Towards a Neo-Shumpterian Theory of the Firm.

Professor Sydney G. Winter is the Deloitte and Touche Professor of Management at The Wharton School of the University of Pennsylvania. The Wharton School consistently ranks as one of the best business schools on the globe. I have read Professor Winter's works before, particularly in combination of the work that he has co-authored with Professor Giovanni Dosi. The title of this article stood out in terms of a good follow through on Professor Langlois' theories.

In the abstract, Professor Winter provides a little more focus in to the theme of this research;

"Schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior, and in particular, a conceptualization relevant to complex organizations and complex tasks."

Which leads me to ask, is Professor Winter stating that innovation can be handled by the Joint Operating Committee, and "routine" tasks handled by the Military Styled Command and Control Structure? This role definition helps to understand the division of labor and the barriers of the firm in assigning tasks. However, I would state that these classifications are both right and wrong. The role of the Military Styled Command and Control Structure (MSCC) is not limited to compliance and routine. The most important aspect of the firm is well represented in the case study of Chrysler by Thomas H. Davenport and John C. Beck in "The Strategy and Structure of Firms in The Attention Economy." (This document is behind a paid wall but you may be able to find elsewhere. It is in the March / April 2002 Ivey Business Journal.)

"One example, of both a problem and a solution, is the Chrysler division of DaimlerChrysler. In the early 1990's, it shifted to cross-functional "platform teams" that managed the entire process of developing a new vehicle. Over all, these teams worked well, producing both successful new car designs and shorter development cycles. But the functional organization that had focused attention on producing and maintaining technical skills was no longer in place. Soon, technical experts found themselves working not with others of their ilk, but with manufacturers, marketers and financial experts on cross-functional issues. The result? A recurrence of quality problems that Chrysler had previously solved. The company is now attempting to turn some of its attention to increasing functional and technical knowledge by organizing "Tech Clubs," so that engineers in specific domains of car development can meet with each other and exchange ideas. In general, matrix structures such as these create attention problems; our innate focus on hierarchy and threat / reward does not match well with situations where it is not clear which dimension is the primary one. But Chrysler's Tech Club approach, a kind of "stealth" matrix, avoids this problem by giving only informal legitimacy to a second dimension of structure. It's important to understand that the balancing act here is not about power, but rather about attention; Chrysler needs employees to stay focused on the process of developing new vehicles, but not forget about enhancing their technical skills. The Tech Club structure seems to get that balance just about right." pp. 52

Just as Chrysler needed to redeploy "Tech Club's" to recapture the engineering capability that was no longer being developed in the "platform teams". And it would probably be safe to say the engineering capability atrophied under Chrysler's revised organizational structure. For oil and gas I see the potentially similar atrophy of earth sciences and engineering capabilities by leaving the Joint Operating Committee (JOC) as the only organizational construct and relegating the Military Styled Structure to "routine" tasks. The scientific capability and the strategic land base of the producer are two of the primary areas of responsibility that those members of a producers MSCC are providing. The nature of the MSCC is about the "firm", and the JOC is about the "market" to relate them back to the discussion around Professor Langlois' theories. Professor Winter takes these concepts to the next step with this quote.

"But the edge of production set is the edge of an abyss so far as technical knowledge is concerned: We there encounter the Great Unknown. When an attempt is made to introduce the phenomenon of technological change into this conceptual scheme, the theorist is almost forced to try to play the new game by the old rules. This means that certain production possibilities are suddenly extracted from the Unknown and added to the Known. There is ordinarily no analysis as to why particular possibilities rather than others should be thus discovered, and considerations of mathematical convenience determine, by default, the path of technological development is such a theoretical world." pp. 3

The oil and gas industry is not static. We are entering a time where the demands of the engineers and geologists is accelerating at a ferocious rate. Innovation will straddle both the JOC and MSCC organizational constructs. How much of these capabilities, innovation capabilities and scientific capabilities, are captured, managed, enhanced, tested, and redeployed within the JOC and MSCC? What I want to do here is ensure that the "routine" tasks of "transaction costs" and accountability are not the only responsibility of the MSCC. I would suggest the MSCC is the "research" and the JOC is the "development" in the traditional Research and Development classifications. This is an overall objective of this re-organization of the industry, to enhance the speed, innovativeness and capability of the producer and the industry. Professor Winter adds some more problems and opportunities to these concepts;

