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Figure 1From “Porter's five forces: industry explains less than the firm does”

Porter's five forces question in the data: industry and firm effects on profit variance in three studies

Pooled, firms or business units differ more than industries do; in the middle of the pack, counting yearly swings, and among medium-sized firms on one method, industry matches or passes the firm.

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Figure 1Porter's five forces question in the data: industry and firm effects on profit variance in three studies

The question behind Porter’s five forces in the data: industry and firm effects as shares of the total variance in profitability in three studies, with year effects counted with the unexplained rest. US manufacturing units 1974 to 1977, return on assets: large units 8.3% stable industry, 7.8% year-to-year industry, 47.2% business unit and corporation, 36.7% year effects and unexplained; all units 4.0%, 5.4%, 45.8% and 44.8%. US listed firms 1987 to 1996, economic profit: all firms 6.5%, 4.2%, 27.1% and 62.2%; middle firms 12.4%, 5.8%, 17.6% and 64.2%. Return on assets: all firms 8.1%, 3.1%, 35.8% and 53.0%; middle firms 16.0%, 4.1%, 16.7% and 63.2%. Spanish firms 1995 to 2004, return on assets: all firms 3.4%, 0.3%, 12.7% and 83.6%; large firms 0.0%, 15.2%, 18.0% and 66.8%; medium-sized firms 18.7%, 20.3%, 5.1% and 55.9%; small firms 0.9%, 0.5%, 13.6% and 84.9%.Stable industryIndustry, year to yearFirm or business unitYear effects and unexplainedUS manufacturing 1974–77, ROA, large units8%8%47%37%US manufacturing 1974–77, ROA, all units46%45%US listed 1987–96, economic profit, all7%27%62%US listed 1987–96, economic profit, middle12%6%18%64%US listed 1987–96, ROA, all firms8%36%53%US listed 1987–96, ROA, middle firms16%17%63%Spain 1995–2004, ROA, all firms13%84%Spain 1995–2004, ROA, large firms15%18%67%Spain 1995–2004, ROA, medium-sized firms19%20%56%Spain 1995–2004, ROA, small firms14%85%The question behind Porter’s five forces in the data: industry and firm effects as shares of the total variance in profitability in three studies, with year effects counted with the unexplained rest. US manufacturing units 1974 to 1977, return on assets: large units 8.3% stable industry, 7.8% year-to-year industry, 47.2% business unit and corporation, 36.7% year effects and unexplained; all units 4.0%, 5.4%, 45.8% and 44.8%. US listed firms 1987 to 1996, economic profit: all firms 6.5%, 4.2%, 27.1% and 62.2%; middle firms 12.4%, 5.8%, 17.6% and 64.2%. Return on assets: all firms 8.1%, 3.1%, 35.8% and 53.0%; middle firms 16.0%, 4.1%, 16.7% and 63.2%. Spanish firms 1995 to 2004, return on assets: all firms 3.4%, 0.3%, 12.7% and 83.6%; large firms 0.0%, 15.2%, 18.0% and 66.8%; medium-sized firms 18.7%, 20.3%, 5.1% and 55.9%; small firms 0.9%, 0.5%, 13.6% and 84.9%.Stable industryIndustry, year to yearFirm or business unitYear effects and unexplainedUS manufacturing 1974–77, ROA,large units47%37%US manufacturing 1974–77, ROA, allunits46%45%US listed 1987–96, economicprofit, all27%62%US listed 1987–96, economicprofit, middle18%64%US listed 1987–96, ROA, all firms36%53%US listed 1987–96, ROA, middlefirms16%17%63%Spain 1995–2004, ROA, all firms84%Spain 1995–2004, ROA, large firms18%67%Spain 1995–2004, ROA, medium-sizedfirms19%20%56%Spain 1995–2004, ROA, small firms85%

Source: Rumelt (1991), Strategic Management Journal 12(3): US FTC Line of Business data, 1974 to 1977, return on assets; large units (sample A) from Table 4, p. 179, all units (sample B) from Table 3, p. 178; firm includes the corporate component. Hawawini et al. (2003), Strategic Management Journal 24(1): 562 US listed firms, 1987 to 1996, Tables 5 and 8, pp. 11 and 13; middle firms exclude each industry's two leaders and two losers. Fernández et al. (2019), BRQ Business Research Quarterly 22(1): Spanish firms, 1995 to 2004, return on assets, variance components analysis, Tables 2 and 3, pp. 29 and 30. Shares of total variance; year effects are counted with the unexplained rest.

