Monday, May 31, 2010

Langlois, Return of the Entrepreneur Part II

In Part I of our review of Chapter 5, "The Return of the Entrepreneur" we discussed the extent of the oil service industry in terms of how it provides the oil and gas producer with its various products and services. I argued that the manner in which they are operated today was eerily consistent with the way the former Soviet Union was managed. Just as the former Soviet Union failed from too centralized control of the commanding heights of the economy. Attempts at centralized management in oil and gas provide many of the same symptoms and outcomes. I have argued here that the oil and gas companies are too involved in the development and planning of what goes on in the service sector. Spending money only for successful innovations that are approved by their management, little if anything from a field level innovation are being developed. For example, if not for the persistence of the individual behind Packers Plus, its doubtful that unconventional gas would exist.

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. 72
How 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. 73
In 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 - 77
Chandler 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. 78
There 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. 78
This 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 - 79
We 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.

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Sunday, May 30, 2010

Langlois, Return of the Entrepreneur Part I

We now turn to the final chapter "The Return of the Entrepreneur" in Professor Richard Langlois' book "The Dynamics of Industrial Capitalism". What we are doing by moving to the Joint Operating Committee is recognizing the partnership of the property that is held by various oil and gas firms. Moving away from the traditional "corporate" perspective of dealing with the compliance and governance of one producing firm owning many interests in many JOC's. Firms will continue to hold many interests in many JOC's, however, the JOC is a stand alone entity operating in the manner of its multi-firm ownership structure. This latter form of organization has persisted, in my opinion, as a result of the history of management and the development of Information Technologies that were not mature. Langlois notes:
And there are certainly examples of this. But it is also possible that a structure of organization can persist because of “path dependence.” A structure can be self-reinforcing in ways that make it difficult to switch to other structures. For example, the nature of learning within a vertically integrated structure may reinforce integration, since learning about how to make that structure work may be favored over learning about alternative structures. A structure may also persist simply because the environment in which it operates is not rigorous enough to demand change. And organizations can sometimes influence their environments — by soliciting government regulation, for instance — in ways that reduce competitive rigors. p. 58
We are on auto-pilot with respect to how the industry is structured and managed. Use of technology is based on the 1980's version of what a network was, a stand-alone hierarchy. The Internet as a tool has not even begun to impact the myopic structure of an oil and gas firm. With the power and connectivity of the Internet, why are partnerships, which are systemic in the oil and gas industry, not operated as partnerships? Bureaucracies are what brought us to this point, not what will take us to the next level.

From internal to external capabilities: the new economy.

By the 1980s, the large corporation that had looked inevitable and invincible in the 1950s and 1960s had become an organizational structure increasingly misaligned with economic realities — and an organization in the process of redefining itself. As those economies revived and trade began expanding by the 1970s, the easy life was coming to an end. Indeed, by the 80s and 90s, the image of invincibility had been virtually replaced by its opposite. As Mark Roe notes, “the image of the corporation as a sweating and not-always successful competitor has become more vivid” (Roe 1996, p. 106). p. 65
Except in oil and gas. In this next quotation Langlois argues that organizational change is driven by the rewards and potential rewards given to the competitors who make the change. He argues further, that as the rewards increase, the probability of changes increase. Naturally I agree with that statement, however, with the substantial increase in oil and gas commodity prices it would be reasonable to assume the increased motivation to change would be true. I think that the rewards of inaction have been greater for management. Higher profits due to commodity price increases have masked the true state of affairs in oil and gas. In essence management have used pricing as the evidence of their superior management skills, when in reality, they have provided zero or even negative value generation. As time passes and the overall deliverability of the firms production declines, we will know the effect of management.
Ruttan and Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational-and-institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it — or to block it — can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase. My argument is that these changes in technology and markets opened up attractive rent-seeking possibilities that could be seized only by breaking down or “unbundling” the vertical structure of the managerial corporation. p. 66
In addition to the lack of development in organizational structures in oil and gas. The oil and gas companies management have focused their efforts on field level innovations. Instead of sponsoring and supporting the next innovative Packers Plus or People, Ideas & Objects they vilify them for their forethought. Having secured 100% of the proceeds of oil and gas sales permits them to control all aspects of the development of the industry. Instead of focusing on the key value generating competitive advantages of the firm, their earth science and engineering capabilities, they involve themselves in a process of divine selection of which friends of theirs will receive the benefits of their budgets. As time passed and the cycle of feast or famine continued in shorter and shorter cycles, the service industries continued to atrophy due to a lack of financial resources or people willing to work in oil and gas. The results of this "management" are in plain sight in the Gulf of Mexico. Everyone is at fault and no one can do anything. Instead, what we need to be doing is something along the lines of what Langlois notes here.
When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70
What I see in oil and gas is not the dynamic and innovative industry that it should be. I see the scope of the problems facing the industry escalating exponentially, and the capacity to deal with the day-to-day operations fading. A desperate situation that is made worse by a management that ceased to be effective decades ago. As hard as I have tried to secure funding for these developments, the past seven years have been frightening and shocking. We are quickly coming to a point where the ability of the industry to increase or even maintain its production deliverability is irretrievably lost. I can certainly say that I have done everything that I could to make this situation right.

We have two choices in how we approach the future deliverability of the oil and gas industry. We can continue to throw money at the situation, as BP is doing. Or we can re-organize ourselves to approach the problem in a different fashion. I think the challenges that we face are significant and there is no more important commodity then oil and gas is to society. I vote we re-organize.