"But "knowing how to bake a cake" is clearly not the same thing as "knowing how to bring together in one place all of the ingredients for a cake". pp. 4

and

"Just to have a label, let us call this level of discussion of a technique the conceptual level as distinguished from the operational level discussed earlier. Two points should be made about it." pp. 6

Here we have a clear definition of the roles within the various organizations. Are you able to bake a cake, or know how to build a kitchen for the Chef to bake many cakes? Do you know how to drill a well, or do you know how to advance the science of geology and engineering? Professor Winter continues with some additional issues regarding the capability and ability of staff within these classifications.

"When a corporation president whose experience is in finance succeeds one who started as a production engineer, the technique that the corporation is using changes even before the new president makes his first phone call: The same procedures are now embedded in a new frame of experience and analogy." pp. 6

and

"Knowing your job' in such an organization is partly a matter of having the necessary repertoire of actions, and partly knowing which actions go with which incoming signals. Each individual has some ability to perform a considerably larger set of actions than are called for in his job, but to the extent that "practice makes perfect" he will acquire superior skill in the ones actually called for. [The man who graduated as a chemical engineer becomes gradually specialized first in petroleum refining and then in those particular aspects of particular refining methods that are central to his job.] As emphasized previously, a large part of any individuals conceptual understanding of his job consists of images of other peoples' jobs." pp. 7

Within the producer there will be those that are practiced at drilling wells effectively and those that conduct research effectively due to the nature of their jobs and previous experiences. The cultivation of two separate and disparate "types" of employees is not necessarily new, it is necessary that these be clearly differentiated within the producers JOC and MSCC. The interactions and communications between employees and particularly between the two organizational constructs is answered here:

"Any single individuals conceptual understanding of the firm in its entirety is mainly at an extremely abstract and aggregative level." pp. 7

"By far the most important coordinating and organizing force is the invisible interlocking structure of mutually consistent expectations held by the various members of the organization: Each correctly expects that he will receive familiar signals from the others, and will respond in the familiar ways" pp. 7

These last quotes emphasizing the tacit interactions that are so prevalent in today's organizations. Dr. Winter then quotes directly from Schumpeter;

"It is easy to see that the characteristic of being in a higher rank, the function of superintendence in itself, constitutes no essential economic distinction. The mere circumstance that ranks one worker above another in the industrial organization, in a directing and superintending position, does not make his labor into something distinct. (p.20)"pp. 8

"But we see at once that the necessity of making decisions occurs in any work. No cobbler's apprentice can repair a shoe without making some resolutions and without deciding independently some question, however, small." (p. 20) pp.8

"... insofar as individuals in their economic conduct simply draw conclusions from known circumstances -- and that indeed is what we are here dealing with and what economics has always dealt with -- it is of no significance whether they are directing or directed. (p. 21)" pp.8

"The data which have governed the economic system in the past are familiar, and if they remain unchanged the system will continue in the same way. (p.22)" pp.8

Winter then comments on the difficulties of how these definitions are understood by the "worker" as classified as the "manager" and "entrepreneur".

"In short, the manager of a firm, when the economic system is in an equilibrium circular flow, is just another guy who knows his job in a firm full of people who know their jobs. The firm in equilibrium knows the technique it is using because it is using it, and has been for some time past." pp. 8

and

"Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. (p.85)" pp. 9

Walking along this road will be difficult. The changes that are being realized and instilled within this software that we are developing will initially provide comfort to few. Change is a difficult and necessary action that is being driven, I suggest, by societies demands for energy, and peoples need to be "less" burdened by the demands of their work. I wrote extensively in the "Plurality" document about Dr. Anthony Giddens and Dr. Wanda Orlikowski and their structuration theory and model of structuration here. Review and familiarity with these theories will help to understand the role of change.

