BCG Classics Revisited: The Rule of Three and Four
This BCG Perspective written in 1976 by the firm’s founder, Bruce Henderson, remains valid for prescribed industries today.Learn More
BCG takes a fresh look at some of the firm’s classic thinking on strategy in order to explore its relevance in today’s business environment.
In 1976, BCG founder Bruce Henderson put forth an intriguing hypothesis about the evolution of industry structure and leadership in “The Rule of Three and Four.” 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.
To test Henderson’s theory, BCG—working in collaboration with academics from Chapman University, Claremont Graduate University, and Rutgers University—studied industry data from more than 10,000 companies dating back to 1975. Analysis confirms that Henderson’s hypothesis was indeed valid when he conceived it—accurately describing the market share structures and trends in a wide range of industries at that time.
And the rule of three and four remains relevant today—in a business environment that is, in many respects, profoundly different from the landscape of 1976. Its implications continue to provide guidance for decision makers working in environments where classical business strategies hold.
For companies in increasingly unstable environments, a new set of rules applies—one that calls for more adaptive approaches to strategy.
The experience curve is one of BCG’s signature concepts and arguably one of its best known.
The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of “experience,” or accumulated production volume.
The type of experience that the classic experience curve refers to—the ability to produce existing products more cheaply and deliver them to an ever-wider audience—can be considered experience in fulfilling demand. But to win in today’s environment, many companies also need experience in shaping demand, or creating demand for new products and services.
The second type of experience must be acquired through new and different means that can sometimes be in direct conflict with the current means an organization employs to acquire experience. But failure to make this shift can exact a significant toll—ranging from the loss of a leadership position to outright business failure.