Executive Summary
This study represents the first empirical examination of Sheth and Sisodia’s (2002) “Rule of Three.” According to the theory, an industry structure consisting of three large generalists and numerous smaller specialists generate a competitive environment that is “optimal” for firm stability and profitability. In general, the author’s findings from more than 160 U.S. industries support the theory and provide five main insights: First, there is 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 fewer or greater number of generalists. Third, both specialists and generalists outperform firms that are “stuck in the middle” or “in the ditch,” implying a nonlinear relationship between market share and performance. Fourth, the performance benefits of market leadership appear to diminish with excessive market share. Finally, the Rule of Three industry structure and its influence over firm profitability do not appear to be priced appropriately by financial markets.
The findings yield the following implications for top management: First, precaution against growth for the sake of growth is advised. Firms may be better-off by “outsourcing” some of their less profitable customers for potential gains in margins. Second, when further growth appears to offer strategic benefits, this can be achieved organically through marketing or through mergers and acquisitions. Third, it appears that generalists need to exceed a market share threshold to become viable in the long run. Management must pay close attention to avoid the “ditch” of intermediate market share, or they will likely disappoint investors.
The finding also yield implications for marketing: First, when the costs and risks of market share growth threaten performance, marketing can create primary demand and provide growth without necessarily changing market share. Large generalists have much to gain from comarketing with generalists in other industries or even with direct competitors. The new focus would be on customer recruitment from nonusers instead of annexing customers from competitors. Not growing market share in the domestic market may also suggest an international growth strategy or even a globalization imperative. Second, the authors find high-performing, small-market-share firms to be the rule rather than the exception. Because of their refined focus, specialists can actually enjoy market leadership in their niches and establish themselves as margin leaders.
Implications for investors are as follows: First, the disequilibrium implied by the findings suggests that a portfolio of firms from Rule of Three industries should outperform a portfolio of firms from other industry structures, all else being equal. Second, the conventional practice to invest in “the best of breed” appears sensible only when the top generalist is not overly dominant. Excessively dominant players get undeserved respect. Third, capital markets usually penalize the stock of the acquirer and boost that of the target when merger news is announced. However, all related stocks in the industry may warrant a boost if a proposed merger and acquisition decreases/increases the number of generalists to three. Fourth, “ditch-dwellers” are not good long-term investments but may make excellent speculative investments in a portfolio because their implied financial vulnerability makes them likely targets for mergers and acquisitions.
Biography
Can Uslay (MBA and PhD, Georgia Institute of Technology) is Assistant Professor of Marketing in the Argyros School of Business and Economics at Chapman University. Dr. Uslay’s research interests lie broadly within marketing strategy, policy, and theory construction. His research is published or is forthcoming in Journal of Marketing, Journal of the Academy of Marketing Science, Journal of Public Policy & Marketing, European Business Review, International Journal of Technology Management, Journal of Business-to-Business Marketing, Journal of Research in Marketing & Entrepreneurship, Marketing Education Review, and Review of Marketing Research. He is a coauthor of Deregulation and Competition: Lessons from the Airline Industry (2007, Sage Publications) and currently serves as Vice Chair of Research for the Entrepreneurial Marketing special interest group of the American Marketing Association. His background includes internal consulting at a conglomerate, hotel administration, international marketing for Vestel (the top exporter of Turkey), and assisting the State of Georgia for high-tech based economic development.
Z. Ayca Altintig is Assistant Professor of Finance in the Argyros School of Business and Economics at Chapman University. She earned her bachelor’s degree from Bogazici University in Istanbul, Turkey, and her MS and PhD in Finance from Louisiana State University. Dr. Altintig’s primary research interests are in the areas of corporate and international finance, primarily agency theory and industrial organization. Her research has been published in various journals, including Journal of Business, Journal of Corporate Finance, and Journal of Industrial Economics. Her posts before academia include working for Deutsche Henkel AG as a financial controller.
Robert D. Winsor is Professor of Marketing at Loyola Marymount University. He earned bachelor’s degrees from Claremont McKenna College and the University of LaVerne and a PhD in Marketing from the University of Southern California. Before academia, he held several positions in the wholesale and retail industries, and he now advises various of organizations on aspects of strategy, branding, and pricing. His research interests include business strategy and business theory. His work has been published or is forthcoming as numerous book chapters and journal articles, including such outlets as Journal of Marketing, Journal of Business Venturing, Journal of Business Research, Journal of Business Ethics, Marketing Theory, and Journal of Consumer Marketing.
Journal of Marketing, Volume 74, Number 2, March 2010
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