"The general emphasis in Schumpeter's work is, of course, on the entrepreneurial phenomenon in its most pure and dramatic form, where single individuals provide the leadership needed to bring about drastically new ways of doing things. But he does occasionally point out the essential continuity between these instances of dramatic innovation and the smallest sort of adaptation, to changing conditions." pp. 9

"Moral: Sometimes an innovation involving substantial technological novelty is much less costly and difficult than a change which, by standards external to the firm, is simple and commonplace. Viewed from inside the firm, technological novelty is only one among several reasons why an attempt to change techniques may involve large and unpredictable costs." pp. 10

Professor Winter moral provides some evidence that we are traveling the shortest route through these changes. I believe so. How much change the development and use of these systems brings about is unknown, however, the directness of our objectives helps in making the journey shorter, and potentially less painful. Professor Winter goes on in the document to note some principles of Neo-Schumpeterian Theory.

1) Contrary to the received theory of the firm, no sharp distinction can made between techniques known to the firm and those that are unknown. There is, instead, a quite continuous gradation from highly routine behaviour, to highly innovative behaviour. pp. 11

2) Relativity to existing routines: the only techniques which may appropriately be considered "perfectly known" to the firm are those it is actually performing, and has been performing repetitively. Furthermore, if we revert to the metaphor of Figures 3 and 4, the steepest part of the percent known curve is reached very quickly as the firm departs from its existing routines. Costs and uncertainties pile up rapidly for all but the most minor departures from well worn paths - even when the new direction is one already taken by other firms. pp. 11

3) A new method of production is a minor departure from an old one the the extent that (a) the repertories represented by the individuals currently in the firm contain the relevant skills, in roughly the right amounts, and (b) only minor "rewiring" is needed in order to create the interlocking system of signals and expectations that will evoke the appropriate actions at the appropriate time, (c) the relationship between the new technique and the old is correctly conceptualized by most individuals - so that planning for the change can go forward under largely correct premises as to who is capable of what. Similarity of list of ingredients may be a useful proxy variable for some of the considerations, but it is not a fundamental aspect of the closeness of one technique to another." pp. 11

4) Just as the fragmentation of knowledge in the firm makes innovation difficult and the consequences of attempted innovation unpredictable, nor does it tend to frustrate the economist who wants to predict the lines that innovation will take. The firm gradually "learns" a new method of production, vast numbers of details of the routines established will be determined by considerations that play no part in ordinary economic calculus, and may in addition be unknown to most of the firms managers, let alone to the observing economist. Not infrequently, decisions with quite major consequences for the firms future economic transaction will turn on such considerations. "Mere mangers" may behave predictably, entrepreneurs (and the organizations led by them) do not especially if the prognosticator directs his attention only to the economic influence on behavior. " pp. 12

Finally, as with Professor Langlois, I have abused the fair use of Professor Winter's copyright. As with Langlois, I am in contact with Professor Winter to determine what is required to make him whole under this phenomenal document. He leaves with a conclusion that resonates with my thinking of where we are headed too, and to a large extent why;

Thus a neo-Schumpeterian theory of the firm would be a historical theory in the sense that significant differences among firms would be regarded as historically determined; it would be a dynamic theory because only in the context of such a theory can the traditional problems of price theory be confronted anew, and, ideally, it would be probabilistic -- the existence of a multiplicity of unobservable factors that shape firm behavior would be explicitly recognized. Clearly, the program is an ambitious one, involving conceptual, theoretical and empirical questions of great difficulty. Success in building a new theoretical road can not be guaranteed, and the easier choice is to walk the old one. The question is how long are we prepared to content ourselves with a theory that is simple at the price of being simplistic. pp. 11

Photo Courtesy Kaley Davis

Technorati Tags: Genesys, Attention-Economy, Capabilities, Development, Winter, Research

Breakthrough ideas for 2007

The online version of the February 2007 Harvard Business Review contains the "HBR List". Which is described as their "Breakthrough Ideas for 2007". Upon reviewing the material I would have to concur. The authors alone are worth the price (apparently free).

Several of the Breakthrough Ideas that I am interested in include:

Algorithms in the Attic

The article starts off with its summary concept:

"For a powerful perspective on future business, take a hard look at mathematics past. As computing gets ever faster and cheaper, yesterday’s abstruse equations are becoming platforms for tomorrow’s breakthroughs. Companies in several industries are now dusting off these formulas and putting them in the service of new products and processes."

