Measuring organisational IQ

May 09 2006 by Brian Amble Print This Article

Are some companies - like some people - smarter than others? A U.S. business professor certainly thinks so, and she also claims to have devised a way to measure organisational 'IQ' based on how effective they are at innovating.

Using data from company filings made to the Securities and Exchange Commission (SEC), Anne Marie Knott, assistant professor of entrepreneurship and management at the Olin School of Business, calculated the IQ of all the publicly-traded US firms that engaged in R&D.

"In essence, firms fall into one of two camps," she says.

"Smart firms, or "high IQ" firms, produce more bang for their R&D buck and therefore spend money to do their own research and development.

"In contrast, firms that are less smart don't find it useful to spend money doing their own R&D and therefore rely on that of other firms.

"Interestingly, firms that aren't smart with their own R&D seem to be better able to use the innovations of rivals," she added.

Firms that aren't smart with their own R&D seem to be better able to use the innovations of rivals
Professor Knott said that her findings contradict a very popular theory in the management literature known as absorptive capacity. This holds that a firm's ability to absorb what other firms are doing is a function of how much R&D the acquiring firm actually does itself. In other words, organisations can't understand cutting edge research unless they actually do some themselves.

"But in practice, that's not what appears to be happening," Knott says.

"Instead, high IQ firms, those that are most productive with their own R&D spending, actually have lower ability to absorb the work of others. In other words while they are "high IQ" with respect to innovating, they are "low IQ" with respect to imitating."

Conversely, she said, firms that are "low IQ" with respect to innovating tend to be "high IQ" with respect to imitating.

Knott's research provides an interesting adjunct to a study carried out last year by Booz Allen Hamilton which found that there is no direct relationship between R&D investment and significant measures of corporate performance such as growth, profitability, and shareholder return.

The study found clear evidence that there is no easy way to achieve sustained innovation success and that organisations cannot simply spend their way to prosperity.

As Booz Allen Vice President Barry Jaruzelski put it: "successful innovation demands careful coordination and orchestration both internally and externally. How you spend is far more important than how much you spend."

In other words, it is the process, not the pocketbook that counts. For example, Apple's 2004 R&D-to-sales ratio of 5.9 per cent trails the computer industry average of 7.6 per cent, while its $489 million spend is a fraction of its larger competitors.

According to Professor Knott, this is all to do with organisational IQ.

"We have always known there were firms who were leaders and those who were imitators," she says.

"What's new is why firms choose their particular strategies - their strategy is matched to their IQ. What is also new is the insight that advising firms to spend more so they can benefit from the R&D of others doesn't add up.

"Spending doesn't affect IQ. IQ affects spending".