OCI Research & Capabilities, Part IV

 Key Factors in Innovation, a Scenario

Review of Professor Giovanni Dosi’s “key factors” of innovation in the context of a scenario we used recently during our review of the Partnership Accounting module. Recall that we had a number of producers who joined together through the Work Order system to participate in an engineering study. This Work Order system was discussed in the Partnership Accounting module to highlight the way it eliminated logistical accounting difficulties that impeded the development of these working groups. Working groups add to the producer's capabilities and are managed in the Research & Capabilities module of the Preliminary Specification.

Upon completion of the working group the producer firm will have a unit of knowledge that has been developed from the efforts of the group. Professor Carliss Baldwin provides clarity here with her “knowledge begets capabilities, and capabilities beget action” comment. What is needed is for the producer to have a central repository for all of the implicit knowledge of the producer. This knowledge is accumulated through the various working groups and other “key factors” in which they acquire knowledge. The “Dynamic Capabilities Interface” in the Research & Capabilities module will detail the source of the knowledge, the key factors, how it was acquired, and what it involves. This will be captured in a wiki-style interface. This interface will also be sorted by geological zone and other technical criteria. It will be populated into the Knowledge & Learning module for deployment to the appropriate or relevant Joint Operating Committees when required. The first step in developing, deploying, and effectively managing a company's and Joint Operating Committee capabilities is to organize them.

Within any module of the People, Ideas & Objects application the user will be able to right click their mouse and select from a contextual menu of actions. These actions will include the ability to create a Work Order, raise an AFE, prepare a Joint Venture Agreement etc. If the user can take action on the capabilities listed within the “Dynamic Capabilities Interface” then we have achieved the process that Professor Baldwin states is necessary. Having this information centralized for the producer, and the specific information for the Joint Operating Committee helps to concentrate the knowledge in one location within the firm. There will be no confusion as to where to find the answer to a specific question. When the user finds what they are looking for, the details of the knowledge or capability should be detailed enough to define a process for how it is successfully implemented. Understanding that knowledge is never static, the ability to update the information with lessons learned would be part of the user's responsibility. Updates from the Lessons Learned Interface are also done for the Joint Operating Committee in the Knowledge & Learning module.

The ability to annotate and reference the material within the “Dynamic Capabilities Interface” would render this more usable. In addition, the tools available today, such as search, make the information more valuable. What is truly valuable are the types of tools available tomorrow. We are beginning to see some of these tools enter the consumer space with the iPhone’s SIRI virtual assistant or Chat GTP. The first step however will be to acquire knowledge and make it actionable through the ERP system of People, Ideas & Objects. We can add these tools as they become available in the future.

If documentation was all that we did with the capabilities aspect of the Research & Capabilities module of the Preliminary Specification, within the “Dynamic Capabilities Interface” then we would waste a lot of people’s time. The purpose of documenting capabilities is to deploy them. This brings in the “Planning & Deployment Interface” which is the topic of discussion here.

Ideally I see a firm's ability to deploy its capabilities as a key competitive advantage. The organization of that competitive advantage will be the focus of the firm's management. It should also be noted that there is a similar “Planning & Deployment Interface” in the Knowledge & Learning module for the Joint Operating Committee. The analogy that I would like to use and have developed in the Preliminary Specification is directly applicable to American football. Where the coach can call in a play and communicate that to the team to execute that play. This is based on their known capabilities, roles and skills on the team. I want to draw a direct analogy for the person who plans and calls upon the capabilities of the firm or Joint Operating Committee in the “Planning & Deployment Interface.”

The Industrial Command & Control method of organizing dynamic Joint Operating Committee resources in the Preliminary Specification. Understands that the role of the individual, as designated in that structure, becomes a critical part of the planning and deployment of the firm or Joint Operating Committee capabilities. There can only be one Quarterback on the team, and you need many Down Linemen. Filling the various roles to take the actions needed is as critical as the capabilities themselves. Industrial Command & Control (ICC) imposes a chain of command across the multiple producers represented in the Joint Operating Committee, or firm. This enables them to operate with the pooled resources and capabilities of these firms.

The “Planning & Deployment Interface'' will take the three critical aspects of the firm / Joint Operating Committee and arrange them within a web-like interface for the user to develop the actions they desire. Having the right people represented in the Industrial Command & Control, having the right capabilities, and having an appropriate time frame are all critical factors to consider. Having chosen the personnel to execute the action you envision, their available time becomes known to the interface from each individual's calendar. Selecting the capabilities from the Research & Capabilities, or Knowledge & Learning, module is then drawn into the interface. From there the user can “process” the information and based on the variables given determine when the work can be completed. Then they may select additional resources to fill deficiencies in areas where capabilities suggest they need more resources, conduct more studies to determine certain unknowns or proceed with the project.

Upon proceeding with the project the people who were selected by the user in the “Planning & Deployment Interface” are given the job to do. They are provided with an explicit understanding of what and how and who will be involved in completing the project. Not that it should be a simple matter of execution, but they should at this time have everything provided within the “package” they receive from the “Planning & Deployment Interface.” Application of their tacit knowledge and their "skills, knowledge, experience and ideas" to complete the program. That package should be comprehensive and detailed such that it is all that they need to focus on the successful completion of the task. 

The quality of documentation of the capabilities will determine how successful the project will be. If the detail contained in the “Dynamic Capabilities Interface” is rich media-based, detailed and provides the user with a good understanding of what is required then the communication from what is expected and what is understood is not at variance. People will be able to see clearly what the project is about and how they are expected to complete the task.

The innovative and capable oil & gas producer needs the ability to document and deploy their capabilities efficiently and effectively. Here is a way in which the deployment is planned and executed with an understanding or “meeting of minds" based on the quality of the documentation in the “Dynamic Capabilities Interface.” It is not just a repository of data that might be used someday. But a living source of quality capabilities which the producer or Joint Operating Committee depends on to ensure the execution of their projects is successful.