In Partnership Accounting I noted the complexity of the algorithm used to calculate the operations in oil and gas could be modeled in the current programming languages and particularly Java. This Harvard article is similar in terms of what the processing power and algorithms of past advanced maths could be used to form new business models and opportunities.
The Leader from Hope;

"Hope is good thing, maybe the best of things, and nothing good ever dies." Is a quotation from the movie "The Shaw-shank Redemption". This Breakthrough Idea is the controversial use of hope in a changing environment. The article states clearly;

If you are an executive trying to lead an organization through change, know that hope can be a potent force in your favor. And it’s yours to give.

And I see absolutely nothing wrong with that sentiment.

An emerging hotbed of user centered innovation (Danish Research Unit for Industrial Dynamics and Danish User-Centered Innovation Lab)

The Danish Government's 2005 strategy for the next 4 years states that, “strengthening user-driven innovation" is a national priority. In response, a group of researchers from Copenhagen Business School in Denmark and MIT Sloan School of Management in the US - supported from Danish Ministry of Economic and Business Affairs – now establish the Danish User-Centered Innovation Lab.

I will be paying close attention to this Danish initiative. This is a topic that suffers from a lack of research, however, it is new and extremely important. This software development project will hopefully develop many of the positive attributes of this worthwhile research.

Here comes XBRL;

This Breakthrough Idea article notes SEC's Chairman Christopher Cox's initiative to use the XBRL reporting language. This is directly in line with what I had written on this blog back in May 2006. The XBRL technology will be truely revolutionary, just as the Harvard Business Review notes.

"All this undoubtedly sounds too good to be true to managers who are rightfully jaded after decades of false promises that the next IT silver bullet is (this time, really!) just around the corner. So what makes XBRL different? Unlike all past technological developments, it doesn’t come in a wide variety of proprietary flavors, like ERP systems, operating systems, and customer relationship management systems, to name just a few. XBRL is an open-source standard that was developed by an international public consortium of nearly 500 organizations from 27 countries, including companies, investors, analysts, auditors, regulators, and aggregators of financial data, such as Standard & Poor’s. (For more background, see www.xbrl.org, the standard’s official Web site.)"

Innovation and Growth, Size Matters; (A future research Field)

An interesting theory has been put forward here, one that I will be picking up as an area for future research. "Superlinear" growth could help to attain the metrics in performance that the industry needs. The individual energy industry clusters, such as Calgary, could potentially benefit from the knowledge that innovations can be leveraged from size.

"Though our research has focused on cities, the social and structural similarities between cities and firms suggest that our conclusions extend to companies and industries. If so, the existence of superlinear scaling that links size and creative output has two important consequences: First, it challenges the conventional wisdom that smaller innovation functions are more inventive, and perhaps explains why few organizations have ever matched the creativity of a giant like Bell Labs in its heyday. Second, it shows that because organizations and industries must apparently innovate at a continually accelerating rate to avoid stagnation, economizing by reflexively cutting R&D budgets and creative staffs may be a dangerous strategy over the long term."

The best Networks are really Worknets; (A future research field)

Building off of Metcalfe's Law which is essentially N Squared and applying it to a situation where-in a business collaborates at a large scale. Noting there is incremental value beyond what is aggregated. Something that is intuitively understood, but never quantified.

In Defence of Ready, Aim, Fire;

How the open source software movement succeeds and provides value to business.

"This presents a conundrum for business. Clearly, firms can’t just start trying everything. Management overhead is real, and the costs of failure can’t simply be laid at employees’ feet. As a result, open system–like innovation must necessarily continue independent of any firm’s ability to either direct or capture all of the value. Some companies’ product lines or employee structures may not allow radical experimentation, but smart managers will look for ways to take advantage of this sort of broadly distributed effort. In environments where organizations can reduce the cost of failure by farming out a problem to individuals—who may be induced to participate solely by the chance to learn new skills or to gain the respect of peers—we can expect open systems to make increasing inroads into standard commercial efforts."