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.

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Saturday, May 29, 2010

Langlois, Rise of the Corporation

We begin our review of Chapter 4 "The Rise of the Corporation" of Professor Richard Langlois' book "The Dynamics of Industrial Capitalism". This chapter deals with the history and development of the corporation over the past few centuries. Prior to our review of Professor Langlois we conducted a summary review of Alfred D. Chandler, who is renowned for his work in documenting the history of the corporation. Instead of revisiting this history, I want to add to the discussion from an Information Technology (IT) point of view. Particularly with respect to the poor use of IT in the oil and gas industry. First lets set the tone of the discussion by quoting the opening paragraph of the chapter.
Industrial structure is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. These systems jointly must solve the problem of value: how to deliver the most utility to ultimate consumers at the lowest cost. Industrial structure is an evolutionary design problem. It is also a continually changing problem, one continually posed in new ways by factors like population, real income, and the changing technology of production and transaction. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organizations — governance structures — bring with them their own costs, which need to be taken into account. But technology clearly affects organization. This is essentially Chandler’s claim. The largescale, high-throughput technology of the nineteenth century “required” vertical integration and conscious managerial attention. In order to explicate this claim, we need to explore the nature of the evolutionary design problem that industrial structure must solve. p. 50
To talk about organizational structure we need to look at the information systems used by the firms and markets that make up the industry. One of the key break-through's of the Preliminary Research Report was that systems define and support organizations. To therefore change the organization requires that we build the systems to support the new organizational constructs. It is a deliberate act that needs to be carried out by those within the industry. Relying on Hayek's spontaneous order will not deliver the systems that are needed for an innovative oil and gas industry. Nothing will happen without the financial resources of the industry being dedicated to a software development capability.

On the surface this seems logical and reasonable. So what is the difficulty in securing the dedicated financial resources. Management of the bureaucracy will not fund what is counter to their best interests. They will fight to have their ways and means be the only alternative available to manage the industry. Their innovativeness and capability are developed as a result of the Chandlerian corporation. The hierarchy is a decidedly human invention that has been ably assisted by IT, not a type of organization that actively exploits the value of IT. If we look in the marketplace of the ERP systems vendor providing solution to oil and gas firms, we see nothing that has been developed in the last few decades. Many of the systems that are still operational in the marketplace are orphans of long-ago acquisitions or dispositions. The bureaucracy are not oriented, nor are they able to fully employ the types of technologies that are readily available to everyone in the Internet age. It is the modern equivalent of selling buggy whips.

Is this the type of situation that provides for the long term and substantial economic development that is needed in the oil and gas industry? Will this be the situation that the industry is operating under in 2020? With no one willing to fund the development of People, Ideas & Objects Draft Specification, it appears it will be the case. Is there an expectation that the current bureaucracy will soon see the light of IT and begin the development of the systems that will propel oil and gas forward? Will I still be writing to try and secure the necessary resources in 2020?

The fact of the matter is, the Chandlerian corporation had its day. The hierarchy was useful and productive to the point of providing the majority of the benefits that we enjoy today. It may still have some distance to travel before it fails completely, however, why should we wait for that fateful day when the alternatives are readily available? And by today I mean we could begin the development process today, the delivery of systems will be as a result of a significant effort on almost everyone's behalf.

Was it Henry Ford or the buggy-whip makers that developed the automobile? Why are we stuck in this mindset that what we have today is good enough? Do we really only respond when a crisis threatens us? We need to stop thinking that someone else will step up and solve this problem. We need to be proactive in approaching people who would be able to fund these developments and telling them they should do so. This action by everyone is the critical step that we need to take to move this project forward.

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.

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Friday, May 28, 2010

Langlois Personal Capitalism Part II

In this second post on Chapter 2 "Personal Capitalism" of "The Dynamics of Industrial Capitalism" Professor Richard N. Langlois documents four centuries of the history of the Swiss watch making industry. I highly recommend you download the book and read Chapter 3 for an understanding of how the Swiss watch industry evolved in the face of many unseen dangers. The key break-through in this post is the role of the large organization in making People, Ideas & Objects and the Community of Independent Service Providers real. There are many contradictions in this post, none more contradictory then myself reflecting on the positive role of the bureaucracy.

This positive role that the bureaucracy can provide is based on the realization that change can be a top down decision. In this post Langlois argues there are two alternatives for change. Through charismatic authority or as a top down decision. For the bureaucracy to fall on its sword seems to be a tall order, however, other miracles have allegedly happened. Funding of this project is the step that would need to be taken in order to initiate top down change. I'm not holding my breath.

That leaves us with charismatic authority as Langlois describes it.
This is so because charismatic authority solves a coordination problem in a situation of “chaos” in which rights, roles, and responsibilities are in flux. All participants would prefer some structure or constitution; but the costs of coordination are high, as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so. Charismatic authority cuts through these costs and establishes a structure, which then presumably evolves in a Weberian way as stability is achieved. p. 37
People, Ideas & Objects have published the Draft Specification as the structure for participants in this project. This is the beginning vision of how the energy industry could be structured to facilitate innovation and speed. The ideas contained within the vision enable people to see their potential rights, roles and responsibilities in the industry. From there they will be able to build the systems they will need to do their jobs in this new environment. If cutting down on the costs of coordination is the objective, I can see how this vision enables the people to begin working constructively towards fulfilling that vision.