Whoever implements the project through the “Planning & Deployment Interface” will select the various capabilities documents from the “Dynamic Capabilities Interface.” When they do this they can ensure that the capabilities they choose reflect the “final” status necessary for the project. If there is further documentation to be completed or more work is needed to advance the state of the capabilities selected, these attributes can be added. This would keep the documentation up to date with the state of capability within the firm or the Joint Operating Committee. Recipients of the information, once the “Planning & Deployment Interface” was processed, could compare the capabilities information they received with the previous version they viewed. They could also determine quickly how the capability has changed from that previous version. This could be done by way of differing colored text or some other means. Then they could assess what impact and consideration that change would have on their portion of the task. They could also assess if they had any issues as a result. Please review the Blockchain Module for implementation of the technical infrastructure necessary for this feature. Updates to the capability will be written to an additional "block" on the chain. Ensuring differentiation between updates, their authors, etc. can be determined.

As with the information regarding the different capabilities, the resource selection would include any updated information regarding the individual's capabilities. If the completion of a course or program, the successful implementation of other capabilities etc. Would be available to the user who initiates the “Planning & Deployment Interface.” This information could be incredibly detailed and include the contributions the individual made to the “Lessons Learned Interface” in both the Knowledge & Learning, and Research & Capabilities modules. Their performance reviews from previous tasks and any comments about their roles in previous assignments and projects. This information should be available for in-house staff, resources pooled through the various Joint Operating Committees that a firm participates in, and any other vendors or contractors that the firm or Joint Operating Committee may have hired to work on the task. This will be at the discretion of the producer firm.

The timing of the project and its completion are somewhat flexible based on the number of resources put into the project. This makes for a bit of a paradox, as if the team gets too large you lose the cohesiveness the team needs to rely upon. Understanding that the people resourced for these tasks are probably assigned to multiple projects, and their participation is constrained by these limits. Therefore, the timeline may exceed the target.

Lastly, the "Planning & Deployment Interface" has focused on the known unknowns. There are known unknowns and unknown unknowns. After the project interface has been processed and assigned, it is the responsibility of the team members to document these, if possible. Recall that Professor Dosi states

In very general terms, technological innovation involves or is the solution of problems." Dosi defines this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problem automatically. Solutions to technological problems involve the use of information derived from experience and formal knowledge. p. 1125, 1126

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

A section of the interface should be set aside where the team can collaborate on these points and provide innovative solutions for the producer or Joint Operating Committee.

It is therefore asked specifically, how can the knowledge, information and capability of oil & gas firms solve technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? I think the development of the “Planning & Deployment Interface” as described here would provide the producer and Joint Operating Committee with these sought-after abilities.

OCI Research & Capabilities, Part III

 Professor Giovanni Dosi on Innovation

Introduction

It is through Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” that we will view the Research & Capabilities module. One of our objectives in the module is to establish a clear division of labor between computers and humans. Formulating ideas, making decisions and collaborating are captured in this module. Leaving the mundane transaction, data management, storage and processing tasks to computers. This I think is an appropriate division of labor in terms of the dynamic, innovative, accountable and profitable oil & gas producer. There is also a strong division of labor and specialization in producer firms' technical resources. This is done to mitigate resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois' comment that we are "moving knowledge to those with decision rights” as being the primary process that the Research & Capabilities module captures. And, that a user can right click at any time within the module and initiate any standard ERP action. This includes initiating a Work Order or AFE on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

Professor Giovanni Dosi's paper discusses innovation's role in the market economy. It assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The investment in science and technologies is with the implicit expectation of a return on these investments. As a consequence, the firm also gains an additional structural competitive advantage by decreasing the cost and/or increasing capabilities of their products beyond those of its competitors. Professor Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation:”

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. p. 1121 

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts for their technical resources. This is with the implicit assumption that they would generate a return on the investment in the firm's capabilities. We also discussed the differences between what is acceptable practice today (with overhead allowances) and the different positions some might take on the topic. However, I think Professor Dosi’s point here should be taken as the key criteria for the industry's direction on the issue. You are “investing to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond that of the competition." The ability to sustain the state of the art oil & gas capabilities on the basis of what a producer earns from oil & gas production is a direct result of those capabilities, but also their land & asset base. However, shouldn’t those capabilities also earn a return on investment above and beyond oil & gas production?

It’s only reasonable that the producer firm approaches the operation of some technically difficult task with the appropriate capabilities. Innovation requires that producer capabilities be the base on which innovations can be leveraged. Professor Dosi's research identifies innovation's key factors. We will discuss these key factors and how they are integrated within the Research & Capabilities and other modules of the Preliminary Specification.

One housekeeping duty is to note that there is a “Capabilities & Commitments” interface in the Petroleum Lease Marketplace module. Which documents the contractual obligations that the producer is required to meet in terms of commitments to their various Joint Operating Committees that the producer is a participant in. And to leverage the capabilities of working interest partners who are likewise committed. This interface is placed in the Petroleum Lease Marketplace module to document contractual legal obligations. This interface will also be populated in the Research & Capabilities module.

Innovations Two Major Issues

We will now deal with the first of two major innovation issues, Professor 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 with each firm and within the industry of which they complete. p. 1121

What you're capable of depends on what has been purposely developed within your firm. These capabilities have evolved over time and can be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more efficient through a variety of different means. The firm's ability to develop these capabilities is limited by what the oil & gas service industry can provide. If they have only x number of rigs available, only so much work will be done. If the rigs can only drill shallow wells, the producer's science will be constrained by the service industry's capabilities. Furthermore, if the producer is a state of the art earth science and engineering wonder in a sea of producers who are barely able to successfully drill shallow wells, then the state of the art producer will be reduced to the same level as the others. The marketplace for producers in terms of their technical resources and capabilities has an enabling and constraining limit on what producers can do. Innovation is leveraged from this base.

