OCI Knowledge & Learning, Part III

 Innovation Supported by Permanent ERP Software Development Capabilities

In both the Knowledge & Learning and Research & Capabilities modules producers benefit from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through its Revenue Model and importantly, derives its quality from our user community. People, Ideas & Objects will remain unbiased as to which producer's perspective it takes. As a result, our user communities - service provider organizations are no different. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things. 

People, Ideas & Objects, our user community and their service provider organization are focused on providing Cloud Administration & Accounting for Oil & Gas. This is for dynamic, innovative, accountable and profitable oil & gas producers. Based on the Joint Operating Committee as the key organizational construct in combination with six other Organizational Constructs. Establishing this new culture across the North American producer population. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software an organization uses is a “technology paradigm” that the oil & gas industry must consider. And a permanent iterative ERP software development capability puts the industry on its own “trajectory” just as we’ve discussed here for the earth science & engineering disciplines. Professor Giovanni Dosi notes. 

First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138.

Secondly, A rather uniform characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries. p. 1138.

Which speaks to ERP software and cloud computing attributes. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by ExxonMobil, BP or Shell? What motivation would they have for making software changes to accommodate other producers' businesses? The third party, objective nature of People, Ideas & Objects, our user community and their service provider organizations are necessary for the software to be amenable to its user communities' needs. If the producer relies on this paradigm and trajectory as a key advancement in their business, it must remain open to the needs of the community. Professor Dosi notes.

Similarly, new technological paradigms, directly and indirectly -- via their effects on “old” ones -- generally prevent the establishment of decreasing returns in the search process for innovations. p. 1138.

Let me restate this for clarity. The indirect nature of ERP software via its effect on earth science & engineering disciplines, will generally prevent decreasing returns in the search for innovations. 

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. We are designed around the Joint Operating Committee, the innovative oil & gas producer, and our user community to ensure quality and determine the industry's precise needs. This is the type of application that is needed for the 21st century oil & gas producer. A vision that focuses the industry on the activities people do best. Leadership, issue identification and resolution, creativity, collaborating, researching, evaluating, planning, negotiating and compromising, observation, reasoning, judgment, and making decisions. An application that leaves computers to do what they do best: storage and process management. A software development capability designed to provide the innovative oil & gas producer with the means to provide all of their ERP software needs. 

Capabilities as the Focus

In Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization” he introduces capabilities as an emerging theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is production. References in this section are to Professor Langlois’ paper.

However, a new approach to economic organization, here called "the capabilities approach," that places production center stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. abstract.

The capabilities approach picks up and builds on the transaction cost approach we've discussed throughout the Preliminary Specification. It also builds on the boundary between firms and markets. 

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as a complementary area of research p. 7.

Building oil & gas producers' capabilities to conduct their own field operations is impractical and inefficient. Sourcing producer field operations needs from the service industry is the only viable solution. Deployment of those capabilities becomes an issue in the innovative oil & gas industry. This is especially true when competitive differentiation is based on earth science and engineering. “What” and “how” those capabilities are developed and deployed are critical elements of oil & gas producers' competitive differentiation. The Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification organize these capabilities where innovation is the priority. 

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent-seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reasons of history and technique, they have allocated most of their resources to the cost side. p. 6.

An innovative oil & gas producer uses the Joint Operating Committee as the key organizational construct. The Knowledge & Learning module is a Joint Operating Committee focused module. There the participants in the Joint Operating Committee can review the capabilities of the various firms that are members of the Joint Operating Committee. Enabling them to make operational decisions based on the right information at the right time with the right people. 

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31.

Field coordination meets innovation

The energy industry is faced with a number of issues that continue from year to year. One of those issues is the cost of field work. We have heard a variety of claims about the service industry. However, there are no solutions outside of traditional cost control and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution to what are believed to be high costs associated with field operations. Quotations are from Professor Richard Langlois' “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

We have with the Knowledge & Learning module a number of other tools as part of the Preliminary Specification. Specifically, Industrial Command & Control (ICC) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during field operations. Members of the Joint Operating Committees, their employees, and contractors from the service industry will be involved in these operations. Having them configured so the chain of command is immediately recognizable. Secondly within the Preliminary Specification is the Job Order system. This provides a means to execute operational orders within the chain of command during field operations. These two systems provide tight control over the entire operation. No action is taken without an authorized Job Order being issued. 

This tight operational control seems to contradict free markets in the service industry. I disagree. Tight operational control has nothing to do with free markets, and free markets have nothing to do with tight operational control. They are two separate and distinct "things'' that are mutually exclusive. Recall that the AFE and Job Order are provided through the “Planning & Control Interface'' which also brings in the capabilities from the specific “Dynamic Capabilities Interface'' that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for people to conduct the work and the operation to succeed. The following quotes are from “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labor between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888). p. 20.

What we imply with this level of operational control is that the Joint Operating Committee representatives, the earth scientists and engineers are in complete and total control of the field operation down to the water hauling driver. In a literal sense, yes, but I think we know the extent of the control implied by the Industrial Command & Control and Job Order systems. There is a command structure. Everything is documented. This level of coordination is provided to offset the detail necessary for the scientific basis of the business to take precedence during operations. 

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination." p. 10 - 11.

What Professor Langlois is implying here is that the converse of “incentive alignment” is “qualitative coordination." The high costs that have been experienced in the service industry to do their job has been in order to motivate the people and the capital to work in the industry. If we were able to better coordinate, in the manner that the Knowledge & Learning module suggests, the issues of costs and quality would be mitigated. 

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11.

By using the Joint Operating Committee we eliminate bureaucracy. In spite of this, bureaucracy lowers the cost of qualitative coordination in a world of uncertainty, albeit poorly. It is therefore necessary to replicate and expand on that coordination in the Joint Operating Committee. 

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p. 15.

By coordinating field operations in the manner proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase control over the implementation of the science basis of the business. All while maintaining free and open markets in which innovation in the service industry can develop. From Professor Richard Langlois in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production cost for the same type of productive activity. p. 18.

Producers within the same Joint Operating Committee may pursue different strategies than their partners. The Preliminary Specification enables each producer to pursue their most effective strategy for each property. A producer may have acquired the property while it was in production and therefore have a different cost structure. Or alternatively the producer may have an interest in the infrastructure used to deliver the gas to market whereas other producers may not. The makeup, strategies, and costs of each producer are unique and do not necessarily lead them to make the same decisions. Financial gain drives consensus.

As we noted, when the Joint Operating Committee conducts a field operation using the Knowledge & Learning modules tools. Coordination of capabilities is provided through Industrial Command & Control and the Job Order system. These capabilities are the “knowledge, experience, skills” and ideas of the people that are part of the producers on the Joint Operating Committee. They are also the service industry representatives hired to conduct the field operation. All of these capabilities are documented in the “Dynamic Capabilities Interface” and deployed through the “Planning & Deployment Interface." 

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 18.

Execution is the focus of the operation and the key competitive differentiation of the parties involved. Within the capabilities that have been decided to be implemented by the Joint Operating Committee there may be new and innovative tools and procedures to be implemented. Oil & gas business relies on geology, geophysics and engineering. Operational control at this level is necessary and a competitive advantage. From Professor Langlois’ paper “Competition Through Institutional Form: The Case of Cluster Tool Standards."

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organizational structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1.