I am appreciative of Langlois' point about "as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so". It would be difficult without the Internet to organize the volume of people needed within these communities. I've always assumed that the numbers of people wanting to contribute would only do so when it was deemed safe to do so. The bureaucracies are particularly difficult towards people who are willing to be the first to step into an "unauthorized" area. Protection from the bureaucracies actions are our first priority.

By using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. We align the firms ERP systems with the legal, financial, operational decision making, cultural and communication frameworks of the global oil and gas industry. Therefore the Draft Specification resonates with the ways and means that the industry operates naturally. This natural way provides People, Ideas & Objects with an advantage in that people can see that the vision of the Draft Specification provides what Langlois calls "cognitive leadership".
The “constitution” in demand in a world of change is a cognitive one. Those who need to cooperate in such a world need to share a cognitive frame or system of interpretation in order to orient themselves toward one another’s goal’s and actions. The entrepreneur provides this orientation through what Witt calls cognitive leadership. p. 37
In addition, much of the Draft Specification provides new metaphors for how the system will integrate with the natural way of the industry. Metaphors such "marketplace" modules and the Military Command & Control Metaphor provide the users with an understanding of what is being created. These are the primary reasons that these developments should be funded.

Oil and gas is based on the partnerships that are created to manage oil and gas assets. These Joint Operating Committees are systemic the world over and are an inherent part of the nature of the business. Multiple ownership is a necessity derived from the desire to reduce risk and the aerial extent of physical assets. Operational decision making is determined based on each contracts "Operating Procedure" which is a codification in the regions culture. It is here that Langlois brings up an interesting point regarding the decision rights in incomplete contracts.
More recent economists tell a similar tale. In the work of Oliver Hart (1989), the necessary incompleteness of contracts in an uncertain world requires the existence of a residual right of control — that is, a right to make decisions in circumstances unforeseen. The ownership structure of production turns on whose possession of that right minimizes the sum of production and transaction costs. p. 39
In a separate post I noted that we will use the technologies that are available to us to make these operational decisions better and faster. Having each of the companies representatives on the JOC participate in an interactive video conference to determine the decisions that need to be made is part of the Draft Specification. Since we are providing the oil and gas industry with a much needed software development capability. These decisions being made can be documented and implemented during the conference in real time with the appropriate AFE's or work-orders being dispatched based on the voting and decisions being made. This is one of the key areas where I see the performance of the producers being able to make the decisions in the time frame in which they are expected.

I want to turn now to the last point in Chapter 3 "Personal Capitalism" and discuss the fact that innovation requires that firms take on characteristics of marketplaces. In this next quote, Langlois reflects on the impact that American watch manufacturer Waltham posed to Swiss manufacturers. Waltham was able to increase the quantity and quality of American watches to a point where they seriously challenged the Swiss manufacturers. The key point is highlighted in italics.
In the specific case of watchmaking, the fragmented Swiss industry responded quickly to the American threat. “In spite of some inevitable resistance,” Jequier (1991, p. 326) tells us, “the spirit of enterprise asserted itself”; and assemblers began building new factories and introducing the same kind of machinery as the Americans. In 1870, three quarters of the 35,000 employed in Swiss watchmaking worked at home; by 1905, only a quarter of the more than 50,000 workers did so (Jequier 1991, loc. cit.). Nonetheless, when Switzerland regained the technological and market lead toward the end of the nineteenth century, it remained far less vertically integrated than the American industry; relied far more on outwork; and comprised thousands of firms to the dozen or so in America (Landes 1983, p, 323). Meanwhile, Waltham’s highly integrated structure proved far less conducive to the routine administration of its operation than it had to bringing that operation into being, and the firm virtually collapsed under principal-agent problems (Landes 1983, pp. 329-334). Even its better-run competitors lost ground to the Swiss. Indeed, both Waltham and Elgin, Waltham’s long-time domestic rival, are now Swiss owned. p. 42
Key to the Draft Specification is the division of labor that is needed in order to increase the economic output of the oil and gas industry. The Military Command & Control Metaphor provides for a pooling of the resources from the firms represented in a JOC. Eliminating the redundancy built in each firms silo of technical capability. The eleven different modules of the specification provides for an enhanced division of labor. And finally, the division between "market" and "firm" is a further division of labor. Within this framework, the People, Ideas & Objects software development capability, and the Community of Independent Service Providers will be able to define ever greater divisions of labor for the producer firms that subscribe to this project.
The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46
It's this next quote that I find the variety of contradictions. The bureaucracies are all about centralization and we are talking about moving the majority of the industry into the market definition. This requires the bureaucracy to voluntarily say so long. Something that this projects history has shown, the bureaucracy won't do.
As I have argued elsewhere (Langlois 1992b), the benefit of centralization lies in the ability to bring about change, not in the ability to administer existing structures. p. 47
If the bureaucrats need further justification for their self selection, I recommend the following.
Nonetheless, innovativeness requires more than mechanistically searching for new routines. In Hamel and Prahalad, it essentially involves forcing the firm to take on more of the characteristics of a market: it must develop the kind of genetic diversity Friedrich Hayek praised. “In nature,” they write, “genetic variety comes from unexpected mutations. The corporate corollary is skunk works, intrapreneurship, spinoffs, and other forms of bottom-up innovation” (Hamel and Prahalad 1994, p. 61). In the end, however, they, like Crozier, realize that the most radical kind of change must come from the top down: it requires a Schumpeterian entrepreneurial vision. “Top management cannot abdicate its responsibility for developing, articulating, and sharing a point of view about the future. What is needed are not just skunk works and intrapreneurs, but senior managers who can escape the orthodoxies of the corporation’s current ‘concept of self’” (Hamel and Prahalad 1994, p. 87). Example? Nicolas Hayek’s “crazy” vision that the Swiss could manufacture cheap watches competitively with the Japanese (pp. 98-99). p. 49
Indeed, one might argue that, the farther an innovation is from the ken of existing firms, the more likely it is that the innovation will be instantiated in new organizations. p. 49
It's now 2010 and it feels like, as a result of the bureaucracy, that we will be arguing the same points in 2020. The deliberate nature of building organizations has to consider that we need to build the systems that define and support those organizations first. Without software, there is no change. Without cash, there is no software, and the bureaucracies are not going to fund these developments. And therefore, here we stand.
Whether Schumpeterian entrepreneurship operates from the top of an existing organization or in the creation of new ones, the same conclusion seems unavoidable. The charismatic authority and coherent vision of such entrepreneurship remains an inevitable part of capitalism, however modern. For reasons that have to do with the nature of cognition and with the structure of knowledge in organized society, some essential part of capitalism must always remain personal.
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.

