The rule of three (or four)
It is surprising how often someone giving a talk tells us that three things are important. They know that our minds can readily accept and remember three things much easier than if the speaker was to say there are 10 important factors. There is something magic about the number three.
Bruce Henderson, the founder of Boston Consulting Group, had an interesting take on the rule of three. Actually, he extended it and talked about "the rule of three and four". His hypothesis, developed in 1976, was that markets develop steadily until just three or four companies dominate. He argued that in such mature markets it is not unusual for the leading company to have a majority share such as 50% with the second company holding 25% and the third just half of this at around 12%. The remaining shares would be divvied among the rest of the competition.
In the 1960s and 1970s many markets had distributions of market share that conformed to the rule of three (or four). These included mature markets such as cement, wire rod, rubber products, agricultural machinery, steel components, car rental companies to name just a few. What were the reasons for this apparent force of nature? It seems that as markets matured, a market leader emerged, perhaps based on product advantages, acquisitions or simply being around longer than its competitors. The second and third companies in the market offered similar products to the leader, followed its pricing moves and existed because buyers always want alternative sources.
However, this rule of three or four only exists in stable industries. Technology changed markets in the noughties. Electronics, media, financial services, and telecommunications grew rapidly. In new and emerging markets there is much fragmentation in the early years. In mature and so called stable markets, disruptors made life difficult for the old guard with new products, low prices and direct lines to consumers. Stable markets had become a thing of the past.
The internet has changed everything and Henderson’s rule of three or four will be less evident in the future. Markets nowadays move quickly and disruption is always round the corner. The small number of players that controlled the wire rod, rubber, and steel industries 30 or 40 years ago have disappeared. The rule of three or four has been broken by universal knowledge and the inability of large companies to monopolise supply chains.