If one considers how the Knowledge & Learning module enables the producer to implement their capabilities. Calling them a competitive weapon is appropriate.

Separate and Distinct

Throughout the Preliminary Specification we have discussed modularity from the perspective of the different modules of the specification itself. We want to discuss modularity from the Knowledge & Learning module. How it isolates the Joint Operating Committee and focuses on field operations. Yet provides the Joint Operating Committee with the most up-to-date information regarding each participating producer's capabilities. A capable, innovative Joint Operating Committee that is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the oil & gas industry. 

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of their respective firms' capabilities. During this process, they test these capabilities that engineers and geologists are developing. Once these ideas are proven and developed into usable and valuable technologies and processes, they are added as capabilities to their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. Depending on the selection of the producers' criteria, a capability might be provided to the Joint Operating Committee in that zone, or available for use with multi-frac technology etc, and will be available to the members of those Joint Operating Committees. 

What we have been able to do with these two modules in the Preliminary Specification is to eliminate the crossover of the two different purposes of the same information. Quotations are from Professor Richard Langlois’ “Modularity in Technology and Organization."

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 19.

The producer firm is engaged in research and development into improving production and reserves. The Joint Operating Committee is involved in operational execution. These are two separate and unique organizational objectives that are necessary and involve, in some instances, the same people and the same firms. We need to separate these people into groups and provide some distance so that they can operate these groups as separate and distinct as possible. 

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 19.

Organizational constructs guide the nature of work in more ways than modules. There are also markets in which they operate. Research & Capabilities will be an internal and academic focus in the geological and engineering disciplines. Meanwhile, Knowledge & Learning will be steeped in service industry initiatives and operational control. These differences also help to differentiate the nature of work between the two modules. 

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 20.

It is necessary for innovation purposes and operational control that the two modules are separated in this fashion. With the flow of information from the Research & Capabilities to the Knowledge & Learning module, and the speed at which electrons flow, the Joint Operating Committee can be assured that they have the latest, proven and field tested capabilities available to them.  

Modularity and Interdependency

We have discussed modularity between the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. How knowledge, skills, experience and ideas flow from producer firms through to the Joint Operating Committees. From innovative initiatives development to operational control. We now want to discuss what is needed from a modularity point of view to attain these benefits. Quotes come from Professor Richard Langlois' paper “Modularity in Technology and Organization."  

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 21.

But this flow is also interactive. To start the process, the capabilities listed in the “Dynamic Capabilities Interface” are populated with relevant criteria through the Knowledge & Learning module. However, the Joint Operating Committee learned lessons from the operation. And these lessons are captured in the “Lessons Learned” interface of the Knowledge & Learning module. This interface is also populated for the specific producers' Research & Capabilities module. Having direct knowledge of the operation updated to the producer firm's capabilities in the “Dynamic Capabilities Interface” is necessary for further development and possible deployment of those capabilities. There are two versions of the same “Lessons Learned” interface provided for two different organizational constructs. One for the producer that originated the capability (Research & Capabilities) and one for the Joint Operating Committee (Knowledge & Learning). 

Users of this information seek different purposes for this information. Although the environments in which the two modules operate (Research & Capabilities and Knowledge & Learning) use data and information in different ways. Research and innovation vs operational control. High levels of interdependence and interaction on the quality and quantity of the data and information contained within these modules are evident. 

Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. There are three parts to the visible design rules (or visible information). 

• An architecture specifies what modules will be part of the system and what their function will be.
• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But in contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 21 - 22.

People will approach data contained within these modules from different perspectives and roles. In the producer firms, engineers and geologists develop the Dynamic Capabilities Interface. In the Joint Operating Committees, engineers and geologists develop the Lessons Learned interface. Data and information will be updated and changed by all participants involved in a dynamic, innovative, accountable and profitable producer, Joint Operating Committee and obtain the necessary operational control.

OCI Knowledge & Learning, Part II

 Emulating the Small Producers Adaptability

This discussion will focus on Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation." We also metaphorically move from the “practice field” of the Research & Capabilities module to “game day” with our football analogy in the Knowledge & Learning module. In reviewing what has been written so far in the Preliminary Specification I was interested in this comment. The domain of the Joint Operating Committee is; “the ability to innovate will not only permit the oil & gas producer to find more oil & gas, increase the production of oil & gas from the field, but will also provide innovative ways in which to deploy its capital and reduce its costs.” Which seems to capture the focus that the Research & Capabilities and Knowledge & Learning modules provide the producer firm and Joint Operating Committee.

What we have so far in the Knowledge & Learning module are three interfaces. The first is the "Dynamic Capabilities Interface" which is the published version of each producer firm's capabilities. These capabilities are sorted based on geological zone, and other criteria, and published based on those criteria. Therefore each Joint Operating Committee receives access to participating producers' capabilities pertinent to that property. People, Ideas & Objects publish and subscribe model allows individuals to subscribe to specific capabilities in either the Research & Capabilities or Knowledge & Learning modules. Knowledge & Learning’s subscription model will allow subscription to all of the capabilities of the producers associated with that Joint Operating Committee.

Getting the right information to the right people at the right time. There is also a “Knowledge Area” that includes policies, procedures, operational and management information for the property. This area also includes what is commonly referred to as the well file in terms of the information contained within it. Lastly, the "Lessons Learned" interface is used by people within the Joint Operating Committee to record operations that did not meet expectations.

Let's review the three key factors of innovation Professor Giovanni Dosi notes:

Typically, the search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Capabilities and stimuli generated within each firm and within the industries.

Broader causes external to the individual industries, such as the state of science in different branches; the facilities for the communication of knowledge; the supply of technical capabilities, skills, engineers and so on;.

Conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change; market conditions, particularly in their bearing on inter-firm competition and on demand growth; financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends especially in the effects on changes in relative prices of inputs and outputs; public policies (e.g., tax codes, patent laws, industrial policies, public procurement.) p. 1121.

Recall that these key factors are funneled through the Research & Capabilities “Dynamic Capabilities Interface." It is there, in the producer firm, that the more significant issues of science, capabilities, microeconomic trends and public policy, etc. can be centralized and dealt with on behalf of all Joint Operating Committees that the producer has an interest in. To expect that each Joint Operating Committee would engage with these major issues would be unproductive and disorganized. By dealing with these points, and codifying them in the Dynamic Capabilities Interface the producer firm publishes the appropriate information to each of their Joint Operating Committee at the appropriate time. The Joint Operating Committee is left to deal with the property's issues and opportunities. It can ignore any noise that may or may not argue for attention. A quotation from Professor Herbert Simon,

What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it. (1971).

One of the first items in the Knowledge & Learning module of the Preliminary Specification. Is how the items within the various “Dynamic Capabilities Interfaces” of the many producers who are participants in the Joint Operating Committee are populated into the Knowledge & Learning module. As we've discussed each producer publishes the pertinent capabilities they have to the various Joint Operating Committees. Therefore the people working within the Joint Operating Committee are presented with a variety of capabilities that may be duplications and similar to others. That would be reasonable to expect. However, just as the football team's playbook may have similar looking plays, they may have subtle differences in the manner in which they are executed, etc. That would be the same as the Knowledge & Learning module.

