Tag: R&D

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.


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.

The Wall St. Journal reports that Google Inc. is placing time limits on its research and development projects. Known for its heavy investment in R&D, Google reportedly spent $9.8 billion on R&D last year and has reaped lucrative rewards from its in house innovations and designs. But Prof. Anne Marie Knott, tells the WSJ that in 2013 Google “was nearing her estimate of the optimal investment on R&D, beyond which companies generally see diminishing returns.”  Article is behind WSJ subscriber paywall.

CNBC unveiled a new ranking of the most innovative companies in the market based on research and a ranking system devised by Olin professor of strategy Anne Marie Knott. The CNBC RQ 50 includes companies from a wide swath of industries from oil, gas, and defense to Silicon Valley’s stars. RQ stands for Research Quotient.

The CNBC RQ 50 is a unique list of publicly traded companies that derive the greatest shareholder value from their research and development spending (at a minimum of $100M annually), created in partnership with Washington University in St. Louis professor Anne Marie Knott, inventor of the Research Quotient (RQ). The RQ is calculated based on Professor Knott’s proprietary formula and is designed to help investors know what a company can expect to gain in revenue from an increase in R&D investment. – CNBC website

“Economic growth comes from innovation and R&D is the biggest source of innovation,” says Prof. Knott. “So if we can get each firm to increase their RQ a little bit that will lead to a permanent increase in economic growth.”

Prof. Anne Marie Knott

Prof. Anne Marie Knott

“The longer-term benefits are even greater,” Knott says, “as RQ also allows companies to more closely link changes in R&D strategy, practices and processes to profitability and value.”

Knott’s research led to the development of the RQ measurement tool. It is designed to help companies address several key questions that underlie R&D strategy:

  • How does a company know what kind of return it is getting from R&D?
  • Is it better at R&D than the competition?
  • How much should it be spending and what can it do to improve the effectiveness of those investments?

“I had been hoping for a measure like this since before becoming an academic,” Knott says. “Existing measures of innovation, such as R&D intensity and product/patent counts, don’t allow firms, policy makers or academics to know the answers to these big questions.”

Knott’s RQ metric allows companies to estimate the effectiveness of R&D investment relative to the competition.

“It lets them see how changes in their R&D expenditure affect the bottom line and, most important, their company’s market value,” Knott says.

Images:  CNBC video screen shot from CNBC website

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