BCG's Rule of Three and Four Strategy Framework Template

Description
In 1976, Bruce Henderson, founder of BCG (The Boston Consulting Group), published a paper called "Business Unit Strategy Growth: Rule of Three and Four" (see link to original paper here: https://www.bcg.com/publications/1976/business-unit-strategy-growth-rule-three-four ). In short, he argues that a "stable, competitive" industry will naturally be caped at 3 significant competitors. Also, he puts forward that the structure of market shares of the top 3 competitors in the industry will correspond to approximately a 4:2:1 ratio (i.e. the top competitor's market share is roughly four times as large as the third, and the second twice as large as the third...). The essence of his framework is not on its mathematical exactitude but on the magnitude of differences between leaders and market share structures in a given industry, and its inexorability over time.

The main underlying force behind this "ending status quo" is the The Experience Curve Effect. Indeed, at relatively similar level of market shares, the actor that has a relative share gain will both gain a volume and cost advantage that will exponentially compound to gather even more market share, and larger profits.

However there are exceptions:
- industries in which shared experience is high between a market sector and the rest of the market, enables a low share competitor to dominate a specific market sector (e.g. low cost).
- a successful company, owning a minority share in a given market, is willing to invest heavily in a "marginal minor product" (often caused according to Henderson by "accounting averaging, full line policy, or mismanagement").

Extract of a selection of strategy implications of the Rule of Three and Four Framework according to Henderson:
♟ - in a market with many competitors, only a few will remain (unless an external contraint or regulation limits this).
♟ - to survive in the market, and even to maintain their relative market share, actors will have to grow faster than the market average
♟ - the cost of growing for losers is increasingly higher in terms of cash flows (you loose increasingly).
♟ - except for the two largest competitors, the others will eventually be eliminated or will have to be "cash traps" where the company will have to keep reinvesting to maintain a presence or temporary profits
♟ - aiming at second place, or cashing out investments fast, are the most ROI effective strategies
♟ - thinking about the actual definition of the market in which one company's products or services is playing in becomes a key focus, as to constantly find new pockets of market leadership
♟ - knowing at the highest possible all aspects of "the leader" in the market becomes key, as he is the one defining the global behavior and destiny

In 2012, Martin Reeves, Michael Deimler, George Stalk, and Filippo Scognamiglio revisited the Rule of Three and Four BCG classic in a publication, aiming to check how Henderson's theory stood the test of time (alias since 1976). Indeed, Henderson had noted that his theory needed to be challenged by detailed analysis with time, to complete or nuance his conclusions. Their findings confirmed Henderson's intuition, in particular when analyzing the evolution of the US Rental-Car industry from 2007 to 2011. See their publication on BCG's blog here: https://www.bcg.com/fr-fr/publications/2012/business-unit-strategy-the-rule-of-three-and-four-bcg-classics-revisited

The implication for decision makers of the Rule of Three and Four, is for them to analyse whether their company is playing in an industry in which the rule applies. If so, this entails the dominance of market-share gain strategies, and the desire to become the leader on the market (automatically you get roughly twice as big as your challenger). For business leaders thinking about positioning products / services in such industries, it means carefully assessing the potential to rapidly beat competition and become the leader (which in stable, long-lasting industries, is a tough run... appart from attempting to severely disrupt it).

For example, on the one hand, the following market share structure in a fictive industry ✅ FOLLOWS Henderson's Rule of Three and Four (MS = Market Share):

- Competitor 1: 44% = Competitor 3's MS x 4
- Competitor 2: 20% = Competitor 3's MS x 2
- Competitor 3: 11%
- Other Competitors: 25%

💡Typical Markets that FOLLOW Henderson's Rule of Three and Four: Machinery manufacturing (Agco, John Deere and CNH), Car rental companies (Avis, Hertz, and Enterprise);
Household appliances (Electrolux, Whirlpool, and GE), Credit-rating agencies (Transunion, Experian, and Equifax).

On the other hand, the following market share structure in a fictive industry ❌ DOES NOT FOLLOW Henderson's Rule of Three and Four:

- Competitor 1: 37% = Competitor 3's MS x 1.4
- Competitor 2: 29% = Competitor 3's MS x 1.1
- Competitor 3: 26%
- Other Competitors: 8%

💡Typical Markets that DO NOT FOLLOW Henderson's Rule of Three and Four: Investment banking, Consumer electronics, IT software and services, Life insurance, Telecommunications or other industries regulated to foster more intense competition to prevent oligopolies/ monopolies.

📚 Other pertinent readings on BCG's Henderson Rule of Three and Four Strategy Consulting Framework:
→ Think Insight's comprehensive blog post on the topic (Origins, The Rule, Exceptions to the rule, Case study – US Car rental industry, For decision-makers, Advantages, Disadvantages): https://thinkinsights.net/strategy/bcg-rule-of-three-and-four/
→ Business Strategy Hub's Blog post on "The Rule of Three and Four: Become the market leader, or exit the market" (with interesting thoughts on industries where this BCG framework is applicable or not): https://bstrategyhub.com/bcg-rule-of-three-and-four-become-the-market-leader-or-exit-the-market/

The Best Practice is:
- 3 editable Microsoft PowerPoint Template Slides + underlying Excel Models
- with an online & offline 15 step-by-step methodology, with pedagogical illustrations for each step.

Should you have any questions on using this top tier BCG Industry/Market Analysis Management/Strategy Consulting Template slide, you're welcome to reach out to me via Private Message.

Good luck!
- Tim

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