The Rule of Three: Surviving and Thriving in Competitive Markets

Rating:
Summary: The best tool to predict a company's future in this economy.
Review: The future looks very uncertain to all of us - no matter what company we are in: big or small, none of us has been spared from this mass anxiety that started in 2001. The old saying 'what goes up must come down' became true after 10 years of the best boom time in America. But will 'things have to eventually turn around' come true? Of course it will, but it would seem that in the process a lot of companies will not survive (as has already been witnessed in the last 2 years). So rather than worrying about when things will turn around, it may be more prudent to focus on figuring out which companies will survive these extremely difficult and trying times.

The book is very deep and I am still in the process of digesting all the material. But I was so moved by the very powerful and sound theory presented in the book that I wanted to share my views immediately and hence this review. So bear with me as the terms I use aren't exactly the ones used in the book. I am using them to help me communicate these ideas faster and more effectively.

This book offers some incredible insight into the fundamental way in which businesses and consumer markets interact. And in the process it provides vital clues that could be used to assess what companies will survive. There are only 8 chapters in this book and a conclusion along with 3 appendices. The first chapter gives some preliminary information on the mechanisms by which consumer markets in free market economies force efficiency increases in the businesses involved. The second chapter addresses the fundamental Rule of Three and why eventually after the dust settles, there can only be three left in an industry - no more and no less.

Chapter 3 broadly categorizes all companies into either Specialists or Generalists and futher defines them into five groups - Full-line Generalists, Portfolio Generalists, Product Specialists, Market Specialists, and Super Nichers. This chapter is especially important as it describes in great detail several of the primary chateristics of both Generalists and Specialists. This is important because it later ties into the successful strategies that must be adopted in order to survive difficult economic times. Chapter 4 shows how companies can get in serious trouble and eventually not survive the difficult times. The authors call this 'The Ditch'.

I wasn't too interested in Chapter 5 which addresses Globalization and the Rule of Three. I still forced myself to read this chapter as I didn't want to miss anything that is used in later chapters. But Chapter 6 and 7 are the ones that everyone has to read! This is where all the secrets lie - the successful strategies one must follow in order to survive this all powerful Rule of Three. Chapter 6 is relevant to the Generalist companies and Chapter 7 is for Specialist companies.

Finally, Chapter 8 introduces the subject of market disruptions - simply speaking how some discontinuous changes in the marketplace (new technologies that can do the same things faster, better, and cheaper - like the Internet) can put someone at immediate risk of failing due to the enormous investment they may already have in terms of time and money in the old technologies.

The authors' conclusion follows these 8 chapters. This is again extremely important as it contains 22 general rules (just a few lines each) that you can't ignore if you are trying to predict where your company future lies. The appendices contain some very good research. For example - the three survivors in all the major industries across the world. As can be expected of a book written by two Ph.D's, there is a very complete reference section at the end of the book where you can check and verify the source data.

There are so many aspects to making a business successful and there are so many books out there on the subject that it is easy to overlook such a critical book as this one. I was fortunate enough to run into this book as a result of my frenzied After Christmas bargain shopping at Amazon where I RANDOMLY selected 30-40 books that were all priced at just a few dollars thinking I can't go wrong even if I find one good book out of three (since the bargain price was a third of the original price). After that it sat on my bookshelf till I recently decided to skim through a few pages of the book. That's when it struck me that this is a landmark book and absolutely essential in predicting the future. I immediately put this book at the top of my reading list and have been devouring it ever since. I consider myself very lucky to find this treasure map of a book. Well, it would be a treasure map only if you are trying to figure out which company is going to survive. Otherwise, you can conveniently skip this book.

Rating:
Summary: Strategic Hypotheses from an Industry Structure Perspective
Review: This book deserves more than five stars.

The Rule of Three is well-documented, easy to read and understand, is filled with practical advice that can be used for many strategic purposes. Regardless of your industry, the size of your business, and your ambitions, you will be well rewarded by the time you spend with this book. It will provide a useful perspective of the sort that you probably have gained from books like The Innovator's Dilemma, The Discipline of Market Leaders, and The New Market Leaders.

For a quick overview of the book, I suggest you begin by reading the clear summary of key points on pages 200-202.

The idea that most industries will eventually be dominated by three broad-scale suppliers with a few profitable specialists was one I first heard from Bruce Henderson, CEO of The Boston Consulting Group, about 1972. My quick look around at the time showed that this pattern did frequently occur (domestic autos, breakfast cereal, and beer came to mind then). This industry structure is more often present now than it was then due to the massive consolidations through acquisitions and business failures that have happened in the United States and world wide. Since learning about the empirical observation, I have usually seen the point applied to the questions of how a market leader could most effectively put pressure on the third largest company in the industry and vice versa. The Rule of Three goes well beyond that scope.

As a result, I was delighted to see that the authors of this fine book have provided extensive empirical documentation of their observations by listing many different industries where this structure occurred, case examples from dozens of old and new industries, and definitions of what can trigger this development. Of particular value to readers will be the detailed descriptions of the strategies that are most likely to succeed and fail, and the most frequent causes of those outcomes.

The detailed observations were usually spot on. I only detected a few places where I disagreed with points that were made. For example, EMC was listed in an appendix as being in the computer peripheral industry along with companies that mostly make PC peripherals. I see EMC as mainly competing instead with the likes of IBM, Hewlett-Packard, Fujitsu, Dell and Storage Networks. The authors also argue that the large general competitors usually enjoy a stock-price multiple over the specialist, niche players who have high returns. I would argue that it is usually just the opposite.

