Recent theoretical work in the strategic management literature has focused attention on enduring firm heterogeneities as enduring sources of competitive advantage. But despite the plausibility of this idea there has been surprisingly little systematic empirical work devoted to the problems of precisely describing or measuring "competence" or "capability" in the context of cross sectional data. In this paper we draw open detailed quantitative and qualitative data obtained from ten major pharmaceutical firms to attempt to measure the impact of competence on research productivity.

We find that unique firm effects account for a very high proportion of the variation in research productivity across firms. Since our data set is constructed using information about individual research programs we are able to identify separately the contribution of the construction of the research portfolio ("choosing the right strategy") from the contribution of unique resources and capabilities ("doing research well") to firm heterogeneity. Portfolio or strategic effects - the choice of therapeutic classes in which to invest and the scope and scale of the research effort - between them account for as much as 30% of the variance in research productivity across firms, while unique resources and capabilities between them may account for as much as another 30%. Thus we find support for the belief that both strategic positioning and unique competencies contribute to firm heterogeneity.