VOLUME 03BEACONJULY 2015 i ISSUE 07

VOLUME 03BEACON ISSUE 07JULY 2015

ContentsABOUT US

OUR TEAM

INDUSTRY ANALYSIS

COMPANY ANALYSIS

BRAND ANALYSIS

CONCEPT OF THE MONTH:RULE OF THREE & FOUR

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OUR PRESENCE

ABOUT US

VISION

The SIMCON - SIMSREE consulting club is an initiative started in 2012 for those students in pursuit of excellence in management consulting and strategic management. Aimed at creating awareness among the students about consultancy as a discipline, the club strives to maintain strong relations with top consultancy firms and provide platform to craft highly skilled & competent consultants from SIMSREE. The club is a resource for information about consulting and a place for students to obtain real-world consulting experience.

SIMCON provides an avenue of interaction among faculty, students and alumni through competitions, live projects, guest lectures, and conclaves. For this purpose the club has also been publishing its monthly newsletter – BEACON (BE A CONSULTANT) and maintains a FACEBOOK PAGE where latest news and development in the consulting industry are posted.

MISSIONTo create awareness amongst the students about consulting industry & its latest trends.

To maintain strong relations with top consultancy firms.

To provide platform to craft highly skilled & competent consultants from SIMSREE.

To provide exposure to students via competitions, live projects, guest lectures & conclaves.

Contributions invited:To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is YOU. We invite articles, research papers, and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to simcon.simsree@gmail.com.

Best Regards,SIMCON - SIMSREE CONSULTING CLUB

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OUR TEAM

SANANDAN DESHPANDE

NIKHIL RAO

AMEYA MAHABAL

CHITRA WANI

deepesh jethwani

krishna nain

prathamesh indani

Sushil Gurav

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INSURANCE INDUSTRYINDUSTRY ANALYSIS

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Introduction - Insurance Industry

As of 2015, the macroeconomic factors (like GDP), across many parts of the world, have shown significant improvement. The number of people belonging to the middle class and the HNIs has been increasing and also their financial resources are on the rise. These factors significantly help international property-casualty and life-annuity insurance companies.The key challenges in 2015 include-• Rising competition• Generally soft pricing conditions• Tight profit margins

According to IMF, the Asia Pacific Region is forecasted to have a GDP of 5.5% in year 2015. But the economic growth is likely to be diminishing thereby affecting the demand for life and non-life insurance products. However, the growth is still higher than that in the US and EU. The region will continue to attract foreign insurers. The life insurance and annuities in the US have their prospects generally upbeat in 2015. The net premiums in the US life insurance segment totalled $629 bn. The U.S. insurance industry’s net premiums written totaled $1 trillion in 2013, with premiums recorded by life/health (L/H) insurers accounting for 54 % and premiums by property/casualty (P/C) insurers accounting for 46 %, according to SNL Financial. In 2013, Emerging Asia was the main contributor to insurance growth, accounting for 29% of all global growth.

Insurance Industry in India

India was ranked 10th among 147 countries in the life insurance business, with a share of 2.03 %, in FY13.

Segments

The insurance sector can be divided into 3 segments namely:

INSURANCE INDUSTRY

LIFE INSURANCE NON-LIFE INSURANCE RE-INSURANCE

The life insurance premium market in India grew at a CAGR of 16.5 %, from US$ 11.5 billion in FY03 to US$ 52.9 billion in FY13, whereas the non-life insurance premium market rose at a CAGR of 14.9 %, from US$ 2.9 billion in FY03 to US$ 11.6 billion in FY13.The share of the private sector in life insurance market has been growing over the years, from around 2% in FY03 to 27 % in FY13.According to IBEF, the total market size of the insurance sector in India is projected to touch US$ 350-400 billion by 2020. India accounts for about 2% of the world’s life insurance premiums despite being the second most populous nation. In India, Life insurance penetration is just 3.1% of GDP, which has almost doubled since 2000. While the Indian non-life insurance segment has evolved significantly over the past decade, the insurance density and penetration levels are significantly lower as compared to the developed and some of the developing countries. As of February 2015, the insurance sector of India consists of 52 insurance companies of which 28 are in non-life insurers and 24 are life insurers. LIC (Life Insurance Corporation of India) is the sole public sector company among the life insurers. There are 6 public sector insurers among the non-life insurers. GIC (General Insurance Corporation of India) is the sole national re-insurer. The Insurance companies in India have entered into JVs with foreign companies. The JV between Bharti Enterprises and AXA group is an example. Bharti AXA Life is a life insurance player which was started in the year 2006. It has strong financial expertise of AXA Group- Paris-headquartered and Bharti Enterprises - one of the India’s leading business groups. The joint venture (JV) has a 74 % stake from Bharti and 26 % stake from AXA.

