Professor Richard N. Langlois argues in this final installment of his book "The Dynamics of Industrial Capitalism". That Adam Smith's "invisible hand", which was replaced by Alfred Chandler's "visible hand" of management are now being replaced by Langlois "vanishing hand". That markets are the more effective means of managing of day to day operations. This discussion is particularly relevant in the oil and gas service sector, where the majority of the innovation needs to occur. With oil and gas generating over $3.3 trillion in annual revenues, the market is the appropriate location for further development of the industry.
The end and the beginning of history.Langlois argues in this first quotation that the last 25 years has seen the decline of the large managerial corporation. This may be the case in many industries, however due to the producer firms generating the entire revenue streams of the oil and gas and service sectors, management have maintained their dominant position. This has been at the expense of the innovativeness and speed in the service sector. What we see in the Gulf of Mexico is a pace and thought process that shows the same symptoms of the decline of the former Soviet Union. Reliance on centralized control by the oil and gas management have left little in terms of getting things done.
In the era Chandler chronicles, the large managerial corporation clustered into an important and perhaps dominant place in that population. In the last quarter century, the relative importance of the large managerial corporation has declined, as has its typical level of vertical integration – which makes the population of arrangements today begin to look a lot more like the antebellum one. p. 72How the producer could benefit from a new perspective on the market is contained within the Draft Specifications Resource Marketplace, Research & Capabilities, and Knowledge & Learning modules. Review of these modules will show the information that is developed and shared between the producers and the service providers. Where ideas can be developed and acted upon in a manner that provides value to the industry.
But the hypothesis I offer here is a bit more subtle, or at least a bit more complicated, and arguably more general. In my view, the phenomenon of the Vanishing Hand is a further continuation of the Smithian process of the division of labor on which Chandler’s managerial revolution was a way station. Thus the Vanishing Hand is driven not just by changes in coordination technology but also by changes in the extent of markets — by increasing population and income, but also by the globalization of markets. Reductions of political barriers to trade around the world are having an effect analogous to the reduction of technological barriers to trade in the America of the nineteenth century (Findlay and O’Rourke 2002). Is this a revolution or the continuation of a long-standing trend? Again, the answer depends on one’s perspective. My argument is that, just as the American “globalization” after the Civil War was revolutionary in its systemic reorganization of production toward standardization and volume, the new era is revolutionary in its systematic de-verticalization in response both to changes in coordination technology and to plain-old increases in the extent of markets. p. 73In a globalized oil and gas marketplace, producers would benefit from innovative products and services that were developed elsewhere by others. Through the People, Ideas & Objects modules mentioned, they would be able to engage with those service providers and build value in their reserves and production by applying those developments. The Draft Specification would also provide them with the means to further develop their ideas of what might work in their properties. The producer firms building value by enhancing their production and reserves. The service industry firms building value by marketing new and innovative solutions to the global oil and gas industry.
To achieve this realignment of the industries, Langlois makes clear that the market and market supporting institutions are what are needed. Market supporting institutions such as People, Ideas & Objects Draft Specification.
It is a major part of my argument that, as the extent of the market grows, markets (and market-supporting institutions) can take over many of the buffering functions of management. “In the beginning there were markets” is Williamson’s famous heuristic dictum (Williamson 1975, p. 20.) For him, a fair comparison between markets and hierarchies implicitly requires us to assume that the same capabilities are available through contract as would be available to hierarchy. I have been at pains to suggest that, from a historical and evolutionary perspective, this heuristic leads us astray. Especially in times of significant economic transformation, internal organization may arise precisely because the relevant capabilities are not cheaply available through contract. As time passes and the extent of the market grows, however, we should expect markets (that is, “contracting” broadly understood) to become more “capable” (Langlois 1992). As time passes, all other things (including extent of the market) equal, the outlines of new capabilities will become sharper; activities will become more routine and better understood; and capabilities will thus begin diffuse to others. Moreover, economic agents can be expected to discover techniques other than integration for mitigating problems of asymmetric information. As the extent of the market grows, all other things (including knowledge) equal, it will pay to incur the set-up costs that markets and market-supporting institutions (like formal standards) require. Moreover, as markets become thicker, assets are likely to become less transaction specific (because there are many more potentially similar transactions) and relative minimum efficient scale is likely to decline in general. In the end there are markets. pp. 76 - 77Chandler has shown that management needs buffers to deal with the supply and demand for their products. Buffers such as inventory and supply chains. In markets these buffers, which is the primary role of management, are limited.
Over time, two things happen: (a) markets get thicker and (b) the urgency of buffering levels off and then begins to decline. In part, urgency of buffering declines because technological change begins to lower the minimum efficient scale of production. But it also declines because improvements in coordination technology — whether applied within a firm or across firms — lower the cost (and therefore the urgency) of buffering. p. 78There is little that I can think of in terms of how significant this level of change would require. Possibly this is why we need to see the complete failure of what has been built before. The culture of the industry is not something that can be changed at will. The decline of the management within the oil and gas companies might be a necessary precursor to the rise of the markets as discussed in this post. Given adequate time, that will happen. What we need to ask is, do our time lines allow for the maintenance of the global deliverability of oil and gas?
This is the Vanishing Hand. Rather than being a general historical trend, the managerial revolution -- in the interpretation -- is a temporary episode that arose in a particular era as the result of uneven development in the Smithian process of the division of labor. p. 78This next quotation is the final paragraph in Langlois book. We have learned a significant amount from his writings. Selection of the Langlois label will aggregate 55 posts that have been written in the past few years. Langlois writing helps provide a direction in which we can take the oil & gas and service sectors. It is difficult at times to conceive of doing just that, however, removing energy production from our advanced economies will leave us with much more difficult choices.
Chandler’s great contribution was to provide an intellectual framework for the field of business history. The exercise I have set for myself is to rethink Chandler while remaining a Chandlerian (and a Schumpeterian), that is, while attempting to provide a larger intellectual frame for organizational change. Obviously, casting complex historical transitions in terms of simple diagrams is a dangerous gambit; but it does provide a valuable heuristic and a way of calling attention to the importance of factors like the extent and evolution of the market and the changing nature of the coordination problem organization has faced. For more than 200 years, economic growth has been a durable trend in the United States. The same is true of the expansion in the extent of the market and the elaboration of the division of knowledge. Indeed, these trends may be the most significant facts of modern economic and organizational life, even if we often take them for granted. Using these trends as initial (or boundary) conditions in explaining organizational choice is not historicism. But failing to take them into account is ahistoricism. pp. 78 - 79We will prepare at least one more post on Professor Richard Langlois. This will be on his presentation slides. Review of these slides will provide us with a strong recap on all that we have learned here. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.
Technorati Tags: People's Langlois Change Management