Towards an Evolutionary Theory of Production Part B

In Part A of this secondary research review of Professor Winter's document. Winter raised two important points that provide companies with the opportunities, risks and rewards involved in the theory of production. The two key points were firstly, the production set of possibilities, and secondly the development and deployment of that knowledge. Suggesting that the production methods employed and operational today were based on the less then optimal choices. Winter suggests that today provides an opportune time to revisit the "evolution of production" and I concur.

There are some nasty pitfalls documented by Professor Winter in Part A of this document review. The software being built here for the oil and gas industry must avoid these pitfalls. But, also provide a production set of possibilities and opportunities for the producer to select the optimal solution for the situation at hand. Part B of this paper will discuss Winter's theories on "replication". Or how to deploy the optimal production process across the organization.

3. Replication

Thus, if management wishes to replicate at B the success it is having at A, a first challenge it faces is to devise methods to evoke the transfer of details of which it is unaware, including some of which nobody is aware, and some that represent information that is in various ways "impacted". This is a tall order that can never be filled completely; the gaps in the transfer will be filled by independent re-invention.

It is at this point I need to ask whom does "own" the "production set" of possibilities? Does a specific company or team of individuals? No one? Whom can effectively aggregate, develop and deploy the production set of possibilities. The competitive differentiating factors of the producer are based on its scientific capability, innovativeness and land base. These form what John Seeley Brown and John Hagel classified as an Innovation Management business. A new classification of either Innovation, Infrastructure or Customer Management would apply to all businesses within an industry. I find these theories resonate with my perception of the future. I see the producer filling the role of innovation, software developers providing the infrastructure and therefore these questions are valid. Who owns the knowledge of the production set of possibilities? Who is in the best position for their development, and whom is also responsible for them?

This ownership issue is a very fine point of conflict that will need to be determined through this software development project. The determination may involve whom provides the best solution to the energy industry. A large portion of these points fall within the domain of intellectual property and specifically, Patents. This topic will be discussed extensively due to the sensitive nature of the conflict. The solution to this issue will need to select the appropriate environment to which area (Innovation or Infrastructure) "should" be responsible for providing the definition of the production set and then replicating it from A to B, C,...

The literature of situated cognition points to the fact that the productive knowledge exercised at A exists in an intimate interconnection with the context of activity at A, both in its designed and coincidental feature. Of particular importance here are the "artefact's," tools and / or equipment used in the work (Hutchins 1995; Hutchins and Klausen 1996). In contemporary work settings, crucially important knowledge is often embedded in the equipment, and the local understanding of its functioning is narrowly instrumental. Computers and software are the most ubiquitous and familiar examples of this issue, but there are "low tech" examples as well. The spatial organization of activity at the micro level affects patterns of interaction and communication, and this can affect outcomes in ways that are not fully recognized or understood. (Bechky 2001). pp. 34

This last quote makes it appear that Winter would site the artefact's of tools, equipment have been the traditional area where the knowledge was embedded. In current times the computers and software "are the most ubiquitous and familiar examples of this issue". Possibly denoting where the analysis of this conflict will lead.

In some cases, top management may be totally unaware of the fact that considerations in these various categories are relevant to success. For example, this is inevitably so for procedural details that have been learned without awareness. In many cases, however, it is fairly obvious that the success of an activity depends in various ways on features of its context. Management may understand very well, for example, that the skills and personalities of employees have considerable bearing on the results achieved. pp. 36

Replication in Practice.

Winter has some particular salient warnings in the following quotations. That management may not take these points in consideration at their peril.

The above discussion suggests that replication is potentially quite challenging. It is not necessarily viewed as such, however. Often, management seem to take quite a relaxed attitude toward such challenges. While the relaxed attitude may be justified in some cases, it is arguable that many managers still have a good deal to learn about the subject. Where special circumstances force the issues to management attention, such as the technological peculiarities of semiconductor production (Intel), or MacDonalds' strategic devotion to a uniform customer experience, we do see managerial practices that are consistent with the general picture offered above. The example of Intel's Copy EXACTLY! policy (McDonald 1998) is particularly valuable because it rests precisely on the recognition that there is more productive knowledge implied in achieved high yields than the organization can capture in the form of comprehensive causal understanding of the method in use. pp. 37

And secondly, the exponential difficulty that is evident when interactions are populated with additional options.