Demographic Performance of Industry

In US, the % population in the age group of 25-40 is set to decrease. Around 12% of men and 12% women were in the age group of 25-40 in 1950 but it dropped to 10.2% and 9.9% in 2010 and it is further expected to drop to 9.6% and 9.1% respectively by 2050.

Source: CIA World Factbook, August 2014

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Porter’s Five Forces

Threat of New Entrants - HighThe threat for new entrants lies within the industry itself. They are running the threat of being squeezed out by big players. Another threat is other financial services companies entering the market.

Bargaining Power of Suppliers - MediumFor the insurance industry, the source of funds is the premium paid by its customers, hence intertwining the customer & suppliers here. The suppliers of funds here, hence have the option of choosing from various insurance agencies. However, the insurance agencies cannot reduce the premiums below a minimum support level. Thereby, the bargaining power of suppliers is medium.

Bargaining Power of Buyers - Moderate to HighThere are 2 types of buyers/consumers- individual and corporate. Large corporate clients who pay millions of dollars in premium have a lot more bargaining power than individual clients. As a whole, the buyers have moderate to high bargaining power.

Threat of Substitutes - LowThere is no real threat of substitutes for the insurance industry. However, PPF and PF can act as low level substitutes.

Intensity of Rivalry - HighThe Insurance companies with low cost structure, better customer service and greater efficiency will be able to beat out its competitors. Considering that more than 50 companies exist in this sector, the intensity of competition would definitely be high.

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Impact Analysis

• Increase in FDI cap from 26% to 49%For growth purposes, it is very much essential that a lot of capital is made available. A bulk of this could come through the FDI.

• Foreign Re-insurersForeign re-insurers possessing a minimum net-owned fund of Rs 5000 Cr must now register with IRDA if they intend to open branches in India.

• Re-Insurance definedThe term “re-insurance” has been defined in the Bill for the first time and refers to insurance taken by an insurer from a re-insurer, only for a part of the risk in the insurer’s insurance policy. The re-insurer will be paid a “mutually acceptable premium” for its services by the insurer. The effect would be that the insurer cannot insure 100% of its risk through a re-insurer.

• Raising CapitalThe GIC and other public sector general insurance companies have been permitted to raise capital for increasing their business in social and rural sectors. The only condition is central government should maintain minimum 51% shareholding.

• Fewer CompliancesThe 2015 amendment to insurance bill has done away with the following requirement- Indian promoters must bring down their stake in insurance company to 26% after a 10 year period, from day the insurance company started its business. The Indian promoters had previously raised concerns over being the minority shareholder while foreign investors gain the majority stake.

Latest Trends

These are the 4 technologies which the companies in this sector should integrate in 2015-• Big Data AnalysisThis would most probably help in improving the efficiency in various ways such as catching fraudulent claims or improving the swiftness of adapting to the changing client needs and expectations.

• MobileMost of the major insurance companies already offer access to quotes, claims support or roadside assistance via mobile apps.

• Re-Engineering UnderwritingInsurers would assess risks and liabilities in much more sophisticated ways by using spatial data, such as google maps, public statistics on crime, income, education and health care.

• Cloud/Client ComputingMany of the insurance carriers are using cloud computing and more would join in the coming years so this trend is expected to continue.

ReferencesPWC , IBEF , Policy Holder , EY

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RELIANCE - GENERAL & LIFE INSURANCECOMPANY ANALYSIS

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History of Insurance in India

Life Insurance came to India from England in 1818. Oriental Life Insurance was the first company set up in Calcutta which insured only the Europeans. Later, after a lot of efforts of some leaders like Babu Muttylal Seal, foreign companies started insuring Indians albeit with higher premiums. Indian insurance companies started with very patriotic and nationalist motives of social service through insurance. Bharat Insurance Company (1896) started like this. In the year 1912, Life Insurance Companies Act came into existence and it brought in the standard of setting the premium tables by actuaries.