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Thursday, May 27, 2010

Langlois Personal Capitalism Part I

In Chapter 3 of Professor Langlois book "The Dynamics of Industrial Capitalism" we look at "Personal Capitalism". In this, and my next post, I want to highlight the role of the entrepreneur in making the changes in the oil and gas industry. The Community of Independent Service Providers (CISP), Industrial Districts (ID), Business Groups (BG) or Small Knowledge Intensive Enterprises (SKIE) being filled with individual entrepreneurs acting in innovative and value generating ways. What becomes clear in this chapter is that the evolutions an industry goes through are usually brought about by unseen changes. I think that the unseen changes that the oil and gas industry will soon be faced with is the prospective decline in deliverability. This may appear to be an industry problem, but I think it is more of a societal issue in that reducing our energy demand will be problematic.

The bureaucracies that are in power today are unwilling to address the overall deliverability issue as theirs. If a producers production profile declines, they see that as a remote possibility and that would qualify as an isolated single event. If there is a potential decline of overall industry production, producers are unwilling to comment on the probability and don't see that as their problem. If unseen dangers lead to changes in an industries makeup, oil and gas might be in for a shake-up.

Nonetheless a decline, if it should occur, will be difficult to stop and impossible to reverse based on the current performance of the oil and gas firms. Five years of static deliverability is an ominous pre-cursor to a potential decline. The passing of these five years would seem to date how far behind the curve we are. With years of software development before we can exploit the Joint Operating Committee as the key organizational construct of the People, Ideas & Objects software application. We have much work to do. This morning the Obama administration have announced a six month moratorium on all offshore drilling. This may be the straw that breaks the Camel's back in terms of the U.S. energy consumption.

If one was willing to bet which group, the bureaucrats or the entrepreneurs will be the ones that solve this deliverability issue, I put my money with the entrepreneurs. Professor Langlois analyses Schumpeter's definition of the term.
The broad outlines of Schumpeter’s theory of entrepreneurship are of Weberian provenance (Carlin 1956). Indeed, one might say that Schumpeter’s schema is an application of Weber’s social theory to the problem of economic growth. Schumpeter’s innovation is to associate Weber’s category of charismatic leadership with the concept of entrepreneurship. p. 32
Weber is principally concerned with the religious leader or prophet, and to a lesser extent with military and political leadership; Schumpeter borrows heavily from that analysis in his characterization of the entrepreneur. Here we begin to see the outlines of Schumpeterian “personal capitalism,” which in its pure form is the antithesis of bureaucratic organization. Consider Weber’s account of the organization of charisma. p. 32
The corporate group which is subject to charismatic authority is based on an emotional form of communal relationship. The administrative staff of the charismatic leader does not consist of “officials”; at least its members are not technically trained. ... There is no hierarchy; the leader merely intervenes in general or in individual cases when he considers the members of his staff inadequate to a task to which they have been entrusted. There is no such thing as a definite sphere of authority and of competence. ... There are no established administrative organs. ... There is no system of formal rules, of abstract legal principles, and hence no process of judicial decision oriented to them. But equally there is no legal wisdom oriented to judicial precedent. Formally concrete judgments are newly created from case to case and are originally regarded as divine judgments and revelations. ... The genuine prophet, like the genuine military leader and every true leader in this sense, preaches, creates, or demands new obligations. In the pure type of charisma, these are imposed on the authority of revolution [sic] by oracles, or of the leader’s own will, and are recognized by the members of the religious, military, or party group because they come from such a source. (Weber 1947, pp. 360-361.) p. 32
Charismatic authority is thus outside the realm of everyday routine and the profane sphere. In this respect it is sharply opposed both to rational, and particularly bureaucratic, authority, and to traditional authority, whether in its patriarchal, patrimonial, or any other form. Both rational and traditional authority are specifically forms of everyday routine control of action; while the charismatic type is the direct antithesis of this. Bureaucratic authority is specifically rational in the sense of being bound to intellectually analysable rules; while charismatic authority is specifically irrational in the sense of being foreign to all rules. Traditional authority is bound to the precedents handed down from the past and to this extent is also oriented to rules. Within the sphere of its claims, charismatic authority repudiates the past, and is in this sense a specifically revolutionary force. (Weber 1947, pp. 361-362.) pp. 32 - 33
It is the charismatic, and therefore revolutionary, quality of entrepreneurship that makes it a source of economic growth, that allows it to play the role of “industrial mutation — if I may use that biological term — that incessantly revolutionizes the industrial structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter 1950 [1976, p. 83], emphasis original). p. 33
Recast in these explicitly Weberian terms, Schumpeter’s theory of entrepreneurship looks something like this. In its undeveloped state, an economy is based largely on traditional behavior, which bounds the possibilities for conscious economic activity. Under the right institutional setting — bourgeois capitalism — charismatic leadership arises, in the form of the entrepreneur, to break the crust of convention and to create new wealth by “‘lead[ing]’ the means of production into new channels” (Schumpeter 1934, p. 89). Charisma is personal and revolutionary; “in its pure form charismatic authority may be said to exist only in the process of originating. It cannot remain stable, but becomes either traditionalized or rationalized, or a combination of both” (Weber 1947, p. 364). In the economic sphere, of course, the tendency is toward rationalization. Not only do imitators rush in once the entrepreneur has blazed the trail, but also the problem of succession within the entrepreneurial organization leads (if the organization is to continue) to bureaucratization, that is, to the substitution of rules for personal authority; to the creation of abstract offices divorced from their individual holders; and to the increasing preeminence of specialized knowledge and spheres of competence (Weber 1947, pp. 330-334). p. 33
Langlois has captured Schumpeter's creative destruction and the business cycle in these quotations. If we agree on the problem that faces oil and gas, the decline in deliverability, it is reasonable to assume that we agree on the entrepreneur being a key to solving the problem. Langlois notes the change that needs to be brought about are initiated by the entrepreneur. Yesterday we discussed how individuals need to approach People, Ideas & Objects with a different mindset. [The cognitive and motivational paradox', the risk of becoming blind sleep-walking agents in the hands of whoever wants to feed us.] This mindset is accurately captured in Langlois discussion of the entrepreneur.