The question therefore becomes how do we broaden the base of not only the producer but the service and greater oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog-like interface where members of both industries can post ideas of products and services that might be of interest to the producer firms. Producers may then support these ideas with funding and product direction to develop them into a product or service. This will enhance the capabilities of the producers. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from each producer's lessons learned. The "Gap Filling Interface" allows producers to anonymously identify gaps in service industry offerings. Filling gaps is the process of expanding specialization and division of labor. Offering new products and services based on a further defined division of labor. Or how the Research & Capabilities interface organizes information by geological zone, or other criteria. This is so that only those pertinent zones are populated for the individual Joint Operating Committees through the Knowledge & Learning module.

In the Partnership Accounting module we discussed the accounting attributes of the Work Order system in establishing working groups among industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers or other parties. The ability to form these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how producers will develop their capabilities and innovativeness. Since the costs and the results are shared the industry as a whole advances. Leaving the producer open to further innovations. I see this as an area that will increase in activity. This is if the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting module Work Order does.

The second major issue Professor Giovanni Dosi defines is as follows.

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

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 etc.

Again these only make sense in terms of being critical to enabling the producer firm's capabilities and innovations. The question becomes how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors and issues to enhance innovation?

The first key factor that I want to address is the “supply of technical capabilities, skills, engineers etc.” That raising the quantity and quality of the earth science and engineering technical resources of the industry is possibly one of the three top issues of the industry. How does the Research & Capabilities module increase the supply of these resources? As we've stated here many times, the need to rely on the standard economic tools of an enhanced division of labor and specialization are the keys to solving this problem.

The issue is that these technical resources are limited for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources is constrained. Add to that the volume of earth science and engineering effort in each barrel of oil increases as time passes. Using specialization and the division of labor we can achieve higher throughput from the same resource base. That is the basis of the solution used in the Preliminary Specifications Research & Capabilities module.

If we look at the industry structure today, producers are building comprehensive capabilities needed to address every possible contingency within their organization. Earth science and engineering capabilities are overbuilt and substantial internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable industry wide. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee can pool their specialized technical resources to meet the properties' technical demands. Eliminates the overbuilding of capacities necessary to attain an operatorship classification within each producer firm, and enables producers to deploy this formerly unused and unusable surplus capacity to their chosen specialized capability.

Each producer needs to specialize in some high level earth science and engineering discipline. Today, covering the global scope of technical requirements is a massive undertaking. The future will require further specialization and division of labor to be undertaken in these scientific disciplines. Without choosing to specialize and using the pooling concept, the producer firms will be faced with such an onerous task as covering the global scope of these technical requirements as to be unprofitable. With the “pooling” approach People, Ideas & Objects has taken in the Research & Capabilities module. It is deemed necessary to avoid excess demand on diminishing resources. Demand is increasing due to enhanced exploration and production techniques needed for each incremental barrel of oil produced. An overall broadening of the science and technology necessary for exploration and production. And the objective of energy independence in North America.

That’s the first element of the division of labor and specialization inherent in the Preliminary Specification. The second element deals directly with the ability to organize technical resources in a manner that deals with how geology and engineering is done in the industry. With a dedicated software development capability such as People, Ideas & Objects Preliminary Specification, the ability to organize business service based offerings to meet the demands of the industry's earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the industry's capacity throughput from the same volume of resources. This will also enhance the quality of resources.

Regarding "facilities for the communication of knowledge” as a key factor in innovation. The Research & Capabilities and the Knowledge & Learning modules are collaborative information systems that are “industry-wide” in their implementation. A review of the many interfaces mentioned here shows that the development and sharing of knowledge, which are critical for the development of the individual producer's capabilities and innovativeness, are systemic throughout this module. Combining their highly specialized capabilities with their partners in their Joint Operating Committees. It is the individual producers' distinct competitive advantage to augment their capabilities by coordinating the markets earth science & engineering capabilities and apply these to their land & asset base.

Lastly we need to develop an interface in the Research & Capabilities module that allows the producer to interact with the academic and research areas of the earth science and engineering disciplines. 

We now want to document the last of the key factors that Professor Giovanni Dosi states are necessary to support innovation. And then begin a discussion on these key factors and how they are implemented in the Research & Capabilities module of the Preliminary Specification.

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

The conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, particularly in their on interfirm 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 policy. (e.g., tax codes, patent laws, industrial policies, public procurement.) p.1121

It's only logical that innovation will spring from advanced markets with labor mobility, legal protection and capital markets. It's one thing to have these facilities provided, but it's another to have them aligned within the organization. With People, Ideas & Objects we align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment permits the producer firm and the Joint Operating Committee to attain enhanced speed, innovation, accountability and profitability as a result. There are six additional Organizational Constructs that work to establish an appropriate culture for the industry to prosper. The seven Organizational Constructs include the Joint Operating Committee, Specialization and Division of Labor, Innovation, Markets, Professor Paul Romer's non-rival costs, Intellectual Property and Information Technology.

These key factors reflect that an innovative oil & gas producer must first be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the general market makeup. A key objective of the Research & Capabilities module is for the producer to achieve their greatest potential. Each producer will be able to demonstrate their own specific capabilities, and that level will depend on these key factors. Not all producers are built the same. Therefore, state of the art capabilities and highly innovative practices are not at risk of being copied by other producers. Therefore a producer's willingness to participate in the collaborative environment created in the Research & Capabilities module would not risk any proprietary competitive advantage. On the contrary, based on these key factors, non-participation would limit their competitive advantage.

