In summary: The "Rule of Three" by Jagdish Sheth and Rajendra Sisodia, based on empirical analyses of hundreds of markets, demonstrates that mature industries converge toward an optimal structure with three large generalists (volume-driven, holding 70-90% of the market) and numerous successful specialists (margin-driven). Companies trapped in the "ditch" — with market shares between 5% and 10% — suffer a performance decline of 5-8% in ROA, while sectors with an optimal structure see an increase of 7-10% in ROA. The empirical examination published in the Journal of Marketing confirms that this rule applies globally: from oligopolistic market concentration (where the top 3-5 players control over 60% of sales) to the competitive dynamics between generalists and specialists across every industry.
Time and again in marketing studies, a very interesting pattern emerges regarding most mature industries: the "Rule of Three." In this analysis, we will discover how it can influence the strategy and marketing decisions of companies across all sectors.
The Rule of Three states that, in general, there are three "generalists" that control the market in every industry. These companies are volume-driven, enjoy advantages linked to economies of scale, and hold a high market share. Some examples of generalists include Coca-Cola, PepsiCo, and Keurig Dr Pepper in the beverage industry; Bridgestone, Michelin, and Goodyear in the tire industry; and Deliveroo, Uber Eats, and Just Eat in the food delivery industry.
If a company is not a generalist, it should position itself as a "specialist" (not to be confused with "niche" in the Al Ries sense, which in Italian means something different and should ALWAYS be avoided). Specialists are margin-driven, focus on specific market segments, and are difficult for generalists to imitate. Some examples of specialists include Red Bull in the energy drinks industry, Cooper Tires in the tire industry, Williams-Sonoma in the home furnishings industry, and Zara in the fashion industry (due to its entirely fast fashion business model).
So what exactly is a specialist brand if it is not a niche? In Italy, unfortunately, our perception has been tainted by years of messages from incompetent gurus, and we need to free our minds from many preconceptions. The core idea behind specialists is that they are companies focused on being optimized for a specific purpose. For example, a certain market segment, a certain technology, a certain way of doing things, a certain product -- as long as all its extensions and variants are included, with a virtually infinite range. A niche speaks to a few potential customers; a specialist brand speaks to potentially millions of customers.
For example, the agency Deep Marketing does provide companies with many marketing and communication services, but all our processes are optimized to better serve medium-high or high-quality companies in a collaboration built on a precise repositioning process followed by high-level operational marketing. Furthermore, all our team members are specialists in their field -- none of them are generalists.
Companies should avoid finding themselves in an intermediate position between specialists and generalists, a situation defined as "the ditch." These companies compete directly with generalists but lack the customer focus typical of specialists. Examples of companies that have found themselves in this situation include Sprint in the telecommunications industry, Toys'R'Us in the toy industry, Bed Bath and Beyond in the home furnishings industry, and JC Penney in the fashion industry.
Studies show that industries that follow the generalist vs. specialist structure tend to have better performance than those with fewer or more than three generalists, with a 7-10% increase in ROA. Additionally, being stuck in the "ditch" can damage financial performance by 5-8% of ROA.
Given these findings, what advice can we give to marketers? First and foremost, it is essential to decide whether it is more important to focus on volume or margin and to develop marketing programs based on market position. It is critical to avoid getting stuck in the "ditch," with a market share between 5 and 10%.
Market leader performance declines when market share approaches 40%; in this case, generalists should focus on collaborating with other market leaders and, occasionally, even with competitors; on customer retention rather than acquiring new customers; on market expansion and protecting market share. It is also important to focus on international growth and the imperative of globalization.
As for specialists, it is important to note that companies with a small market share that achieve high performance are the norm rather than the exception. Specialists should continue to focus on margins, on their core competencies, and resist the temptation to pursue growth just for the sake of growing.
Sources and References
- ResearchGate — Sheth, J. & Sisodia, R. — The Rule of Three: Surviving and Thriving in Competitive Markets (2002)
- Journal of Marketing — Uslay, Altintig & Winsor — An Empirical Examination of the "Rule of Three" (2010)
- BCG Henderson Institute — The Global Rule of Three con Jagdish Sheth, Can Uslay e Raj Sisodia
- Federal Reserve Bank of St. Louis — What Makes a Market an Oligopoly? (2023)
- Oxford Academic (Journal of Competition Law & Economics) — Concentration and Competition: Evidence From Europe and Implications for Policy (2023)
- Jagdish Sheth — The Global Rule of Three: libro e ricerca aggiornata
