Tag: RQ

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.


The bad news is: “the money companies spend on R&D is producing fewer and fewer results,” according to Anne Marie Knott, Olin strategy professor, and author of the just-published book How Innovation Really Works.

Knott_chosenIn an article published on the Harvard Business Review website this week, Knott says, “My research shows the returns to companies’ R&D spending have declined 65% over the past three decades.” This decline begs the question and title of Knott’s article, “Is R&D Getting Harder, or Are Companies Just Getting Worse At It?”

Her research finds that companies are getting worse at R&D, but there’s a silver lining:

“It appears the decline in companies’ (and the economy’s) ability to drive growth from R&D stems from the fact that companies have gotten worse at innovation, rather than because innovation has gotten harder. This is great news, because the problem of companies getting worse is fixable, whereas the problem of innovation getting harder isn’t. The challenge, of course, is knowing what to fix and how to fix it.”

Link to Harvard Business Review

Professor Anne Marie Knott’s, award-winning research tool RQ (Research Quotient) is now available via Wharton Research Data Services (WRDS), the data research platform and business intelligence tool for corporate, academic and government institutions worldwide.

“WRDS is very happy to offer RQ to our academic subscribers,” said Robert Zarazowski, Managing Director of WRDS. “We know that R&D plays a critical role in both firm growth and valuation, and I’m confident that RQ will be extremely useful to WRDS users.”

“I’m very excited WRDS is hosting RQ,” said Professor Anne Marie Knott. “It’s important for academics to make data available for study replication, but because RQ is derived from Compustat, I didn’t have permission to do that. WRDS solves that problem. Not only can scholars replicate RQ studies, but they can also retest prior innovation studies using patents. Since we now know patents don’t match expectations for a measure of R&D productivity, we think a number of prior results may be overturned.”

RQ enables researchers to link R&D to firm growth and market value; derive optimal firm R&D spending; examine revenue generation from R&D and assess undervalued firms. Used for notable academic research on R&D, and developed by Anne Marie Knott, Professor of Strategy at Olin Business School, Washington University in St. Louis, RQ is key for R&D-related inquiries.

RQ is available at no cost to academic institutions that maintain a subscription to S&P Capital IQ Compustat. A part of the Wharton School of the University of Pennsylvania, WRDS provides thought leadership, data access and research insight to corporations, universities and regulatory agencies worldwide.

Content from BusinessWire Press Release

HBR Article: The Trillion-Dollar R&D Fix
Paper: Measuring Innovation
2015 Olin Award Winner: The Broken Link Between R&D and GDP Growth

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.