It would also be the case that company A who is a member of the Joint Operating Committee has developed a capability for XYZ operation. This capability is considered state of the art in the industry. This capability is one of several listed in the Knowledge & Learning modules Dynamic Capabilities Interface for XYZ operation. However, the Joint Operating Committee has operational decision-making authority. It has decided to execute company B's capability for XYZ operation through the Knowledge & Learning modules fourth interface, the "Planning & Deployment Interface." The Joint Operating Committee has the operational decision making authority and therefore the choice as to how day to day operations are implemented. Performance is the driving motivation, and they are most familiar with the property. In the football analogy this may be the quarterback calling an audible.

As technical paradigms are introduced, Joint Operating Committees will accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of Joint Operating Committee structural and performance characteristics implies an analysis of the learning and competitive process through which an industry changes. Professor Giovanni Dosi notes these behavioral attributes.

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157.

We have seen over the past twenty years a trend that has created significant differences in the stratification of the oil & gas industry. This is in terms of the size of the producers and their associated innovation. The small organization purchased reserves and facilities from the open market only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the ability to innovate in the larger organizations. Most disturbing is the lack of concern or identification of this as an issue over the past decades. The combination of depressed commodity prices, especially for natural gas, and a significant overhead burden that is fixed and demands a large percentage of free cash flow to meet the regulatory and other demands of all oil & gas producers. This overhead burden has offset the innovativeness of small producers who are about to disappear from the landscape. People, Ideas & Objects see this as detrimental to North American oil & gas's long-term health and prosperity. 

The Preliminary Specification has changed the behavior of producers' overhead costs from fixed to variable, based on profitable production, through implementation of our user communities service provider organizations. And established two distinct sources of revenue for producer firms. Revenues from oil & gas sales and creating markets for earth science & engineering capabilities developed by producers and charged directory to the Joint Operating Committees. Taking advantage of both of their strategic competitive advantages to generate revenue. Consisting of oil & gas sales from their land & asset base, but also deployment of their earth science & engineering capacities and capabilities to generate revenues to offset these costs.

With this structure and arrangement between the Research & Capabilities and Knowledge & Learning modules, focused around the Joint Operating Committee. It replicates the environment of a small oil & gas producer that is focused on performance. Alternatively, suggestions that further industry consolidation as the solution defies prior consolidations performance history. Globally, decentralization and disintermediation have been adopted as successful strategies in all industries. And the logic of consolidation contradicts any probability of resolving the identified difficulties North American producers are dealing with. 

Revenue Per Employee at the Joint Operating Committee

We want to discuss the calculation and publication of specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the factor's trajectory. How this financial calculation could affect those that work within the property; and the use of this information contained within the Knowledge & Learning module of the Preliminary Specification.

First of all it is understood that not all people are necessarily assigned to work for one Joint Operating Committee. There are times when people might be assigned to dozens during one month. Calculating the hours worked by the people within these Joint Operating Committees from the different companies is not going to be difficult for People, Ideas & Objects software. Within the Security & Access Control module, Industrial Command & Control, our Work Order records the time and tasks each individual performs and in turn charges that time out at a factor of the producer's calculated Revenue per Employee.

A comparison of revenue per employee over time, or its trajectory, has been discussed previously. These trajectories were key financial performance indications as to where the property was heading. Was the property accelerating its innovation or decelerating? We also broke down the trajectory into three different variance types. Volume, price, and number of employee hours variances. Each of these variances reflects a reason why the trajectory changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member assigned to the property should have access to this page and contribute ideas and suggestions on how to improve the factor. An open collaboration focused on enhancing Revenue Per Employee and its trajectory. In addition, this page could have the historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee variances and trajectories performance scored at that Joint Operating Committee.

We also learned that revenue per employee reflects the asymmetry (revenue per employee is widely variable) of asset quality within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. The comparison of revenue per employee for the same property over time however, will have a significant impact on the people that work for that Joint Operating Committee.

Professor Giovanni Dosi describes the most effective way to deal with the factor is as follows;

In very general terms, technological innovation involves or is the solution to problems. p. 1125.

In other words, an “innovative solution” to a certain problem involves “discovery” and “creation” since no general algorithm can be derived from the information about the problem that generates its solution “automatically.”

Certainly, the “solution” of technological problems involves the use of information drawn from experience and formal knowledge (e.g., from the natural sciences); however, it also involves the specific and uncodified capabilities on the part of the inventors. p. 1126.

Members of the Joint Operating Committee can access the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms partnership. There, people could see what the firms offered in terms of their earth science & engineering issue identification and resolution capabilities. It may then be realized that some formerly unknown or recently developed and now available capability being applied to the situation in the Joint Operating Committee will yield greater productivity, or...

Deploying Capabilities, Not Hoarding Information

We start this discussion of capabilities with a clear definition of what they are. These are some of the definitions published earlier in the Research & Capabilities module and are noted here for clarity. The first is from Professor Richard Langlois in his 1992 paper “Transaction Cost Economics in Real Time” defines what capabilities are in a corporate setting. (Oxford University Press 1992)

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

We have Professor Carliss Baldwin’s “Knowledge begets Capabilities, and Capabilities beget Action.” There is also the quotation from Professor Richardson that capabilities are "Knowledge, Experience and Skills” (1972, p. 888) to which we at People, Ideas & Objects have added “Ideas.” And this next quote from Professor Langlois “Transaction Cost Economics in Real Time” helps to bring the clarity we need.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106.

With respect to information, we have all seen how information, and more specifically secrets, within the oil & gas industry can travel from one producer to another at a rather rapid pace. No one should be surprised to learn that what they thought was confidential to the firm has somehow leaked and become well known throughout the industry. It is sometimes harder to communicate information within an organization than across an industry. The question therefore becomes how does proprietary information, and more importantly these proprietary capabilities that are available within producer firms, be deployed on an as needed basis within the various Joint Operating Committees?

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, it has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another may not be worthwhile doing.

What the firm can hope to do technologically in the future is narrowly constrained by what it has been capable of doing in the past. p. 1130.

Moreover, even when licensing and other forms of interfirm transfer of technology occur, they do not stand as an all or nothing substitute for in house-search: One needs to have substantial inhouse capacity in order to recognize, evaluate, negotiate, and finally adapt the technology potentially available from others. p. 1132.

Within the Knowledge & Learning module we operate within the Joint Operating Committee. Populated with the capabilities of each participating producer through the “Dynamic Capabilities Interface" of the Knowledge & Learning module. It may be a concern for some producers that the publication of these capabilities to other producers' representatives on the Joint Operating Committee would lead to the leakage of proprietary information or loss of knowledge or capabilities. That may be, however the nature of capabilities means they can’t be reproduced by a simple matter of recording the text. As we have discussed elsewhere, development of capabilities is the result of research and application of the firm's resources in a determined and purposeful manner. This is to achieve an outcome. Copying plans or instructions would not necessarily provide the means to achieve the objective. Copying the “pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities.” What we have to ensure is the ability to deploy the right information, knowledge or capability at the right time and at the appropriate place. Knowledge, information and capabilities need to be employed and deployed when and where they are needed and required. That is the competitive advantage, deployment of dynamic capabilities, not hoarding of information.

Deploying Innovations

Keep in mind that innovation is not research. Research is conducted in the Research & Capabilities module. When the research is proven and added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate and relevant criteria to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the Joint Operating Committees are similar to the way that a football team’s plays are developed and executed. Using the analogy of a football coach, motivated by winning, he selects plays from a long list of possible plays.

