Four's a Crowd
THE RULE OF THREE
Surviving and Thriving in Competitive Markets
By Jagdish Sheth and Rajendra Sisodia
Free Press -- 277pp -- $28
How come Microsoft (MSFT ), which has a spotty record at best when it comes to innovation, became a leader in nearly every category of software application? Why was mega-retailer Wal-Mart (WMT ) able to crush its once-bigger competitors? Why was Lowe's (LOW ) tactic of cloning its bigger rival, Home Depot (HD ), so successful? And in an economy dominated by giants, why do some small fry such as Victoria's Secret and Southwest Airlines (LUV ) thrive?
Responses to these and many more questions may be found in the provocative if much overstated The Rule of Three: Surviving and Thriving in Competitive Markets by Jagdish N. Sheth, professor of marketing at Emory University's Goizueta Business School, and Rajendra S. Sisodia, marketing professor at Bentley College. The authors argue that in mature markets, competitive forces dictate an optimum of three big players that together control 70% to 90% of sales. Companies pursuing strategies appropriate to their market position--No. 1, 2, or 3, or a narrow niche--will survive and flourish, they say. They also attempt to explain consolidation and to show why many seemingly strong companies, such as Kmart Corp., stumble. Grand theories such as this are enticing. But they also immediately prompt the reader to think of cases where the theory doesn't work--and in this instance, there are many.
Here's some of what the authors argue. Microsoft Corp., as the market leader, does not have to innovate to be on top: With its economies of scale and speed, it can just be a rapid follower of innovators. In contrast, Wal-Mart Stores, once the No. 3 retailer (only Kmart and Sears Roebuck were larger) had to innovate. And it did, with low prices, inventory tracking, and entry into small-town markets that Kmart had ignored. A No. 2 company such as Lowe's, meanwhile, can thrive just by cloning the industry leader's big-box layout in a smart way, offering appliances as well as hardware. All of these companies are what the authors call generalists, in contrast to specialists such as Victoria's Secret and Southwest, which have created their own niche markets. Such outfits operate under a different set of rules, say Sheth and Sisodia.
The authors' discussions of corporate strategy are more persuasive than their description of consolidation. In most industries, they say, there are three dominant players: American (AMR ), United (UAL ), and Delta (DAL ); McDonald's (MCD ), Burger King, and Wendy's (WEN ); NBC, ABC, and CBS. These function like oligopolies, with little likelihood of either collusion or destroying each other. Because of inherent market efficiency, though, any fourth player is endangered.
Here, one sees the authors forcing evidence into the straitjacket of their theory: Are Northwest (NWAC ) and Continental Airlines (CAL ) really slated for extinction? And what about Fox TV, which keeps gobbling up market share? Other industries, such as bricks-and-mortar book retailing, are dominated by two companies, but the authors include a weak third player to fill out their quota. Sheth and Sisodia try to keep the description of consolidation dynamic--saying that further change will come in autos and banking, for example. In the end, The Rule of Three founders under the weight of its many exceptions.
By Aixa M. Pascual