The Rule of 3

rule 4What is the Rule of Three?

The Rule of Three method from Jagdish Sheth and Rajendra Sisodia holds that 3 big companies will evolve/adapt to dominate any industry. Name the players in almost any industry; from airlines (United, America, and Delta) to fast food (McDonalds, Burger King and Wendy’s) and you’ll find that 3 is the magic number. Other companies will be niche players, or fall in the ditch (i.e. a market position between generalist and specialist that offers no long-term viability).

The theory explains how in every industry eventually 3 major players will always emerge to dominate the market, with the balance being filled by specialist niche players.  Evidence suggests that 3 volume-driven competitors eventually emerge to capture between seventy to ninety percent of a given market. The theory talks of existence of either generalists, or specialists that thrive to succeed in this competitive environment. Ineffective strategy will let the company fall in the ditch.rule 3

Origin of the Rule of Three.

Empirical study and case studies of a large set of companies were studied by Professors Jagdish Sheth and Rajendra Sisodia. Based upon years of research on hundreds of both national and local companies, Sheth and Sisodia showed that three market leaders 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). Sheth and Sisodia say most markets resemble a shopping mall, with specialty shops anchored by large companies.

Usage of the Rule of Three.

ü  Useful for strategy/competitive moves by businesses, small or large.

ü  Strengths of the Rule of Three.

ü  Rule of thumb.

ü  Identifying the position of a company with respect to competitors.

ü  It helps to find a way to improve or change the strategy if required before companies fall in the ditch.

Limitations of the Rule of Three.

v  Is unable to explain the exceptions to a great extent.

v  Other factors may influence the number and dominance of market players, which need to be explored further.

v  Some people say that there’s no magic number 3, and attribute the presence of today of several dominant players in many US industries to the way that antitrust laws are currently enforced.

Reference:

The Rule of Three: Surviving and Thriving in Competitive Markets by Jagdish Sheth and Rajendra Sisodia (May 1, 2010), The Free Press

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