This is not at all the case; the point is to control the amount of new learning and problem solving required. Every decision to create a difference between the sites makes an addition to an invisible list of unintended and hidden differences that will occur in spite of the policy. Interaction effects tend to make complexity rise exponentially with the number of discrepancies to be dealt with; it is better to keep the list as short as possible. There will be no shortage of problems to solve. There are several reasons why the problematic aspects of replication often go unnoticed. A basic one, surely, is that exploiting existing knowledge from the original site is rarely an end in itself. pp. 37

4. Production Theory Evolving

One of the competitive advantages of this software offering that differs from SAP and Oracle is the ability to exercise the fact that the costs of goods sold for the second and subsequent copies of the software is zero. This value is being captured by the Energy Industry in a lower cost offering through this development. Industry pays for the developments once. Then pays the associated costs of supporting and improving the application over its life time. Not each time there is a sale, but once and only once. This is where I would assert that these issues being discussed reside for the betterment of the energy industry. Professor Winter touches on these points with the following and final comments:

That knowledge and information are not exhausted by use in a kind of economic magic, a cheerful exception to the manifold scarcities that give the dismal science its name. pp. 39

and

To extend the use of existing knowledge in time and space is not at all the trivial matter it is often made out to be. pp. 39

and

Intra-firm homogeneity of method across establishments is definitely not something that just happens; it is something that happens when managements work hard to achieve it and devote substantial resources to the task. pp. 40

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Toward an Evolutionary Theory of Production, Part A

Professor Sidney G. Winter, December 2002

With over 2700 words of quotation I am well beyond the fair use doctrine of using Professor Winter's paper. As I mentioned before I will make him whole when I have completed this comprehensive and valuable secondary research. What we have discovered to this point was nicely summarized in the table I published here. The "Production Costs" were assigned to the market with the secondary assignment being to the firm. The topic of discussion at this point is associated with these "Production Costs" however in the form of their interaction and determining the production function. Winter states this nicely in the following quotes, and points to an evolutionary theory of the production process. So the topic of this discussion is deeply related to "Production Costs" although it is more to do with the development of production possibilities based on multiple cost scenarios.

"It should be obvious that evolutionary economics needs to strike quite a different balance. Evolutionary thinking sees questions of production as tightly and reciprocally connected with questions of coordination, organization and incentives. Also, production activity is embedded - now more then ever - in a variety of processes of knowledge creation; theory needs to make room for those links. A major deficiency of the mainstream theory is its isolation from the realities of organizational knowledge. Above all, the evolutionary economy needs theory to address questions of economic change, not the principles of resource allocation in a hypothetical static world." pp. 1

Why we are now discussing the topics of the boundaries of the firm, the Schumpeterian thinking and theory of production is well articulated in Winters argument. What he is essentially saying is the production method chosen may have been selected for other then optimal reasons. That the time frame in which we find ourselves in is an ideal time to readdress these previous decisions, more with an eye to the optimal solution.

"The dominance of the production function apparatus in contemporary mainstream treatments of technological change is also a "Panda's thumb" phenomenon; it reflects the logic of path-dependent evolution (Gould). The apparatus was created and developed for various other reasons, and when questions of technological change came to be confronted it was conveniently available. The inherited apparatus was then extended and supplemented by a variety of formal treatments of technological change, the simplest being the introduction of the multiplicative fact A in the relation Q = Af(x). Negligible attention was paid to the question of whether plausible real-world mechanisms might actually produce knowledge changes with effects that correspond to these formalisms; the formalisms are convenient and hence chosen for reasons other than micro-level verisimilitude. The major investment in building a truly knowledge-based production theory, well-suited to close analysis of the problems of change, was never made. Recently, however, some beginnings have at least been made." pp. 2

Professor Winter provides support for a theory of how the various inputs and outputs of a production process provide an essentially known set of production possibilities. That a production set of possibilities provides a means to provide for a multitude of options in a business. This accurately describes the oil and gas industry. There are many ways to proceed with the drilling and completion of wells, and how the variety of possibilities provides little in terms of a consistent standard manner of interpreting and optimizing production. The scientists and engineers' craft is augmented by the strategic opportunities and issues that the industry face as well. Winter provides this as somewhat of a direction towards a new or "evolutionary theory of the firm".

"It was in introducing this problem that he (Wicksteed 1894 An Essay on the Coordination of the Laws of Distribution) made the notion of the production function explicitly in economic analysis for the first time in the following terms: The Product being a function of the factors of production we have P = f(a, b, c, ...)2. Neither in this statement nor in Wicksteed's subsequent analysis is there any hint that there is anything conceptually problematic about the idea of such a function; it is merely a mathematically explicitly expression of the long familiar idea that if the input quantities vary, the output quantity will vary as well, and in certain characteristic ways." pp. 5

"It is the production set concept that stands, in contemporary formal theory, for the classical idea of a "state of the arts" or for an "existing state of technical knowledge." Arrow and Hahn concisely say"

"Thus the production possibility set is a description of the state of the firms knowledge about the possibilities of transforming commodities."

