Lazonick on Chandler Part III

In the first post on Professor Lazonick's paper we discussed the differences between optimization and innovation in terms of corporate culture. How in oil and gas we need to move from optimization to an innovation footing. To do so requires a substantial investment for the oil and gas producers. An investment that begins with the development of the software defined in the vision of the Draft Specification. An investment that up until today, the oil and gas industry has been unwilling to make. What I think Lazonick makes clear in this second part of our review of this paper is that the means to which to make the changes are within our grasp. All that is missing is the willingness to make the necessary investments. That willingness is a product of the innovative firms corporate culture.

2. The theory of innovative enterprise cont

Professor Lazonick begins with a comparison between what he calls the neoclassical firm and the innovative enterprise. The role of the entrepreneur and the assumptions supporting each. In oil and gas I see the bureaucracy believing theirs is a management discipline that deals with all aspects of the industry. That their management capabilities are the critical resource to the profitability of the industry.Lazonick notes;

There are two assumptions of the neoclassical theory of the firm that limit its ability to understand innovative enterprise. First, the neoclassical theory assumes that the entrepreneur plays no role in creating the disequilibrium condition that triggers the reallocation of resources from one industry to another. In the theory of the innovating firm, by contrast, entrepreneurs create new profitable opportunities, and thereby disrupt equilibrium conditions. Second, the neoclassical theory assumes that the entrepreneur requires no special expertise to compete in one industry rather than another. All that is required of the entrepreneur is that he follows the principle of profit maximization in the choice of industry in which to compete. In the theory of the innovating firm, in contrast, the entrepreneur’s specialized knowledge of the industry in which he chooses to compete is of utmost importance for his firm’s ability to be innovative in that industry. p. 6

My experience in dealing with management of the oil and gas industry is accurately captured in Lazonicks text. What management has learned is they too can control the disruptive nature of the entrepreneur, by not allocating any resources towards it, and hence avoid the disequilibrium that is created. Or so they believe. This behaviour has become systemic and has the companies actively avoiding the necessary investments in the business of the oil and gas business. Optimization is the word that everyone marches to and any producer that makes the necessary investments ininnovativeness is deemed risky.

The limiting assumption here is that the entrepreneur does not choose the firm’s level of fixed costs and the particular productive capabilities embodied in them as part of his firm’s investment strategy. In the theory of the innovating firm, the level of fixed costs manifests strategic decisions to make investments that are intended to endow the firm with distinctive productive capabilities compared with its competitors in the industry. p. 7

I referenced this article from the Calgary Herald the other day. It suggests the National Energy Board has determined that Alberta Natural Gas production will decline to 8.5BCF / day in 2012 from 12.7 today. Are we as an industry unaware of the consequences of inaction in the investments necessary for innovation? AsLazonick notes the costs of optimization eventually turn to eliminate the profit elements. The oil and gas industry in Alberta is experiencing these increased costs, of which they attribute to greedy suppliers, and the declining production values. Why, in discussing this with Canadian management, it clearly is not their fault. Imputing they are only a small part of the market.Lazonick discusses this U-shaped cost curve of the optimizers.

The assumption is that the addition of variable factors of production to the firm’s fixed factors of production results in a declining average productivity of these combined factors (i.e., the firm’s technology, which is also the industry’s technology). In deriving the U-shaped cost curve, neoclassical theorists give two quite plausible reasons why productivity declines as output expands. Both reasons assume that the key variable factor is labor. One reason is that as more variable factors are added to the fixed factors, increasingly crowded factory conditions reduce the productivity of each variable factor as, for example, workers continuously bump into one other. The other reason is that as more workers are added to the production process, the entrepreneur, as the fixed factor whose role it is to organize productive activities, experiences a “control loss” because of the increasing number of workers that he has to supervise and monitor. p. 7

It is reasonable to assume that by 2012 the Canadian producers lack of investment in innovation, and the increased costs associated with the U-shaped nature of the optimizers fixed and variable costs, will eliminate them from the marketplace. As I have indicated here on this blog before, Canada, and that is all of Canada, represents a negligible 2 percent of the readership of this blog. I can say with almost 100% assurance, when the scope of the Preliminary Specification is determined by the users, that Canada will not be represented in the functionality of the People, Ideas & Objects application. Conversely, the U.S. makes up 88% of the total users represented here. Anyone want to guess where the innovative, or profitable, elements of the oil and gas industry will be located?