How I see this project developing is through the entrepreneurial efforts of the Community of Independent Service Providers. Each member of the CISP, SKIE, ID or BG would fulfill the role in making the necessary changes within the industry. Each member maybe supported by 5 - 10 support staff that are able to leverage the entrepreneur's talents. These groups would be part of the larger SKIE community that would work together through the enhanced Information Technologies they build with the People, Ideas & Objects software development capability. I think this is the logical and probable makeup of the service sectors of the greater oil and gas industry. What needs to be done today is that these members need to act.

I approach this environment with a sense of self preservation. There is an abundance of work that needs to be done. I have two choices in approaching this work, I can do it all, or I can do none of it. I choose the sane approach and find a role that I am best suited to filling. Raising the money needed for development and the CISP. To involve myself in the actually software development at this point is counter productive, or more probably destructive. My key role to date has been to ensure that the change as defined by the Draft Specification happens.
But — and this is the heart of Schumpeter’s thesis — once the hard work of crust-breaking has been done, charismatic leadership is no longer necessary, and the entrepreneur must ride into the sunset. p. 34
I can be a strong advocate for this software development. I am the one to encourage the investors and shareholders in oil and gas to fund these developments. I am the one who can direct the producers to involve themselves in the various communities working to build these solutions. That is the role that I feel I should fill on a go forward basis.
As we saw, however, Schumpeter’s claims are much different. He associates “personal” capitalism with charismatic leadership. It is the entrepreneur who makes dramatic, and often creatively destructive, changes. In Schumpeter, those who come along and fill in the details are important, but it is the changes that really matter. The obsolescence thesis is a claim not that large, fully articulated enterprises may be necessary to realize the vision of an individual entrepreneur; rather, it is a claim that those enterprises will be the sources of change. Let us put it succinctly. In Chandler, large organizations are the result of economic change; in Schumpeterian later capitalism, economic change is the result of large organizations. p. 36
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.

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Wednesday, May 26, 2010

Douglas North Chapter 1

Taking a short break from our review of Professor Langlois. I noticed that a new and interesting book has been published. The book is "Understanding the Process of Economic Change" by Nobel Prize winning economist Professor Douglass North. I took the opportunity to download the first chapter and I highly recommend the entire book, however, at this time we will only be covering this first chapter in our review.

If there is one word to summarize what People, Ideas & Objects is about, it's change. Moving from the bureaucracies that control the industry today. To a newer more innovative footing as represented in identifying and supporting the Joint Operating Committee. Brings about a significant scope of change in the oil and gas marketplace. How this change is implemented is of great concern to me. Making sure this process is focused on the new innovative footing, and not on the bureaucracies needs is a difficult dynamic to manage. Specifically we can't be concerned with the day-to-day of the industry. These day-to-day concerns are for the bureaucracy to manage for the time being. We can not be constrained by the difficulties that constrain the bureaucracy. People need to approach this project with fresh thinking that is free to be as it should be. This unfortunately makes my life infinitely more difficult, however, we are close to securing some funding. And that funding will be from the appropriate resource, the oil and gas investors and shareholders. Selling out to the bureaucrats at this point would be very destructive in terms of ensuring that we are not constrained by the bureaucrats.

We have also been mindful of how individuals approach People, Ideas & Objects. Mindful to ensure that there is a strong break from the day-to-day to ensure they don't bring their cognitive and motivational paradoxes with them from their day jobs. These paradox defined in 1998 by Carroll and Rosson were spelled out in an appendix to the Preliminary Research Report and are noted for the following.