"To assume that the production set has certain properties - for example, those that correspond to the linear activity analysis model - is thus an indirect way of imputing analogous properties to the "state of knowledge" that the production set describes. I have proposed here that this indirect approach may be understood as a reflection of the historical development of the theory. In the modern synthesis of the subject, production sets are a fundamental concept, production functions are a derived construct, and marginal productivity schedules are an implied attribute of production functions." pp. 9

It is at this point that Professor Winter opens the doors wide on the possibilities of more. What would happen in oil and gas if all the known methods and procedures that were available and could be immediately quantified to determine the optimal route to pursue the optimal production. I am suggesting here that a large collaboration with in the oil and gas industry, through the joint account, in real time, where I have suggested that the industry capability be determined in terms of the whole industry as opposed to the knowledge and understanding that is currently constrained by the individual or silo-ed companies. That this resource is commanded and controlled within the industry to what I have suggested as the Military Styled Command and Control governance structure. But Winter doesn't stop there, he takes it further to suggest that the limits to production knowledge have been constrained over the years. Hence the potential of yielding greater returns is suggested by Winter in;

Thus it happened that it became much easier for the theorist to describe the logical connection between the production set and the production than to explain the substance of what the production set supposedly represents - a state of knowledge. This neglect of the independent conceptual anchoring of the production set idea has inhibited both the recognition of its limitations and the development of alternative and complementary theoretical treatments of productive knowledge. The following section initiates the discussion of such treatments by exploring the central concept itself. pp. 10

2. The Nature of Productive Knowledge

Dr. Winter begins to deal with the human element of organizations as he discusses what an organization knows. The "learning by doing" and "learning by using" covered in my May 2004 publication provides an understanding of how organizations and people obtain tacit knowledge. Learning is a key competitive tool of the oil and gas industry. Next to NASA, the oil and gas industry is the most scientific business there is. The knowledge contained within each company is massive. How this information is managed could have benefits for the industry, particularly at a time when the expected retirements of senior staff is expected in the 5 to 15 year time frame. The following is a series of quotes that offer some salient criticisms and issues for the oil and gas industry.

However, an important implication of the discussion to follow is that a narrow focus on what goes on in human minds can seriously impede understanding what goes on when organizations produce things. That sort of understanding is the true objective here, and the scope of the term "productive knowledge" is therefore deemed to be expandable as necessary to cover whatever needs to be understood. pp. 11

and

"For engineers, production managers and corporate strategists, the visible face of the validity problem is the question of transferability across time and space. The process worked well today, will it also work well tomorrow? If we build similar facility in a remote location, can we confidently expect that one to work as well? The salience of these questions depends critically on the degree to which the answers seem to be in doubt. When experience seems to confirm the temporal and spatial transferability of the knowledge in use, it quickly acquires a "taken for granted" character. When problems arise, attention is directed to them until they are solved 'for practical purposes." Under both conditions, the judgements made are not those of philosophers or scientists who care about the validity question for its own sake, but of practical people who need to get a job done and have other urgent demands on their attention." pp. 12

Hence the paradox that employees face each day. The motivational and cognitive paradox were discussed in my May 2004 paper. In it, it refers to Dr. Wanda Orlikowski's Model of Technology Structuration which incorporates the motivational and cognitive paradox. Her paper is available on DSpace. We are running the risk of hopping down a bunny trail if we are not careful, however these two paradox are important to refresh our memories.

"Based on extensive studies of user's experience with word processors, Carroll and Rosson (1988) identified two significant paradoxes; The motivational paradox arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning, and consequently productivity suffers. The cognitive paradox has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions." (Cox, Delisle 2003)

Professor Winter shifts gears again and immediately begins to discuss the risks of too much change, too many changes without the full recognition of the processes in operation.

While modern thinking may dismiss some beliefs and related practices as plainly superstitious and others as ill-founded, the line between superstition and practical knowledge is oftentimes difficult to draw. pp. 13

and

A striking and well documented example of the issues concerns the role of the water temples in the irrigated rice agriculture of Bali. In the traditional system that had developed over a period of more that a thousand years, the allocation of water among hundreds of farming communities was governed by the priests of the water temples. The temple system was responsive to the variation of rainfall by elevation, seasonally, and from year to year. Implicitly, it dealt with an underlying trade off between the requirements of pest control, which is facilitated by synchronized planting and harvesting among the farms, and the problems of allocation, which is complicated by synchronized decisions. This traditional system was disrupted when the government promoted change in agricultural practices a the time of the "Green Revolution" in the early 70's. The result was a brief period of increased productive, followed by a collapse caused by increasing pest problems and water shortages. Fortunately, the traditional system had been under scholarly examination by anthropologist J. Stephen Lansing, who extended his investigation into a systematic comparison of the ecological consequences and economic effectiveness of the traditional and officially promoted systems. Ultimately - but only after many years - this research led to a reversal of policy and an ensuing recovery of productivity (Lansing 1991; Lansing, Kremer et al. 1998) Professor Lansing commented, "These ancient traditions have wisdom we can learn from."