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Source and evidence

Each line names a claim related to this exhibit, its source, and how it was checked.

  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Data and measure: US FTC Line of Business data on the domestic operations of large corporations in 261 four-digit manufacturing industries, 1974 to 1977; sample A 1,774 business units of 457 corporations in 242 industries (6,932 observations), sample B 2,810 units adding small ones (10,866 observations); return on assets as profit before interest and taxes over total assets (pp. 170, 171): "The FTC collected data on the domestic operations of large corporations in each of 261 4-digit FTC manufacturing industry categories"; "Sample A then contained 6932 observations provided by 457 corporations on 1774 business-units operating in a total of 242 4-digit FTC industries"; "Sample B then contained 10,866 observations provided by 463 corporations on 2810 business-units operating in a total of 242 4-digit FTC industries"; "The rate of return was taken to be the ratio of profit before interest and taxes to total assets, expressed as a percentage"Rumelt (1991)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Partition of business-unit returns, restricted model: sample A (B) 8 (4) percent stable industry, 1 (2) corporate, 46 (44) business unit, 8 (5) industry-year, 37 (45) residual; Table 4 for sample A: 8.28, 7.84, 0.80, 46.38, 36.70 (sum 100.00); Table 3 for sample B: 4.03, 5.38, 1.64, 44.17, 44.79; business-unit variance six (eleven) times the industry variance; Table 3 prints 36.87 for the sample A error, Table 4 36.70, which sums (pp. 178, 179): "8 (4) percent industry effects, 1 (2) percent corporate effects, 46 (44) percent business-unit effects, 8 (5) percent industry-year effects, and 37 (45) percent residual error"; "business-units differ from one another within industries much more than industries differ from one another"; "six times larger in sample A and eleven times larger in sample B"Rumelt (1991)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Sample: Stern Stewart data set of 1,000 US listed firms ranked by market value added; 1987 to 1996; three-digit SIC; 562 firms in 55 industries, 5,620 observations; survivors only; may be dominated by large firms (pp. 6, 7): "The U.S. data set covers 1000 listed firms for periods of up to 21 years"; "The sample set covers the 10-year period from 1987 to 1996"; "The firms are classified into industries based on the SIC system"; "The final sample contains 5620 observations for 562 firms across 55 industry classifications"; "The data set only contains firms that survived during the time period"Hawawini, Subramanian and Verdin (2003)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Full sample, Table 5: firm effects 27.1, 32.5 and 35.8 percent (EP/CE, TMV/CE, ROA); stable industry 6.5, 11.4 and 8.1; industry-year 4.2, 2.9 and 3.1; total industry 10.7, 14.3 and 11.2; stable firm effects more than four times stable industry effects for EP/CE and ROA (p. 11): "Total industry effects for EP/CE, TMV/CE and ROA are 10.7 percent, 14.3 percent, and 11.2 percent, respectively"; "the corresponding figures for stable firm effects are 27.1 percent, 32.5 percent, and 35.8 percent"; "stable firm effects dominate stable industry effects by a factor of more than four"Hawawini, Subramanian and Verdin (2003)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Middle of the pack, Table 8: industry effects (stable plus transient, as the authors compare them) 18.2 against firm 17.6 percent for EP/CE, 20.1 against 16.7 for ROA, 35.2 against 17.0 for TMV/CE; on stable industry effects alone 12.4 against 17.6 (EP/CE), 16.0 against 16.7 (ROA), 30.2 against 17.0 (TMV/CE); the transient component measures sensitivity to business cycles; firm-specific assets matter more only for the few leaders and losers (pp. 1, 7, 12, 13, 14): "overall industry effects (the sum of stable and transient industry effects) explain 35.2 percent in variation compared to only 17.0 percent for firm effects"; "In the case of EP/CE it is 18.2 percent for industry effects vs. 17.6 percent for firm effects and for ROA it is 20.1 percent against 16.7 percent"; "only for a few dominant value creators (leaders) and destroyers (losers) do firm-specific assets seem to matter significantly more than industry factors"; "Industry factors may have a large impact on the performance of the ‘also-ran’ firms, while for the industry leaders and losers it is firm factors that dominate"; "the transient component of industry effects measures the sensitivity of profitability to the impact of business cycles on the industry"Hawawini, Subramanian and Verdin (2003)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Sample and measure: Spanish firms from SABI, manufacturing and services, with accounts for all of 1995 to 2004 (14,204 originally); final 7,843 after excluding micro firms, 87.58 percent small, 10.97 medium, 1.45 large; EU size classes of the 2003 Commission recommendation as the authors apply them, on employees and turnover in the last sample year, 2004 (medium: fewer than 250 employees, up to 50 million euros turnover; large: 250 or more and over 50 million); ROA; NCEA three-digit sectors; a decade of expansion with no year of GDP decline (pp. 26, 28): "The original sample comprised 14,204 Spanish firms with accounting data for the entire"; "The final sample consisted of 7843 firms, of which 87.58% were small, 10.97% medium, and just 1.45% large"; "medium-sized firms, fewer than 250 employees and up to 50 million euros turnover"; "we follow the European Commission recommendation of 6 May 2003"; "In this paper the analysis was carried out using ROA"; "covering an expansive phase of the economic cycle"; "In this work we use a broad sample of Spanish firms, both manufacturing and services"; "The assignment of each firm to a size category was made taking into account the value of the employment and turnover variables of the last year of the sample period"Fernández et al. (2019)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Pooled, Table 2: firm 12.71 percent, industry 3.35, year 0.48, industry-year 0.34, residual 83.12 (the printed total 156.82 is the small-firm total; the shares are of 211.14) (p. 29): "These show that the firm effect has the greatest explanatory power, while the industry effect is less important"; "a significant part of the variance of ROA is not explained by the model"Fernández et al. (2019)
  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported By size, variance components analysis, Table 3: large firm 17.99, stable industry 0.00, industry-year 15.24; medium firm 5.07, industry 18.71, industry-year 20.29; small firm 13.62, industry 0.93, industry-year 0.53 percent; industry about 39 percent against 5.07 for medium firms (pp. 29, 30, 32): "In the case of large firms, the transient industry effect explains almost as much as the firm effect, but the stable component of the industry effect has no significance whatever"; "In the case of medium-sized firms, the importance of the industry effect is eight times that of the firm effect, and is almost equally split between its two components, stable and transient"; "approximately 39% of variance explained by the industry and industry-year effects and 5.07% by the firm effect"Fernández et al. (2019)
  • B A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported First-screen synthesis across the three studies, one comparator per claim (G5 F1, F2): pooled stable industry share on profitability measures 3.35 (Fernández, all firms, ROA) to 8.28 percent (Rumelt A, ROA), so about 3 to 8, and 11.4 on HSV’s market-value measure (TMV/CE); firm or business-unit share 12.71 (Fernández) to 47.18 percent (Rumelt A, business unit 46.38 plus corporate 0.80), so about 13 to 47; middle of the pack: industry matches the firm only with yearly swings counted; medium-sized Spanish firms: industry exceeds the firm on the variance components method only; Figure 1 composition rows sum to 100 within roundingAuthor synthesis

