Why only three companies will dominate global markets

Jagdish Sheth, Rajendra Sisodia and Can Uslay talk about their latest book ‘The Global Rule of Three: Competing with a Conscious Strategy’

Founding Fuel

In a discussion based on their latest book The Global Rule of Three: Competing with a Conscious Strategy, three thought leaders—Jagdish Sheth, Rajendra Sisodia and Can Uslay—talk about why only three companies are starting to dominate the market. And the implications of this global phenomenon for businesses and leaders. 

It is an important subject that is based on empirical evidence from the US and globally that cuts across industries. It builds on Sheth and Sisodia’s original work titled The Rule of Three nearly two decades ago. They call the three dominating companies “generalists”; all other players in the market are specialists.

The original idea said

  • The two kinds of competitors—generalists and specialists—may co-exist in the short term, but are competitors in the long term. 
  • There are always three generalists in the long run. The generalists take over the market from specialists and vice versa. Others fall in the ditch.

In the two decades that have passed since the original work, some things have changed.

  • It’s still a rule of three, but technology and globalisation have brought a major transformation in the world. 
  • And there’s also the rise of emerging markets, together with economic reforms in socialist markets. 

The idea of a global rule of three is a simple yet powerful theory with many implications—managerial, strategic, marketing, and financial.

Their latest work, which is based on data from two mega databases with information from a quarter million firms over four decades, explores what these implications are. The work also reflects what it takes to build a research-based culture—with networks, collaboration and very strong empirical databases to bring rigour and relevance to research.

Jagdish Sheth is Charles H. Kellstadt Professor of Business, Goizueta School of Business, Emory University, USA

Can Uslay is Associate Professor and Vice Dean for Academic Programs and Innovations, Rutgers Business School, USA

Raj Sisodia is FW Olin Distinguished Professor of Global Business and Whole Foods Market Research Scholar, Conscious Capitalism at Babson College, USA

The discussion was held on January 8 and was moderated by Indrajit Gupta, Co-founder and Director, Founding Fuel

Highlights from the conversation

The human side of business: How the Rule of Three intersects with conscious capitalism 

  • We’ve always rooted it in the fundamentals of business. But business has to be
    human-centred—good for people, good for the planet, good for the world. But business also has to function well as a business. 
  • Companies that are loved by their stakeholders, also outperform the
    marker literally by 9:1 ratio.
  • The core purpose of business is to create value. In the past, we’ve defined it narrowly as financial value for shareholders. But business creates and destroys all kinds of wealth—financial, intellectual, emotional, cultural, spiritual, ecological.
  • How can we strategize in a way that maximises the wealth and value we generate? If you don’t have a rule of three, that doesn't happen. For example, that airline industry in the US when there were 8-10 airlines, all competing viciously—there was overcapacity and lack of investment in customer care.

The nature of competition and the many paths to winning

  • There's a belief that more competition is good. But there is a negative aspect when you have too much competition. Rule of Three is a way of sorting it out, where you have the right amount of competition, no monopoly, customers have the right amount of choice. The Rule of Three creates more value at the industry level, overall.
  • It also reduces the likelihood of failure. If you are aware of the theory, you will not make suicidal strategies. 
  • It shows that in business there are many paths to winning.
  • There are important policy consequences of this too in terms of antitrust. You should allow consolidation up to a point, but if you allow consolidation beyond three major players, it becomes problematic.

The enduring ideas that have stood the test of time

  1. Despite an oligopoly—the Rule of Three—there is always an opportunity for a niche player. Example, Toys”R”Us, and the Book People. There's always opportunity for an
    entrepreneur not just to compete, but to co-exist.
  2. The No. 3 company is the most innovative, game changing. Not the No. 1 or No. 2. They may have very large R&D expenditure, but it's the No. 3 which is closer to the ditch—it’s a survival game. (When the top two compete on price when the industry is not growing, the No. 3 goes into the ditch.) So, not General Motors, not Ford, but
    Chrysler. No Coca-Cola, not Pepsi, but RC Cola. Not Boeing or McDonnell Douglas, but Lockheed in bringing change in technology or marketing practices.
  3. Economies of procurement, not scale: The economies of scale concept was anchored to the manufacturing sector in the industrial age, because of the value add in the factory. The value-add that we do in the factory today is less than 20%. The real scale is not in manufacturing, but as value-add in procurement, which has to become a very strategic function. Because 60-70% is all procurement cost.

How do you look at value?

  • Value in use: There is great synergy between marketing and engineering departments because they focus on functional value. R&D people don't think about buyers, they think about users. And we've forgotten that in marketing we think about users; selling is where we think about buyers. 
  • Social value: Products and consumption lends meaning and symbols to people.
  • Affordability and accessibility are also values
  • Accountability: Companies need to step up and say I am responsible.

Patterns that their research shows

1. This is a dynamic rule: Very few can answer, which tyre-maker has been the most innovative in history? (It is BF Goodrich—their tyres were used under the plane that Charles Lindberg flew; and Nasa contracted them to review spacesuits when they started sending astronauts to space.) 

It still found itself in the ditch when Goodyear and Firestone got into a competition. But it figured out that its core competency wasn't tyres, but speciality chemicals. (By the way, margins in the tyre business are very thin.) It eventually became a pure aerospace player. In 2012 when they were bought out, their market capitalisation was 6x of Goodyear.

2. Globalisation and cross-border mergers, plus technology reshuffle the deck: As you can see in the auto sector over the years, and now with electric vehicles.

What happens when sectors begin to evolve into ecosystems?