Hence organization—in this case the relation between the entrepreneur as manager and the work force that he employs—becomes central to the neoclassical theory of the firm. Within the theory of the optimizing firm, the constraining assumption is that the entrepreneur passively accepts this condition of increasing costs, and optimizes subject to it as a constraint. In sharp contrast, in the theory of the innovating firm, the experience of increasing costs, as shown on the left-hand side of Figure 2, provides the firm’s strategic decision-makers with an understanding of the limits of the initial investment strategy, and with that information they make additional new investments for the strategic purpose of taking control of the variable factor that was the source of increasing costs [for an elaboration of this argument, seeLazonick (1991: ch. 3, 1993)]. An innovating firm would not take a condition of overcrowding or control loss that results in increasing costs as a “given constraint,” but rather would make investments in organization and technology to change that condition. In effect, for the sake of improving its capability to develop and utilize productive resources, the innovating firm makes strategic investments that transform variable costs into fixed costs, which the firm, in order to innovate successfully, must now endeavor to transform into low unit costs. pp. 7 - 8

Therefore investment in the productive capacity of the oil and gas industry starts here. Development of the innovative organization is deemed a necessity due to the demands of the marketplace and the increased complexity in the underlying earth science and engineering disciplines. Today we live in a sophisticated marketplace that demands the changes to organizational structure be contemplated and built within the software first. This is only the beginning of the investments that are necessary. These investments are a significant undertaking for the industry, and they are past due.

An innovative investment strategy is inherently uncertain, and investments in innovation must be made despite the existence of uncertainties concerning prospective returns. Any strategic manager who allocates resources to an innovative strategy faces three types of uncertainty: technological, market, and competitive. Technological uncertainty exists because the firm may be incapable of developing the higher quality processes and products envisaged in its innovative investment strategy; if one already knew how to generate a new product or process at the outset of the investment, it would not be innovation. p. 9

In Part III of this paper we will begin to look at the risks associated with an innovative strategy. 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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Lazonick on Chandler Part I

I introduced Professor Lazonick's paper the other day, it can be downloaded from here. I will be reviewing this paper in multiple posts. Professor Lazonick is from the University of Massachusetts at Lowell and based on a review of the bibliography for this paper, has been writing on the topic of innovation for over two decades. This is the first that I am aware of Professor Lazonick's writings, and we will definitely have to take a look at some of his other papers.

Lazonick starts off with an appropriate reference to Joseph Schumpeter about the importance of innovation.

More specifically, since, as Joseph Schumpeter (1934, 1950) recognized, innovation drives economic development. p. 1

Economic development from the point of view of greater productive capacity to produce oil and gas. How does the oil and gas industry produce more with the same volume of inputs? This is highly dependent on innovation and the capability to innovate that the industry develops. Lazonick notes Chandler;

Chandler (1990: 594) then goes on to articulate in two paragraphs, which I quote in full, what I consider to be the essence of his theory of innovative enterprise, including its contribution to the growth of the economy as a whole, that he had distilled from his trilogy. p. 2

Such organizational capabilities, of course, had to be created, and once established maintained. Their maintenance was as great a challenge as their creation, for facilities depreciate and skills atrophy. Moreover, changing technologies and markets constantly make both existing facilities and skills obsolete. One of the most critical tasks of top management has always been to maintain these capabilities and to integrate these facilities and skills into a unified organization—so that the whole becomes more than the sum of its parts. p. 3

Such organizational capabilities, in turn, have provided the source—the dynamic—for the continuing growth of the enterprise. They have made possible the earnings that supplied much of the funding for such growth. Even more important, they provided the specialized facilities and skills that gave the enterprise an advantage in foreign markets and in related industries. Because of these capabilities the basic goal of the modern industrial enterprise became long-term profits based on long-term growth—growth that increased the productivity, and so the competitive power, that drive the expansion of industrial capitalism. p. 3

2. The theory of innovative enterprise

The Preliminary Research Report, the Draft Specification and all of the work done at People, Ideas & Objects points directly at the Joint Operating Committee (JOC). The reason for this is that People, Ideas & Objects have determined that the JOC is the ideal organizational construct of the innovative energy producer. Lazonick summarizes why an organization like the JOC is that innovative construct for oil and gas, better then I have seen elsewhere.

