The Origins of Organizational IQ

Armed with an engineering background, Anne Marie Knott, professor of strategy, brings a precision to her research. She recently created a tool to measure the effectiveness of a firm’s R&D expenditures — one counter to long-standing strategic theories.

Anne Marie Knott, PhD, professor of strategy at the Olin Business School, says that she is most proud of her work with doctoral students (background), helping to develop the next generation of business professors. (Joe Angeles)

One of the most intriguing aspects about Anne Marie Knott, PhD, is that when you type “professor of strategy” into Google, a link to her curriculum vitae comes up on the first page of the search results. Sometimes it’s even in the top five.

“I have no idea how I ended up there,” says Knott, professor of strategy at the Olin Business School. “I know it’s a big deal and that companies are paying millions to find a way to get high placement in a Google search, but I have no idea how that works.”

While Google may be a mystery, the reason for Knott’s success as an academic and professor are clear, according to her colleague, Todd R. Zenger, PhD, the Robert and Barbara Frick Professor of Business Strategy. Knott is not afraid to take on well-established research, tackling tough questions and artfully arriving at new conclusions.

“Her work is creating a great deal of buzz in the field. She has created an original, convincing and empirically supported theory that challenges the basic assumptions and conclusions of two very famous papers in management and economics,” Zenger says.

One paper, published 20 years ago, established a concept called “absorptive capacity” — the idea that for a firm to assimilate new knowledge it must have prior knowledge on which to expand. Based on this assumption, a firm should invest heavily in research and development in order to get the maximum benefit when it acquires knowledge from the R&D of other firms. The idea of absorptive capacity has been the accepted wisdom.

Yet, Knott, prior to earning her doctorate, had spent 15 years as an engineer for Hughes Aircraft Company. Her observations while there led her to question the assumption underlying absorptive capacity.

“In the back of my mind, I always thought that R&D investment was promoting economic growth,” Knott says. “But while I was at Hughes, R&D investment had been rising, but growth was declining. So, the company wasn’t getting the most bang for its buck in research investment.”

Added to her personal observations from Hughes was the evidence that many firms invest relatively little in their own R&D, yet benefit greatly when they acquire other firms’ knowledge, which runs contrary to the theory of absorptive capacity. This observation prompted Knott to wonder if a company’s existing knowledge is supposedly required to reap the benefits of acquired knowledge, why do firms gain so much from others without having spent money on their own R&D first?

What companies needed, Knott decided, was a way to know empirically if R&D investments were paying off. This would help determine not only how much a firm should invest in R&D, but also how much it should spend on acquiring knowledge from other firms. What emerged from Knott’s research was the “organizational IQ”: a tool that quantifies a firm’s effectiveness in generating revenue from R&D expenditures, then helps determine a corresponding R&D budget.

The ability to measure a company’s IQ is so groundbreaking that Knott received a $150,000 grant from the National Science Foundation to support her research — unusual for a business school professor. Knott is using the grant to delve into both high and low value firms to identify factors that distinguish them in their ability to invest effectively in R&D.

“The most valuable aspect of having the ability to measure IQ is that once people start using the measure, they can improve it,” Knott says. “Once they know their firm’s IQ and know what is different between their R&D and high IQ firms, they can start behaving more like high IQ firms and, accordingly, develop a higher IQ (something people can’t do with their own individual IQ).”

The IQ tool is generating interest from a variety of companies and has even garnered inquiries from a Goldman Sachs analyst to see how it can be applied to put together high-tech portfolios. Between the external attention and the NSF grant, Knott is excited about her IQ measure.

“I’m not trying to make money off of it; I’m trying to get firms to be more productive,” Knott says. “I became an academic because I thought the innovation engine is broken, and I wanted to fix it.”

Innovation and Entrepreneurship

Knott’s vision to fix the business innovation engine is not limited to measuring IQ. A good chunk of her career has focused on studying, teaching and writing about entrepreneurship. It’s a natural extension of the larger questions of innovation, says Knott. It also allows her to indulge her own entrepreneurial tendencies, although, Knott says, she would make a lousy brick-and-mortar entrepreneur.

“I like designing things. But once the design is done, I don’t need to stick around to see it executed because I know it will work,” Knott says. “I’m probably perfectly suited for academia because of that.”

Her colleague, Barton H. Hamilton, PhD, the Robert Brookings Smith Distinguished Professor of Entrepreneurship, says Knott is more than merely “suited” for academia. He says she is a tremendous asset to her field, and to Olin.

“What’s interesting is that she brings her background as an engineer to the table. She brings precision and scientific thinking to her academic research,” Hamilton says. “A lot of people can talk about stuff in vague ways, but she tries to be very precise about how she measures large ideas.”

As proof, Hamilton points to Knott’s research into why some people are willing to start a business, even when empirical evidence suggests the market is not prime for its success. The general assumption is that entrepreneurs have a higher tolerance for risk than others. Knott’s research has found that it is not entrepreneurs’ willingness to take on risk that pushes them into the market; it is their overconfidence in their abilities.

“Anne Marie doesn’t just take on the idea of overconfidence,” Hamilton says. “She can give us a measure of what that overconfidence looks like.”

Seeing Potential In People

As much as Knott has made a name for herself for her ability to challenge existing theories in business strategy and entrepreneurship, she also excels in bringing along the next generation of business professors. In fact, when asked about her most significant accomplishment, she says: “I’m most proud of my work with doctoral students. I think I work better through other people. Even when I was at Hughes, everyone I worked with had PhDs, but at the time I didn’t even have a master’s degree. But there — as with my students — I saw potential in everyone. I could see how things related to each other, and I could point people in that direction.”

As a faculty adviser for candidates pursuing doctorates in strategy, Knott has worked with eight students, frequently publishing papers with them, helping them to win significant scholarship awards or launch their careers at prestigious universities. Most recently, Knott served as Erin Scott’s adviser. Scott, MS/MBA ’07, is a fourth-year PhD candidate who recently was selected to receive a $20,000 fellowship from the Ewing Marion Kauffman Foundation for her work on the effects of regulation on entry and innovation in the bail bond market.

Scott says that Knott’s mentorship has played a significant role in shaping her approach to academic research.

“Her strength is in identifying puzzles where others don’t,” Scott says. “She can read the same literature others have read, yet she sees where two streams [of literature] are in conflict with each other or with what we see in industry. She’s then able to develop an approach to test what’s really going on.”

Knowing about all the areas in which Knott is making an impact further inspires Scott in her own research. “It’s motivating to look at what we can do for firms in the short term as well as what we can contribute to the academic literature over the long term.”

The feeling is mutual, notes Knott, who says she is just as motivated by working with her students.

“It’s an exciting time at Olin for the PhD program,” Knott says. “We’re bringing in really talented students, and it’s great to be able to usher them along. As a professor, you are always aware that the people coming in after you will always bring more cutting-edge tools with them. Working with them keeps me from becoming irrelevant. I teach them theory, and they come in and teach me ever more sophisticated econometrics.”

Shula Neuman is a freelance writer based in Seattle.

Strategy Professor Knott (left) serves as faculty adviser to students pursuing doctorates, such as Erin Scott (right), MS/MBA ’07. Scott says Knott’s mentorship has played a significant role in shaping her approach to academic research. (Joe Angeles)

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