<\/a>On the right side of the graph, the most vulnerable is the No. 3 company, because it is closest to the ditch. In a growing market, the third full-line player continues to survive. However, when market growth slows, the two leaders aggressively fight for share. In the process, the No. 3 player (and any other aspiring full-line generalist) often gets pushed into the ditch. This is most common during tough economic times (such as the high inflation 1970s or the low-growth early 1990s), when overall market growth shrinks or is negative. This impels the No. 1 and No. 2 players to raise the competitive stakes and take market share away from the easiest target: the No. 3 player. For example:<\/p>\nAircraft Manufacturing<\/strong><\/span>: In the recession of the late 1970s, the intense fight for market share between Boeing and McDonnell Douglas pushed Lockheed into the ditch. Lockheed, which had been #3 behind Boeing and McDonnell Douglas before the emergence of Airbus, was forced to exit the commercial aviation market, and focus on the military market. Trailing badly behind Boeing and Airbus in the globalized commercial aviation market in the mod 1990s, McDonnell Douglas sought a deal with Taiwan Aerospace to make the fast-growing Asian market its second \u201chome\u201d and particularly to position itself for the fast-growing China market (with its $20 billion in backlog orders). When the US government disallowed this deal, McDonnell Douglas\u2019 options were limited; it could have emerged as a specialist producer of short-haul jets based on its MD-80 platform, or exited the commercial aviation market. In 1997, the company chose to accept a merger with Boeing, leaving the commercial aviation business without a third full line generalist. We believe this condition is temporary, and that a new full line generalist will eventually emerge.<\/p>\nBeer<\/strong><\/span>: In the late 1970s, Anheuser-Busch and Miller battled each other for market share; in the process No. 3 (Schlitz) and No. 4 (Pabst) were driven out. Now the combination of Coors and Strohs is positioning itself as the new No. 3 full-line player.<\/p>\nAutos<\/strong><\/span>: Chrysler\u2019s descent into the ditch in the mid-1970s had little to do with Japanese competition and everything to do with the fight between GM and Ford. After the 1974-75 energy crisis, GM redesigned the Chevrolet Caprice, a car that had great fuel efficiency and was rated by Consumer Reports<\/em> as a \u201cBest Buy\u201d for several years running. As a result, GM\u2019s market share in full-size cars jumped significantly. Ford was able to keep pace, but Chrysler couldn\u2019t. It went into the ditch, and then reemerged following its bailout as a marginal full-line player with an emphasis on minivans. Chrysler could have remained in the ditch, giving Toyota or Honda an opportunity to become the No. 3 player in the U.S. market. However, Chrysler pulled ahead through its acquisition of AMC from Renault, while Honda failed to rapidly expand its product line to include minivans and sports utility vehicles.<\/p>\nIn the short run, the third player may exit during market slowdowns or period of intense rivalry. At the end of such a period, there is usually another third player who emerges\u2013usually not the one that left.<\/p>\n
Importantly, niche players are not significantly affected by the competitive tumult among the generalists. The competitive challenge from full-line generalists primarily affects other generalists and would-be generalists. Successful specialists are generally secure in their own niches. For example, the beer battles left microbreweries unscathed, the cola wars had little impact on sports drink maker Gatorade, and corporate jet makers prospered even as the generalists fought for dominance in the commercial aviation market.<\/p>\n
<\/span>The Rule of Three and Globalization<\/span><\/h2>\nArtificial market structures outside Europe and North America are also giving way to the \u201cnatural\u201d market structure represented by the Rule of Three. For example, the great trading houses of Japan (such as Mitsubishi, Mitsui and Sumitomo) have long participated in numerous business sectors, supporting weaker businesses through interlocking shareholdings (the \u201ckeiretsu\u201d system, which creates a closed market within the overall free market). This has shielded many poor performing companies from market forces, and as a result has kept too many weak companies afloat in the market. In recent times, however, this system has finally started to break down. The discipline of a truly market-driven economy is forcing weak companies to exit or get acquired, often by global competitors.<\/p>\n
In South Korea, the huge diversified \u201cchaebol\u201d such as Hyundai, Daewoo, Samsung and LG (Lucky- Goldstar) have traditionally used their enormous clout with the government to maintain their leadership in virtually every major economic sector. The Asian economic crisis of 1997 and the conditions of the subsequent IMF bailout of South Korea started the process of breaking down this cozy relationship, and bringing market forces to bear to a greater extent.<\/p>\n
In India, most major industries have been dominated by the large industrial houses, many of them family controlled. Until a few years ago, foreign companies faced stringent restrictions on their ability to participate in the Indian economy. Capacity rationalization was nearly impossible to achieve as a result of licensing and the inability to \u201cdownsize\u201d (reduce the labor force) when market conditions so dictated. All of this is now changing, as economic liberalization and the demise of isolationist economic thinking have triggered a shift toward more freely competitive markets.<\/p>\n