This environment is the polar opposite of how the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk and regulatory compliance. And I am not suggesting a different posture be taken in terms of the industry's risk profile. Only that a more open and collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. And to begin the move to that next level of performance requires we build software that defines and supports the dynamic, innovative, accountable and profitable oil & gas producer. This is the People, Ideas & Objects Preliminary Specification.

Sources, Procedures, and Microeconomic Effects of Innovation, Part IV

Let’s shift our focus away from the madness occuring in oil and gas for a moment. It is a remarkable issue the producers resistance to rational thinking, if that is what I have and am doing with the Preliminary Specification. Producers will willingly slaughter themselves before they’ll consider taking any corrective action. They don’t even identify they have a problem. The price of oil and gas is the price of oil and gas. There’s nothing they can do about it. I suggest they stop financially destroying themselves by shutting in any unprofitable production and only produce profitable production. However People, Ideas & Objects are the odd man out and sit in absolute amazement at today’s actions. We continue with the next section of the paper “Sources, Procedures, and Microeconomic Effects of Innovation” by Professor Giovanni Dosi. In today’s post he defines the elements necessary for an industry and producer to achieve innovativeness.

Typically, the search, development, and adoption of new processes and products in non centrally planned economies are the outcome of the interaction between (a) capabilities and stimuli generated within each firm and within industries and (b) 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; the conditions controlling occupational geographical mobility and / or consumer promptness / resistance to change; market conditions, particularly in the bearing of interfirm competition and on demand growth; financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends, especially in their effects on changes in relative prices of inputs and outputs; public policies (e.g., tax codes, patent laws, industrial policies, public procurement). It is impossible to consider here each of these factors in detail and the survey will focus upon the procedures, determinants, and effects of the innovative efforts of business firms; however, at each step of analysis, I will try to show how those broader factors affect the opportunities, incentives, and capabilities of innovating in different firms and industries.

With this quote I think we can see the structure that is necessary for the oil and gas industry and each of its producers to enhance their innovativeness. I would suggest that these are the areas of competitive differentiation in the future of all industries but most particularly within the oil and gas industry with its earth science and engineering competitive advantages being at the forefront of the producers success. There is no question in my mind that this structure will be necessary to both facilitate and enhance the innovativeness of the producer and industry. What we know today is that organizational structures are both defined and supported by the software that is in use by that organization. If oil and gas wants to enhance their future competitiveness to be innovative then they’ll need to make the changes to the structure of their organizations. Making the changes however is not enough. They must first establish the software that defines and supports the organization on the basis of what Professor Dosi establishes here. And that is what we have done in the defintion of the Preliminary Specification.

How do we continue on in oil and gas without an innovative framework driving our competitiveness? How do the consumers know they’re receiving value from the energy they consume? How do we undertake the significant tasks that are ahead of us? Where the proposed LNG exports by Canada will require so much capital, as well as in other areas. A better business proposition needs to be adopted by industry in order for the investors to return. With a $20 to 40 trillion capital expenditure program, the business proposition needs to be more than just the spending of this money. We certainly cannot continue to just spend money as the basis of competitiveness of today’s industry. The financial devastation of the industry is comprehensive and complete. Yet so much will be needed from it in such a short period of time. The reserves are there and they exist. None of which can be produced profitably and the business has no coherent direction. We have a resistant, abstinent and self serving bureaucracy that believes in magic and myths which will resolve everything on its own. With software taking such a defined role in our lives we have to understand its key implication to business. The producers muddling along and do nothing strategy is doomed. Active management is necessary to proactively deal with these issues and opportunities. Figure out how to deal with them, write the solution into the software in order to enable the changes in the organization to capture them. Spontaneous order can’t occur in a world where software seals the organization in metaphorical cement. When I first published this thinking in August 2003 the bureaucrats knew they’d discovered their gold at the end of the rainbow. If they never changed their software, they’d never be challenged in their franchise. Which is exactly how things have developed.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Sources, Procedures, and Microeconomic Effects of Innovation, Part III

One of the outcomes of the Preliminary Specification was the understanding that innovation can / is a defined and replicable process within organizations and industries. With that understanding we can see that Apple is not that lucky, but that skilled. A purpose built organization with high standards of quality and innovation in the consumer electronics marketplace could be a really valuable firm. It seems so easy when it’s set out as the goal and objective of an organization to undertake the possible and viable task that Apple has achieved. It does eliminate much of the magic and mystery to the story though. It was through Professor Giovanni Dosi paper Sources, Procedures, and Microeconomic Effects of Innovation that we learned this and what is required of an organization and industry in order to enable innovation. In today’s post we’ll begin to get into the detail of those specific requirements of an innovative oil and gas producer. With that we turn to the next quote from Professor Dosi’s paper.

It is not my purpose to review the whole body of innovation-related literature. Rather I limit my discussion to a selected group of (mostly empirical) contributions and focus on the microeconomic nature of innovation upon techniques of production, product characteristics, and patterns of change of industrial structures. The discussion will aim to identify

• The main characteristics of the innovative process, 

• The factors that are conducive to or hinder the development of new processes of production and new products, and

• The processes that determine the selection of particular innovations and their efforts on industrial structures. 

There are two major set of issues here: first, the characterization, in general, of the innovative process, and, second, the interpretation of the factors that for observed differences in the modes of innovative search and in the rates of innovation between different sectors and firms and over time. 

Oil and gas are well known for their claim to be highly innovative. With the recent developments in shale, the deliverability and reserves of oil and gas in North America have been substantially increased. Is this due to the innovations of the producers? Or is it a result of the developments made by the service industry in the areas of coiled tubing and companies such as Packers Plus? When we look critically at the success in the shale era was it as a result of the service industries perseverance in driving their ideas forward through decades in which the producers refused to consider their “new” technologies. Or was it as a result of the producers determined effort to solve the future shortages of oil and gas commodities? Knowing what I know about the difficulties in having the Preliminary Specification discussed and considered. Knowing what I know of the coil tubing providers begging producers for years to try their products. The difficulties that Packers Plus had. The developments made by the service industry are wholly responsible for the innovations that we’ve seen in oil and gas.

