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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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 (2), 20-39.
This study represents the first empirical examination of the “Rule of Three,” a theory at odds with several popular notions regarding industry structure and business performance, including the positive linear market share–performance relationship. In general, the findings from more than 160 industries support the Rule of Three and provide five main insights: First, there appears to be a prevalent competitive structure for mature industries in which three “generalist” firms control the market. Second, industries that conform to this structure tend to perform better than industries with a fewer or greater number of generalists. Third, both “specialists” and generalists outperform firms that are “stuck in the middle.” Fourth, the performance benefits of market leadership appear to diminish with excessive market share. Fifth, the Rule of Three industry structure and its influence over firm profitability do not appear to be priced appropriately by financial markets. The authors discuss the implications for multiple stakeholders.
Special thanks to Kelley Gullo, Ph.D. candidates at Duke University, for her support in working with authors on submissions to this program.
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