Lesson 3 of 7
Who holds the power in an industry
The five forces explain why one industry earns high returns on capital and its neighbour does not, before either company's own strategy enters it.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Five forces set an industry's returns before any one company's strategy: rivals, new entrants, substitutes, suppliers and buyers.
- A force that is weak for the industry lets more of the price paid stay in as profit.
- The same forces explain why two industries with similar products can post very different returns.
Some industries earn high returns on capital for years, and their nearest neighbour does not, with neither company's management having done anything differently yet. Porter's five forces explain the industry's average return, before either company's own choices.
Median return on invested capital, by sector
- Healthcare · 622 companies−31.76%
- Communication Services · 160 companies1.79%
- Technology · 489 companies2.79%
- Basic Materials · 160 companies3.92%
- Consumer Defensive · 153 companies6.19%
- Consumer Cyclical · 336 companies6.37%
- Industrials · 455 companies6.96%
Median, all 2,821 companies in the cohort: 3.43%
The five forces, one question each
The five forces, one question each
| Force | The question |
|---|---|
| Rivalry among competitors | How hard do existing companies fight for the same customer, on price or otherwise |
| New entrants | How easily could a new company start competing tomorrow |
| Substitutes | Could the customer solve the same need a different way entirely, not just with a rival's version of the same product |
| Supplier power | Can the businesses that sell inputs to the industry dictate the price of those inputs |
| Buyer power | Can the industry's own customers dictate the price they pay |
Each force is scored for a narrow industry, not for one company or for a whole sector, because a sector label spans dozens of industries with very different forces. Mauboussin, Callahan and Majd spend most of their attention on two of the five: barriers to entry and rivalry.
Weak forces let profit stay in
An industry where entry is hard, rivalry is muted, and neither suppliers nor buyers can dictate price keeps more of the sales dollar as profit. None of the five forces is pulling it away. An industry where every force is strong competes the average profit down towards the cost of capital. A company can still beat its industry by defending against the forces, but it starts from a harder place.
Why the sector chart still surprises
Technology's median sits below the whole market's, although its best companies earn some of the highest returns anywhere. The median is pulled down by many young companies with no profit yet, a life-cycle effect rather than a verdict on the whole sector. The cohort's 25th percentile is -22.19 percent and its 10th is -88.7 percent. A sector label also spans dozens of industries, which is why the five forces are scored for a narrow industry, not a sector.
Check yourself
An industry is easy to enter, has many rivals, and sells a product with close substitutes. What does the five forces framework predict?
- High and stable returns
- Returns pushed down towards the cost of capital
- Returns that depend only on management skill
Show the answer
Answer: B.
When most of the five forces are strong against the industry, competition for the customer's dollar tends to compete profit down to what capital costs.Why does one industry's median return on invested capital sit below another's even before looking at any single company?
- It is always an accounting artifact
- Its five forces let less of the sales dollar stay in as profit
- Industries cannot be compared this way at all
Show the answer
Answer: B.
Industry structure sets the average of how much of the price paid a company in it can keep, independent of any one firm's strategy.A sector's median return can be pulled down even when its best companies have wide moats. Why?
- The median always equals the average
- The sector also contains many weaker or unprofitable companies
- Moats do not affect return on invested capital
Show the answer
Answer: B.
A sector label groups businesses with very different five forces together, so a median can sit low even where a handful of companies inside it face almost none of the five forces.Sources
- Porter, Competitive Strategy, 1980, and "The Five Competitive Forces That Shape Strategy," Harvard Business Review, 2008.
- Mauboussin, Callahan and Majd, "Measuring the Moat," Credit Suisse, 2016, on industry structure and the five forces as the first layer of analysis.
- Return on invested capital by sector, published on the open research pages of ValueScreener, built 2026-09-07.
What this leaves out
- The sector medians were built on 2026-09-07 and are rebuilt on a schedule, so a later reader will see different values.
- Banks, capital markets firms, insurers and mortgage REITs have no return on invested capital computed at all and are excluded from every sector shown, not folded in at zero.
- The branded food and commodity chemical example is illustrative and names no company.
- A sector median says nothing about any one company's own moat or what it is worth. Nothing here is advice about any security.