The “motivational paradox” arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for through put. Their work is hampered by this lack of learning, and consequently productivity suffers.
The “cognitive paradox” has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions.
In the first paragraph North provides us with an understanding of where we are and the significance of the times at which we live.
UNDERSTANDING economic change including everything from the rise of the Western world to the demise of the Soviet Union requires that we cast a net much broader than purely economic change because it is a result of changes (1) in the quantity and quality of human beings; (2) in the stock of human knowledge particularly as applied to the human command over nature; and (3) in the institutional framework that defines the deliberate incentive structure of a society. A complete theory of economic change would therefore integrate theories of demographic, stock of knowledge, and institutional change. We are far from having good theories of any one of these three, much less of the three together, but we are making progress. The central focus of this study, and the key to improving economic performance, is the deliberate effort of human beings to control their environment. Therefore, priority is given here to institutional change, with the consequent incentive implications for demographic and stock of knowledge changes; but there is no implication that such an approach deals adequately with the latter two. p. 1
Clearly we have much to learn in terms of how best to approach the development of these systems. The other day I noted that we risk becoming blind sleep-walking experts in the hands of whoever wants to feed us. (Habermas) And this is reiterated by North. To "improve the economic performance" of the oil and gas industry requires that we deliberately exert effort to control our environment. I believe, if we continue in the fashion of the bureaucracy, that the world oil production will begin a serious decline in deliverability. Then we will realize, that some of the tasks that we need to occupy ourselves with are beyond those that are parsed out by managements budgets. North details the impact that existing constraints can have.
The structure we impose on our lives to reduce uncertainty is an accumulation of prescriptions and proscriptions together with the artifacts that have evolved as a part of this accumulation. The result is a complex mix of formal and informal constraints. These constraints are imbedded in language, physical artifacts, and beliefs that together define the patterns of human interaction. If our focus is narrowly on economics, then our concern is with scarcity and, hence, competition for resources. The structure of constraints we impose to order that competition shapes the way the game is played. Because various kinds of markets (political as well as economic) have different margins at which competition can be played out, the consequence of the structure we impose will be to determine whether the competitive structure induces increasing economic efficiency or stagnation. Thus well-developed property rights that encourage productivity will increase market efficiency. The evolving structure of political and economic markets is the key to explaining performance. pp. 1 - 2
If well developed property rights that encourage productivity will increase market efficiency, I think People, Ideas & Objects achieves the appropriate institution of those rights. Here I am talking about the Intellectual Property (IP) rights of the people that are associated with this project. I as the copyright holder to the ideas expressed here and in the Draft Specification license those participants in this project with unencumbered use of this IP. In turn, the derivative ideas generated in the development of the applications is essentially sold back to me, where in turn they become available to everyone in the community that has signed the license. This maintains the IP in its pristine condition and is available to all that need it. The license also provides members of the Community of Independent Service Providers with the rights to build a service based offering that is associated with the People, Ideas & Objects software applications.

North provides us with an understanding that we need to be ever vigilant in terms of these concerns.
While the uncertainty that pervades our existence may be reduced by the structure we impose, it is not eliminated. The constraints that we impose have, themselves, uncertain outcomes reflecting both our imperfect understanding of our environment and the equally imperfect nature of both the formal rules and the informal mechanisms we use to enforce those constraints. p. 2
I am unsure at this point if there will be a second post on this chapter. I have downloaded a number of Professor North's papers and we will review those for applicable content. I have also set up a "North" label so these posts can eventually be aggregated.
This book is a study about the ceaseless efforts of humans to gain greater control over their lives and in the course of that effort continually confronting new and novel problems to solve. It is a study of the perceptions that induce institutional innovation intended to reduce uncertainty or convert uncertainty into risk. It is also a study of a continually changing human landscape. This landscape poses new challenges, as a consequence of which policies emanating from “non-rational” explanations frequently play a part in the structures we create. p. 2
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.

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Tuesday, May 25, 2010

Langlois Obsolescence

I am encouraged by the shareholder lawsuit against BP's directors. Each day there appears to be more and more people taking action to deal with these bureaucracies.