  • The Rule of Three prevails even at a platform level. The platform becomes the ecosystem. You see it in ride-sharing.
  • Platform companies are clearly emerging in the cell phone business (Android, Apple).
  • In the industrial age we believed vertical integration is good for you—you invent, design, make, sell and service. 
  • In the new system, licensing is a better opportunity. You invent and license it to create de facto standards. Which is what Android did with Google—to block out a competitor, and co-opt them.
  • A new paradigm may emerge where licensing (royalty, subscription etc.) may become a more mainstream industry.
  • You see the Rule of Three in the food delivery platforms in the US, even though it is only five years old. (There’s DoorDash with 45% market share, GrubHub with 23%, and Uber Eats with 22% (and an additional 8% from the Postmates acquisition). 

 Can the No. 3 upstage the No. 1? 

  • We don’t see that. Mainly because the top two are quick to duplicate them and are “fast followers”. Because they have more market access, they copy what No. 3 invented and take the market away.

From an investing lens, how do you identify who will end up in the ditch and who will thrive?

There are three opportunities from an investing lens:

  1. Large-scale M&As across borders.
  2. Where there is a new technology (a VC market for niche players).
  3. And the most interesting is taking the “ditch dwellers” out of the ditch. By either repositioning them as a niche player or to become a generalist in the process.

The implications of this construct

Companies from emerging markets will emerge as one of the top three players—from China, India and MENA (Middle East and North Africa)

  • In the new Global Rule of Three, the three largest consumer markets are China, the US and India. Rule of Three will manifest as one company each from China, the US and India. Example: Lenovo is competing on PCs, Haier in appliances. Alibaba will be a global player; it is much stronger than Amazon in capabilities. 
  • It is also happening in India within the retail sector.

What does the Global Rule of Three mean for businesses that want to stay local or regional?

  • They have the option to be healthy, viable specialists in their defined markets. In a narrowly defined specialist market, you can be quite successful. They can be market or product specialists. 
  • For example, SouthWest Airlines. They started as a carrier within Texas. After deregulation, they grew and became a national carrier. And though they are now No. 2 in the US, they never became an international carrier. They have some international flights, but to places you’d like to go for vacation, and not to any commercial destination. They are basically a specialist at the global level. And they are doing very well.
  • Another example is Yildiz Holding, a Turkish food manufacturer that specializes in biscuits. It is the No. 3 biscuit manufacturer in the world after it bought out chocolatier Godiva and United Biscuits. And it is competing with Parley in biscuits also.
  • Going from specialist to generalist can be a challenging process.

How does cartelization impact the play?

  • Surprisingly, cartels are legal in many parts of the world, especially in Europe. Because the idea is that you have national resources and sharing those operations is good for you.
  • Cartels are illegal from a regulatory lens only in the US. Because of the abuse that has taken place. (A paper that Jagdish Sheth and Atul Parvatiyar co-wrote talks about how cartels, in fact, benefit society.)  
  • In many operations like logistics, it is good to share—it is basically a platform. 
  • Their theory says, you really need optimal three players—an oligopoly. And that economists malign oligopoly unnecessarily.
  • In India, the biggest issue is that we have the size of the market, but no scale.
    So you don’t get the economies of procurement.
  • China reformed everything to allow large enterprises to come in, as state enterprises or in the private sector—Alibaba, Tencent, etc.

Have antitrust laws impacted the Rule of Three in any way?

There are four situations where Rule of Three does not emerge.

  1. In partnerships: Where the whole industry is organised in partnerships. Example, consulting or accounting businesses. As soon as it moves from partnerships to corporate ownership, the Rule of Three comes in. Like it happened with ad agencies.
    (The Rule of Three will be a long time coming in India because we have so many family-owned businesses. Even if they are listed on the stock market, control is with the management.)
  2. When you have a patent that doesn’t allow anybody to come in. Like in pharmaceuticals, you have a monopoly of one company because they invented it.
  3. In a government-dictated market: Example, large-scale state enterprises in India.
  4. In regulated markets, like utilities, where you say it’s OK to have just one company.

Antitrust is now shifting its thinking. Instead of looking at just classical economic theories, they’re looking more and more to the newer theories coming in. 

How to build a research culture in management education

At an individual researcher level

  • In recent times, researchers have focused on incremental contributions rather than long-term contributions.
  • At an individual researcher level, you could broaden your scope, but it will take time.
    So, build research coalitions in different areas to make fundamental contributions.
  • Another option is to downsize and specialize in a narrowly defined research
    topic.

As an institution

  • The choice is somewhat simple: Decide, are you a specialist or a generalist? And act according to that strategic choice. 
  • The fundamental change is to discard the old regulatory framework of how we evaluate educational institutions’ contribution to society and how individuals can contribute to the institution. We have a legacy of the British system, where we have a University of Bombay or a University of Madras. At those universities’ level, a few people will do research and the colleges will be teaching colleges. Focus was on teaching. 
  • New thinking says, that’s only a teaching role and can be delegated to junior college assistants. Become research-oriented in which the faculty is interested.
  • Funding is key. It cannot depend only on tuition fees. Have industry, government and philanthropy contribute to academic institutions. In India, companies don’t have strong R&D. 
  • Another weak link is the doctoral education in management. Make doctoral programmes comparable to research-driven universities worldwide. That will create a next generation of scholars who have begun from a research rather than a teaching perspective.

Still curious?

Watch: Masterclass: The future of the MBA

Read: The race to build a ‘desi’ Super App by Haresh Chawla

Read: Three must-read books on strategy for the digital era by Rishikesha T Krishnan

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