Professor Giovanni Dosi states;

Clearly, the commitment of resources by profit-motivated agents must involve both the perception of some sort of opportunity and an effective set of incentives. Are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both? Jacob Schmookler, in his classic work, argued that the serendipity and universality of modern science provide a wide and inter-sectorally indifferent pool of opportunities that are exploited to different degrees in each economic activity according to differential economic incentives, and in particular, to different patterns of demand growth. (Schmookler 1966) p. 1135.

For the purposes of this discussion the perception of some sort of opportunity is realized through the members of the Joint Operating Committee reviewing the capabilities presented to them through the Knowledge & Learning module. The listing of capabilities presented by the various producers that are participants in the Joint Operating Committee would provide a depth of opportunity that was previously unqualified and unquantified. The incentives would be performance-based and focused around increasing revenue per employee trajectory.

We’ve all seen the football coach on the sidelines with a list of hundreds of plays to call during the game. Selection of the appropriate plays will help the team move towards winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee is probably the case for many in the industry. The ability to select and execute them in the manner that the football coach is able to, and have them communicated to the team members for precise execution in the half second that it takes is the rarity. There is no reason why every Joint Operating Committee should not have this type of efficiency. Efficiency in selecting and executing the capabilities made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user can select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and manage the operation from Industrial Command & Control. Scheduling and other considerations must be made regarding resource requirements since the Joint Operating Committee capabilities are from various firms. The "capabilities" are for company x, derived from company x, not necessarily for Joint Operating Committee xyz without x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. It is then possible to execute the capabilities.

We have drawn the analogy of a football coach who reviews his list of plays, selects one, and calls it for the team to execute. The ability of a Joint Operating Committee to have this style of communication and understanding of what needs to be conducted may be necessary in the near future. With the insatiable demands for energy and the ever increasing demands for earth science & engineering work needed with each incremental barrel of oil & gas produced, the need for the North American marketplace to be energy independent, a Joint Operating Committee will be required to conduct its work in a highly organized and controlled manner.

Added to this level of increased workload for the Joint Operating Committee is that the field and service industries are moving through their own innovative cycles. The problem is that if each Joint Operating Committee is left to deal with each of these issues on their own, there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. Something to be avoided. However, the Joint Operating Committee needs to deploy the latest state of the art proven technology in the most capable manner.

If we look at the previous discussion regarding the Research & Capabilities and Knowledge & Learning modules, we can see how these "things" are filtered out and dealt with. The Joint Operating Committee is provided with the most up to date and proven capabilities from the producer firms that have a financial interest in the property. It is those producers that are investing in research to expand their understanding of earth science & engineering. This is on behalf of their interests in all of their Joint Operating Committees. Taking trips down blind bunny trails once and only once on behalf of all their Joint Operating Committees. Not having each and every Joint Operating Committee discover the same blind bunny trail on their own. Then developing the capability to the level necessary for inclusion in the "Dynamic Capabilities Interface" where it will be used successfully and repeatedly by all of their Joint Operating Committees they have an interest in.

This process helps the Joint Operating Committee focus on the property. To eliminate the noise of what is currently happening in the oil & gas arena and deploy known capabilities and innovations that add value. It is as if when the coach calls the play the only concern is to ensure that each person executes their part of the play in the manner that it is designed. There may be times back on the practice field to fiddle with some changes, but for now it's time to run the play as it was designed. This is the business of the “Planning & Deployment Interface” in the Knowledge & Learning module.

Professor Giovanni Dosi asserts that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications.

First, the specificity, cumulativeness and tacitness of part of the technological knowledge imply that both the realized opportunities of innovation and the capabilities for pursuing them are to a good extent local and firm-specific. Second, the opportunity for technological advances in any one economic activity (and, thus, also the "innovative productivity" -- were we able to measure it -- of a dollar investment in R & D) can also be expected to be specific to and constrained by the characteristics of each technological paradigm and its degree of maturity. Moreover, the innovative opportunities in each economic sector will be influenced by the degree to which it can draw from the knowledge base and the technological advances of its suppliers and customers. p. 1137.

Professor Dosi notes the implications of the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enables the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” Providing the producer with the best of both worlds.

OCI Research & Capabilities, Part VII

 Who Does the Innovation

When we consider what a producer's capabilities would look like, such as those listed in the “Dynamic Capabilities Interface” of the Research & Capabilities module of the Preliminary Specification, much would depend on the type of producer represented. As one could imagine a large firm such as Exxon would have a vast library of capabilities. In contrast, a small start-up would be limited to a small database in terms of what they could achieve.

Some might assume that the majority of oil & gas innovation is developed by the largest producers. However, I think that is generally untrue. Small and start-up oil & gas firms along with intermediate producers are probably responsible for the majority of innovations in the last 20 - 30 years. Professor Giovanni Dosi’s reference to the Schumpeterian hypothesis, “that bigness is relatively more conducive to innovation, that concentration and market power affect the propensity to innovate” and his rejection of that premise is evident in his paper’s following three points.

For the purposes of the present work, it is enough to mention three major regularities that come out of empirical studies.

First, there appears to be a roughly log linear relation within industries between firm size and R & D expenditures (or patenting). This is, however, a rather crude approximation. On closer inspection, subject to industry differences and different measures of innovativeness, one finds better fits of quadratic and cubic relationships between size (i.e., sales or employment) and innovativeness (R&D expenditure, R&D employment, number of patents, or number of innovations); p. 1151.

Second, the size distribution of innovating firms within sectors depends on the technological characteristics of the sectors themselves. 

Third, after allowing for the effect of firm size, one still generally observes a substantial unexplained interfirm, intrasectoral variance, in terms of both R & D investments and, even more so, innovative output.. p. 1152.

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by small oil & gas producers. SAP does significant generic research in software development. However, they do very little oil & gas research. On the other end of the scale People, Ideas & Objects have completed substantial oil & gas specific research and have commenced the development of oil & gas software with the publication of the Preliminary Specification. And I can assure you that at this time we are a very small firm, proving Professor Dosi’s first and third points.

If we look at Professor Dosi’s second and third points together, it is clear that money is not necessarily a determining factor in innovation. Although large firms spend impressively on R&D, that does not produce many usable innovations. And it may be the lack of financial resources that motivate smaller firms to innovative problem solving on the other end.

Professor Dosi (1988) provides three caveats to the three differences noted.

There are three obvious caveats for the interpretation of these results.

• The first relates to the fact that the statistical proxies cannot capture aspects of technical change based on informal learning. 
• The second is that some (generally undetermined) part of the intrasectoral variance in innovative performance must be attributed to differences in actual lines of business (and thus in opportunity, appropriability) which are, nevertheless, statistically classified within the “same” industry.
• Thirdly, some firms may not patent or innovate but still engage in substantial R & D which is simply devoted to keeping up and adapting to what other competition are doing.  p. 1152.

In summary, it shows that money is not necessarily a determinant of innovative success. All producers need to be represented in the innovative oil & gas industry. 

One element that we have not discussed in our review of the Research & Capabilities module is the factor of revenue per employee. We use the factor in many of the interfaces. I am only highlighting it here to show how the Research & Capabilities module influences the elements that make up the revenue per employee calculation. As you’ve seen in the other modules, the factor variances are large between producers. These variances show that there is a large asymmetry between producers. It is this asymmetry that is the topic of our discussion.