Chapter 2 of Professor Richard N. Langlois' book "The Dynamics of Industrial Capitalism"  is entitled "The Obsolescence of the Entrepreneur" and deals with the Schumpterian Dichotomy. That dichotomy is the declining importance of the entrepreneur in the latter part of Schumpeter writings. This appears to be in contrast to his earlier writings in which he focused on the entrepreneur. What this post seeks to better define is Professor Langlois' vanishing hand hypothesis and its application to oil and gas. That is, the era of the large bureaucracy had its time and place. That era is now passing, to be replaced once again by the entrepreneur.
In the "early" Schumpeter -- Schumpeter I -- the innovation process might best be characterized as a linear one. Christopher Freeman (1982) describes it this way. Basic inventions are more or less exogenous to the economic system; their supply is perhaps influenced by market demand in some way, but their genesis lies outside the existing market structure. p. 21
Freeman notes that innovation is under the direction of no one group or individual. Adam Smith's invisible hand is present and the market provides. In this next quotation we see Chandler's visible hand.
“The main differences between Schumpeter II and Schumpeter I,” says Freeman, “are in the incorporation of endogenous scientific and technical activities conducted by large firms... p. 21
These quotations are noting the changes in the source of innovation. From the entrepreneur to the rise of the successful corporate Research & Development (R&D) arms of large firms such as Xerox PARC, Bell Labs and others. These firms R&D activities replaced the role of the entrepreneur during the middle of the last century. Langlois vanishing hand suggest that the role of the entrepreneur will rise again in prominence to the bureaucracy. Therefore it is reasonable to ask, what is the critical role of the entrepreneur?
Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27
Its more then just knowledge. Ideas have a critical role in economic growth. People, Ideas & Objects is derivative of Professor Paul Romer's "New Growth Theory" of People, Ideas and Things. The idea of using the Joint Operating Committee as the key organizational construct of the innovative oil and gas industry was in front of everyone in the industry. Why didn't this idea percolate to the top earlier?
There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27
What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27
How different a thing this is becomes clearer if one bears in mind the impossibility of surveying exhaustively all the effects and counter-effects of the projected enterprise. Even as many of them as could in theory be ascertained if one had unlimited time and means must practically remain in the dark. As military action must be taken in a given strategic position even if all the data potentially procurable are not available, so also in economic life action must be taken without working out all the details of what must be done. Here the success of everything depends on intuition, the capacity of seeing things in a way which afterwards proves to be true, even though it cannot be established at the moment, and of grasping the essential fact, discarding the unessential, even though one can give no account of the principles by which this is done. Thorough preparatory work, and special knowledge, breadth of intellectual understanding, talent for logical analysis, may under certain circumstances be sources of failure. (Schumpeter, 1934, p. 85.) pp. 27 - 28
I read this as not being the role of one entrepreneur. I have identified that the Joint Operating Committee is the key organizational construct of an innovative oil and gas producer. I have taken that idea and formulated a vision, the Draft Specification, of how the idea of using the JOC could be incorporated in the day to day of the industry. From this point forward, it is the work of many entrepreneurs to develop the application and make the industry as innovative as possible. That is where the Industrial District (ID), Business Groups (BG), Small Knowledge Intensive Enterprises (SKIE) and Community of Independent Service Providers play a key and different role then what is done today. Langlois notes.
Entrepreneurship – introducing the qualitatively new – is an activity inherently different, it would seem, from the kind of rational calculation portrayed in the imagery of neoclassical modeling.
It is interesting that Schumpeter regards the entrepreneurial act as requiring in fact greater conscious rationality than routine activity (Schumpeter 1934, p. 85). This reemphasizes the empirical nature of his conception of economic knowledge. Routine behavior requires less conscious rationality because it is essentially “preprogrammed” through trial-and-error learning. Notice, of course, that, at least in “early” capitalism, the conscious rationality of the entrepreneur is not adequate to the task of innovation. This is why entrepreneurship requires intuition, the leap of logic. But – and here we get to the heart of the matter – conscious rationality, for Schumpeter, is in fact becoming increasingly adequate to the job of dealing with the radically new.
The more accurately, however, we learn to know the natural and social world, the more perfect our control of facts becomes; and the greater the extent, with time and progressive rationalisation, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of this [entrepreneurial] function decreases. Therefore the importance of the entrepreneurial type must diminish just as the importance of the military commander has already diminished. (Schumpeter, 1934, p. 85, emphasis added.)
Notice the syllogism. Because the unknown can be increasingly calculated rationally, the “extra-logical” function of the entrepreneur becomes increasingly unnecessary, and so the importance of the entrepreneurial type must diminish. p. 28
Placing the caveat "experienced entrepreneur" on the ID, BG, SKIE or CISP is a necessary. People who are able to see the forest for the trees in terms of what has to be done. As much as no one was in control of the innovation in the entrepreneurial era of Schumpeter's first writings, no one can influence the scope and scale of the project defined here. What we can do is share the understanding of how the industry operates, capture that in the software and apply it through the innovative tools that we develop.

We are at the beginning of this process. The bureaucracy remains in complete control. However we find encouragement in the ongoing activities in the industry. In these next three quotations Langlois provides us with an understanding of where we are in the process and how the transition will come about.
"Defenseless fortresses invite aggression, especially if there is rich booty in them. Aggressors will work themselves up into a state of rationalizing hostility -- aggressors always do. No doubt it is possible, for a time, to buy them off. But this last resource [sic] fails as soon as they discover that they can have it all" (Schumpeter 1950 [1976, p. 143]). p. 30
“Thus the modern corporation, although the product of the capitalist process, socializes the bourgeois mind; it relentlessly narrows the scope of capitalist motivations; not only that, it will eventually kill its roots” (Schumpeter 1950 [1976, p. 156]). Like Marx, then, he sees capitalism as leading to its own destruction. But unlike Marx, Schumpeter sees capitalism as the victim of its own economic success not its economic failure. This tale stands Marx on his head, its plot laced with a heavy and self satisfied irony. The tone is disinterested and the attitude fatalistic; but the message is largely cautionary. At base, Schumpeter is nothing so much as a neoconservative, perhaps the first neoconservative. p. 30
Lastly a word of caution to put these points in context.
In the end, however, taking all this too seriously puts us in danger of reading Schumpeter literal-mindedly. The force of the argument is in the texture of the landscape -- not in its details. Indeed, there is a sense in which the “Schumpeterian tension” -- the tension between the Schumpeter who comes to praise entrepreneurship and the Schumpeter who comes to bury it -- actually enriches the majestic irony of Capitalism, Socialism, and Democracy. p. 31
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.