Harsh words that will most certainly put more noses out of joint. The fact is the industry refuses to accept anything from a “small” company. It refuses to accept anything from a company that has a technology that they don’t fully understand. And they refuse to accept the Intellectual Property rights of the service industry representative that provided the product or process. They prefer to call the service industry greedy and lazy when the activity level is high and the only field equipment available is scheduled for two years from now. And they expect that payment to the service industry will be made in 18 months when the producer has a difficult time with their cash flow. This is the true “innovative” environment of the oil and gas producer and as we have stated in the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification if this behavior is not corrected it will lead to the financial destruction of the industry, on top of all the other reasons, and it will ensure that only the bureaucrats are truly benefiting as a result of oil and gas exploration and production.

There is nothing further from the current oil and gas industry configuration and culture in terms of what is required from an innovation point of view. Based on the research of Professor Giovanni Dosi significant changes will be required. What I have described here is an ad-hoc approach in which producers cherry-pick the value add from the service industry and wash that Intellectual Property amongst the innovators competitors. All diplomacy aside the producers do not have much time in which to make the changes described in the Preliminary Specification. From an innovation point of view, and from the point of view of profitability. They believe they can continue in an industry where their costs are in the range of $150 and receive barely half of that value in sales on a pre-differential basis. The difference is made up by not recognizing the substantial capital costs involved in a capital intensive industry. Storing those capital costs for decades at a time on the balance sheet as property, plant and equipment. And then adding to those capital costs all of the overhead that they feel they can justify as “capital” in order to “build their balance sheet” that much larger. Meanwhile during the entire process the cash only goes out and rests on the balance sheet as property, plant and equipment where it will be recognized and consequently returned to the producer some decade from now. It is a ludicrous way to run an enterprise, and one that has failed spectacularly. It just doesn’t seem to ever be realized by those that are running the show.

Recently President Trump was promoting the oil and gas industry as the largest producer of energy in the world. He also took the OPEC cartel to task with accusations of stealing money from americans as a result of the high oil prices. Throughout the life of the oil and gas industry. It has only been a handful of years where they’ve received the political support of the american administration. This usually being expressed through a quiet, arms length approach. Having President Trump so supportive of the industry is an anomaly and a treasure that the industry needs to better manage than they are today. Should the industry be found to be unprofitable and incapable of supporting its own operations as a result of not charging enough for their products. It may be seen by President Trump and the american people as a fundamental betrayal of the rosy stories and positions that have been promoted in the past decades by these producers. Making it very difficult for any future administration to believe the industry but also to take anything but the safer and more secure confrontational and adversarial positions against the industry that we’re all familiar with. Then again, I am talking about credibility and what do oil and gas bureaucrats know about credibility and integrity?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Sources, Procedures, and Microeconomic Effects of Innovation, Part II

Readers should strap themselves in we’ll be travelling at a much faster pace than we did on our first post of this series. Today we’ll be reviewing two paragraphs of Professor Giovanni Dosi’s paper Sources, Procedures, and Microeconomic Effects of Innovation. Bringing the sum total of our review so far to three paragraphs! The richness of the content of this paper is astounding. It was also very hard work to get through. Which is probably why I went through the entire document a number of times. Each iteration building on the knowledge gained in the previous pass. As with yesterday we have a broad scope of understanding captured in a small number of words.

It is the purpose of this essay to analyze the processes leading from notional technological opportunities to actual innovative efforts and, finally, to changes in the structures and performance of industries. 

Thus, I shall discuss the source of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search and the nature of the incentives driving private agents to commit themselves to innovation. pp 1120 - 1121

I wonder why it is that Professor Dosi raises the point about the “changes in the structure and performance of industries.” Just as the oil and gas industry and producer firm must reorganize themselves to enable profitability they also need to structure themselves to facilitate and enable the innovations in the sciences and technologies that make up the industry. Both profitability and innovation can be achieved through the decentralized production models price maker strategy. Where the service providers are created from the producers current administrative and accounting resources. I think this is intuitive, or it should be. Yet the battle rages between the producers vs. People, Ideas & Objects. Is it truly worth the destruction that is being realized in oil and gas to remain opposed to the changes required in the Preliminary Specification?

It is at this point that we meet the ultimate academic argument between Hayek’s Spontaneous Order, Schumpeter’s Creative Destruction and Giddens Structuration Theory. And we have chosen the best features of each one to fit our arguments throughout the Preliminary Specification. I consider that creative license. The weight of our argument however would go to Giddens Structuration Theory and most specifically to Professor Wanda Orlikowski’s Structuration Model of Technology.

Structurational studies of technology and organizations have been highly influenced by the social studies of technology. Initially arguing for a view of the "duality of technology," Orlikowski went on to argue for a practice-based understanding of the recursive interaction between people and technologies over time. Orlikowski (2000) argues that emergent structures offer a more generative view of technology use, suggesting that users do not so much appropriate technologies as they enact particular technologies-in-practice with them. The ongoing enactment of technologies-in-practice either reproduce existing structural conditions or they produce changes that may lead to structural transformation.

People, Ideas & Objects believes based on our understanding of all of these theories that software defines and supports the organization. It not only enables the “structure and performance of industries” as Dosi suggests, but in the case of oil and gas today, is a constraint on those structures and diminishes the performance of the industry and producer due to the inability to change the software as the industry and producer changes. This is why People, Ideas & Objects offer the user community, our service providers and the software development capabilities that are provided through Oracle developers as the means to not only accommodate the necessary changes but in certain instances to drive the changes to increase the profitable and innovative performances of the producer and industry.

