Tag: R&D

Research and development is the key expertise of Anne Marie Knott, who developed the metric known as the Research Quotient (RQ), the only innovation metric that reliably predicts firm value.

With the new presidential administration announcing its economic-policy intention to invest $300 billion in research and development, there is a key voice offering the caution: Aim for the development end.

That is the counsel of Knott, the Robert and Barbara Frick Professor in the Olin Business School.

“President Biden has his work cut out for him in ensuring ‘a future made in all of America … where the United States wins … the jobs and industries of tomorrow.’

The most important thing he can do in the short-run is dedicate the $300 billion additional R&D to development (D) rather than research (R), she said.

“This level of investment could indeed bear fruit, but not if targeted at research,” Knott said.

(Research is diligent inquiry or examination to seek or revise facts, principles, theories, applications, etc. Development is about growth and directed change. Essentially, one is the creation of new ideas and the other is the application of them.)

“There has indeed been a dramatic decline in federal R&D support, but the decline is not in research. It is entirely in development.

“In fact, the decline in American R&D productivity tracks the decline in federal development almost perfectly. The decline in federal development is therefore the most likely culprit for the decline in R&D productivity. Thus, investing in research is solving the wrong innovation problem.”

Though the stock market is strong, company profits are stagnant—a function of a short-term focus that one Olin professor attributes to a slow-down in innovation.

In a Dec. 13 article for Harvard Business Review, Anne Marie Knott attributes the lack of innovation to three trends she uncovered through research she and her collaborators have developed.

Knott, Olin’s Robert and Barbara Frick Professor in Business, blames the “short-termism” on the trend toward companies hiring “outside” CEOs to “shake up” the organization and provide fresh insights; the decentralization of corporate research and development efforts; and a focus on “development,” rather than “research”—or, said another way, too little early-stage innovation.

In the first case, Knott argues that new, outside CEOs tend to lack the technical domain expertise to drive R&D growth. Using “RQ,” or a “research quotient,” as a measure of the return on R&D investments, Knott noted that firms with outside CEOs tended to see a decline in R&D intensity—a ratio of investment to sales—and a corresponding decline in R&D capability.

“In other words,” Knott writes, “the new leader’s disinvestment cut meat as well as fat.”

Further, by moving R&D responsibility from a central unit to separate division managers, firms separate the incentive from the result. Division managers, Knott writes, find that “their compensation is typically based on division profits (which they largely control), rather than on the company’s market value (over which they have little control).”

The result again is a reduction in the firm’s RQ quotient.

Finally, a similar problem plagues firms by lowering their tendency to invest in early-stage technologies and innovations—and for a similar reason: Division manager compensation is tied to division profits.

She cites Procter & Gamble as an example of a company that decentralized R&D from the 1990s to 2008. After a string of market-moving innovations such as the first synthetic detergent (Dreft in 1933), first fluoride toothpaste (Crest 1955), and Febreeze odor fresheners in 1998, “P&G failed to introduce a single blockbuster,” Knott writes.

Read more of Knott’s article on HBR.org.

An article in the San Francisco Chronicle, “HP Labs seeks to regain its former glory,” cites research from Olin professor of strategy Anne Marie Knott on corporate ROI from R&D spending.

“R&D has not been as productive as it was four decades ago,” Knott told the Chronicle. In her research, Knott “found that corporate returns on R&D spending actually declined 65 percent,” since 1972.

According to the Chronicle, the Internet age has taken a toll on innovative companies like HP that were known for their R&D prowess:

Hewlett-Packard launched HP Labs in 1966, which promptly created the HP2116A minicomputer. In the years that followed, HP Labs rolled out LED lighting, scientific calculators, lasers to make microchips, and ultrasound technology to capture live images of the human heart.

However, the emergence of the Internet in the 1990s posed problems for big companies. The pace of innovation accelerated and once-dominant industries seem to crumble overnight. Corporations were too slow and bulky to catch up.

