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BCG Classics Revisited: The Rule of Three and Four

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  • In 1976, BCG founder Bruce Henderson posited that a “stable, competitive” industry will never have more than three significant competitors, and the industry's structure will find equilibrium when the three companies' market shares reach a ratio of approximately 4:2:1.

  • BCG research confirms that Henderson's observation was valid when he made it and has remained valid over the decades for prescribed industries.

  • This “rule of three and four” does not seem to apply to the growing number of more dynamic, unstable industries, or to industries where regulation hinders genuine competition or industry consolidation.

 

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To mark The Boston Consulting Group’s fiftieth anniversary, BCG’s Strategy Institute is taking a fresh look at some of BCG’s classic thinking on strategy to gauge its relevance to today’s business environment. This first in a planned series of articles examines “The Rule of Three and Four,” a Perspective written by BCG founder, Bruce Henderson, in 1976.

BCG Classics Revisited

In “The Rule of Three and Four,” 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.

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