The important and ongoing shift toward global markets leads to a significant corollary of the Rule of Three: No matter how large the market, the Rule of Three prevails<\/em>. In other words, when the scope of a market expands\u2013whether from local to regional, regional to national, or national to global\u2013the Rule of Three prevails, and further consolidation and industry restructuring become inevitable. Many nationally or regionally dominant companies find themselves trailing badly once the market globalizes.<\/p>\nFor example, though U.S. banks are still prohibited from true, no-holds-barred interstate banking, they are working around those restrictions with holding company structures making de facto<\/em> regional banking increasingly the norm. Consolidation through mergers and acquisitions is proceeding apace towards a Rule of Three market structure. Such a structure already exists in Germany and Switzerland. Likewise, the U.S. airline market has moved from a regional to national scope, and the process of sorting out full-line players from geographic specialists is underway, with the likely survivors being American, United and Delta. Cable television franchises, once the most local type of business, are consolidating into large regional players, with national and international consolidation following close behind.<\/p>\nBecause local or regional markets are relatively rare (and are usually maintained only through regulatory mandate), the most important transition is when a market organized on a country-by-country basis moves towards becoming truly global. A distinct pattern emerges when markets move to this level, offering some of the most powerful evidence for the Rule of Three.<\/p>\n
When the market globalizes, many full-line generalists that were previously viable as such in their secure home markets are unable to repeat that success in a global context. When this happens, we usually find that there are three survivors globally\uf8e7typically, but not necessarily, one from each of the three major economic zones of the world: North America, Western Europe and the Asia-Pacific region. To survive as a global<\/em> full-line generalist, a company has to be strong in at least two of the three legs of this triad.<\/p>\nIf a country has a large stake in an industry, it may be home to two or even all three full-line players. This was true in the aerospace market in the U.S., where the Defense Department essentially bankrolled the industry\u2019s technological superiority. Japan targeted industries such as consumer electronics, steel, shipbuilding and several others. In the long run, however, political considerations make it unlikely that one country could dominate a significant market globally. Thus, in the aerospace market, the historical dominance by U.S. companies led several European governments to boost Airbus to a position of global prominence.<\/p>\n
With globalization, the No. 1 company in each of the three triad markets is best positioned to survive as a global full-line generalist. Other players either go through mergers as a consequence of global consolidation, or they selectively exit certain businesses to become product or market specialist, often by geographic region.<\/p>\n
In consumer electronics, the U.S. market is now experiencing a fierce fight for market share between the Japanese (Matsushita\/Panasonic and Sony) and the Europeans (Philips\/Magnavox and Thomson\/RCA\/GE). This battle will determine which players survive as global full-line generalists. The U.S. presents an ideal battleground because there is no company with a \u201chome court advantage;\u201d since there is no major domestic consumer electronics player, there is little danger of government intervention.<\/p>\n
In the airline market, globalization is proceeding simultaneously with the market\u2019s evolution towards national competition after deregulation. Given the numerous restrictions on foreign ownership of airlines, and in the absence of true \u201copen skies\u201d competition, the global industry is organizing into three big alliances: Star Alliance (Air Canada, Lufthansa German Airlines, SAS, United Airlines and several others), Oneworld (Aer Lingus, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, LanChile and Qantas) and Skyteam (Delta, Air France, Aeromexico, Alitalia, CSA Czech Airlines and Korean Air Lines).<\/p>\n
<\/span>Strategies for Generalists vs Specialists<\/span><\/h2>\nFull-line generalists are first and foremost volume-driven players, while specialists tend to be margin-driven. In addition, successful generalists and specialists follow different strategies and have very different operating characteristics, as depicted in Table 1.<\/p>\n
\n\n\nCharacteristics<\/strong><\/td>\nGeneralists<\/strong><\/td>\nSpecialists<\/strong><\/td>\n<\/tr>\n\nSources of Advantage<\/strong><\/td>\n\u2022 Size x Speed<\/td>\n | \u2022 Selectivity x Service<\/td>\n<\/tr>\n | \nCost Structure<\/strong><\/td>\n\u2022 High Fixed Costs<\/td>\n | \u2022 High Variable Costs<\/td>\n<\/tr>\n | \nScope of Offerings<\/strong><\/td>\n\u2022 Full Line of Products<\/td>\n | \u2022 Limited Line of Products<\/td>\n<\/tr>\n | \nPositioning and Branding<\/strong><\/td>\n\u2022 One Stop Shop Positioning with Single Brand (Corporate) or Dual (Upscale and Mainstream) Brand Identity<\/td>\n | \u2022 Target Market Positioning, Multiple Brand Identity<\/td>\n<\/tr>\n | \nDistribution Channels<\/strong><\/td>\n\u2022 Multiple Channels<\/td>\n | \u2022 Focused Channels<\/td>\n<\/tr>\n | \nOrganization and Operations<\/strong><\/td>\n\u2022 Integrated Organization, Shared Operations<\/p>\n \u2022 Networks and Alliances<\/td>\n | \u2022 Multibusiness Organization, Dedicated Operations<\/p>\n \u2022 Vertical Integration<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Table 1: Generalists versus Specialists<\/strong><\/em><\/p>\n<\/span>Sources of Advantage<\/span><\/h3>\nBecause they are large, volume-driven players, generalists depend on economies of scale and the potential for selective cross-subsidization for much of their competitive advantage. They have large fixed assets in place, and their success depends heavily on their ability to maximize use of those assets. Such players create (and constantly must improve) an \u201casset-turns\u201d advantage\u2013the ability to reuse the same large variable and especially fixed assets (which could be retail floor space, a large factory, a national telecommunications network or financial assets such as working capital and inventory) continuously and efficiently.<\/p>\n Generalists achieve their value positioning through internal synergies, such as integrated operations, and external synergies, such as a single corporate identity. The cost savings enabled by these two factors, along with efficiency advantages derived from scale economies, enable generalists to offer superior value to many customer groups.<\/p>\n Specialists, in contrast, tend to emphasize service and selectivity rather than size and speed. Most specialists are also margin-driven players, due to the fact that they tend not to invest heavily in fixed costs. | | | | | | | | | |