What is resource heterogeneity?

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Understanding resource heterogeneity

Resource heterogeneity is a fancy way of saying that different firms have different resources. Their resources are heterogeneous – i.e., different.  In many ways, this is self-evident – when you consider organizations, it is easy to see that different firms have different resources that underpin them. Some may be strong in particular areas. Others may not even have resources in those areas, instead concentrating on different activities, or outsourcing those areas.

The importance of the resource heterogeneity assumption to the Resource-Based View

The assumption of resource heterogeneity – firms have different resources – is key to the resource-based view of the firm (RBV). The perspective tries to explain differences in firm performance by the underlying differences in resources of the firms – different performance comes because they have different resources and can do different things. If all firms had identical resources, then you couldn’t explain differences in firm performance by differences in their resources.

How is this assumption different from other perspectives?

While the idea of resource heterogeneity may not seem that controversial, it is quite a different assumption to in much economic theory. A standard assumption in economics is the exact opposite – homogenous firms (i.e., all companies are identical). Similarly, industry analysis, such as Porter’s Five Forces, while not inherently assuming that all firms are the same, does put an emphasis on industry-level differences rather than firm-level differences.

Indeed, the difference gets at quite a fundamental difference between theories in strategy and economics. In economics, there are limited choices for managers to make in order to compete – potentially adjusting the price or quantity produced. Firm performance is generally explained by differences in the industry, particularly the number of firms. In strategy, there are much greater opportunities for firms to have different profitability – with such differences explained by different bundles of resources that the firms have, which may cause individuals to prefer one firm over another (and in turn allow some firms to have greater sales or charge elevated prices).

The importance of industry setting

In many ways, whether it is more appropriate to consider firms to be homogeneity (i.e., all identical), or heterogeneous (i.e., different), depends on the industry setting. There are some environments whether there are a large number of firms, with all more or less the same resources. In others, the differences between firms are more stark – clear differences in the resources of the companies.