextual factors.

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An Empirical Examination of the “Rule of Three”

  1. 1. From: The Rule of Three: Implications of Industry Structure and Strategic Type Key finding: Absent regulatory restraints or anti-competitive practices, any given industry is expected to evolve and converge toward an optimal structure in which there are three full-line generalists that are volume-driven, numerous successful small specialists that are margin-driven, and high overall industry performance as measured by ROA. Uslay, Altintig, and Winsor (2010)
  2. 2. From:From:  Across mature industries, there is a prevalent competitive structure where three “generalist” firms control the market  Generalists are volume-driven, have economies of scale advantages, and high market share  Examples: Coca-Cola, PepsiCo, and Keurig Dr Pepper; Bridgestone, Michelin, and Goodyear; GrubHub, Doordash, and Uber Eats  If a firm isn’t a generalist, it should be a “specialist”  Specialists are margin-driven, focus on less competitive niches, and are hard to imitate by generalists  Examples: Red Bull, Cooper Tires, William-Sonoma, Zara  Firms should avoid being between a specialist and a generalist (stuck in “the ditch”)  These firms compete directly with generalists and do not have the customer focus of specialists  Examples: Sprint, Toys’R’Us, Bed Bath and Beyond, JC Penney  Industries that conform to this structure tend to perform better than industries with fewer or greater number of generalists by 7-10% greater ROA (return on assets), and being stuck in the middle can hurt financial performance by 5-8% ROA. The Rule of Three Uslay, Altintig, and Winsor (2010)
  3. 3. From: (Source: Sheth and Sisodia 2002, p.4) FINANCIAL PERFORMANCE (Return on Assets) Uslay, Altintig, and Winsor (2010) The Rule of Three
  4. 4. From:From:  Do you need volume or margin? Develop marketing programs based on market position  Avoid the getting stuck in the ditch (5-10% market share)!  Performance benefits of market leadership diminish at high levels; Generalists with close to 40% market share should focus on:  collaborating with other market leaders and occasionally even with competitors  customer retention rather than acquisition  expanding the pie and protecting share  International growth, globalization imperative  High-performing small share firms are the rule rather than exception. Specialists should remain margin-driven, focus on core competencies, and resist the lure of growth for the sake of growth Advice to Marketers Uslay, Altintig, and Winsor (2010)

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