With respect to that third paragraph that we quote from Professor Dosi’s paper. The oil and gas industry is currently configured in such a way that the oil and gas producer does everything for itself other than the field operations. Having a geographically diverse operating theater makes it impractical to maintain their own service industry operations, although some still do. In terms of control, all aspects of the producers operations, governance and administration are under the producers direction. In the 1950’s this was not only possible but probably ideal. There is probably no one from that era to check with regarding the validity of that statement. In the 21st century it is ludicrous to think that a firm can concentrate their entire domain of operations under one roof. It was through the research that we conducted of Professor Richard Langlois that we were able to determine that in the battle between firms and markets, markets would be the preferred choice in the 21st century. In yesterday’s post we mentioned the performance measurement in the Preliminary Specification of Revenue Per Employee. It is through a greater involvement of the market that a profitable and innovative producer will be able to positively increase their Revenue Per Employee trajectory.

The impetus of the Preliminary Specification is for the producer to produce all of their production profitably. Rarely would that involve their entire production profile. To attain the highest level of profitability the producer will seek to produce profitability throughout their production profile in order to maximize their profitability. That requires and demands that the producer innovate on the earth science and engineering capabilities that they’ve developed and deployed on their properties. To expand the sciences of geology and engineering is the frontier where they can expand their organization further with higher production volumes and profitability due to the innovations they deploy. At the same time striking an equally equitable balance between the consumers current consumption of the lowest cost, yet profitable oil and gas production, and the commercial conservation of energy for future generations.

I want to take a moment to comment on my concern for the financial health of the producers. In the second quarter I was surprised at the difficulties being experienced by our sample of 23 producers. I was expecting a very difficult second quarter to be reported and ended up thinking that there is a serious degradation of the financial foundation of the industry undergoing at that time. One based on the fact that, as we’ve stated here many times before, the only source of cash is production and most particularly new production. This was creating what I saw as enormous pressure on producers to increase production at all costs in order to increase their available cash. As we discussed in the second quarter the deterioration of cash and working capital was epic. In the third quarter I think it will have accelerated further as a result of this chronic overproduction creating differentials, particularly in Canada and to a lesser extent in Texas, that are higher than the commodity prices being realized. When over half of your revenue is going to be gone from the late third quarter and better part of the fourth quarter, this industry will have its day of reckoning before this year ends. The only choice is for the hamster to run faster…

People, Ideas & Objects puts forward our Preliminary Specification as the solution to the issues in the industry. It is designed to deal with the problems that are causing the producers so much financial distress. We believe that if the industry would adopt the Preliminary Specification investors and bankers could see a profitable and innovative future that would be of interest to them from an investment point of view. And may be motivated to carry the producers across to the point in time where the decentralized production models price maker strategy enables all production in North America to always be produced profitably.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Sources, Procedures, and Microeconomic Effects of Innovation, Part I

Lately we’ve noted some of the research that we reviewed of Professor Richard Langlois from the University of Connecticut. Research that we conducted during the writing of the Preliminary Specification. He was a rich resource in terms of determining the needs of the dynamic, innovative, accountable and profitable oil and gas producer. In terms of innovation we also had the work of Professor Giovanni Dosi, who at the time of this particular paper was with the University of Sussex and the University of Rome, and provides one of the key documents on the topic of innovation. This paper was published in September 1988 and is entitled “Sources, Procedures, and Microeconomic Effects of Innovation.” If you have access to a resource for the download of papers I highly recommend adding this paper to your library. You can download it here from JSTOR for $10 as well. I will caution my readers that I went through a lot of papers during the research for the Preliminary Specification. This paper generated significant volumes of this blogs text, contribution to the Preliminary Specification and is very rich in content. It is also unquestionably one of the most difficult papers that I’ve had to review in a comprehensive manner. Reading it briefly or skimming it may not be worthwhile as a result. What I think will be worthwhile is that we include a review of Professor Giovanni Dosi and Professor Richard Langlois on this blog to update everyone on some of the basis of innovation and other aspects of the Preliminary Specification that we’ve learned through these two researchers.

The first paragraph of this paper frames the purpose of innovation in oil and gas in a constructive manner. I immediately am flooded with ideas regarding the impact to the industry, the producer firm and supporting service and other industries and sub-industries.

This essay concerns the determinants and effects of innovative activities in contemporary market economies. In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations. In turn, the success of some agents in introducing or imitating new products and production processes changes their production costs, their market competitiveness and, ultimately, is part of the evolution of the industries affected by the innovations. p 1120 

The Preliminary Specification was published in its final edited form in December 2013. In it we speak of imitation and the distribution of laggards and leaders within the oil and gas industry. We’ve even created a factor for comparison purposes and to determine the position that a producer would find itself within the industry. This factor is Revenue Per Employee that we generate within the Preliminary Specification. What we found is there is a large disparity between the values of a laggard and a leader in terms of Revenue Per Employee, and how the laggard firm would find it difficult to make the changes necessary to affect an upward trajectory of Revenue Per Employee. It is with this understanding of the Preliminary Specification that I find this first paragraph of the Dosi paper to generate the most thought around the idea of “imitation.”

A lot has happened in the industry since the publication of the Preliminary Specification. Yet nothing has changed other than the addition of the Blockchain Module. I think it will remain as timely throughout its intended 25 year usable life. When we look at imitation in oil and gas we have to ask ourselves what role it’ll take in the future? And although there were laggards present in the industry in 2013, will there be room for them in the future? Will they be able to rely on the capabilities that have been developed by others and “make it up as they go?” To be candid I don’t think so. The reliance on the leaders abilities and capabilities to be innovative and to move the science and technologies of oil and gas forward will be one in the same with that producers production profile. Most particularly I think is the heart of that quotation of Professor Dosi’s that puts into context that the role of laggards will be very difficult.

