The Firm in a Knowledge Perspective.

Professor Sidney G. Winter, The Wharton School, May 15, 2006, European School of new Institutional Economics presentation slides.

Professor Sidney Winter presented at last Years European School on New Institutional Economics (Esnie). Click on the title of this entry to be taken to Esnie. It appears that Professors Winter, Dosi and Langlois have submitted working papers and participated in this organization. Also, I have included Esnie in both the oil and gas and academic "Google custom search engines" you can find in the first column of this weblog. Although Professor Winter did not submit any working paper, and his presentation is only 23 slides long, there is much to learn from this resource, so lets begin.

Recall that many of the papers that have been reviewed on this blog were authored by Professor Winter and the "Winter" label will pull together the individual blog posts. With only 7 posts to date, Professor Winter's contribution is of very high quality. The firm in a knowledge perspective is something that I recently wrote about in the Life and Times of Humpty Dumpty. I suggested that Chrysler's loss of engineering capability in the move to design teams is something the energy producers needs to consider may also apply to them. In the redefining the boundaries of the firm I have also suggested here that the scientific and engineering research capability reside with the firm. This is so that the losses realized by Chrysler are not symptomatic of the move to "Design Teams", or similarly, the Joint Operating Committees in the energy industry case. And operational performance metrics override the knowledge capability within firms. I have also suggested elsewhere that the competitive advantages of an oil and gas producer depend on their land base and the capability to find and produce oil and gas are the critical competitive strategies and value creators. This article will therefore focus on the role of the firm and particularly the Research Module of our proposed application.

Winter suggests the key competitive advantage of a firm is the "Knowledge Based View" a subset of the "Resource Based View." Clearly arguing that the knowledge of the firm is the key competitive advantage. This may seem contradictory to what I just stated about the land base and engineering and science based capabilities as the competitive advantage of oil and gas producers. I think we are saying the exact same thing. What does a company know and how is it known? What key resources are required to deploy that capability? (Land, Scientific and Engineering Capabilities). These are more direct questions that seek to reconcile the two different "views" of what has been stated. It is the knowledge of the firm and the ability to deploy it that makes the firm more competitive. And Winter concurs with this assertion with the following quotation;

"Some speak of a competence view or a capabilities view or even a dynamic capabilities view -- all to roughly the same, fairly vague, effect." Slide # 2.

As we have discussed before, in determining the boundaries of the firm and the market. I believe the market is ready to take on a greater role in deploying and developing the innovative approaches to how, what, where, when, who, and why of the industry. To have the contracts between firms free the hand of the market to conduct the operations in dare I say a "just in time" basis. These contracts are able to handle the transaction costs better then the bureaucracy is able to micromanage at this time, primarily through enhanced Information Technologies. And it is this thinking that Winter states

"In that view, firms are where productive knowledge lives, the only place it lives, and knowledge does not travel among them. When firms are a "nexus of contracts" or have boundaries determined only by transaction costs, this traditional perspective tends to fade form view." Slide # 3.

Here I think Winter, is also making the assumption that the move to Design Teams at Chrysler is responsible for the slackening in the intensity of global engineering capabilities. And therefore the risk of a degradation in firm knowledge and capability is a potential outcome of organizational change focused on moving to a market perspective only. The firm exists, and it is the firms sole responsibility for knowledge.

On the next slide Professor Winter comes in with a few solid home runs.

"On this view, firms are central to the social arrangements for storing productive knowledge for extending its application, and for advancing it - three very closely related economic functions."

and

"Of course, there are also other players - other types of institutions, organizations and individual roles complement the firm role." Slide # 4.

This last point firmly pointing to the production related transactions, and other activities of the Joint Operating Committee as proposed in this table.

Winter then makes the point of this discussion with a handful of objectives. Slide # 5.

• "Explain what has been added to the traditional understanding of knowledge and the firm."
  
• "Point out some specifically "institutional" aspects of the current view."
• "Take note of recent and potential research topics in this area."
  

It is also at this time Winter takes the entire scope of operations and opens it up for consideration and discussion. Slide # 6

• "Organizational learning."
  
• "Creativity and innovation, and diffusion." (Innovation has been primarily assigned to the market or JOC.)
  
• "Knowledge transfer -- transfer of practices, replication (broad scope), imitation (from afar)"
• "Industrial and technological evolution."
• "Knowledge Management."
• "Communities of practice, networks."
• "Routines, capabilities, dynamic capabilities."

Outside of innovation these items should be conducted primarily by the firm. With the caveat that items like "creativity" are not the sole domain of the firm or the market but the global oil and gas industry.

