After What They Think published my article Survival of the Small and Mid-sized Printing Company in Today’s Chaotic Environment, Scott Johnson commented with some nice words and the question: Had I read the book The Rule of Three: Surviving and Thriving in Competitive Markets? I had not read it but out of curiosity I found it, bought it and read it.
Published in 2002, the book was written by Jagdesh Sheth and Rajendra Sisodia. It is based on their research about structural changes that occur as industries grow and mature. According to these authors, naturally occurring competitive forces – if allowed to operate without excessive government intervention – will create a consistent structure across nearly all maturing markets and industries.
The structure that emerges will have two major groups. There will be, for a while, a third group that will eventually blend into the other two groups. I will say more on that group in a minute.
The dominant group will have 3 players. They will control over 50%, maybe up to 75% of all industry revenues. They can all be characterized as full-line generalists. They offer a wide range of products and services that comprise the bulk of the industry’s offerings. In doing so, they serve most of the major market segments in the industry. Just to reinforce the point, all of the $1 billion plus US printing firms have been formed by consolidating market segments. The two largest, RR Donnelley and Quad have participated in the consolidation of several segments.
The second group is a much larger collection of much smaller, on average, competitors. These will tend to be product specialists, i.e., direct mail providers in the print industry, or market specialists, i.e., printers who focus on specific vertical markets like retail. Some may become what the authors refer to as “super nichers” who specialize in a specific product category within a specific market segment. A hypothetical example in our industry would be a firm providing direct marketing services to the grocery store retail segment.
I mentioned a third group. As industries and markets mature and begin consolidating, there is, for a while, a third group. According to Sheth and Sisodia, this group is comprised of:
- Firms too big and broad to compete effectively in a niche;
- Firms too small to scale up to the efficiencies enjoyed by the big three.
Distressingly, over time all of the members of this group demonstrate the worst financial performance of any companies in the industry.
The fate of this group tends to end in one of three ways:
1) They are acquired by one of the big three as industry consolidation progresses;
2) They go out of business when they run out of cash;
3) They successfully shrink to become an effective niche player.
Until one of these three alternatives plays out, this group operates in the industry’s “no man’s land”. I suspect there is an analogous parallel to the firms in our industry who are between $6-10million in annual sales. Looking at their average margins, they are worse both than size groupings above and below. As a group, they are leading the way in being acquired by larger firms. Most have shrunk over the past 4-5 years, and if they can successfully get rid of some debt may still be sold or emerge in a newly invented form as a niche player.
This should all sound very familiar to industry veterans who have, as have I, watched and participated over the last 25 years in the print industry. We have seen it go through the process of maturing and, due to the impacts of factors both technological and economic, watched total industry revenues crest and begin to decline. We didn’t know it but the Rule of Three has been playing out in print as an industry. The process is, by no means, complete.
A number of thoughts come to mind:
- Given the wide diversity of traditional industry segments, the process may not yet have yielded our “Big Three”. In the US, two of them may have emerged but the number three is still up for grabs. On top of that, the forces of globalization, as also predicted in the book, will eventually create a global “Big Three”. Who knows where the US big three will settle out in that hierarchy?
- The average size of the big three, obviously, will be well north of a billion dollars in annual sales. The average size of the smaller niche player group is, at this point, unpredictable. There is plenty of room for larger niche players who can create a niche so specialized as to be un-assailable by one of the big three.
- What’s next for those of us not swept up in the sphere of an emergent big three? Sheth and Sisodia offer 8 strategies for the niche specialists. We’ll explore some of those in my next article.
Bear in mind the lifecycle of a business, market, or industry. Eventually, they run the course. This is true of niches. They don’t last forever. But if you manage the lifecycle of your business with that in mind, you’ll have your next niche well staked out before the current one runs out of steam.