It was through the review of Professor Giovanni Dosi’s paper “Sources, Procedures and Microeconomic Effects of Innovation” that we learned of the asymmetry effect. That each successful innovation creates an asymmetry effect, or an overall increase in the competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the industry participants. Laggard companies' ability to improve their competitive position helps them to establish new positions within their industries. These laggard companies generally move forward faster through imitation of leading companies. However, the primary differentiating component of competition based on innovation is attributable to the firm's innovative capability.  ie. A laggard will remain a laggard without the direct and active development of innovative appropriability conditions.

Professor Dosi finds these points difficult to quantify and prove, but states they may be tacitly understood. People, Ideas & Objects asserts that that was the case in 1988 at the time this paper was written. However, the laggards' ability to “keep up” or even “catch up” may have diminished through Information Technology during the 2000’s.

There is a paradox related to innovation, whether it is based on imitation or strict Research and Development. Companies can copy others' innovations in industries with minimal asymmetry (where competitors are all the same). While industries that are asymmetric (such as oil & gas) or have large variances in their capabilities are best served by differentiating themselves through the pursuit of Research and Development. People, Ideas & Objects assert oil & gas is asymmetric due to large variances in revenue per employee.

This is why capabilities are critical to the oil & gas industry's success. They differentiate themselves through research, development and capabilities. Passing these capabilities on to the Joint Operating Committee through the Knowledge & Learning module allows the producer to initiate these capabilities “just in time,” where and to whom they are needed. They do not need to worry about being exposed to potential competitors through the Joint Operating Committee. It should be clear from this analysis that those that attempt to mimic others' capabilities will spend extensive resources to do so. This is as much or more than it would cost to develop these capabilities on their own. However, those that copy will remain static in their competitive position within the industry. It's just not that easy to copy someone else, and it's not that valuable to their firm. Developing innovative and profitable oil & gas producers demands research and development to be undertaken when markets are asymmetric.

The Outlook for Innovation

Our discussion now summarizes Professor Giovanni Dosi’s research and applies it to the oil & gas industry. To show the potential of developing People, Ideas & Objects ERP software.

Professor Giovanni Dosi asserts that the makeup of industries and companies is not solely due to the endogenous force of competition. Innovation and imitation also make up industry structure.

Market structure and technological performance are endogenously generated by three underlying sets of determinants.

Each of the following three components is evident in the marketplace of an oil & gas producer today, as reflected in:

• The structure of demand.

Satisfying the insatiable demand of the global energy marketplace is critical to society's advancement. American and western as well as Chinese and developing societies face real challenges in sourcing adequate long term energy sources. The long term demands on energy producers have never been so significant.

• The nature and strength of opportunities for technological advancement.

The nature and opportunities for technological advancement lead one to believe mankind has never faced the level of opportunity and acceleration possible today. The industrial mechanization of the past 100 years combined with the anticipated mechanization of intellectual pursuits markedly appreciates human life. Energy availability will be a critical element of this advancement.

The ability of firms to appropriate the returns from private investment in research and development.

The oil & gas industry is moving closer to earth science and engineering principles. Innovation, research and development in both the producer firm and the market are and will become more commercial in nature. It is on the basis of the success or failure of these factors that will determine the success or failure of the producer firm within the industry.

By codifying the earth science and engineering capabilities within the “Dynamic Capabilities Interface” the producer begins the process of documenting what it can achieve. By using the “Planning & Deployment Interface” either through the Research & Capabilities or Knowledge & Learning modules, the producer will be able to deploy those capabilities at the right time and with the resources they have developed. We have drawn the analogy of a football team and how they design and communicate plays as to how these modules will work in the People, Ideas & Objects Preliminary Specifications Research & Capabilities module.

OCI Research & Capabilities, Part VI

 Research Into the Underlying Sciences

Our discussion of the Research & Capabilities “Research Budget Allocation Interface” offers the innovative oil & gas producer the opportunity to control the costs of research and innovation conducted within their firm. Professor Giovanni Dosi asserts that businesses commit to innovation due to both exogenous scientific factors and endogenous accumulated capabilities developed by their firms. We have discussed in detail how capabilities are handled in the Research & Capabilities module of the Preliminary Specification. We'll now discuss how the research end of the module is managed.

With the “Research Budget Allocation Interface” we can provide a global view of the firm's capabilities under development. As was mentioned, this interface will provide the user with the ability to see areas that might otherwise fall through the cracks. What is needed now is a similar interface that would give a view of the research being undertaken in the scientific arenas. This would enable the producer to “commit to innovation due to exogenous scientific factors.”

It would be worthwhile to quickly recall the major processes managed in the Research & Capabilities module. We have the “Ideas Marketplace Blog” providing an environment where the service industry actively develops original and innovative products and services with input from producers. We have the “Dynamic Capabilities Interface” where the firm documents what it can achieve. These capabilities are deployed through the “Planning & Deployment Interface” in the Research & Capabilities or Knowledge & Learning modules and lastly we have the “Research Budget Allocation Interface.” There are more processes under management in the Research & Capabilities module, but I only wanted to highlight the pertinent ones for the discussion that follows here on the scientific nature of the business.

Professor Dosi concludes that scientific input into the innovation process is evidence of the importance of factors exogenous to competitive forces among private economically motivated actors. This is subject to two critical qualifications.

• First, the link between science and technology runs also from the latter to the former. It has been noted, for example, that the development of scientific instruments has exerted a major impact on subsequent scientific progress. In general, however, the scope, timing, and channels of influence of technological advances on science have a different nature from the more direct influence of scientific discoveries on technological opportunities.
• Second, scientific advances play a major direct role, especially at an early phase of development of new technological paradigms. p. 1136.

These points support Dosi’s (1988) assertion that “general scientific knowledge yields a widening pool of potential technological paradigms,” where the greatest value is attained in the earlier stages.” Professor Dosi analyzes the specific mechanisms through which a few of these potential paradigms are actually developed economically, applied, and become dominant in their industry. The process of selection depends on the following factors.

• The nature and interests of the bridging institutions between pure research and economic applications. (p. 1136).
• Institutional factors such as public agencies (e.g., the military) (p. 1137).
• The selection criteria of markets and / or techno-economic requirements of early users. (NASA, and the Pentagon in the early days of integrated circuits, FDA requirements in the case of bioengineering, and the technical needs of the American Navy in the case of Nuclear Reactors.) (p. 1137).
• The trial and error mechanisms of exploration of the new technologies, often associated with Schumpeterian entrepreneurship. p. 1137.

There is not a doubt that we need an interface here. An interface similar to the “Research Budget Allocation Interface” would be appropriate. And maybe we only need a second “page” within that interface. One for internal or endogenous budget items and one for exogenous budget items. The key here is to note that the greatest value is attained in the early stages. 

Innovating on the Science

Continuing our discussion of the “Research Budget Allocation Interface” and the two-page format. It is expected that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. The process that the user of this interface will document is the capabilities of the research being conducted within the firm and the broader scientific community. By way of the football analogy we raised earlier, I want to show how this documentation would be done.