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Sunday, May 23, 2010

Langlois Progressive Rationalization Part II

In Part II of our review of Professor Richard Langlois book "The Dynamics of Industrial Capitalism", Chapter I "Progressive Rationalization" we discuss the role of capabilities. In People, Ideas & Objects Draft Specification capabilities reside in both the firm and the market, however, the division of labor between the two is different then what exists today. We will also see in this chapter that the multi-unit vertically integrated firm is of diminishing value. How the hierarchical organizational construct was designed to provide control to the means of production and how today, that means of production is best met through dynamic markets.
As Chandler tells us on the first page of The Visible Hand, two characteristics set the managerial corporation apart from earlier modes: (1) it is overseen by salaried professionals rather than by owners, and (2) it comprises multiple units or stages of production each of which could in principle have stood on its own as a separate organization. The last characteristic is really the essential one. In the large corporation, management supersedes the price system as a method of coordinating stages of production. p. 8
Scratch the surface of any start-up oil and gas firm today and you will find the primary owners are the engineers and earth scientists that are running the firm. Using debt for leverage and to expand their scope, these small teams are actively developing a number of oil and gas fields over a five to ten year time frame. When the fields are fully developed, they will monetize their investments by selling the firm to one of the major independents or International Oil Companies (IOC's). This focus on building value is the future of the industry. Although the scope of the projects may not be as large as the multi-billion dollar programs of the IOC's. They are prototypical of how I see People, Ideas & Objects Draft Specification providing all members of the oil and gas industry with the means of value generation through exploration and development.

The future configuration of a producer firm will have a handful of engineers and earth scientists augmented by similar resources from the partner firms of the Joint Operating Committee. These individuals will be joined by the various resources of the dynamic field and service sectors on as required basis. The JOC will implement a comprehensive governance structure through the applications Military Command & Control Metaphor. The scientists and engineers will be leading these groups through the five to ten year development of the oil and gas reserves. Langlois notes;
The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9
In breaking down the way that oil and gas firms operate, People, Ideas & Objects is only providing the ERP software that identifies and supports what is desired by those in the industry. The difficulty today is that each producer firm is conflicted and constrained by their own needs. One of the conflicts is that they are focused on their own compliance needs. Focused on the compliance requirements of their tax, royalty and SEC requirements as opposed to the business of the oil and gas business. Companies are also attempting to secure the global scope of capabilities that their firm may require. As a result they may have a greater in-house capability then required at any point. Replicate this over each producer firm and we see independent and mutually exclusive capabilities silo's being built. The industry as a whole can not afford to maintain capabilities in this fashion.  

As each barrel of oil produced requires progressively more earth science and engineering resources, where will the future technical resources come from? With each producer firm attempting to secure all the capabilities they can, they quickly realize the industry wide demand for these capabilities far exceeds the resource base. The capacity to increase the capability is very limited, and therefore the alternative means of deploying a limited capability over a greater scope of projects is through re-organization. Reorganizing to the JOC as the key organizational construct; permits a pooling of the capabilities from all the producers represented in the JOC and the greater service sectors. Langlois helps to define capabilities with the following definitions.
Coase noticed that there can be costs of transacting because of limitations of knowledge and information; capabilities theory insists that limitations of knowledge and information are the key to understanding everything an organization does (Langlois and Foss 1999). Indeed, transacting is just one of the many activities an organization undertakes – one of many activities requiring capabilities (Winter 1988). p. 11
Richardson (1972, p. 888) describes capabilities as “the knowledge, experience, and skills” of the firm. p. 12
Why is there an assumption that the capacities resident in the earth science and engineering resources fixed? To train and deploy them takes the better part of ten years, and the community that exists today have a predetermined retirement date. In other words its not an assumption but a fact that the population of these technical resources will probably remain constant over the foreseeable future. Based on that fact, would it be reasonable to assume, that the industry will produce no more oil and gas over the foreseeable future? That isn't the case, this therefore becomes an economic problem and not a resource constraint.
Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13
Innovation in oil and gas will arise as a result of People, Ideas & Objects use of the Joint Operating Committee in the manner as described in the Draft Specification. No other alternatives, that I am aware of, have been suggested. The bureaucracy can not function in today's environment, and are certainly incapable of transforming itself to the future demands of the marketplace.
In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14
Management are being unreasonable in expecting that theirs is the only way in which to proceed. Managerial coordination in today's marketplace is redundant. People, Ideas & Objects have received no support from the bureaucracy. As a result there is no competitive form of organization to challenge managements ways. Control of the financial resources of the industry ensures that we are reduced to blind sleep-walking experts in the hands of whoever wants to feed us. (Habermas)
Schumpeter’s account of progressive rationalization takes the form of a contrast between two modes of economic organization, modes roughly cognate to the difference between the small owner-managed firm and the large multi-unit enterprise. Characteristically, however, the issue in Schumpeter is a dynamic one: he is concerned with the respective merits of these two modes of organization not in the static allocation of existing resources but in generation of economic change and growth. The paradox of Schumpeter is that he famously defended, and has come to be associated with, both of these modes as drivers of economic growth. Schumpeter has returned to prominence today as champion of the role of bold entrepreneurs in creating new combinations and redirecting the means of production into new channels, to such an extent that he is revered as an inspiration to the present-day field of entrepreneurship studies (Shane and Venkataraman, 2000). In this (Schumpeterian) literature, the force behind economic growth comes from individuals or small groups of individuals who work mostly outside the established structure of organization rather than from within it. pp. 17 - 18
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