Reliance Capital

Reliance Insurance business is a part of Reliance Capital owned by Mr Anil Ambani. The Reliance Capital structure is shown as below:

Reliance Capital

Asset management

Insurance Commercial Finance

Broking & Distribution

Other

General Insurance

Life Insurance

A) GENERAL INSURANCE

Reliance was one of the first companies to apply for insurance licenses after the liberalization of the insurance business in 2000. It ventured into General Insurance and soon became one of the top private players in the business. It soon grew in size and business and today it provides nearly 94 customized insurance products to cater to various segments like Motor, Health, Travel, Home, Corporate and SME insurance. Reliance has over 200 offices inthe country spread across 173 cities and 22 states.

Product Basket

1) Health Insurance: RelianceHealthWise Policy - Standard, Silver and Gold Plan, Critical Illness Policy,

Individual Mediclaim Insurance Policy

2) Motor Insurance: It helps to meet the expenses of repair and damage in case of any accidents. One of the products of motor insurance is ‘Reliance Two wheeler Insurance Policy’

3) Travel Insurance: Reliance travel care insurance policy for individuals and family, Schengen, Asia and Reliance Pravasi Bharatiya Bima Yojana

4) Student Travel Insurance: For students planning to travel abroad to pursue international education reliance offers ‘Reliance Travel Care Insurance for Students’

5) Accident Cover: Reliance Individual Personal Accident Policies

6)Home Plans: Plans to safeguard your homes against burglary with plans like Household Packages

7) For Corporates: a) Fire Insurance b) Engineering insurance c) Marine Insurance d) Liability Insurance e) SME Plans

Key Executives

Name DesignationMr. Rakesh Jain CEO and Executive DirectorMr. H. Ansari Independent DirectorMr. S. P. Talwar Independent DirectorMr. Soumen Ghosh Non-Executive DirectorMs. Kirti Kothari Actuary Department

Financial Overview

The company recorded an underwritten Gross direct premium of 2,388.83 crore in 2013-14 recording an increase of 19% over last year. According to industry reports from IRDA, the gross direct premium recorded by the industry was 77,538.25 crore in 2013-14 with an increase of 12.23% over the last year. This goes to show that Reliance General Insurance performed better than the industry.

Following is the graph which shows a gross direct premium for last 4 years and loss due to insurance throughout. A trend that can be seen is that throughout these years the loss has been reducing drastically. Losses due to insurance happen as a result of third party car insurance. IRDA has increased the

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premiums for third party car insurance as it became very tough for companies to bear losses.

One of the important incomes for the insurance companies is the income from investments. Reliance earned 426.16 crores from investments in the year 2013-14.

0

500

1000

1500

2000

2500

0

50

100

150

200

250

300

350

400

Gross Direct Premium (Rs Cr) Loss from Insurance (Rs Cr)

2013-20142012-20132011-20122010-2011

Investments

The investments were placed in different asset classes. The debt part of it comprised 98.38% while the equity part 1.62%. The debt part comprised of the following as shown in the graph:

Money market and Fixed Income

AA/AA-/A+

AA+

AAA

Sovereign Bonds

Portfolio (in %)

36.38%

32.78%

12.54%

7.16%11.13%

Business Segments

Revenues for the general insurance business are divided amongst fire, marine, miscellaneous insurances. The largest premium is recovered from fire insurance, which is also the only profit making segment. The premiums earned and the profitability of the business segments can be shown as below:

Miscellaneous

Marine

Fire

Premium Earned (in Rs '000)

97%

2%1%

Insurance Profit/Loss( Rs’000)Fire 2,28,879Marine -5,958Miscellaneous -4,56,605

Key Ratios

Ratio Head Mar ‘13

Mar ‘14 Implications

Gross Direct Premium to Net Worth ratio

2.58 2.82 This shows the increase in the business. The d e n o m i n a t o r includes profits of the business also. So if the ratio has increased it also implies that volumes in the business have also increased.