A business enterprise seeks to transform productive resources into goods and services that can be sold to generate revenues. A theory of the firm, therefore, must, at a minimum, provide explanations for how this productive transformation occurs and how revenues are obtained. These explanations must focus on three generic activities in which the business enterprise engages: strategy, organization, and finance. Strategy allocates resources to investments in developing human and physical capabilities that, it is hoped, will enable the firm to compete for chosen product markets. Organization transforms technologies and accesses markets, and thereby develops and utilizes the value-creating capabilities of these resources to generate products that buyers want at prices that they are willing to pay. Finance sustains the process of developing technologies and accessing markets from the time at which investments in productive resources are made to the time at which financial returns are generated through the sale of products. p. 4

Chandler noted that "strategy follows structure". One of the key attributes of using the JOC is that it enables the strategy to be unique and specific to the property represented. In order for the value to be earned, each facility, each zone of oil and gas requires that a different strategy be implemented. One that is unique and develops the value based on the facts and the situation at the property.

With the structured hierarchy, and its close cousin the bureaucracy, the focus is on the corporate entity. This is reasonable until we discover the conflict associated with many corporate entities represented in each JOC. To eliminate the conflict at the JOC it is important to remember that consensus at the JOC is driven by financial interests. If the strategy and structure are both focused on the same organization, this conflict between corporate entities disappears.

The last attribute is equally important. To establish finance at the JOC does not seem to be an issue until it is realized the oil and gas finance mechanisms are focused on the corporate entity. The Financial Marketplace module of the Draft Specification moves the finance function from the corporate entity to the JOC. This enables proper matching of investments and returns based on the strategy and organizational alignment noted.

As this discussion of strategy, organization and finance show, the culture of the oil and gas industry is based on the Joint Operating Committee. The closer we move to that conceptual model, the greater the alignment, efficiencies and other attributes become. In addition to the focus on the culture of the JOC, there needs to be a revision in another attribute of culture of the energy industry. The culture that we want to change is what Lazonick and Chandler call the optimization culture, and is applied to the oil and gas industry in this post. 

I see the two cultures as being mutually exclusive. One, the JOC, being developed to deal with the unique requirements of the partnerships represented in oil and gas. And the optimization culture exists as a result of the "easy" energy era that existed in the 1980's and 1990's. There was a demand to survive commercially during this "easy" energy era. Innovation was the last thing that people thought of. Optimization for the survival of the firm was the skill that was rewarded. Lazonick notes;

The problem is, however, that the optimizing firm is not an innovating firm; indeed it can be characterized as an un-innovating firm. p. 5

How do we change from an optimizing to an innovative culture? What we do know is that software defines and supports the organization. Therefore to change the organization requires that we build the software first, and that is what we are doing at People, Ideas & Objects. Review of the remainder of Lazonicks paper will provide more answers, and I think that Lazonick and I are not talking about a wholesale change from optimizing to innovating. I would rephrase it for the purposes of the communities represented by People, Ideas & Objects as from where we are today; innovating on top of optimization, to change it to a culture of optimizing on top of innovations.

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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Focused on the Proof

Number seven of eight in our "Focused on" series looks at the academic proof supporting the transition to People, Ideas & Objects. How the academic community in general, and the key leadership within that community specifically, are actively promoting similar concepts.

The Proof

To summarize and provide proof that the academic community is squarely of similar mindset we need to only highlight the "Chandlerian Perspective". Consisting of the following three simple facts.

1. Technical innovation & Organizational Innovation are interdependent.
2. New Forms of Business organization & institutional arrangements are invented to solve specific economic problems.
3. Organizational & Institutional innovation is an evolutionary process - nothing guarantees "We get it right every time."

To consolidate all of the excellent research that we have reviewed on this blog would be impossible. In addition to our current review of Alfred D. Chandler, we have reviewed the works of (in order of importance to the work of People, Ideas & Objects). Professor's Carlota Perez, Richard N. Lanlgois, Carliss Baldwin, Giovanni Dosi, Oliver Williamson and many others. [Williamson winning last years Nobel prize in economics for Transaction Cost Economics.] All of these authors are focused on the impact of technology and organizational change.

