The Rule of Three and Four: A BCG Classic Revisited
The authors thank Can Uslay, Assistant Professor of Supply Chain Management & Marketing Sciences, Rutgers Business School; Ekaterina Karniouchina, Assistant Professor of Marketing, Chapman University; and Ayça Altintig, Assistant Professor of Finance, Claremont Graduate University, for their collaboration.
In “The Rule of Three and Four,” written in 1976, Bruce Henderson put forth an intriguing hypothesis about the evolution of industry structure and leadership. He posited that a “stable, competitive” industry will never have more than three significant competitors. Moreover, that industry structure will find equilibrium when the market shares of the three companies reach a ratio of approximately 4:2:1.
Henderson noted that his observation had yet to be validated by rigorous analysis. But it did seem to map closely with the then-current structures of a wide range of industries, from automobiles to soft drinks. He believed that even if the hypothesis were only approximately true, it would have significant implications for businesses.
Fast-forward to 2012. Has the rule of three and four held? If so, to what degree? Does it merit the attention of today's decision makers? Our analysis yielded compelling findings.