Net Earnings ratio

-6% 3% With the increase in profits i.e. change from losses to profits, net earnings to ratio has been positive and it is expected to grow further

O p e r a t i n g Profit ratio

-10% 0% As the underwritten profits increase this ratio increases

Competitor Analysis

Private companies have a 43% market share of General Insurance in India, while the majority 57% is still with the public sector companies. Let us have a look at the distribution in private sector.

Public Sector Companies

Others

ICICI Lombard

Bajaj Allianz

Royal Sundaram

Sriram General

Tata AIG

Reliance General

HDFC ERGO General

IFFCO Tokio

Market Share in General Insurance

57%

4%4%

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SWOT Analysis

• Growing revenues & profitability• Good distribution net-work• Strong capital base

• Low investments in R&D • Small business units

• Increasing income levels of consumers• Growing demand owing to newer risks in businesses

• Increasing interest rates• Increasing competition due to increasing FDI for insur-ance industry to 49%

Strengths Weaknesses

Opportunities Threats

A) LIFE INSURANCE

Reliance Life Insurance is one of the top 5 private sector companies in terms of individual weighted received premium and new business. It is the largest corporation in insurance business which is not supported by a bank. It has a network of over 900 branches.

ShareholdingNippon Life Insurance Company

Owner

Shareholding (%)

74%

26%

Key Executives

DesignationNameCEO and Executive DirectorAnup RauChief Operating OfficerSrinivasan IyengarChief Human Resources Officer

Andleeb Rabbi

Chief Risk OfficerS.V.Sunder KrishnanChief Financial officerSunil AgrawalHead MarketingAlok KalraChief Investment OfficerViral BerawalaAppointed ActuaryPrithesh Chaubey

Company Financials

Miscellaneous

Marine

Fire

Premium Earned (in Rs '000)

97%

2%1%

The revenues from the premium have consistently declined, thus hampering the profitability of the company.

Comparative Analysis

Net Profits (in Rs Crores)Growth

(%)2014-152013-14Company Name

4.41634.391,565.59ICICI Prudential

-14.58761025Bajaj Allianz

10.8820.04740.13SBI Life8.3785.51725.28HDFC Life-5414.24435.91Max Life

-36.2263.62412.95Tata AIA

-23285.4370.75Birla Sunlife

-62.3135.18358.83Reliance Life

-4.3228.89239.13Kotak Life

92.9154.5680.11IDBI Federal

-65,597.835,953.68TOTAL

The above table shows the drop in growth of most of the top private players in life insurance business. The over life insurance business has been a drop in growth by nearly 6%.The profitability of life insurance companies has also seen a drop of 2.9% during 2014-15 owing to the low surrender charges of Unit Linked Insurance Plans (ULIP). This happened as a lot number of ULIP investors surrendered their policies after a three year lock-in period. Reliance saw the largest drop in growth of nearly 63%

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which goes on to show that they have high dependence on ULIPs. Other companies like SBI Life and HDFC Life handled the transition phase quite nicely and also reported the profits. While a lot of big private players saw a deceleration in growth, a lot of small companies did a fairly good job.

Net Profits (in Rs Crores)

Growth (%)2014-152013-14Company

Name2365.353.08Exide Life

7.252.4248.9PNB MetLife

4333.339.90.9DHFL Pramerica

-6.89-25.47IndiaFirst

-0.99-38.68Future

Generali Life

-12.87-46.5Star Union Dai-Ichi

-178.37-7.77TOTAL

SWOT Analysis

• Robust and diverse port-folio• Network of 1252 offices and 165000 agents• Strong capital base

• Controversies related to Reliance Capital may lead to negative publicity • Low advertising as com-pared to competitors

• New urban and rural terri-tories for new markets• Earning urban youth look-ing for investment

• Economic crisis & global financial problems• Entry of neew NBFC’s in sector

Strengths Weaknesses

Opportunities Threats

Recent News

• CBI had initiated a preliminary inquiry against Reliance General Insurance and the former chairman of IRDA for violating IRDA guidelines continuously. The Chairman has been accused of favouring the

company and reducing the charges against Reliance General Insurance from 17,500 crores to 20 lakhs.

