Size Matters

As the last of the rubble is cleared away from the dot com bust perhaps some perspective is needed. According to author Donald Sull back in 1920 there were over 400 tire manufactures and in one city alone 122 tire company owners were millionaires. Then, in similar fashion to the dot com bust the inevitable industry shake out occurred and ten years later there were five large tire producers left standing who collectively controlled 80% of the market (in the year 2002 we're now down to three).

Two marketing professors studied over 200 industries and noticed a phenomenon they called the "Rule of Three". Basically the rule of three states that in any free market (and in any geographical market this also held true) as the market matures it will evolve in a highly predictable fashion moving to three main competitors. Their empirical study showed that in any mature market there are traditionally three main competitors or generalists who control between 70% - 90% of the market and earn a decent return on their investment. Although there were some exceptions the market generalists with the highest market share also had the highest ROI for that industry.

As new markets emerge, as with the dot com market, the market is usually unorganized with numerous small players. As the market expands there is generally market consolidation as players buy each other up and others drop out. This process repeats itself with "uncanny regularity" consistently leaving three large players in industry after industry. Secondly, this market consolidation often takes place during industry expansion. Typically, according to the authors the top three players end up with 40, 20 and 10 percent market share.

Companies with market shares below 10% are in danger of extinction. The only hope held out for small players is to specialize - in other words become leaders in a very narrow segment of the market where they can command superior prices for special technology. Siemens cell phones may have been an example of this in a market dominated by Nokia, Motorola and to a lesser extent by Sony/Ericssson.

Other interesting findings pointed out that once a market is mature; the number one market share leader is the least innovative while the number three is usually the most innovative. However the authors pointed out that the number three's innovations are usually "stolen" by the number 1 company.

It is important to identify market sectors where a company can build a leadership position or move to a strong number two position. If one determines that a number one or two position is not attainable, given the overwhelming evidence, one should consider moving out of that business and applying those resources to build business units that currently are (or have the potential to be) winners.

Understanding where your products and services stand in the market place is important. It has huge implications on your company's ROI and profit. Plot your portfolio - weed out the laggards and strengthen the winners. Size does matter!

1. Plot your product portfolio - find the products where you're a leader or a strong number two. (Be careful to define your market well as leadership need not be worldwide leadership).

2. Look for products in your portfolio that are laggards - is there a future for them - are they adding to or detracting from company growth?

3. Develop strategies to become the market leader or a strong number two. The best time to initiate a strong challenge is when there is a technological step change and customers must retool.

4. Number 2 and especially number 3 companies are often more innovative. Integral to an innovative company's product development must be a strategy to block your competitors from coming in late with copy cat products or services.