The nation’s top 20 public firms could have added nearly $1 trillion to their market value if, in 2010, they had used a new tool, known as the research quotient (RQ), to determine their research and development (R&D) budgets, says its creator, Anne Marie Knott, PhD, associate professor of strategy at Washington University in St. Louis.
“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.”
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Knott’s metric, featured in the May 2012 “Spotlight on Innovation” issue of the Harvard Business Review, 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.
“My research, which includes a comprehensive analysis of all publicly traded companies in the U.S., suggests that if the top 20 firms traded on U.S. exchanges has optimized their R&D spending in 2010 using the RQ method, the potential collective increase in market cap would be an astonishing $1 trillion.”
To read the full story, visit: hbr.org/2012/05/the-trillion-dollar-rd-fix/ar/1.
