Business strategy for leading and specialist firms in any full-service, multi-product business always is constrained, especially when markets have reached a stable configuration. The leading two firms by market share actually have disincentives to launch attacks aimed at gaining share, though the temptation for the number-three provider to launch attacks is higher, if risky.
Smaller firms simply have to find sustainable niches, and cannot contemplate broad market leadership.
“The financial performance of the three large players improves with increased market share-up to a point, typically 40 percent,” said professor Jagdesh Sheth. “Beyond that point, diseconomies of scale set in, along with the potential for regulatory problems related to heightened anti-monopoly scrutiny.”
That perhaps explains the stability of market share once the pattern is established. Once reached, it is no longer advantageous to push for additional market share: the leader because diseconomies set in; for the number-two provider because it does not have the resources to dislodge the leader.
When the market leader has share of 70 percent or greater, there might not even be room for a second full-line generalist provider. “When IBM dominated the mainframe business many years ago, all of its competitors had to become niche players to survive,” Sheth said.
When the market leader has a share of between 50 percent and 70 percent, there is often only room for two full-line generalists. When the market leader enjoys considerably less than a 40 percent share, there may--temporarily--be room for a fourth generalist player.
The minimum market share for a company to be viable as a full-line generalist is 10 percent.
“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976. Professor Jagdesh Sheth likewise has written about the Rule of Three.
Notably, Sheth’s analysis parallels competitive market outcomes predicted by Henderson in 1976, though few telecom markets yet seem to have the idealized pattern, suggesting the markets are unstable, and will continue to change.
Still, Sheth’s rule of three observations do seem to apply fairly well to changes in the telecom markets in the competitive era, allowing for the existence of big original monopolists that were disrupted by the switch from monopoly to competitive frameworks.
Sheth’s analysis suggests that a “typical competitive market starts out in an unorganized way, with only small players serving it.” Consolidation happens, resulting in the emergence of a handful of “full-line generalists” surrounded by a number of “product specialists” and “market specialists.”
In other words, a small handful of market share leaders is augmented by many specialist firms of smaller size that do not serve the full range of market segments. You might say that mimics the long tail structure many markets--including the connectivity business--assume as well.
“With uncanny regularity, the number of full-line generalists that survive this transition is three,” Sheth said. “Typically, the market shares of the three eventually hover around 40, 20 and 10 per cent, respectively.”
“We have found that the extent of market share concentration among the big three depends on the extent to which fixed costs dominate the cost structure,” according to Sheth.
There are implications for specialist providers, as well.
Given that specialists can only survive in niches, the performance of specialist companies deteriorates as they grow market share within the overall market, but improves as they grow their share of a specialty niche. In other words, “lead in a segment” works, while trying to compete with the giants fails.
However, specialists sometimes can make the transition to successful full-line generalists when there are two or fewer incumbent generalists in the market. There the strategy is to try and become a new number three in the generalist market.
Specialists thrive especially when markets are fragmented, as by geography. Many smaller firms avoid competing with others in the same market segments because they operate locally.
Successful “super-niche” firms might be functional monopolists in their small niches.
Firms sometimes try to grow by acquiring many smaller firms in a segment. That “roll up” strategy of amalgamating assets can lead to leadership of a niche, emergence in a broader or different category, especially if there is no viable third-ranked supplier to block them.
The general rule is that, for most firms, sustainability in a settled market hinges on clear adherence to a niche or super-niche.
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