• Reliance Life insurance business has seen a 12% rise in their business with the launch of ‘Reliance Education Plan’. Agents being the main strength of this business, Reliance have decided that it would increase its agent base by 20%.

• Increase in use of technology has improved the operations in Reliance General Insurance division. The number of complaints has been reduced by 30% with the direct benefits to customers. Reliance General registered a total of 1,354 complaints as against 1,467 by HDFC Ergo, 1,799 by IFFCO Tokio, 3086 by TATA AIG.

Recent Developments

• Reliance has been adding new plans in its portfolio. Some of the plans added in 2015 are health insurance policy, health total plan with renewal till 99 years, child education plan- Umar Ujala.

• With the new regulations of cap on the bank selling insurance products exclusively, the move has affected a lot of banks who had tie ups with the insurance companies. Reliance Life had never been in a tie-up with banks (bancassurance) to sell their products and hence the move is not going to affect Reliance.

• Reliance life in its CSR activity, started to reach out to children. It has started to build 1000 libraries in Hyderabad where children can come and read for free.

ReferencesReliance Life - Media Centre , Economic Times , Money Control , Reliance Life , Life INS Council , DSPACE NITRKL

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WALT DISNEYBRAND ANALYSIS

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Walter “Walt” Disney was arguably one of the most famous animators and cartoonists of all time. Mickey Mouse has made him one of the most famous cartoonists amongst children and Disney the brand is all due to the charisma of the man.

the Kansas City Art Institute. During his high school freshman year, Disney took night classes at the Chicago Academy of Fine Arts under the tutelage of artist Louis Grell. He became the cartoonist for the school newspaper, drawing patriotic topics on World War I. In 1920, Disney along with another cartoonist Ubbe Iwerks, formed a short lived company called “Iwerks-Disney Commercial Artists”. While working for the collaboration, Disney decide to become an animator. Disney started creating cartoons called Laugh-O-Grams. Disney studied Aesop’s Fables, and the first six of the new Laugh-O-Grams were modernized fairy tales. His cartoons were very successful, and Disney was able to acquire his own studio due to the resounding success. After losing the rights to Oswald the Lucky Rabbit which he himself created, Disney realized he needed to create another character to replace him. Thus, Mickey Mouse was born, the most iconic of Walt Disney’s creations.

Walter Disney

Origins

Disney was born on December 5, 1901, to parents of Irish-German; and German English descent. At his school he met Walter Pfeiffer, who introduced Disney to the world of vaudeville, theatre and motion pictures. Soon, Walter started attending Saturday courses at

Mickey Mouse First Appearance in Steamboat Willie

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2) Parks and ResortsIn 1955, Walt Disney opened Disneyland in Anaheim, California, an idea he had of a place where parents and children could both have fun at the same time. He conceptualized the idea after visiting amusement parks with his daughters. Soon, in 1965, Disney started seeking a second site, to build another theme park. Disney World was announced, with plans for theme parks, hotels, on thousands of acres of land purchased outside Orlando, Florida.

3) Walt Disney StudiosFor over 90 years, The Walt Disney Studios has been the foundation on which The Walt Disney Company was built. Today, the Studio brings movies, music and stage plays to consumers world over. Films are released under the following banners: Disney, including Walt Disney Animation Studios and Pixar Animation Studios; Marvel Studios; Lucasfilm; and Touchstone Pictures, the banner under which live-action films from DreamWorks Studios are distributed.

4) Disney Consumer ProductsDisney has one of the largest licensing deals, due to the sheer number of film merchandise that it licenses out to various toy makers. Disney is the world’s largest licensor and is responsible for bringing merchandise, toys, apparel and a host of other products to children worldwide. Disney Consumer Products also includes Disney Publishing Worldwide, which is the world’s largest publisher of children’s books, magazines and digital content.

5) Disney InteractiveDisney Interactive consists of interactive entertainment, games as well as educational material. Products are released to mobile and console games, online digital content providers as well as the Disney website.

Disney World, Florida 

Mickey Mouse became hugely popular in the 1930s, becoming the most famous cartoon character.