I thought that the problem of the #4, #5, #6 and so forth general suppliers was well described as falling into "the ditch" where the lowest returns on assets are earned. These companies lack the benefits of being a specialist and the scale of being a leader. Often, they succumb. If they can merge to become or join a top company, then the situation may change.

I was pleased to see that the authors described how a company may "change the rules" citing how Starbucks has made progress against the traditional coffee suppliers (Maxwell House, Folger's, and Nestle) by providing more accessible, better quality coffee at a higher price. The main opportunity to strengthen the book would have been to discuss this point with more examples and in more detail.

I also enjoyed the discussion of how specialist companies can be lured into chasing unprofitable market share, and falling by the wayside as a result.

Many authors with an empirical theory like this one would try to avoid talking about situations where one company has almost all the market share (such as occurs in personal computer software), or two companies get almost all the business (as in commercial airframe manufacturers), or even four (as often occurs in Europe and Japan). The authors actually strengthened their main point by examining those exceptions to their rule, and showing the influences that made these results occur.

As someone who is interested in uncontrollable forces that can influence industry structure, I thought that the focus here was good although much simpler than the detailed lists that Professor Michael Porter provides.

Having understood these points, I encourage you to think through how you could use these forces against the current market leaders. As the book suggests, the leaders' efficiencies and size make them vulnerable to nimble competitors offering new business models that serve customers and stakeholders in more ways than by lowering costs. Like the cataclysmic event that killed off the dinosaurs, new business models can doom the existing leaders to being poorly fit for the new environment.

Look for the ultimate competitive advantage!

Rating:
Summary: Strategic Hypotheses from an Industry Structure Perspective
Review: This book deserves more than five stars.

The Rule of Three is well-documented, easy to read and understand, is filled with practical advice that can be used for many strategic purposes. Regardless of your industry, the size of your business, and your ambitions, you will be well rewarded by the time you spend with this book. It will provide a useful perspective of the sort that you probably have gained from books like The Innovator's Dilemma, The Discipline of Market Leaders, and The New Market Leaders.

For a quick overview of the book, I suggest you begin by reading the clear summary of key points on pages 200-202.

The idea that most industries will eventually be dominated by three broad-scale suppliers with a few profitable specialists was one I first heard from Bruce Henderson, CEO of The Boston Consulting Group, about 1972. My quick look around at the time showed that this pattern did frequently occur (domestic autos, breakfast cereal, and beer came to mind then). This industry structure is more often present now than it was then due to the massive consolidations through acquisitions and business failures that have happened in the United States and world wide. Since learning about the empirical observation, I have usually seen the point applied to the questions of how a market leader could most effectively put pressure on the third largest company in the industry and vice versa. The Rule of Three goes well beyond that scope.

As a result, I was delighted to see that the authors of this fine book have provided extensive empirical documentation of their observations by listing many different industries where this structure occurred, case examples from dozens of old and new industries, and definitions of what can trigger this development. Of particular value to readers will be the detailed descriptions of the strategies that are most likely to succeed and fail, and the most frequent causes of those outcomes.

The detailed observations were usually spot on. I only detected a few places where I disagreed with points that were made. For example, EMC was listed in an appendix as being in the computer peripheral industry along with companies that mostly make PC peripherals. I see EMC as mainly competing instead with the likes of IBM, Hewlett-Packard, Fujitsu, Dell and Storage Networks. The authors also argue that the large general competitors usually enjoy a stock-price multiple over the specialist, niche players who have high returns. I would argue that it is usually just the opposite.

I thought that the problem of the #4, #5, #6 and so forth general suppliers was well described as falling into "the ditch" where the lowest returns on assets are earned. These companies lack the benefits of being a specialist and the scale of being a leader. Often, they succumb. If they can merge to become or join a top company, then the situation may change.

I was pleased to see that the authors described how a company may "change the rules" citing how Starbucks has made progress against the traditional coffee suppliers (Maxwell House, Folger's, and Nestle) by providing more accessible, better quality coffee at a higher price. The main opportunity to strengthen the book would have been to discuss this point with more examples and in more detail.

I also enjoyed the discussion of how specialist companies can be lured into chasing unprofitable market share, and falling by the wayside as a result.

Many authors with an empirical theory like this one would try to avoid talking about situations where one company has almost all the market share (such as occurs in personal computer software), or two companies get almost all the business (as in commercial airframe manufacturers), or even four (as often occurs in Europe and Japan). The authors actually strengthened their main point by examining those exceptions to their rule, and showing the influences that made these results occur.

As someone who is interested in uncontrollable forces that can influence industry structure, I thought that the focus here was good although much simpler than the detailed lists that Professor Michael Porter provides.

Having understood these points, I encourage you to think through how you could use these forces against the current market leaders. As the book suggests, the leaders' efficiencies and size make them vulnerable to nimble competitors offering new business models that serve customers and stakeholders in more ways than by lowering costs. Like the cataclysmic event that killed off the dinosaurs, new business models can doom the existing leaders to being poorly fit for the new environment.

Look for the ultimate competitive advantage!

Rating:
Summary: Incredible Book for Making Strategic Decisions
Review: This book increases my ability to weigh my competitors in my industry and give me better tools to position my company against my competitors... Read it you will find it interesting or your company in a big ditch...