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Q&A: Jagdish Sheth

Rule of three: Half-life lost?

Jagdish Sheth, the Charles H. Kellstadt professor of marketing at the Goizueta Business School of Emory University, Atlanta, Georgia, has authored such high-buzz books as Relationship Marketing and Internet Age Marketing, but is remembered most distinctly for his earlier work. Specifically, for his enunciation of the Rule of Three, an empirical construct that expects every mature competitive market (with minimal barriers in terms of licensing, patents and so on) to reach equilibrium with three full-line generalist companies. Any fewer, a third will come along (if not, the trust-busters should worry). Any more, somebody's going to get gobbled.

In an exclusive interview with BT Online's Aresh Shirali, Sheth speaks of this rule in the specific context of India's quest for competitive markets.

Q. Given that you place the "half-life of marketing knowledge" at a mere 18 months--and shortening--do you still deem your Rule Of Three as relevant today as when you first came up with it?

A. Definitely. The Rule of Three is not marketing, it is much more a pattern of industry evolution. How an industry starts, how it grows, how it matures, how it changes, you know, how it transforms. That pattern holds. What has changed probably, what is dynamic, may be the kind of industries that engage in the Rule of Three.

The four or five constraints that prevent competition from and shaping them towards the Rule of Three are going away rapidly. For example, a regulated economy. Any kind of trade controls and restrictions. Other barriers to entry, like patent rights. The fourth constraint has to do with ownership. Generally owner-managed industries don't follow the Rule of Three. But more and more companies are becoming publicly traded firms. So all the conditions we see not prevalent for Rule of Three, are coming together.

The Rule of Three is a stable phenomenon we have discovered that exists over time. So the half-life of knowledge does not work.

Q. So with markets liberalising, you stand firmly by your Rule, even more so...

A. Exactly. Especially here. The Rule of Three, which was not prevalent in India, is more and more likely to prevail now. All the classic signs are there. For example, lack of scale. A lot of companies are organised as independent companies, a lot of family-owned businesses, a high level of unorganised structure.

Q. Would you then say that Indian markets are evolving in the same way your theory predicts?

A. Absolutely. The first phase will see some contradictory behaviour. Companies that don't have scale economies will begin to have more and more problems. They will have to merge, acquire etcetera etcetera... consolidation and shake-outs will take place. Whether it's the cement industry, whether it's the banking sector, whether it's the telecom industry, it will follow the same pattern.

The more interesting thing is that--given India's uniqueness, which is the other side of the theory--while the Rule of Three will give us three big companies, there are a lot of opportunities for niche players. Now, more and more, niche markets and super-niche markets will grow. What are these niche markets? Given the cultural and geographical diversity, you will always find some new idea doing very well somewhere. You will see new cuisines coming out, new forms of beverages coming out. The Coca-Colas and Pepsis of the world will find some herbal product selling very well.

Q. But are you satisfied with the level of competition Indian markets are currently under?

A. No. We have too much family ownership of business in India. Even if the business is sold, families worry about succession planning--'what will my son or son-in-law or daughter do' kind of notion. That's one factor. The second factor is that we still unfortunately have a lot of leakages--which means they didn't pay taxes. So it's a great business. But it isn't viable without all the subsidies. These things are prohibiting the full force of competition.

Q. Are family businesses insufficiently profit-oriented in their objectives? Are they overly sentimental? Why should family ownership make such a large difference to the competitive scenario?

A. They're profit-oriented, okay? They may have significant amounts of profits. But they are not getting the value of their companies. They would make more money if they sold the firms than if they continued to run them. They think, "It's a good steady income I'm getting, so why let it go?"

Also, the Indian stockmarket was organised in such a way that we have allowed families with very low equity of their own--10 to 15 per cent--leverage the rest quite effectively. Given that, there are no real incentives to let the companies go. They're getting to use public money to do what they want to do, by and large.

Q. A lack of growth orientation then...

A. Exactly. Study after study has shown that family-owned businesses like to plateau and don't like to grow. They make a nice living, and there's little incentive to grow. There is little stock market pressure.

Q. But open markets are supposed to be changing that, aren't they?

A. It's going to happen. Competition is coming in, but not as strongly as it could. Surprisingly, the multinationals have not done as well, except Hindustan Lever, which is more an Indian company really. Multinationals like Procter & Gamble have not done very well, so we in India have this false sense of security that it means we must be very good--you know, that the business is sustainable.

But the competition is going to come more through trade than companies investing in India. Foreign competition through imports is going to reshape industries.

Q. You said once that niche companies can become mainstream full-line ones only if there are two or fewer mainstream firms in the market. Is that because incumbents are so difficult to overthrow?

A. Incumbents are very powerful in terms of capacity, capital and customer base. And remember, customers have inertia. The only way you can bring about a change as a niche company is if you have a technology or expertise that is so superior that the old incumbents have an inherent weakness. Take the classic example of watchmaking. In the old days, the Swiss were making hand-made watches, one watch at a time, with jewelled movements--very expensively. Then America invented factories with assembly line mass production, you know Henry Ford, and that changed the paradigm and Timex became the largest watchmaker. Then came the Japanese with quartz, and now, it's almost all Japan.

So, yes, a niche company can become mainline if there's a significant paradigm shift. Other than that, if the incumbents are organised around regulation, and if all of a sudden there's massive deregulation, niche players could take advantage of that. For example in America's airline industry, which had what's called 'big bang' deregulation, large carriers like PanAm, which used to be No. 1, and Eastern Airlines have died. The new guys that came in were Delta, United Airlines and others--and now they're suffering because the paradigm is shifting, not in terms of regulation but cost structure. The newer airlines in the world have a much lower cost base, like Ryanair which flies you from Ireland to England in six pounds. Incredible. They've made a claim that they'd like to fly passengers free. They believe it's like an entertainment business. They get the passengers and then the advertisers would show up, and money will be made on snacks, meals and soft drinks. It's a whole new paradigm. How do you compete with somebody like that? There's EasyJet, there's Ryanair, there's Jet Blue. There's a company in Atlanta called Aiaaiair Tram growing like crazy.

Q. So incumbents can get overthrown if they get fossilised in their thinking.

A. Exactly. What was once the core competence can become the core liability.

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