Applying Random Coefficient Models to Strategy Research: Testing for Firm Heterogeneity, Predicting Firm-Specific Coefficients, and Estimating Strategy Trade-Offs

Abstract

Although Strategy research aims to understand how firm actions have differential effects on performance, most empirical research estimates the average effects of these actions across firms. This paper promotes Random Coefficients Models (RCMs) as an ideal empirical methodology to study firm heterogeneity in Strategy research. Specifically, we highlight and illustrate three main benefits that RCMs offer to Strategy researchers — testing firm heterogeneity, predicting firm-specific effects, and estimating trade-offs in strategy — using both synthetic and actual data-sets. These examples showcase the potential uses of RCMs to test and build theory in Strategy, as well as to perform exploratory and definitive analyses of firm heterogeneity.