Much of this academic review has been applied to the development of the Draft Specification. The Draft Specification provides a sound vision of how the problems facing the industry are resolved by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This vision sets out to define the boundaries of the firm and markets, how transactions are designed, how modularity in the specification creates a more specific division of labor and how these attributes affect science-based businesses.

One of the key break-through's of the Draft Specification is the use of marketplace's in the modular specification. There are three marketplaces, Resource, Financial and Petroleum Lease, in the specification. Importantly we have learned from Professor Ronald Coase that markets are created. This is a further extension of what we learned in the Preliminary Research Report     that software defines and supports organizations. As a further development in this area, we recently learned of a concept put forward by Professor Carliss Baldwin of "Actionable Transparency". Instead of confusing the reader I will leave it to their desire to further review the concept by selecting this label.

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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Two points of interest.

I want to highlight two different issues or articles of interest today. The first is a video by Professor Simon Johnson of MIT making a presentation on his new book 13 Bankers. Although not directly on topic, the video provides a different perspective on the financial crisis, which has morphed itself into what is now called the debt crisis. A debt crisis that the oil and gas producers can ill afford. Professor Johnson's video makes the presentation of his issue, and it will be interesting to see how his ideas develop.



The second point of interest is a spectacular paper that I am reviewing. The paper is one of the many from the April issue of the Journal on Industrial and Corporate Change. The specific paper is written by Professor William Lazonick and is entitled "The Chandlerian corporation and the theory of innovative enterprise." The final paragraph of the document reads.

In the 2000s, it can fairly be said that the Chandlerian corporation has ceased to exist. In historical retrospect, Alfred Chandler uncovered the dynamics of a historically-specific business model that drove the development of the world’s richest economy. The essence of capitalism is, however, as Schumpeter recognized, change. The work of Chandler has provided us with a deep understanding of the foundations of US economic power in the middle decades of the last century. His work does not provide us with a roadmap for understanding the business models that have become dominant in the first decades of the 21st century. There is a need for us, who seek to build on the Chandlerian legacy, to remain committed to the integration of theory and history. My claim is that, with its focus on strategic control, organizational integration, and financial commitment, “the theory of innovative enterprise” is a potent framework for analyzing the process of change. It is a framework that, through the integration of theory and history, can enable us to “catch up with history” so that we can analyze the present as an evolving reality before the present as history passes us by.

I will be writing my review of this document in multiple parts. I am also extensively quoting the text and as such it is making for a long series of posts. In the back of my mind I think these posts would be substantially more valuable to the readers if they were to read the paper first and then review the application of Lazonick's paper to People, Ideas & Objects. So with that thought the paper can be downloaded from here.

The many points that Professor Lazonick is making are directly applicable to the oil and gas industry. Over a period of time, during the low energy prices era, the demands of the business  required optimization in order to survive. However, in the past 10 years the marketplace has changed to this new energy era we find ourselves in today. An era where demand is insatiable and supplies are constrained. Creating the higher commodity prices that re-allocate the financial resources towards the innovative oil and gas producer. The marketplace has shifted, however, the energy industry remains constrained in an optimizing mentality that is inconsistent with its needs.

The shift from optimization to an innovative footing is counter cultural. We can't get to the innovative footing the energy industry needs without Schumpeter's creative destruction being put into full force. What is also clear is that the move to an innovative footing is a substantial capital investment. Starting off with the development of People, Ideas & Objects and continuing on within each producer firm developing their own scientific capabilities. The current management are locked in the optimization mindset, and are conflicted by their reported earnings from higher commodity prices. They have poorly prepared us for the need to change, and have betrayed our interests in this constant pursuit of optimization. A constant pursuit of optimization that Lazonick shows leads to the destruction elements of Schumpeter's creative destruction.

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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Professor David Mowery on Chandler

We now continue on with our review of Alfred D. Chandler's work. A review of the historical development of the corporation through the last century. This posts notes the publication of a new issue of Industrial and Corporate Change that is dedicated solely to Chandler for this purpose. This represents a large body of work which our review is being aggregated under the "Chandler" label of this blog. 