The folly of Accountabilism;

There would be little to doubt that the need for accountability has escalated significantly in the past decade. This article deals with many of the related issues that stem from the abundance of accountability in business today. It's concluding comment accurately captures the issue;

"Accountabalism tries to squeeze centuries of thought about how to entice people toward good behavior and dissuade them from bad into simple rules by which individuals can be measured and disciplined. It would react to a car crash by putting stop signs at every corner. Bureaucratizing morality or mechanizing a complex organization gives us the sense that we can exert close control. But grown-ups prefer clarity and realism to happy superstition."

Seven out of twenty of these articles are directly related to the work being done here. Two provide new material for future research and one is a rich resource on the topic of user centered innovation.

Technorati Tags: Ideas, Open-Source, Innovation, Research, Genesys

Mondrian Code Review.

Guido von Rostrum, who wrote the Python scripting language, is also an employee of Google. Guido has been with Google for a little over a year and is presenting his Mondrian Code Review project. The development of Mondrian is what he has done with his 20% time that Google pays him to do the things that interest him. Mondrian Code Review fills a nice hole in most IDE (Integrated Development Environments) and is a natural extension of the standard concurrent version systems, like Subversion, the choice of this development project. With the variety of projects that Google is involved in, the tool would provide real value. A real value for any large software development project.

I have reviewed many of the videos that MIT produces and it is a source that never fails to inform and entertain. Google on Google video looks to me to be as high a quality of source of useful videos. This review provides the petroleum user with a window on the methods and procedures of how software is built in an open environment.

Technorati Tags: Genesys, Open-Source, Software, Development, Video

How Open Source Projects Survive Poisonous People.

Google has had the capacity in the past few years to draw in many of the pioneer's and industry leaders to work for them. Two of these people, Ben Collins-Sussman and Brian Fitzpatrick are leaders in the open source world. Both have worked on Subversion which is the version control system used on this project. Of note, Google hired them to implement Subversion through out their product line, and in the process giving the tool the most significant test I could imagine.

The experiences they refer to throughout the presentation are based on work done for both Subversion and Apache. The topic of discussion focuses on how to avoid the toxic or poisonous people that can infect an open source project. The most important aspect of any contribution is to ensure that the team is not drawn down by people not reviewing the archives. Contributions have to be incremental to the work that has been done, not reiterating what has already happened.

The presenters open with their 4 areas of concern.

1. Comprehension
2. Fortification
3. Identification
   
4. Disinfection

The resource you are trying to protect is the Attention and Focus of the user and development community. Keeping disparate groups from losing focus and spending their attention in the wrong areas will lead to project failure. The methods to guard against these incidents is highlighted in their video. The first note is that poisonous people can;

1. Distract.
2. Emotionally drain your community.
3. Cause Needless infighting.
   

You need to avoid paralysis.

• People can derail forward progress by people being.
• Perfectionists.
• People obsessed with process.
• Even nice guys can do this unintentionally.
• The perfect is the enemy of the good.

The presenters then bring up the analogy of "Painting the bike shed". Which was an analogy that was used in the development of BSD Unix. The analogy goes; a nuclear plant that was needed to be built was progressing as good as it could. The entire development then stalled to determine what color the bike shed should be painted. The debate then ground to a halt on both the bike shed and the nuclear plant. Here the authors noted "The amount of discussion on a feature, is inversely proportional to their value. And is noted to be one of Parkinson's Law's.

Fortifying against the threat.

Politeness, Respect, Trust and Humility are necessary in an open source project. All of the deficiencies that the presenters had experienced originated from these 4 points.

Have a Mission, where do your want to go. Limit your developments scope. Define the project so that future requests can be classified as "its on our list of things to do" or "its not"

Mailing lists are a critical tool of the open source project, etiquette should be monitored and enforced. Review of the archives, don't let users disrespect any previous conversations by not reviewing the archives. A few more of their points include;

• Design documentation.
• Bug fixes.
• Document Mistakes. (Ensures that travels down dark alleys are limited and not repeated.)
• Code Changes (Change Log)
• Code Collaboration policies. Email is the key to participation.
• No powerpoints.
• Do big changes on branches for easier review. (Be generous on creating branches.)
• Spreading the "bus factor" so that developers move around alot. (Bus factor is how many people need to get hit by a bus before the project fails.)
  
