Market Share and Profit: The Rule of Three

Product & Brand ManagementUslay, C.; Altintig, Z. A.; Winsor, R. D. · 2010Journal of Marketing
Topicsmarket share·industry structure·profitability·market concentration·generalists·specialists·mergers and acquisitions

Imagine your team plans to grow share in a mature industry, on the usual assumption that more share means more profit. A generalist holds at least 10% of industry sales; a specialist, under 5%. Should your business pursue generalist scale or specialist focus?

Firms earn a higher operating return on assets in industries with exactly three generalists than elsewhere.

Data chart

Firms in three-generalist industries earn the highest operating return

Average operating income as a percent of assets in 2002, for industries grouped by how many firms hold at least 10% of industry sales each.

Zero to two generalists5%Exactly three generalists15%Four or more generalists7%
  • The same pattern appears in both years.

Firms in industries with exactly three generalists earn a higher operating return on assets than firms in industries with more or fewer.

Table 2, p. 27, mature U.S. industries; exact 2002 averages in bar order: 4.887%, 15.102%, 6.982%. The 1997 averages follow the same pattern: 5.522%, 16.520%, 5.424%.

Data chart

Intermediate-share businesses had the lowest operating return in 1997

Average operating income as a percent of assets in 1997, for businesses grouped by their share of industry sales.

Specialists under five percent share14%Businesses five to under ten percentshare6%Generalists at least ten percentshare11%
  • In 2002, the gaps in operating return were not reliable.

In 1997, specialists and generalists both earned a higher operating return on assets than intermediate-share businesses.

Table 4, p. 30; exact 1997 averages in bar order: 13.577%, 6.290%, 10.577%. In 2002 neither operating-return gap was reliable (10.609%, 11.762%, 12.425%); price-earnings ratios kept the pattern (22.54, 13.95, 18.74 in the same order). The above-40% comparison in Evidence uses a separate three-year measure from Table 6, not this axis.

Action guide

  1. Count your industry's generalists before approving more share.Firms earn higher operating returns where exactly three compete, the Rule of Three. Map the specialists and your own capabilities too.
  2. Choose scale or focus for any intermediate-share business.Such businesses usually trail specialists. Ask whether there is room for another generalist, or whether divesting could make the business a specialist.
  3. Approve growth plans on operating profitability, not share alone.Require profit evidence and a plan to build brand, customer and channel equity.
  4. If you lead your market, pilot demand growth when more share threatens profit.Near the limits of your scale economies, test recruiting nonusers or comarketing instead of winning rivals' customers. The study tested neither route.
  5. Pilot deeper loyalty and share of wallet within your specialist niche.Keep your focus. The study did not test it.

Evidence

  • In 2002, firms averaged about 15% operating return on assets in industries with exactly three generalists, about 7% with four or more and 5% with zero to two. The advantage remains after accounting for each firm's market share and its industry's concentration.
  • Intermediate-share businesses, with 5% to under 10% share, trail specialists in nine of ten comparisons. Generalists beat them in four of five 1997 comparisons, but in 2002 only the price-earnings ratio differed reliably.
  • In 1997, generalists above 40% share averaged about 9% operating return on assets over three years, against 11% below 40%. Annual operating returns did not differ reliably.
  • When the costs or risks of winning share threaten profit, marketing may grow industry demand without changing share.
  • Specialists may improve profitability by deepening target customers' loyalty and share of wallet within their niche, without necessarily increasing overall market share.

Key takeaway

Firms in industries with exactly three generalists earn higher operating returns than firms elsewhere.

Limitations

The study covers nonfinancial firms and business units in mature U.S. industries in 1997 and 2002. It shows association, not cause, and groups firms by share cutoffs meant as guidelines, not by their actual focus.

Source

Uslay, C., Altintig, Z. A., & Winsor, R. D. (2010). An empirical examination of the "Rule of Three": Strategy implications for top management, marketers, and investors. Journal of Marketing, 74(2), 20–39. https://doi.org/10.1509/jm.74.2.20

https://doi.org/10.1509/jm.74.2.20

Exact values behind the rounded figures: 2002 operating return on assets of 4.887%, 15.102%, 6.982% for zero to two, exactly three, and four or more generalists; 1997 operating return on assets of 13.577%, 6.290%, 10.577% for specialists, intermediate-share businesses and generalists; three-year operating return on assets of 8.670% and 11.008% for generalists above and below 40% share in the 1997 sample.

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