Ultimately the objective of the “Research Budget Allocation Interface” is to augment the firm's “Dynamic Capabilities Interface” or to enhance the firm's overall capabilities. The Dynamic Capabilities Interface documents what the firm is capable of. Then based on geological zones or other applicable criteria the user selects, the pertinent criteria are used to populate these capabilities to the appropriate Joint Operating Committees through the Knowledge & Learning module. The football analogy would come into play here in that the design of a play is committed to writing in which the team studies it, and each team member learns their role, and then executes the play in the manner in which it was designed.

As the firm continues, research from the endogenous and exogenous areas develops into innovations that populate the “Dynamic Capabilities Interface". These innovations in turn populate the various Joint Operating Committees. Professor Dosi (1988) asserts that much of a firm's innovativeness is dependent on technology more than science, and has several implications.

First, the specificity, cumulativeness, and tacitness of part of the technological knowledge imply that both the realized opportunities of innovation and the capabilities for pursuing them are to an extent local and firm specific. Second, the opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity. Moreover, the innovative opportunities in each economic sector will be influenced by the degree to which it can draw from the knowledge base and the technological advances made by suppliers and customers. (p. 1137).

In the third paragraph of the previous section we documented that we have three processes that deal with these variables under management in the Research & Capabilities module.

In addition, we learned that copying another firm's ideas or capabilities has little to no value. In contrast, copying others' capabilities can be as challenging as building their own. We now learn that innovation depends on the firm's technology. Thus, technology facilitates or constrains a producer's innovations. Therefore copying capabilities, without a foundation or base of technology and capabilities to support what is being reproduced, is useless. And if you have that innovative and technological base, copying would not be productive or motivating. We need to consider the time frame necessary to maintain these capabilities in the near future. What level of idea generation will be necessary to maintain and generate value in oil & gas? The value of the capability and its iterative pace of change will be endogenous, unique and most likely confusing to those attempting to copy them. Professor Dosi notes.

New paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations and ease with which they are achieved. p. 1138. 

The technology of a producer includes ERP systems used within an organization. As the petroleum industry is science-based, it would be in the producer's interest to remain open and flexible in both their scientific and business approaches. This is the strategic position a producer can maintain with the People, Ideas & Objects Preliminary Specification.

Highlighting the speed at which a producer firm can implement innovations. From the research and discovery, to the actual implementation of the innovation there is little in terms of time or bureaucracy standing in the way of the proven innovation being implemented across the firm. When the time comes for people to use the latest developed, tested, procedurally complete, approved and authorized processes in terms of what innovation they should adopt, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use in the Knowledge & Learning module.

To review the process, we have the firm conducting a variety of studies or research through Work Orders and AFE’s to enhance their capabilities. The progress of these studies and research is monitored in the “Research Budget Allocation Interface." This interface also has a page that monitors the scientific community's research. When these studies and research are concluded and capabilities are enhanced they are published to the “Dynamic Capabilities Interface” of the Research & Capabilities module. Then they are populated with all the information necessary to document and implement the capability. We have drawn a football analogy here in order to illustrate the playbook of a football team. A team member only needs to look at the playbook (the Planning & Deployment Interface) to determine what their role is during any play. The “Dynamic Capabilities Interface” is sorted through a variety of different attributes with geological formation being one of them. In the Knowledge & Learning module any Joint Operating Committee that produces from xyz formation (or other pertinent attributes tagged in the Research & Capabilities module) will therefore have access to xyz capabilities in the “Dynamic Capabilities Interface.”

The key limiting factor in terms of time is the amount of effort necessary to take the research or study from its raw form and turn it into a usable capability. The Joint Operating Committee is doing two things. Executing operations and making operational decisions. They are not field testing experiments as lab rats. It's imperative that this distinction be made and the proper documentation be handed off from the research and study to those that will implement it. Once the capability is documented, tested, proven and procedurally implemented it will be available to be implemented the next time the operation is conducted. This is anywhere it is pertinent within the producer firms' Joint Operating Committees. We'll discuss this point in the Knowledge & Learning module.

With this process in mind, we note that Professor Giovanni Dosi suggests two separate phenomena are observed:

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138.
• Second, a rather uniform characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries. p. 1138.

Considering the complexity of processes as described here, this brings to mind the Research & Capabilities module would be insufficient from the point of view of feedback from the Joint Operating Committees. Particularly because of the first phenomenon noted above. Therefore we need to open a third “page” in the “Research Budget Allocation Interface” that is a window on the “Lessons Learned” from the Knowledge & Learning module. That way what is being learned on a day to day basis in the Joint Operating Committees can “bring forward new opportunities for product development and productivity increases.” 

The individual user(s) of the Research Budget Allocation Interface of the Research & Capabilities module will be at the forefront of innovation within the producer firm. Having windows on the research developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and let's not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the service industry state of affairs. (For emphasis I quote again from Dosi (1988), as above "to which it can draw from the knowledge base and the technological advances of its suppliers and customers.") Theirs will be a rich medium of information of what is happening in the innovative oil & gas industry. The concern that many will have is that this information is then codified into further capabilities which are subsequently published through to the various relevant Joint Operating Committees. They will have these capabilities available to other members of the Joint Operating Committees. They will be able to see and use the capabilities, which will include participants of other producer firms. Professor Dosi (1988) notes a study conducted by Richard Levin et al 1984.

Call appropriability those properties of technological knowledge and technical artifacts, of markets, and of the legal environment that permit innovations and protect them, to varying degrees, as rent-yielding assets against competitors' imitation.

Appropriability conditions differ among industries and among technologies: Levin et al. (1984) study the varying empirical significance of appropriability devices of (a) patents, (b) secrecy, (c) lead times, (d) costs and time required for duplication, (e) learning curve effects, and (f) superior sales and service efforts.

Levin et al. (1984) find that for most industries, "lead times and learning curve advantages, combined with complementary marketing efforts appear to be the principal mechanisms of appropriating returns for product innovations" (p.33). Learning curves, secrecy and lead times are also the major appropriation mechanisms for process innovations. Patenting often appears to be a complementary mechanism which, however, does not seem to be the central one, with some exceptions (e.g., chemicals and pharmaceutical products).(p. 1139).

Oil and gas producers focus on process innovations. Dosi observed that "lead times, secrecy and learning curves are relatively more effective ways of protecting them.” Which brings up a valid point. Assume that one of the capabilities published through the Knowledge & Learning module was the capability to fracture shale. Just because it is published doesn't mean it can be copied. Through experience and "learning curves," the "team" has developed the capability. Just because a football team sees the design of other teams' plays does not mean they can implement the same plays and win the Super Bowl. They will have to work on building the right talent and practice implementing the capabilities necessary to execute that capability. This is before they can successfully complete it. The same would be the case for anyone observing another producer's capabilities in a Joint Operating Committee. They’ll understand the explicit knowledge of the other producers. As that will be all that can be captured. Tacit knowledge, learning from doing, can’t be captured in any medium and is inherent in the producer firm's resources. It is the successful deployment of tacit knowledge that producers should seek to provide to their Joint Operating Committees.

Professor Dosi notes that Levin states that “whereby the control of complementary technologies becomes a rent-earning firm-specific asset.” 

In general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation as well as innovation, a creative process, which involves search, which is not wholly distinct from the search for “new” development, and which is economically expensive - sometimes even more expensive than the original innovation (for evidence on the cost of imitation relative to innovation, see Mansfield, Mark Schwartz, and Samuel Wagner 1981; Mansfield 1984 and Levin et al. 1984). This applies to both patented and non-patented innovations.” (p. 1140).