The Disney Brand

In November 1932, Disney received a special Academy Award for the creation of Mickey Mouse. In 1934, Disney began planning a full length feature film. Disney intended to create a full length feature film on Snow White, however most felt this was a mistake and would destroy the Disney brand and his studio. Snow White, the first animated feature in America made in Technicolor, was released in February 1938. The film became the most successful film that year. Disney was able to build a new campus for the Walt Disney studio following the success of Snow White. Soon, Pinocchio, Bambi, Alice in Wonderland and Peter Pan were in the pipeline. The Disney brand had officially arrived.

Walt Disney in a Scene from the Original Snow White

Business Segments:

Percentage of RevenueSegment46%Media Networks29%Parks and Resorts16%Walt Disney Studios7%Disney Consumer

Products2%Disney Interactive

The Walk Disney comprises of five business segments:1) Media NetworksDisney’s Media Networks comprise of a wide range of broadcast, cable, radio and digital businesses; that are grouped into two divisions: the Disney/ABC Television Group, and ESPN.

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Major Milestones

MilestoneYear

Release of First Mickey Mouse cartoon “Steamboat Willie”

1929

Release of Snow White and the Seven Dwarves, the first full-length animation feature

1937

The re-recording of Fantasia breaks ground as the first film done in digital sound

1982

Captain EO, one of the first “4-D” films (a 3-D movie incorporating special effects such as smoke and lasers), opens at Disneyland

1986

Pixar Animation Studios releases Toy Story, the first full length computer-animated film

1995

Disney makes full-length TV episodes available on Apple’s iTunes Music Store

2005

Disney stores adopt Apple Pay2014

Disney Social Media

For a company like Disney, social media is one of the most important areas of focus. Disney has a total of 300 million likes on Facebook across 267 pages. On YouTube, Disney has generated more than 365 million video views. Disney has its target demographic as 12 year olds to late teens, and to cater to this strategy, they particularly emphasize their Facebook social media pages. Another reason for this is the integration of games on Facebook, which further augments their desire to cater to the teen demographic. Another tool that is used judiciously is sweepstakes. Sweepstakes are often one of the popular ways to engage with fans across social media. Fans also tend to share more content when it is regarding sweepstakes, since they hope to win merchandise or tickets. Disney, contrary to popular belief isn’t focussed on garnering the most likes or shares on social media. Disney instead focusses on the emotional experience of the audience, the majority of their demographic are children, and hence appealing to them on an emotional level rather than a superfluous attempt to garner the maximum likes on social media is what works in Disney’s favour. To achieve this, Disney would share rare pictures of Walt Disney, or a picture of a child enjoying at Disney world, this allows the audience to connect on an emotional level.

Positioning

Disney has been very astute with its positioning. Think of Disney, and magical worlds, fantasy tales and family entertainment spring to mind. Disney has built this image over the course of decades, with its theme parks, movies, franchises. This has been a very deliberate effort, in contrast with Universal Studios, one of Disney’s major competitors. Universal Studios has a target demographic of a slighter older audience, and this has been due to some of the more mature themes in some of Universal Studios franchises such as Harry Potter amongst others.  Disney in India

Walt Disney India was formed in August 1993 as a Joint Venture with Modi Enterprises & is headquartered in Mumbai.In 2001, Disney created a wholly owned subsidiary company to launch the Disney Channel in India. Walt Disney Television International (Asia Pacific) took over distribution of content in September 2003 to Star Movies, AXN, and HBO along with several other children’s programs. On December 17th 2004, Disney Channel was launched along with Toon Disney channel in three languages, English, Tamil and Telugu. The channels were to be distributed by the Star Group. Talks began regarding the launch of an amusement park, with the outskirts of Delhi seemingly the best location. During the same time, Disney partnered with Indiagames to release Disney games, wallpapers and other digital content, primarily in association with Airtel. In August 2005 Funskool India and Disney partnered for Funskool to sell Disney Princess products in India. The next year, 2006, Disney obtained a controlling share in Hungama TV from UTV Software Communications, while also getting a 14.9% stake in UTV. In 2008, the company seized an additional 17.5% share in UTV.In May 2011, Disney and UTV agreed to co-produce Disney family films with both entities handling creative function and UTV producing, marketing and distributing the films. In February 2012, Disney announced the complete acquisition of UTV. UTV Chief Executive Officer Ronnie Screwvala would become Managing Director of The Walt Disney Company India.