In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

What is it that a laggard will be imitating, or be able to imitate in the future? When the development and deployment of ideas to the various Joint Operating Committees is done through the Research & Capabilities and Knowledge & Learning modules as we recently noted. At a velocity and throughput of an exponential volume. These will be the basis of the producers competitive advantage. The application and development of their distinct competitive advantages in the earth science and engineering capabilities upon their land and asset base. I see this as a far different producer than the one that exists today, as it has become a far different oil and gas industry. I wonder how the dynamic, innovative, accountable and profitable producer will come about? Muddling through as the strategy, and doing nothing as the operating procedure, which are the producers current position which has brought us to this state of financial crisis. Will the producers current strategic and operating position stumble upon this means to develop and deploy its capabilities on its own? Just as they’ll stumble upon the methodology for becoming the profitable firm society needs them to be. I think we should bank on it happening, just based on luck, what about you? As a matter of fact, right now I can see the software for this necessary industry infrastructure being written by itself with no human involvement and no producer cash! It’s a miracle!

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Professor Giovanni Dosi on Innovation Part VI

We now soar with the eagles as we apply the overarching scope of the application of innovation to the oil and gas producer. Our discussion takes the summary of Professor Giovanni Dosi’s research and applies it to the oil and gas industry. To show the potential of what would be the effect of developing the People, Ideas & Objects ERP software.

Professor Giovanni Dosi asserts that the makeup of industries and companies is attributable not only to the endogenous force of competition. Innovation and imitation also make up the fundamental structure of an industry. “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 and gas producer today, as reflected in:

• The structure of demand.

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

• 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 that is possible today. The industrial mechanization of the past 100 years combined with the prospective mechanization of intellectual pursuits combine to markedly appreciate the value of human life. The availability of energy 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 and gas industry is moving closer to its 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 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 is capable of achieving. By using the “Planning & Deployment Interface” either through the Research & Capabilities or Knowledge & Learning module, 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.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part V

When we consider what a producers capabilities would look like, such as those that are listed in the “Dynamic Capabilities Interface” of the Research & Capabilities module of the Preliminary Specification. Much would depend on the type of producer that is represented. As one could imagine a large firm such as Exxon would have a vast library of capabilities, and a small start up would be limited to a small database in terms of what they were able to achieve.

Some might assume that the majority of the innovation in the oil and gas industry is developed within the larger producers. However, I think that is generally considered to be untrue. The small and start up oil and gas firms along with the intermediate producers are probably responsible for the majority of the 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.

• First, although “there appears to be roughly a log linear relation within industries between firm size and R & D expenditures,” upon closer investigation, “estimates show roughly non-decreasing return of innovative process to firm size.” This is probably attributable to the fact that very large and very small firms conduct most R & D. p. 1151
• Second, although the expenditures in R & D incurred by large firms are impressive from a total expenditure perspective, the aggregate expenditures of small firms on a global basis becomes far greater in aggregate than the large business. p. 1151
• Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size. p. 1152

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by the small oil and gas producers ability to punch above their weight. In the software development business, SAP does significant generic research in the software development arena. However, they do very little in terms of specific oil and gas research. On the other end of the scale People, Ideas & Objects have completed substantial oil and gas specific research and have commenced the development of oil and 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 a number of usable innovations. And it may be the lack of financial resources that motivate the smaller firms to innovative problem solving on the other end.

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

• Statistical proxies cannot capture aspects of technical change based on informal learning. p. 1152
• Secondly, “differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms. p. 1152
• Thirdly, many firms are expending significant research dollars in keeping up with other firms innovations.  p. 1152

Or in summary, proof that money is not necessarily a determinant of innovative success and that all producers need to be represented in an innovative oil and 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 are using the factor in many of the interfaces, and I am only highlighting it here to show how the Research & Capabilities module influences the elements that make up the calculation of revenue per employee. Recall in the other modules that there are large variances in the factor between producers. These variances show that there is a large asymmetry between the 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 competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the participants of the industry. The ability of laggard companies to improve their competitive position helps to form new positions within their industries. These laggard companies are generally able to move further quicker through their imitation of leading companies. However, the primary differentiating component of competition based on innovation is attributable to the innovative capability of the firm.  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 these 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 progressively diminished through the application of Information Technology during the 2000’s.

There is a determining paradox for the ability to innovate based on imitation or on the basis of strict Research and Development. Companies can copy others innovations in industries with minimal asymmetry, (where competitors are all the same). Whereas industries that are asymmetric (like oil and gas) or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development.

This is why the focus on capabilities is critical to the success of the oil and gas concern. They are able to differentiate themselves by research and development and focusing on 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 who they are needed. This can be done without the concern that they are exposed or risked to potential competitors through the Joint Operating Committee. It should be clear through this analysis that those that would attempt to copy others capabilities will be expending extensive resources to do so, as much or even more then it would cost to develop the capabilities on their own. However, those that chose to copy will remain static within their competitive position within the industry. Its just not that easy to copy someone else, and it's not that valuable to their firm. When markets such as oil and gas are asymmetric, Research & Development are the ways in which to differentiate capabilities and build an innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part IV

Research Into the Underlying Sciences

Our discussion of the Research & Capabilities “Research Budget Allocation Interface” offered the innovative oil and gas producer the opportunity to control the costs of the research and innovation conducted within their firm. We know from Professor Giovanni Dosi that businesses commit to innovation as a result of both the exogenous scientific factors and endogenous accumulated capabilities developed by their firms. We have discussed in fairly good detail how the capabilities are handled in the Research & Capabilities module of the Preliminary Specification. I want to continue to discuss how the research end of the module is managed.

With the “Research Budget Allocation Interface” we are able to provide a global view of the capabilities that the firm have 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 that is being undertaken in the scientific arenas that enable the producer to “commit to innovation as a result of exogenous scientific factors.”