With the fast changing science and technological paradigms and steep trajectories of the industry, the need to have the capability to innovate is required by each producer to develop on their own. If the costs of duplication are as steep as the costs of developing internal capabilities, producers should rely on internal process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear of copying?

However, this deployment of capabilities to the Joint Operating Committee also implies greater co-dependency exists. Partners on the Joint Operating Committee will have other specialized resources available to commit to the projects, and suppliers will contribute as well. As the Preliminary Specification seeks to eliminate the current overbuilt, redundant, unshared, unshareable and unspecialized capabilities within each siloed corporation. The proposed alternative in the Preliminary Specification is to rely on the advanced specialized contributions of the partnerships. This is to bring the most innovative solutions to the Joint Operating Committee.

When we discuss the Research Budget Allocation Interface of the Research & Capabilities module it feels that we are at the heart of the innovative oil & gas producer. Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation" clearly identified the key factors that make a firm innovative. By instilling his work within the modules of the People, Ideas & Objects Preliminary Specification, the innovative oil & gas producer can have a quantifiable and replicable innovation process within their domain. Something necessary in the difficult energy era we find ourselves in today.

The vision laid out in the Preliminary Specification provides a coherent way to operate in this difficult energy era. These processes support the innovative oil & gas producer and are based on research conducted here at People, Ideas & Objects. What is also clear from the research is that the lack of processes that identify and support innovation will lead to no innovation at all. A producer originally constructed in the easy energy era. An era that focused on cost control cannot function in the innovative and difficult energy era that is here, or just around the corner. The difficulty in managing these oil & gas concerns, with conflicting constructs and demands will only intensify.

Recently I stated that the people operating on the Joint Operating Committee are not experimental lab rats. That leaving a capability that was untested and untried for them to sort out was counter to the purpose of the “Dynamic Capabilities Interface,” the Knowledge & Learning module and the Joint Operating Committee. They are there for execution and not for the purpose of developing concepts or experiments. To use the football analogy the Joint Operating Committee is game day, and what the research and study area needs is a metaphorical practice field. One in which the opportunity to explore failure is welcome and where a producer can gain a learning experience to the ultimate solution or capability.

Our next interface is the “Experiments Interface". This will list the number of experiments and document the type and expected results of any and all experiments being conducted by the firm. This will be a comprehensive interface, much like the “Research Budget Allocation Interface” in that it will also have many similarities to a project management interface. This allows users to manage a project from start to finish. Where capabilities can be developed as expected by the firm. Both interfaces will allow users to control and manage the firm's development at the speed of market and science.

I am not asserting that past efforts were not innovative or moved science substantially. The issue People, Ideas & Objects is raising is that the pace and speed of science's development in the near to midterm, and particularly in the long term, will accelerate based on the fact that, globally, reserve replacement continues to be progressively more challenging, and the prices realized for commodities have begun to reflect these challenges. Bureaucracies cannot handle the workload. Professor Dosi concludes. 

Finally, the evolution of the economic environment in the longer term, is instrumental in the selection of new technological paradigms, and, thus in the long term selection of the fundamental directions and procedures of innovative search. p. 1142

A dynamic, innovative, accountable and profitable oil & gas producer must therefore be tuned to the market and science.

OCI Research & Capabilities, Part V

 Earth Science and Engineering Capabilities of Producers

People, Ideas & Objects software application modules enable producer firms and Joint Operating Committees to focus on their core competitive advantages. The innovative and profitable oil & gas producer's land & asset base, as well as its earth science and engineering capabilities. The Research & Capabilities module of the Preliminary Specification is the key module for producers focusing on their earth science and engineering expertise. We have discussed the “Planning & Deployment Interface” of the module. Now we begin the discussion on how the producer maintains the pace of change in the underlying sciences and technologies.

The simple answer to this question is that the producer and particularly the Joint Operating Committee will not have the distraction of the long term acquisition of scientific and engineering research and capabilities development affect the day to day implementation of the knowledge of the firm or Joint Operating Committee. Recall at the beginning of this module's review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. Research & Capabilities is about the acquisition of capabilities, their documentation, and Knowledge & Learning is about their deployment, implementation and execution. The fact that there is a “Planning & Deployment Interface” in the Research & Capabilities module may lead to some confusion, however, it is there as there are times when the producer firm needs to implement its capabilities for experimentation and its sole benefit.

This separation of the long term horizon for Research & Capabilities. Provides the appropriate mindset for the producer firm to focus on the coordination of the market and overall development of earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and map the necessary changes within the “Dynamic Capabilities Interface” to communicate these changes from their organization to their various Joint Operating Committees that need that information. These changes and communicating the changes to the appropriate people in a timely fashion will increase performance for the producer and Joint Operating Committee. Establishing a foundation for the producer to further build and implement their competitive advantages in earth science and engineering capabilities.

Restating for clarity. That is how the Research & Capabilities module enables producers to develop, implement and integrate advanced capabilities within their organization. Research undertaken by the firm should not interrupt the day-to-day operations. However, when research augments the firm's capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. As documented in the "Dynamic Capabilities Interface," the Knowledge & Learning module will allow selection of capabilities based on the appropriate and related criteria. If the research conducted by the firm is unresolved or undetermined in its conclusion then it would not belong in the “Dynamic Capabilities Interface.” If it remained unresolved or undetermined then it would indicate that further work was required to prove, troubleshoot and implement the capability. Therefore, they remain open within a Work Order until they are resolved, completed or terminated.

How and Where Innovation is Implemented

In this section we want to reinforce the point that innovation will develop from the interactions and collaborations in the “Planning & Deployment Interface.” We noted that the people assigned to the project would discuss the project and raise any issues they may have where capabilities and innovation would stem from these interactions. This process captured in the “Planning & Deployment Interface” is how the Preliminary Specification reduces innovation to a defined and replicable process.

Professor Dosi notes that innovation is developed through the interactions between the “capabilities and stimuli” and “broader causes external to the individual industries such as the state of science.” These are captured in the “Planning & Deployment Interface” (capabilities and stimuli) and the Work Order system (state of science) of the Research & Capabilities module of the Preliminary Specification. As time passes the producer augments their capabilities with the findings from their research undertaken in the various Work Orders issued. Capabilities are then populated to the Joint Operating Committee's day to day activities. It is the interaction between the producer firm and Joint Operating Committee, and the broader causes that create the innovations. 

We take the concept of a trajectory, describe it, and apply it to oil & gas. A technological trajectory is defined as the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as the compromise, and the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil & gas is accurately reflected in commodity prices. Higher commodity prices will finance enhanced innovation. These “trade-offs” are very much an engineering approach and therefore I want to reiterate the point that they are “defined as the compromise, and the technical capabilities.”

These trade-offs facilitate industries' innovation on changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & gas, People, Ideas & Objects would assert that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms that will provide companies with fundamental innovations.

Therefore the ability to collaborate in the “Planning & Deployment Interface,” and elsewhere, of the Research & Capabilities module is critical to the innovativeness of the producer firm. And by extension, this would also apply to the Joint Operating Committee through the “Planning & Deployment Interface” in the Knowledge & Learning module. Innovation is as much an engineering discipline as it is anything else. And this is how we can reduce it to a defined and replicable process.

