Empirical Findings on “Rule of Three”
The article by Can Uslay, Z. Ayca Altintig, and Robert Winsor (“An Empirical Examination of the ‘Rule of Three’: Strategy Implications for Top Management, Marketers, and Investors”) in the March 2010 issue of JM is thought provoking. This study breaks new ground by empirically testing the “Rule of Three” proposed by Sheth and Sisodia that suggests that both strategic focus (generalist vs. specialist) and market share are related to firm performance.
A generalist is defined as a firm that “serves the general market with a full line of offerings and has 10%–40% or higher market share” (p. 21). In contrast, a specialist firm focuses on a market niche and has a market share below 5%. The Rule of Three specifically advances the following views or hypotheses: (1) In general, the competitive structure in mature industries is controlled by three generalist firms, (2) industries with three generalists perform better than those with a fewer or greater number of generalists, (3) both generalist and specialist firms perform better than firms that fall somewhere in between in terms of strategic focus, (4) the performance advantages stemming from market leadership diminish when market share is large, and (5) the financial markets are yet to fully recognize/acknowledge the Rule of Three and its influence over firm performance.
The authors augment the Rule of Three using ecological resource partitioning theory and industrial organization theory to advance formal hypotheses. Using COMPUSTAT/CRSP databases from 1997 and 2002, they present tests of several performance outcome measures: oROA, or operating return on assets; three-year oROA; CAR, or cumulative abnormal return; three-year CAR; and price–earnings ratio. Their empirical analyses support the hypotheses. Given potential definition problems and/or specific data characteristics or operationalizations, I found the authors’ attention to robustness checks to be especially impressive. In other words, they took special care to rule out the likelihood that the results were idiosyncratic to the manner in which the variables were operationalized.
The implications discussed with regard to the investor community are especially intriguing. For example, the authors argue that firms with a strategic focus between the generalist and the specialist (i.e., the ditch dwellers) may not be good long-term investments but could be excellent speculative investments.
As always, the views of JM readers on this featured article and this blog are most welcome. Your contributions help us advance research discussion for the benefit of our discipline.
Siva K. Balasubramanian, Web Editor, Journal of Marketing