Much has changed in the past few decades when the seven sisters (Shell, BP, Chevron, Texaco, Exxon, Mobil, and Amoco) were dominating the oil and gas industry. They were able to generate much of the oil and gas reserves and production in the world due to the fact that they had the size and scale necessary to manage huge libraries of geological and production information and data. Floors of buildings were dedicated to the storage of this data and large departments were dedicated to maintaining these libraries. Next to these large investments were the geological scientists and engineers that were able to access these libraries of information and apply their knowledge on a global scale. These began to fade from prominence in the early 1980's, and today this information is provided through any number of systems that are generally available for a few thousand dollars per month. What was once a competitive advantage in the storage and use of scientific data, has been replaced by the pure scientific capabilities of the earth scientists and engineers.

So powerful were these libraries that most of the geologists trained at the seven sisters, and who had early access to these libraries, are predominately the heads of the independent producers today. Such was the power of those libraries that one could learn enough about a region, that the geologist or engineer could leave the firm, either purchase the property or buy some land and take the chance they would become successful. Chandler notes similar developments in all large businesses.

Indeed, Chandler’s earlier historical work on US railways highlighted the role of these large enterprises in training such manufacturing magnates as Andrew Carnegie and Edgar Thomson. But the importance of established firms as “incubators” and learning for the entrepreneurs who subsequently guided the formation and entry of new firms within the same industry suggests that the barriers to entry emphasized by Chandler were surmountable by individuals or firms able to transfer and improve on the knowledge that they acquired in established firms. p. 21

Although it was and is a science based business, the science today is pure in terms of its application. That is to say, it's more of a scientific theory that drives the start-up success in the business. Large producers are limited to picking off the start-up at the right time where the science is established and the value is not yet fully recognized. This has become a multi-billion dollar game of high risk, high reward science and knowledge based business. It is reasonable to assume that these databases and information were developed throughout the many decades that the seven sisters existed. However, I was only witness to their existence in the late 1970's and the demise of their effectiveness by Information Technology (IT).

This post deals with the paper "Alfred Chandler and knowledge management within the firm" written by Berkeley Professor David Mowery. However, I want to start with a document that is also included in this Oxford Journal "Introduction to Management Innovation: Essays in the Spirit of Alfred D. Chandler Jr." by Professor William Lazonick and Professor David J. Teece. I will start with a few quotations from Lazonick and Teece and then move to review the paper of Mowery.

Through a prodigious body of work that included the volumes, Strategy and Structure (1962), The Visible Hand (1977), and Scale and Scope (1990), Professor Chandler made the study of the evolution of business enterprise integral to the study of the evolution of economy and society. His work combined detailed historical investigations with grand sociological syntheses. As a result, Chandler’s study of the modern business enterprise invited social scientists and business academics as well as historians to contribute to our understanding of a central institution of our time.

and

In memory of a great scholar and in honor of his intellectual legacy, Industrial and Corporate Change is publishing this special issue of essays that build on Chandler’s work. We have chosen “management innovation” as the unifying theme of this special issue to emphasize the Chandlerian contribution to the analysis of the ways in which people who exercise strategic control over the allocation of resources put in place organizational structures that can enable an enterprise to prosper and grow.

This last quotation placing the context of the review that we are doing on the geological libraries of the seven sisters. Today the geological and engineering issues and the opportunities in the oil and gas are all known. What isn't known is how to solve or take advantage of them. For example tight gas formations hold significant volumes of natural gas. Most people know where the tight gas resides in the world, the ability to develop them into commercial fields is the trick. Now as the development of packers and multiple fractures on lateral wells becomes more commonplace, the science moves onto other issues. Maintaining a competitive advantage in this environment is temporary, and the firm needs to move quickly through the sciences or have the capability to aggregate oil and gas reserves by acquisition.