From the essay

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APA 7

Isoglu, S. (2026). Porter's five forces question in the data: industry and firm effects on profit variance in three studies [Figure]. isoglu.com. https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig01/

BibTeX
@misc{isoglu-2026-porters-five-forces-fig01,
  author = {Isoglu, Sinan},
  title = {{Porter's five forces question in the data: industry and firm effects on profit variance in three studies}},
  year = {2026},
  howpublished = {Figure 1, isoglu.com},
  url = {https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig01/},
  note = {From the essay {Porter's five forces: industry explains less than the firm does}}
}
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<figure>
  <a href="https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig01/">
    <img src="https://isoglu.com/social/isoglu-2026-porters-five-forces-fig01.png" alt="Figure 1: Porter&#39;s five forces question in the data: industry and firm effects on profit variance in three studies" width="3200" height="2400">
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  <figcaption>Figure 1: Porter&#39;s five forces question in the data: industry and firm effects on profit variance in three studies. Source: Rumelt (1991), Strategic Management Journal 12(3): US FTC Line of Business data, 1974 to 1977, return on assets; large units (sample A) from Table 4, p. 179, all units (sample B) from Table 3, p. 178; firm includes the corporate component. Hawawini et al. (2003), Strategic Management Journal 24(1): 562 US listed firms, 1987 to 1996, Tables 5 and 8, pp. 11 and 13; middle firms exclude each industry&#39;s two leaders and two losers. Fernández et al. (2019), BRQ Business Research Quarterly 22(1): Spanish firms, 1995 to 2004, return on assets, variance components analysis, Tables 2 and 3, pp. 29 and 30. Shares of total variance; year effects are counted with the unexplained rest. <a href="https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig01/">View exhibit</a>.</figcaption>
</figure>

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