Marketing and business scholars have long observed a “rule of three” when it comes to the formation of markets and industries, a natural progression where disruption gives way to consolidation and a triad of core players emerge before the cycle repeats itself.
Jagdish Sheth, Charles H. Kellstadt professor of marketing at Emory University’s Goizueta Business School, said the phenomenon easy to see in the Big Three U.S. automakers, airline alliances (SkyTeam, OneWorld and Star) mobile phone networks (Verizon, AT&T, T-Mobile/Sprint) soft drinks (Coca-Cola, Pepsi, Keurig/Dr. Pepper) and semiconductors (Intel, TSMC and Qualcomm) — and the list goes on.
What’s been less explored is how this plays out as industries mature domestically and markets become more globally dispersed and interconnected. Do the same competitive trends and rules surrounding market share tend to emerge?
The answer, Dr. Sheth writes in a new book with co-authors Can Uslay and Raj Sisodia, is a resounding “yes,” and the implications for managers of multinational enterprises, from entrepreneurs to the Fortune 500, are profound.
In “The Global Rule of Three: Competing With Conscious Strategy,” the co-authors explain that as a market develops, three “full-line generalists” emerge from inevitable consolidation that follows a new category’s creation by early innovators.
There’s a reason for this, Dr. Sheth and his collaborators have found after researching thousands of cases: It turns out that a market is optimally profitable for all when the lead player has around 40 percent market share, a second contender takes 20, and a third hovers around 10 percent, Dr. Sheth said.
He used the analogy of a shopping mall, where a few large anchor stores are interspersed with smaller shops that offer greater selection and thrive on value rather than volume. These are Dr. Sheth’s “specialists” or niche players, who stay strategically small, profiting by commanding a higher price due to their control of a slice of the market — think luxury goods, for instance, rather than mass-market brands.
Firms that want to thrive, the book argues, must stay out of the no man’s land between 5 and 10 percent market share known as “the ditch,” a purgatorial state where they lack the scale to match the big boys and the specialization to compete with those niche players that command high margins on low volumes (think Porsche versus than GM).
How companies craft their competitive strategies depends on where they land on this continuum, Dr. Sheth told Global Atlanta in an interview conducted via Zoom as part of the Authors Amplified series sponsored by the Atlanta Global Studies Center.
For the No. 1 generalist, the challenge is to stay profitable by expanding the market pie or spinning off new products or services to create new sectors. The second-place player is forced with a choice — aggressively challenge the leader or adopt a posture of peaceful coexistence. No. 3 is often the most innovative, hoping to climb the food chain and stay out of the ditch.
Those in the ditch have tougher choices to make — either grow their way out, shed products, submit to an acquisition or refine offerings to grow margins, and thus, profitability.
“If you come from the volume side, you become more and more like a niche player by abandoning must most markets where you are not profitable,” Dr. Sheth said during the virtual event.
This leads to a cycle that has played itself out over thousands of industrial segments, always defaulting back to the equilibrium of the rule of three generalists, a concept that emerged in the marketing literature in the 1970s.
In industries where regulation has not impeded globalization, trade liberalization has enabled this trend to replicate itself across geographies. The Japanese took over the television and electronics markets followed by South Korea and now China, which is also dominating areas like appliances and automotive, Dr. Sheth said.
For multinationals, this means that threats to one’s competitive position can come domestically or from abroad — at any time. Emerging market firms are becoming multinationals with greater ease, leveraging the scale and regulatory protection of their home markets and adopting a “reverse brand life cycle” to get larger by focusing on their domestic market and cost advantages, then move into the premium segment and head abroad once they have established a reputation for quality, he added.
Competing in the 21st century means factoring in global threats and opportunities more than ever, and taking into account the shift in economic and consumer power from the old triad of the U.S., Western Europe and Japan to “the new global triad” of the U.S., China and India — the three largest consumer markets that will define at least the first half of the 21st century.
And that latter becomes more vital as the first two find themselves increasingly at odds. If there is to be a new Cold War, Dr. Sheth said, it will play out in the realm of industrial policy, as evidenced by President Joe Biden‘s hesitance to take a new tack in the U.S.-China trade war kickstarted by his predecessor.
“The new battle will be fought not on ideology, but on technology,” he said.
With that in view, India is set to become a key alternative for multinationals that have previously relied on the Chinese market but now find it closed off, he said.
“You have to be at least two in three to survive properly as a global player,” Dr. Sheth said. “If the China market is not going to be as accessible because of the geopolitics, then it is in the interest of American corporations to focus even more on India market, because the American market alone is not going to be sufficient.”
Dr. Sheth, who has long promoted the convergence of the world’s two largest consumer markets in “Chindia,” packs the book with prognostications about how entrepreneurship will shape and even eclipse capitalism, how business leaders will take center stage on geopolitics and how governments will drive the creation and development of industries through regulation and standard-setting.
The book is packed with research, insight and examples, culminating in an appendix at back that provides projections of how the top three players will shake out over the next 20 years in more than 60 globally relevant industries.