Next Winter asks for and attempts to define what knowledge is. Noting that "it is to achieve some understanding of how society's work gets done." Let a definition emerge! (If needed.)" And Winter provides an excellent definition of "productive knowledge that guides work" with a few global parameters. Slide #'s 8 & 9.

• "Situated, context dependent."
• "Embedded - in physical, temporal and social contexts at various levels."
  
• "Partly Tacit - skills, pattern recognition, not facts."

If we look at these three parameters and the scope of operation of the upstream oil and gas producer. We see the constraints and opportunities based on this definition of knowledge. I hesitate to discuss the impact of these three categories of knowledge for fear that I may limit the scope of the knowledge base. I will state however that the importance of this definition needs to be codified in this applications Research Module. "How" may have to wait until I complete more of this research into this critical area. That I believe the energy industry needs to move in this direction obviously resonates with the academic community overall. Today there is more research being put into these areas. It is overwhelming in volume and quality of the work being done. I can also assure my readers that the scope of this problem, what I am asserting as the "Chrysler Issue", for purposes of this blog, will not be raised as a reason for any failure associated with this software application. The scope of the "firms" responsibilities has not diminished in my opinion. The firm needs to be as strong, and as involved in their operations then they ever have been. The boundaries of the firm, and the allocation of some responsibilities to the market does not provide any opportunity for the "Firm" to rest. The transition will bring an enhanced focus to the competitive differentiators of its land base and this knowledge stuff. And Winter agrees. With Slide # 10 recreated here.

"Therefore,"

• "We must put aside, probably forever, any ambition of drawing a sharp conceptual line between productive knowledge and the context in which such knowledge is operative."
• "All three of the named considerations point to the infeasibility of that; it is a futile exercise."
  
• "The good news: dropping the idea may be the main key to understanding knowledge."

It is at this point that Winter provides an excellent discussion on the issues around personnel turnover and firm knowledge. Citing a combination lock with three numbers from 0 to 9 on each dial. If each dial were represented as an individual, it is fairly easy to replace only one, in fact it would only take 10 tries to have the key replaced. If all three need to be determined it may require a 1,000 searches and 500 expected in order to restore the combination. A strong analogy to the human resource issues that are being faced in the oil and gas industry as we transition to new leadership and management. The retirement of the baby boomers in the next 5 to 10 years, based on this analogy, may be devastating to the operations of the firm and market. If the knowledge that is contained within the boomer generation isn't captured in the short time available, we could experience serious difficulty.

It is at this time that I want to add this information to our table and module breakdowns. And this is how I see the situation evolving;

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	P
Routine, compliance and accountability	s	P
Research	s	P
Development	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary

Application Modular Breakdown

So if we take a moment and define some of the modular architecture of this system.

• Partnership Accounting Module,
  

• Petroleum Lease Marketplace,
  

• Human & Supplier Resource Marketplace,

• Financial Resource Marketplace,

• Governance & Compliance Module, (a.k.a. Military Command & Control Structure)

• Research Module (Primary is the Firm)
  
• Firm Knowledge Objectives
• Storing Productive Knowledge
• Extending Knowledge Application
• Advancing Knowledge
  
• Organizational Learning
  
• Knowledge Capture
• Situated, context dependent.
• Embedded - at various levels
  
• physical,
  
• temporal
  
• social contexts
• Partly tacit
• Skills
• Pattern Recognition
• Not facts
• Replication
• Imitation
• Knowledge Management
  
• Industrial and Technological Evolution
• Communities of Practice, Networks
• Creativity, Innovation and Diffusion
  
• Other
• Routines
• Capabilities
• Dynamic Capabilities

I think the primary thing we have learned through Professor Winter's slides is that the firms role is not diminished in this proposed organizational change. And with some concurrence on the issues regarding Chrysler. Some of the aspects and attributes are ceded to the market, however, the firm is as vitally needed in these new capacities as it has in the past 100 years. As we look to the challenging future of the energy industry, the needs to address these points will become more prescient as the knowledge contained within the firm begins to retire, and hopefully left in the hands of those that will able to continue on.

I noted in the entry about Matthew Simmons that May 2005 was possibly the point of peak oil. Which may or may not be the case. It is important to realize an interesting aspect of all declarations of peak oil in terms of a single field or a single country. (Such as the U.S. onshore peak occurring in 1972) Each time that the Peak has been attained it is also the point where half of the recoverable oil or natural gas remains in the ground. So even though the total throughput will continue to decline. At least we know the reserves that remain are what fueled the world economy for the past 140 years.

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