ReferencesFortune , Walt Disney Company , Disney Institute , Social Media Today , Digiday , Richmond

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RULE OF 3 AND 4CONCEPT OF THE MONTH

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Introduction

Bruce Henderson, the founder of BCG, in 1976, put forth an interesting hypothesis about the evolution of industry and leadership. He propounded that an industry which is “stable and competitive” will never have more than three significant competitors and that the industry structure will find equilibrium when the market shares of the three companies reach a ratio of approximately 4:2:1

This rule is created because of the following conditions:

• A market share ratio of 2:1 between any two competitors seems to be the equilibrium point at which it is neither practical nor advantageous for either competitor to increase or decrease its share. This observation is pragmatic.

• Any competitor which has less than one quarter the share of the largest competitor cannot be considered as an effective competitor. Though this is also empirical, it is quite predictable from the experience curve relationships.

Source: Euromonitor International

Illustration of Rule of Three and Four (Evolution of US Car Rental Industry)

An excellent example of the rule of three and four is that of the US rental car industry:

• In 2006, in US four competitors namely- Avis, Hertz, Enterprise Holdings and Vanguard Car Rental, individually had total market share of more than 10 percent.

• In March 2007, Enterprise acquired Vanguard which

gave the latter nearly half of the market. Competitive dynamics was set in motion because of this event which inferred the rule of three and four.

• In 2011, the 3 market leaders- Enterprise Holdings, Vanguard and Avis had shares of 48%, 22% and 14% respectively. This ratio was close to the ratio 4:2:1 which was predicted by Henderson. The acquisition of Dollar Thrifty by Hertz in 2012 aligned the numbers even more closely.

If two competitors have market shares that are nearly equal, the one which is able to increases its relative share (by means of acquisition in the above example) gains both volume and cost differential and the potential gain is high compared to the cost. If the market share difference widens, the opportunity diminishes for the leader. The potential gain is less because price reduction costs more. This rule is confined to “stable and competitive” industries which have low turbulence and limited regulator intervention. The rule of three and four is also applicable to other industries such as household appliances (eg: GE, Whirlpool and Electrolux) and machinery manufacturing (eg. John Deere, Agco and CNH). It does not apply to the dynamic, unstable industries such as IT software and services, investment banking, consumer electronics etc.

Strategic Implications

• In the absence of any external control on competition (like government regulation) and large number of competitors, a shakeout is almost predictable

• Those competitors who wish to survive will have to grow faster than the market in order to maintain their relative market shares

• The losers, if they try to grow at all, will have increasingly large negative cash flows

• All competitors except the top two (who have the largest market shares) will either be losers and will eventually get eliminated or be marginal cash traps that report profits periodically and reinvest forever

The experience curve is an excellent indicator to find whether the shakeout has started. If the slope of the curve is 90% or flatter then the leader is probably losing its share and still holding the price. If the curve has a sharp break from 90% or above to 80% or less then the shakeout will continue until the Rule of Three and Four is satisfied. For more details about ‘Experience Curve’ refer the June edition of Beacon and the graph in the following page.

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Implications For Decision Makers

For the corporate decision makers, this rule has many significant implications. First, indepth understanding of the industry environment is critical and then the decision makers must determine whether their company has a long term viable position in the industry. Accordingly, the decision makers should shape their strategies. For a company that operates in an environment where the rule of three and four is not applicable, it should employ adaptive strategies.The Rule of Three and Four is not so easy to apply. It depends on the exact definition of relevant market. It requires many years to reach the equilibrium unless the leader chooses to hold his share during the high growth phase of product life. However, the rule appears to be inescapable.

The rule of three and four is a great way to predict the

future of certain industries having characteristics such as low innovation, stability and high barriers to entry, etc. But the main limitation of this rule is that it lacks predictive power explaining what sort of industries will end up following the rule and which companies within those industries will end up at the top.

ReferencesCaseprep , BCG Perspective - Growth Business Unit Strategy , BCG Perspective - Rule of Three & Four