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Figure 3From “Porter's five forces: industry explains less than the firm does”

Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect

An industry ten points above the mean still had a one-in-seven chance, on Rumelt's model, of a below-average stable industry effect; the chance falls to 5 percent only at about 15 points.

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Figure 3Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect

Five forces analysis and noisy industry averages, computed from the 1991 model by Rumelt of US manufacturing industries from 1974 to 1977. The chance that an industry’s stable effect is below average, given how far its four-year average return sits above the all-industry mean: 50% at 0 points, 39.4% at 2.5, 29.5% at 5, 20.9% at 7.5, 14.0% at 10, 8.9% at 12.5, 5.3% at 15, 3.0% at 17.5 and 1.6% at 20 percentage points.0%10%20%30%40%50%1.6%02.557.51012.51517.520Industry average return above the all-industry mean, percentage pointsChance of a below-average stable industry effect (%)Five forces analysis and noisy industry averages, computed from the 1991 model by Rumelt of US manufacturing industries from 1974 to 1977. The chance that an industry’s stable effect is below average, given how far its four-year average return sits above the all-industry mean: 50% at 0 points, 39.4% at 2.5, 29.5% at 5, 20.9% at 7.5, 14.0% at 10, 8.9% at 12.5, 5.3% at 15, 3.0% at 17.5 and 1.6% at 20 percentage points.0%10%20%30%40%50%1.6%05101520Industry average return above the all-industry mean, percentage pointsChance of a below-average stable industry effect (%)

Source: Computed by this essay from the model in Rumelt (1991), Strategic Management Journal 12(3), p. 181: the stable industry effect given an industry's four-year average return is normal with mean 0.4 times the distance above the all-industry mean and standard deviation 3.71 points (sample A, US FTC Line of Business data, 1974 to 1977). Rumelt reports 0.14 at 10 points and 0.05 at 15.21 points; the other points, and the limit with unlimited years from the components in Table 5, p. 181, are this essay's.

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  • A A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Industry averages are noisy: about 40 percent of the variance among four-year industry average returns is stable industry effect, about another 40 percent business-unit effects that randomly combine in industry averages, the remaining fifth (sample A) industry-year and business-unit-year fluctuations, the only part more years would shrink (Table 5); conditional model with mean 0.4 times the distance above the mean and standard deviation 3.71 (p. 181, read on the page image); at 10 points the estimate is 1.08 standard deviations above zero, probability 0.14 that the effect is negative; 15.21 points needed for 95 percent confidence; on the normal approximation about one in forty, some six of 242 industries, would pass, an expectation, not a tally (pp. 168, 180 to 182): "only about 40 percent of the variance among industry returns is actually due to stable industry effects"; "industry returns are noisy estimates of the true industry effects"; "this estimate is only 1.08 standard deviations above zero"; "the observed industry average must be at least 15.21 percentage points above the mean"; "could be judged (95 percent confidence) to have positive industry effects"; "This portion would be smaller had the averages been taken over more than 4 years"; "Fewer than one in forty industry returns are high enough to pass this test"; "effects which randomly combine to affect industry averages"; "The remaining variance (one-fifth in sample A, one-eighth in sample B) is due to various industry-year and business-unit-year fluctuations"Rumelt (1991)
  • B A verified against the printed page of the primary sourceB primary source, text layer onlyC authoritative secondaryD reported Figure 3 curve: P(stable effect below average, given d) = Φ(−0.4 d / 3.71), from Rumelt’s p. 181 model; values 50.0, 39.4, 29.5, 20.9, 14.0, 8.9, 5.3, 3.0, 1.6 percent at 0 to 20 points in steps of 2.5; checks against Rumelt’s 0.14 at 10 and 0.05 at 15.21; with unlimited years only the industry (23.3) and business-unit (25.3) components of Table 5 remain, ζ = 0.479, σ = 3.48, so about 8.4 percent at 10 points (G5 N14); the strategy-deck implication is the author’sAuthor computation

From the essay

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APA 7

Isoglu, S. (2026). Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect [Figure]. isoglu.com. https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig03/

BibTeX
@misc{isoglu-2026-porters-five-forces-fig03,
  author = {Isoglu, Sinan},
  title = {{Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect}},
  year = {2026},
  howpublished = {Figure 3, isoglu.com},
  url = {https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig03/},
  note = {From the essay {Porter's five forces: industry explains less than the firm does}}
}
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  <a href="https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig03/">
    <img src="https://isoglu.com/social/isoglu-2026-porters-five-forces-fig03.png" alt="Figure 3: Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect" width="3200" height="2400">
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  <figcaption>Figure 3: Five forces analysis and noisy industry averages: the chance that a high average hides a below-average stable industry effect. Source: Computed by this essay from the model in Rumelt (1991), Strategic Management Journal 12(3), p. 181: the stable industry effect given an industry&#39;s four-year average return is normal with mean 0.4 times the distance above the all-industry mean and standard deviation 3.71 points (sample A, US FTC Line of Business data, 1974 to 1977). Rumelt reports 0.14 at 10 points and 0.05 at 15.21 points; the other points, and the limit with unlimited years from the components in Table 5, p. 181, are this essay&#39;s. <a href="https://isoglu.com/insights/exhibits/isoglu-2026-porters-five-forces-fig03/">View exhibit</a>.</figcaption>
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