Rule of Three
(Sheth Sisodia)

Knowledge Center

What is the Rule of Three? Description

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 3 major players emerge to dominate the market. With the balance filled by specialist niche players. And how this determines business strategy. The vast majority of industries follow a particular pattern and ultimately fall under the influence of 'the Rule of Three.' 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. Any loose strategy will let the company fall in the ditch.
 

Origin of the Rule of Three. History

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. Applications

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

Strengths of the Rule of Three. Benefits

• Rule of thumb.
• Identifying the position of a company with respect to competitors.
• 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. Disadvantages

• Is unable to explain the exceptions to a great extent.
• Other factors may influence the number and dominance of market players, which need to be explored further.
• 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.
• Limited applicability in many countries outside the US. A Rule of Four may be better in the European Union?

Book: Jagdish Sheth and Rajendra Sisodia - Rule of Three -

Book: Michael E. Porter - Competitive Strategy : Techniques for analyzing industries and competitors -

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Compare with Sheth and Sisodia's Rule of Three: Competitive Advantage  |  Delta Model  |  BCG Matrix  |  Distinctive Capabilities  |  Relative Value of Growth  |  Experience Curve  |  Twelve Principles of the Network Economy  |  Blue Ocean Strategy  |  Strategic Types

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