Sustainable competitive advantage in the large corporations that emerged from the historical processes analyzed by Chandler typically rested on more than technological capabilities alone. Instead, it was the creation of technological and organizational capabilities through corporate investments in management, manufacturing, and marketing, as well as the managerial ability to recognize the business contexts to which these capabilities were best suited, that differentiated successful from unsuccessful corporate performance over the long run. p. 2

I believe that all sizes and all types of producers would be advantaged by having People, Ideas & Objects Draft Specification built. In addition to having access to the geological and engineering technologies and capabilities, Mowery notes the organizational capabilities were necessary as well. Today the barriers to entry are not so much just the sciences, but also the ability to be in compliance with the various regulations and governance frameworks that govern the modern corporation. Recall we are moving the Compliance & Governance frameworks of the hierarchy to align with the five frameworks (legal, financial, cultural, communication and operational decision making) of the Joint Operating Committee. It is therefore in everyone's best interests that the compliance and governance required be provided to all participants in the oil and gas industry. What I am seeing is the past barriers to entry being the access to the geological libraries of the seven sisters being replaced by today's barriers of the compliance and governance frameworks of the modern corporations. This is unnecessary and an impediment to progress in the oil and gas industry.

Industrial R&D and the product diversification that emerged from the in-house R&D facilities of many of these firms contributed to the development of the so-called “M-form” corporation (the origins and development of which in the United States were examined by Chandler in Strategy and Structure), in which corporate management and strategy formulation were organizationally differentiated and separated from functional management. pp. 2 - 3

And that is why the bureaucracy exists. What was necessary for the seven sisters to develop this "industrial R&D" demanded that size and scope be managed through the layers of management and corporate management. This is not the situation today, the technology is available to support and identify the key organizational construct of the innovative oil and gas producers, that being the Joint Operating Committee, and a more direct form of ownership where the investor or shareholder is the owner of the properties interest.

For Chandler, therefore, the efficiency advantages of intrafirm coordination underpinned the growth of large firms and increased producer concentration, and explained the differential pattern of adoption during the late 19th and 20th centuries of these new methods for administrative coordination among US industries. p. 6

What has'nt changed in oil and gas is the ability to understand and operate within the industry. The tacit knowledge that is the critical resource that makes the industry operate. Although today it is far more disorganized from the perspective that these capabilities are not housed in one location, the value of the tacit knowledge is just as important, and possibly more important today then a few decades ago. Recall one of our break-through's is that tacit knowledge drives software definition. Tacit knowledge can't be captured, but it needs to be organized.

Central to these studies is the idea of an “integrated learning base” that is rooted in the technical, functional, and managerial capabilities that are embedded in the organization rather than individuals. Chandler argued for the knowledge-based foundations of all three types of capabilities: “ . . . the large enterprise performs its critical role in the evolution of industries not merely as a unit carrying out transactions on the basis of flows of information, but, more important, as a creator and repository of product-related embedded organizational knowledge.” (2005b: 6) p. 13

The technical, functional and managerial capabilities need to be identified and supported in a software application such as the Draft Specification. Otherwise we are destined to muddle along as the last remnants of the bureaucracy atrophy.

Chandler’s focus on a small number of established firms, most of which were founded before 1940, reflected his view that entry barriers and the development of technical capabilities within these firms precluded competition from entrants. p. 14

and

Chandler’s historical discussion stresses the contrasting paths of development of the leading German, British, and US “first-movers” in chemicals, and then considers the entry by large petroleum firms into the chemicals industry during the 1940s and 1950s, and the difficulties faced by US chemicals firms in particular in their efforts to diversify out of commodity chemicals. As was the case in electronics, the efforts of these firms to diversify into unrelated industries, ranging from oil and gas to residential construction, were consistently unsuccessful, which Chandler attributed to the importance of firm-specific capabilities and the limited applicability of these knowledge-based capabilities to very different industries. p. 15

Clearly energy's history accurately replicates these trends that Chandler discovered. Big oil and gas was able to attain scale through the management of information and knowledge. Technology has had a remarkably destructive effect on these capabilities. And today, the need to have these types of "technical, functional and management capabilities" need to be re-developed. But not on a global scale as they were by the seven sisters. On a scale that is represented by each and every JOC. The level of focus, in order to be successful, requires that strategy and structure be appropriate for the times. This level of focus (@ the JOC) is one of the break-through's that the Preliminary Research Report determined was necessary for the innovative oil and gas producer.