and

The unifying generalization here is that agricultural production is highly exposed to contextual influences arising in imperfectly understood natural systems of great dynamic complexity. pp. 14

These components need to be dealt with during this software development. If the wrong processes are baked into the software, that would be a disaster. Hence the important role that a user provides in making these developments driven by their collective needs. Dr. Winter provides a real time example in a highly controlled, scientific business, that being of Intel and their change processes.

"A semiconductor factory (a "fab") and its operating procedures can be viewed as an enormous and costly effort to achieve strong "experimental control" on the production process for semiconductor devices, made in the interest of attaining consistently high yields." pp. 14

and

"Elements that might (superficially) appear to be superstitious even appear in codified organizational practice, as in Intel's "Copy EXACTLY" technology transfer policy:
Everything which might affect the process or how it is run is to be copied down to the finest detail, unless it is either physically impossible to do so, or there is an overwhelming competitive benefit to introducing a change. Of course its true basis is not superstition, but a very rational adaptation to the reality that understanding of what does matter is limited." pp. 15

and

"Finally, there is one major consideration limiting the validity of productive knowledge that the examples of agriculture and semiconductor production may not adequately suggest: people are involved. People are also involved as the customers, the consumers, the ultimate arbiters of productive achievement. When the product is corn or computer chips, it may be reasonable to consider that the "experiment" ends when the product appears, and set the customer response aside as a separate problem. But what if the product is education business consulting health care, elder care or day care, entertainment, or just "the dining experience"?" pp. 17

and

Quite rational satisficing principles dictate that investment in the quest for understanding be deferred until there is a symptom of trouble to deal with. When the pace is fast and the competitive pressure intense, such deferral may even involve suppression of ordinary skepticism about the rationale for prevailing ways of doing things. Paradoxically, "practical men" are constrained to be gullible, while high standards of proof are a luxury reserved to certain cliques among the inhabitants of the ivory tower. pp. 18

Distributed Character.

Professor Winter brings up the point that the individual knowledge is one issue, other issues such as work groups, teams, organizations and I am going to suggest clusters, such as Calgary, Houston and Aberdeen, each contain bodies of knowledge that may be both competitive and complementary.

A third distinctive attribute of productive knowledge is that it frequently resides in work groups or organizations rather than in individuals. This is not simply a matter of the same knowledge being held by several individuals, although such common knowledge may play an important role. Neither is it adequately captured by the image of complementary specialized skills being coordinated in the execution often exists only as it is evoked in the actual activity of the group. It is crucially a matter of distributed knowledge, i.e., of complementary parts of the same functional unit of knowledge being held by several individuals and applied in a coordinated way - the coordination itself being a crucial aspect of the knowledge. pp. 22

Accepting the view that knowledge can reside in a group is in this sense a "forced move". Just as practice allows an individual to improve in the performance of a complex skill through improved coordination, so the shared practice of a group permits patterns of multi-person coordinated action to arise, improve and stabilize. pp. 23

In recent years, the fact that productive knowledge often resides in groups rather than in individuals has received increasing attention both from business firms and from scholars outside of the economics discipline. There has been a striking degree of mutual reinforcement between the interest in these issues on the business side, driven by the practical concerns of an increasingly knowledge - based economy, and academic scholarship. pp. 25

To put it another way, it is hard to find a potential barrier to the movement of knowledge that does not function significantly as an actual barrier: national boundaries matter, firm boundaries matter, plant boundaries matter and even within - plant boundaries matter (Dyer 1998). To explicate the functioning of such a complex, multi-level system of distributed knowledge stands as a major challenge for theorists. pp. 28

These last few quotes reflecting the energy industry is not alone in approaching these issues. Clearly the majority of all businesses face similar knowledge and employee retention systems. It appears to me that the level and quality of the research in these specific areas is increasing. However, the difficulty ahead is accurately reflected by the two concepts that Winter has put forward in this paper. The interactions between these cause the complexity of the problem to accelerate in my opinion. The production set of possibilities that an individual, group, organization or cluster has at its disposal is one aspect of how the knowledge is deployed, the problem being where did it come from, how reliable and accurate is it. These issues can best be summed as the underlying issues around tacit knowledge. Its value, difficulty in obtaining and relying upon. The next issue that Winter brings is one of how the capture of tacit knowledge can be replicated throughout an organization or even an industry. That will be discussed in a Part B of this paper.

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