It might be important to quickly recall the major processes that are being managed in the Research & Capabilities module. We have the “Ideas Marketplace Blog” providing the environment where the service industry is actively developing new and innovative products and services with input from the producers. We have the “Dynamic Capabilities Interface” where the firm is documenting what it is capable of and 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, 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 important qualifications.

• Science and Technology are self-fulfilling in their developments.
• 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, subsequently applied, and that often have 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 that drive the technology or science, such as (the military) (p. 1137)
• The selection criteria of markets and or techno-economic requirements of early users. (p. 1137) (NASA, Pentagon the FDA and Nuclear Reactors for the Navy.)
• Trial and error associated with the Schumpterian entrepreneurship.

There is little doubt in my mind that we need an interface here. An interface that is similar to the “Research Budget Allocation Interface” would be appropriate. And maybe we only need to establish a second “page” within that interface. One for the internal or endogenous budget items and one for the exogenous budget items. The key here is to note that the greatest value is attained in the earlier stages.

Innovating on the Science

I want to continue on with our discussion of the “Research Budget Allocation Interface” and the two “pages” format. Recall that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. What I want to discuss is the process that the user of this interface will be involved in in documenting the capabilities from the research that is being conducted within the firm and the greater scientific community. By way of the football analogy that 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 similar 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 become innovations that populate the “Dynamic Capabilities Interface” which in turn populate the various Joint Operating Committees. Professor Dosi (1988) continues to assert that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacitness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific.” Secondly, 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.” This is further defined by the technological and scientific capabilities, and “the 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.

Recently we also learned of the difficulty for a firm to copy another firm's ideas or capabilities provides little to no value. On the contrary the effort to copy anothers capabilities is as potentially difficult as building their own unique capabilities. We now learn that innovation is dependent on the technology that supports the firm. That is the technology both enables and / or constrains the innovations of the producer. Therefore copying capabilities, without a foundation or base of technology and capabilities to support what is being copied is useless. And if you have the base then copying would not be productive or motivating.

Professor Dosi notes “New technology 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 that a producer has includes the ERP systems used within the organization. When the business is a science, as it is in oil and gas, it would be in the producers interest to remain open and flexible in both its scientific and business approach. This is the strategic position that a producer would be capable of maintaining with People, Ideas & Objects Preliminary Specification.

I now want to highlight the speed at which a producer firm is able to implement innovations. From the point in time of 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 approved and authorized processes in terms of what innovation they should use, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use.

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 day to day of these studies and research are monitored in the “Research Budget Allocation Interface” which also has a page that monitors the scientific communities research. When these studies and research are concluded and capabilities are enhanced they are added to the “Dynamic Capabilities Interface” of the Research & Capabilities module where they are populated with all of the information necessary to document and implement the capability. We have drawn a football analogy here to 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 attribute) will therefore have access to xyz capabilities in the “Dynamic Capabilities Interface.”

The key limiting determinant 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 people within the Joint Operating Committee are doing two things. Making operational decisions and executing the operations. They are not field testing experiments as lab rats. It's important that this distinction be made and the proper documentation be handed off from the research and study to those that will execute it. As once the capability is documented, it will be immediately available to be executed the next time that the operation is conducted anywhere it is pertinent within the producer firms Joint Operating Committees. We will also have more to discuss on this point in the Knowledge & Learning module.

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

• 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

This brings to mind that the Research & Capabilities module, with the complexity of processes as we detailed here. Would be deficient from the point of view of having any feedback from the Joint Operating Committees. Particularly from 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 the innovation that occurs within the producer firm. Having windows on the research that is developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and lets not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the state of affairs in the service industry. Theirs will be a rich medium of information of what is happening in the innovative oil and 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. There they will have these capabilities available to the members of the JOC’s who 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, in which they studied “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, (f) superior sales and service efforts.” Professor Dosi (1988) observed, “that lead times and learning curves are relatively more effective ways of protecting process innovations, and patents a more effective way to protect product innovations.” Dosi concludes. “Finally, there appears to be quite significant inter-industrial variance in the importance of the various ways of protecting innovations and in the overall degrees of appropriability.” (p. 1139)

Oil and gas producers are focused on process innovations which Dosi observed “that lead times and learning curves are relatively more effective ways of protecting them.” Which brings up a very valid point. Assume that one of the capabilities that was published through the Knowledge & Learning module was the capability to fracture shale. Just because it is published doesn't mean that it can be copied. The “team” has practiced and built the capability from previous experience and “learning curves” and that is how the capability exists. Just because a football team sees the design of other teams plays does not mean that they will be able to implement the same play. They will have to work at building the right talent and practice to implement the capabilities necessary to execute the capability before they can successfully complete it. The same would be the situation for anyone observing another producers capabilities in a Joint Operating Committee.

Professor Dosi notes that Levin states that the control of complementary technologies becomes a “rent-earning firm-specific asset.” Dosi states “in general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation 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, and 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 will be needed for each producer to develop on their own. If the costs of duplication are as steep as the costs of developing the internal capabilities, the producers should then rely on their process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear that someone will copy them, in order to protect them?

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

When we are discussing the Research Budget Allocation Interface of the Research & Capabilities module it feels that we are at the heart of the innovative oil and gas producer. Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” has 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 and gas producer is able to have the quantifiable and replicable process of innovation within their domain. Something that I think is necessary for the difficult energy era that we find ourselves in today.

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

Recently I stated that the people who are operating in the Joint Operating Committee are not experimental lab rats. That to leave 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 experimenting. 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 attain a learning experience to the ultimate solution or capability.

With that it sounds like it's time for another interface. And we’ll call this the “Experiments Interface” which 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 will provide the users with the ability to manage the project from start to finish in a manner that the capabilities are able to be developed as expected by the firm. These two interfaces will enable the users to control and manage the firm's development at the speed of the market and the science.

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

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

Therefore being in tune with the market and the science is the only safe place for the innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.