Every organization has to deal with two distinct and differing types of work that needs to be done. Essentially, the two types of work are the need to execute and the need to develop the firm's capabilities for the future. These two roles have been separated in the Preliminary Specification with the Knowledge & Learning module, or Joint Operating Committee, concerned with execution. And the Research & Capabilities module, or producer firm concerned with developing its capabilities through market coordination. This division of labor and specialization regarding these two types of work is the topic of this discussion.

We have noted that innovation was an engineering approach to problem identification and resolution. We however want to focus these innovation efforts on one area of the firm. Making sure they are concentrated where they are most useful and least harmful. And that is in the “Dynamic & Capabilities Interface” of the Research & Capabilities module. It is at that location that the focus can be on innovation without affecting the Joint Operating Committees' day to day operations. Only when an innovation is proven worthwhile and its implementation procedures defined should it be written up as an additional capability in the Dynamic Capabilities Interface. This capability is therefore available to be populated into the Knowledge & Learning module. It is available for use in the day to day operations of the Joint Operating Committees. Professor Giovanni Dosi notes;

Organizational routines and higher level procedures to alter them in response to environmental changes and / or to failures in performance embody a continuous tension between efforts to improve the capabilities of doing existing things, monitor existing contracts, allocate given resources, on the one hand, and the development of capabilities for doing new things or old things in new ways. This tension is complicated by the intrinsically uncertain nature of innovative activities, notwithstanding their increasing institutionalization within business firms. p. 1133

It supports both the "how to do things" (the Joint Operating Committee) and the "how to improve them" (the producer firm). The dichotomy reflects the challenges of improving processes and products through trial and error. The ability to accurately predict the success or failure of an idea contains inherent high risks and hence high rewards. This is one of the constraining factors in innovative thinking, in that no one wants to be proven wrong. While, even if the idea fails to test the theory, the failure may ultimately lead to and be one of the keys to discovery.

By containing the innovation within the producer firm in the manner that the Research & Capabilities “Planning & Deployment interface." Limits contamination if innovation was attempted in areas where execution is expected. Eliminates the high cost of innovation when repeated trial and error is conducted again and again in different areas of the same organization and over repeated timeframes. This division of labor is necessary between oil & gas firms and their Joint Operating Committees. We know there are two types of people, those who function best in either of these two environments. Any time either of these people are asked to operate in an environment they’re not oriented to, they feel uncomfortable and perform poorly.

This reflects a contradiction in the People, Ideas & Objects software. We assert that the software aligns the Joint Operating Committees' legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. This claim that the innovation framework is part of the Joint Operating Committee is consistent with the fact that once the producer has proven the innovation is valid, then the Joint Operating Committee is the means in which it is implemented and executed throughout the producer firm through the “Planning & Deployment Interface” in the Knowledge & Learning module. However, we also have innovation as an Organizational Construct. In contrast to the Joint Operating Committee, the producer develops innovations through its capabilities. Organizational Constructs, including the Joint Operating Committee, seek to establish, support and define a culture within North American oil & gas producers and the greater oil & gas economy. Creating an alternative to today's bureaucratic and non-performing culture.

Uncertainty and Risk in Innovation

Continuing our innovation review of the Research & Capabilities module of the Preliminary Specification. We note that the “Dynamic Capabilities Interface” enabled the innovative oil & gas producer to isolate innovation activities within one area of their firm. This enabled the various Joint Operating Committees to focus on the execution of what was known, which included proven innovations. We now want to discuss the uncertainty and risk associated with innovative search. Something that I think most producers are familiar with, however, something that will become more commonplace as the demand for innovation increases.

What is clear is the role software will play in enabling innovation within the oil & gas firm. Throughout this discussion in the Preliminary Specification it is evident that software plays a critical role in the future oil & gas firm. Software defines and supports quantifiable and replicable innovation processes. The lack of this software constrains the industry. For the oil & gas industry to conduct any level of innovation without software, as defined here by People, Ideas & Objects, will leave the innovation outcome to chance. Such is the nature of software in the 21st century.

Whether it is geological or engineering in nature, the pursuit of these sciences brings to the oil & gas business certain elements of risk and uncertainty. Add to this the commercial nature of the oil & gas business and you have an atmosphere where innovation is for those who can take the heat. Professor Dosi suggests this is the appropriate environment for innovation.

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134

Uncertainty exists in both scientific and business realms. I am not convinced that the two can be separated. This is perhaps why the industry has been poorly served, in my opinion, by business systems today. They don’t recognize the innovative and scientific basis of the business and cannot support an innovative oil & gas industry. If commodity prices allocate financial resources to fuel innovation, the industry will need systems and procedures installed to manage innovation. Systems such as those described in the Preliminary Specification. With the low costs of knowledge and collaboration being the two commodities that affect the technological trajectories, having interfaces such as the “Planning & Deployment Interface” of the Research & Capabilities module will be a necessity.

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge (Mansfield et al. 1977). p. 1134

We now turn to the research area of the Research & Capabilities module in the Preliminary Specification. What we are particularly interested in, is taking control of the financial costs of innovative activities conducted within the producer firm. A firm of any size has many projects underway. With the volume becoming unmanageable quickly if there was no control over the amount spent and the type of activity. There are cost controls in the People, Ideas & Objects Preliminary Specification such as AFE’s and Work Orders. These will control research costs. The interface that we're discussing does not replace those, it only centralizes the information for a clearer understanding of the activity and its funding.

A producer firm may become involved in many projects that seek new knowledge and capabilities regarding the oil & gas business. Some of these activities may be rather large and will certainly be the focus of the firm. They will have no difficulty attracting the firm's attention. Some however may be small and important from the perspective that the capability is just as pertinent to the firm, but don’t attract the attention. Nonetheless, these capabilities need to be included in the day to day of each and every operation of your firm, and as such need to be documented in the “Dynamic Capabilities Interface.” How does the firm manage the various projects within a firm to ensure that the money spent and all of the projects are documented within the capabilities of the firm?

Within the Research & Capabilities module we will have the “Research Budget Allocation Interface". This will help deal with innovation costs and the volume of projects the firm is involved in. If an AFE is raised with some element of the costs including the partnership doing some joint research or innovative activity, this activity will be populated in the “Research Budget Allocation Interface.” Or, if a Work Order is raised to conduct some study, that too will be populated into the “Research Budget Allocation Interface.” The purpose of this interface is to ensure that there is no duplication of the research undertaken, if there is then the costs could be saved. It also documents the project's ongoing status. And ensure that the project results are documented within the “Dynamic Capabilities Interface” of the Research & Capabilities module.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Although this may appear like a simple interface, in the right hands it would be a very powerful tool. It would provide a global view of the firm's activities in innovation and demonstrate the overall progress that the firm was making. It would also show where unrelated innovations might occur. Lastly it might show where some opportunities exist. Professor Dosi (1988) states

Clearly, the commitment of resources by profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives. Are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both? Jacob Schmookler in his classic work, argued that the serendipity and universality of modern science provide a wide and intersectoral indifferent pool of opportunities that are exploited to different degrees in each economic activity according to differential economic incentives, and in particular, to different patterns of demand growth (Schmookler 1966).

The “Research Budget Allocation Interface” would provide a window on both the “different incentive structures and different opportunities" within the producer firm. Making for a powerful tool for the innovative oil & gas producers.