As I noted earlier, Chandler relied on a broad conceptualization of the knowledge relevant to the creation and maintenance of competitive advantage. p. 16

and

For Chandler, therefore, competitive advantage rests on more than technological knowledge alone. p. 16

In June of 2007, which was a critical time in terms of the development of the Draft Specification. This blog reviewed Professor Richard N. Lanlgois paper "The Vanishing Hand: the Changing Dynamics of Industrial Capitalism" in which the movement away from Chandler's visible hand of management was leading back to the invisible hand of Adam Smith's markets. Professor Langlois is one of the key researchers that was used in the development of People, Ideas & Objects. Mowery notes;

As Langlois (2003) pointed out in his survey of these developments, the “visible hand"; of Chandler’s large firms has been challenged in many industries by a revival of the “invisible hand,” as market-based coordination of transactions among vertically specialized firms partially or entirely replaces intrafirm management of these transactions. p. 18

We see through this historical perspective the work of Chandler being directly applicable to the oil and gas industry. I think we also see the need to act to reclaim what is necessary in terms of corporate organization today. As the bureaucracy atrophies, we have to deliberately replace it with something purpose built. Our focus at People, Ideas & Objects is to do just that.

In his 1973 Presidential Address to the Economic History Association (Chandler, 1973), Alfred Chandler characterized his historical research as being focused on the study of decision-making corporate strategy, and the historical development of modern industrial corporations. p. 21

and

His research on the emergence of the modern, multifunction industrial corporation emphasized the central role of knowledge management as a factor contributing to the expansion in the boundaries of the modern firm and eventually, to the development of the decentralized “M-form” organizational structure. Chandler’s later work on the long-term performance (including the collapse) of established firms in knowledge-intensive industries extended this research to cover much of the 20th century. p. 21

and

Although his research emphasized the importance of knowledge management in corporate strategy and development, it is difficult to develop testable or falsifiable hypotheses from much of Chandler’s work. His invaluable contributions to scholarship derive their force and influence from his masterful reading and synthesis of the historical evidence, rather than from the development of an analytic model or predictive theory. Indeed, as I noted earlier, Chandler’s work on modern high-technology industries failed to recognize the development of new models of competition that threatened the position of many of his older “core companies.” But the breadth of his analysis, spanning more than a century of economic development across three continents, distinguishes his historiography from that of almost any other recent scholar in business and economic history, and helps account for his lasting influence on both historical research and contemporary work on corporate strategy. By highlighting the historical forces that underpinned the growth of the large industrial firms that dominated the global economy for much of the 20th century, Chandler’s work will enable future scholars to better understand the new factors that are transforming the 21st-century economy. pp. 21 - 22

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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Alfred D. Chandler, an introduction

There are a large number of papers that have been published highlighting the work of Professor Alfred P. Chandler. Chandler's work can best be summarized as providing an historical context of the American corporation over the 19th and 20th Centuries. To start this review I want to highlight a few papers of interest, the reason we are beginning this review, and what we hope to gain from a review of the history of the corporation.

Our review of Chandler has been rather limited for such an important topic. Other then reviewing a number of Professor Richard N. Langlois' papers which built on Chandler's "The Visible Hand, The Managerial Revolution in America", no direct research of Chandler has been conducted for People, Ideas & Objects. I expect to read his three premier books "The Visible Hand", "Scale and Scope", and "Strategy and Structure" as well as a handful of his papers.

The first paper provides us with an understanding of the scope and scale of Chandler's historical work. The paper is written by Professor David C. Mowery from the University of California at Berkeley. The paper is entitled "Alfred Chandler and knowledge management within the firm". This will be the first paper we review as it provides a strong basis of the historical record that Chandler established. This paper also acknowledges Richard R. Nelson, David Teece, and William Lazonick for comments.

The second paper to be reviewed is written by Professor William Lazonick and is entitled "The Chandlerian Corporation and the theory of Innovative Enterprise". Mowery's and Lazonick's papers will be the first two papers that are reviewed. All of Chandlers works can be aggregated by using the Chandler label when the reviews are published.

The reason to go back and look at the history through the works of Chandler and others is to gain an appreciation of why things are done the way they are today. As Mowery states: "By highlighting the historical forces that underpinned the growth of the large industrial firms that dominated the global economy for much of the 20th century, Chandler's work will enable future scholars to better understand the new factors that are transforming the 21st-century economy." Or in other words, those that fail to learn from history are doomed to repeat it.

These reviews will be conducted in addition to a number of other researchers works. We have a large, strong group of authors that we are now following, and I have over 20 papers that I will be reviewing.

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