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If you are an R&D executive, here are some questions you should be asking:

Is your business growing nicely? 

Is it very profitable? 

If not, are you afraid, your business is losing competitiveness and profitability? 

If so, how should you innovate? For products? Processes? Markets?

Prof. Jagdish Sheth, Professor of Marketing, Goizueta Business School, Emory University, Atlanta, helps you think through using a model, the "Rule of Three." It is a powerful empirical construct based on an analysis of over 200 industries that helps one to understand the likely end-points of market evolution and to use them to develop successful growth strategies. 

Rule of Three: The idea

Competitive forces within a market end up creating distinct, recognizable, and repeating patterns in any given market. Typically in any one market, three market leaders, Big Three, emerge. These Big Three control 70-90% market share.

In US:

In a suburban shopping mall, you are likely to see, as anchor stores, three large stores such as Macy’s, J. C. Penney, and Sears, flanked by several smaller specialty stores.

In airline industry three big players are Delta, United, and American. 

For fast food the big three are McDonalds, Burger King, and Wendy's.

For smartphones the top three are Apple, Samsung and Nokia/Motorola.

For most industries you will find that three is the magic number.

In India:

For oil and petroleum, the big three are, Indian Oil, Reliance and Bharat Petroleum.

Rule of Three, Key Characteristics

According to Prof. Jagdish Sheth1, free markets evolve in a highly predictable fashion governed by the “Rule of Three”:

  • When a market gets organized by competitive processes and matures, it results in three full line generalists and a few product/market specialists.
  • The three full line generalists serve 70-90% of the total market with the smallest one exceeding 10%. 
  • The product/market specialists serve the balance of the market. For example, in an American suburban mall, the specialists include Limited (for younger women), Aeropostle (for teenagers), Victoria’s Secret (lingerie) and so on. 
  • While performance improves with market share for the large companies, it declines for companies with really small market share. There is a discontinuity in the middle, dubbed “the ditch” where companies are not profitable.
  • Small companies can still maintain high profitability by remaining specialists in niche products/markets. However, as they grow their market share, their performance declines.
  • If there is fierce fight between top two companies for market share, quite often, the company with 3rd largest market share ends up in “the ditch” and becomes unprofitable. Satyam comes to mind!
  • Very interestingly, Dr. Sheth observes that a company with the largest market share is typically the least innovative, they become complacent. Think Indian Airlines. A company with the third largest market share is likely to be the most innovative. 

Air India) used to be the biggest domestic carrier. When industry was opened up many newcomers joined in -- Deccan, ModiLuft, King Fisher, Air Sahara and so on. They thought it was a great growth opportunity. There were price wars; airlines were selling tickets for as little as Rs100! They were giving away gifts on each flight, serving hot dosas on a one hour flight! Many of these smaller airlines ended in the “the ditch.” 

In the current airline market, IndiGo is a notable exception, it has made a successful transition from 3rd position to 1st position in market share. Economic Times, March 28, 2015 reports IndiGo’s market share has grown to 37.1%. Jet Airways to 24.3%, whereas third place Air India’s market share has declined to 17.8%. 

What innovative strategies did IndiGo use to breakthrough in a commodity market place? 

IndiGo’s innovation strategy is simplicity. Use only one type of aircraft, be punctual and keep costs as low as possible. In my mind it sounds like Indigo is mimicking US based SouthWest’s strategy. In early 2000, in USA, two big airlines, Delta with Delta Song, and United with Ted, tried to emulate Southwest’s budget airline strategy. Both failed miserably. They both were operating “budget” airlines, but did not fully comprehend Southwest’s strategy! Simplicity sounds easy, but it is not. See Sayan Chatterjee’s Failsafe Strategies for an excellent account.

For R&D and Innovation, in terms of the Rule of Three, here are some questions to think through: 

In your industry, who are the Big Three companies by market share?

What is your company’s market share and rank?  

Where are you heading? 

Can you survive and grow and remain profitable? How? 

What role should innovation play in your growth strategy? 

Is your innovation strategy failsafe? Are you sure?

So crank up your Product Development engines...

And let the fun begin!

In the next issue we will share a key idea to get organized for innovation and get started.

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Source: 

Prof. Jagdish Sheth  A seminar presented by Dr. Sheth for ASEI. The Rule of Three: Surviving and Thriving in Competitive Markets, Jagdish Sheth and Rajendra Sisodia, Free Press, 2002

Matt Baxter-Reynolds The "Rule of Three" explains the smartphone market perfectly, http://www.zdnet.com/article/the-rule-of-three-explains-the-smartphone-market-perfectly/ August 15, 2013 

Sayan Chatterjee, Failsafe Strategies, Wharton School publishing, 2005


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