If HP wants to improve innovative output and profits from its once fabled Silicon Valley labs, the company should study Knott’s recent book, How Innovation Really Works. She explains how companies can use her RQ (Research Quotient) tool. It measures a company’s R&D capability―its ability to convert investment in R&D into products and services people want to buy or to reduce the cost of production.

RQ not only tells companies how “smart” they are, explains Knott. “It provides a guide for how much they should invest in R&D to ensure that investment will increase revenues, profits, and market value.”

Related blog post.

Photo: HP Labs celebrates 50 years: Barney Oliver (left), director of research and development at HP for three decades, checks out a new scope in 1966 at HP Labs along with Peter Lacy (center) and George Mathers.

Professor Anne Marie Knott’s book based on her research into the connection between R&D investment and growth isn’t available until the middle of March, but it’s already attracting media buzz. How Innovation Really Works is featured in a column by Lee Schafer  in the Minneapolis Star Tribune:

In a book coming out next month called “How Innovation Really Works,” Knott lumps R & D tax credits in with a long list of other misconceptions, questioning the conventional wisdom of strategies like only chasing radical ideas or looking outside a company for new ideas, known as “open innovation.”

Yet she’s also hopeful. The conventional approach of having your own team of engineers and marketers solve problems still works. What has stalled innovation is mostly having executives routinely misunderstand the value of what they are getting from R & D spending. In other words, the innovation problem seems fixable.

Knott, who teaches strategy at Washington University in St. Louis, knows she’s a rare optimist. It’s now common to hear how we have run out of big ideas, as the Wall Street Journal recently reported. “My answer that is no, there is plenty of opportunity,” she said. “Firms have just gotten worse at the R & D they do.”

Armed with insights from her experience as an R&D project manager, 20 years of academic research, and two National Science Foundation grants, Knott devised RQ (Research Quotient), a revolutionary new tool that measures a company’s R&D capability―its ability to convert investment in R&D into products and services people want to buy or to reduce the cost of producing these.

RQ not only tells companies how “smart” they are, it provides a guide for how much they should invest in R&D to ensure that investment will increase revenues, profits, and market value.

Knott’s RQ research was the recipient of the Olin Award in 2015.

Judges of the 2015 Olin Award competition couldn’t choose just one winner this year from the field of relevant and rigorous research papers submitted by Olin faculty, so they named two winners. Professors Andrew Knight and Anne Marie Knott were each awarded the prize.

Professor Knott presented her paper, “Explaining the Broken Link Between R&D and GDP Growth,” on March 27 to business leaders from industries including pharmaceuticals, life sciences and technology, energy, and household product manufacturing.

Knott’s latest research grew out of her work on developing a measure of R&D productivity called the Research Quotient (RQ), which forms the basis for CNBC’s annual firm innovation rankings. RQ measures the percentage increase in revenues achieved from a 1 percent increase in R&D spending, and fits the construct in growth theory that predicts a firm’s profits, growth, and market value.

In searching for an explanation of RQ declines at some companies and the broken link between R&D productivity and GDP growth Knott realized there was a culprit hiding in plain sight: outsourced R&D!

Firms failed to realize outsourced R&D has zero returns! Thus while a 10% increase in internal R&D increases later revenues by 1.7%, a 10% increase in outsourced R&D has no impact on later revenues.

The good news is this problem is easily reversed! And it’s likely R&D can again drive firm and economic growth. If firms restore their prior R&D productivity levels by gradually bringing outsourced projects back in house, Knott predicts growth in firm revenues and GDP will follow.

Learn more about Professor Knott’s articles and presentations.

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An Invitation

The 2015 Olin Award co-winner, Professor Andrew Knight, will present his paper “Who Defers to Whom and Why? Dual Pathways Linking Demographic Differences and Dyadic Deference to Team Effectiveness” on May 12. Professor Knight’s research explains what drives interpersonal influence in teams and connects patterns of influence to team performance. Register for this event by emailing your RSVP to CorporateRelations@olin.wustl.edu.

Read more faculty research and watch professor videos here.