• No names on top of source code files. (Makes people nervous) Everything is owned by everyone. (Cuts the pettiness.)
• Have well defined processes.
• Releasing Software
• Backport Bugs
• Test and release tarballs.
• Accepting and reviewing patches.
• Admitting new committers
• The community founders establish the culture.
• The culture becomes self selecting.
• Voting is a last resort
• A healthy community should rarely need to vote.

Identifying poisonous people.

Communications Annoyances

• Uses silly nicknames
• Uses multiple nicknames in different media
• Overuses Capital letters.
• Uses excessive punctuation.
• Acronyms are used.

General lack of a clue as to what is going on.

• Unable to pick up on the mood.
• Doesn't understand common goals of the community.
• Asks incessant questions.

Hostility

• Insults the status-quo.
• Angrily commands help.
• Attempts to blackmail.
• Attempts to deliberately rile people .
• Makes accusations of conspiracy.

Conceit

• Refuses to acknowledge the opinions of others.
• Makes sweeping claims.
• Usually about the projects future success.
• Re-opens topics that are long settled.
• Without reading the archives.

Lack of Cooperation

• Willing to complain but not help with anything.
• Unwilling to discuss design.
• Too insecure to take criticism.

Disinfecting your community.

• Is this person draining attention and focus?
• If so, is the person really likely to benefit the project?
• Is this person paralyzing the project?
• Is the dispute likely to finish soon?

Don't...

• feed the energy creature.
• give jerks purchase.
• engage them.
• get emotional

Do...

• pay attention to a newcomer.
• even if they're annoying at first.
• extract a real bug report if possible.
• know when to give up and ignore them.
• know when to forcibly boot them from community.

Summary

• Comprehend:
• Preserve attention and focus.

Fortify:

• Build a healthy community.

Identify:

• Look for tell tale signs.

Disinfect:

• Maintain calm and stand your ground.

And finally, the presenters put a special emphasis on decision making. All decisions can be discussed off-line, no decisions made without the documentation in the email lists. The reason why and what alternatives will show up in the archives and contributors can see the reasons and justification for the previous decisions. All of these excellent points will form a major part of the code of conduct that will be one of the first deliverables from this community.

Technorati Tags: Code-of-Conduct, development, software, tradition, Attention-Economy, Genesys

LEM Working paper series.

Dr. Giovanni Dosi was the centerpiece of research that I used in my thesis to derive the Joint Operating Committee would provide industry with greater speed and innovative-ness. Dr. Dosi is a professor at the Sant'Anna School of Advanced Studies in Pisa, Italy. Within the school there exists the "Laboratory of Economics and Management" of which they published a series of articles known as the "LEM Working Paper Series" which can be downloaded from their site located here. The purpose of this laboratory is;

The Laboratory of Economics and Management (L.E.M.) at the Sant'Anna School of Advanced Studies sponsors and hosts research in the areas of economics, organization theory and empirics, management and corporate strategies, public choice and other aspects of public policy, innovation studies, environment, industrial history and theory, cognitive and artificial sciences. It welcomes interdisciplinary endeavours and favours dialogue between empirical investigations, theoretical developments and normative contributions - concerning both corporate management and public policies.

Naturally this is the place I want to travel too next. The articles within this series will be researched in much the same manner that I did with Professor Langlois works. After the LEM series I want to go to Professor Schumpeter and review two of his books. And for those readers that may wish to read ahead. These books can be downloaded from here.

These articles are just a small sampling of the documents that are available through IDEAS. A variety of economics authors and researchers have decided these papers belong collectively in one place for people to download them. These downloads are free! Therefore, since my job now and in the future is devour these documents; learn and apply what I know about industry and publish them through this blog. I could not be happier. To review the documents are free, however, as in the case of Langlois. I have certainly crossed the line in terms of the fair use doctrine, and I am awaiting his assessment of how these transactions should be conducted. I will do the same for the others that I research. It is also mandatory that I note http://repec.org as the source of some of this information.

Technorati Tags: Genesys, Dosi, LEM, Research, Summary

Capabilities and Governance, Conclusion

Langlois' et al's theories have taken us a long way in terms of researching the optimal organizational construct for oil and gas. I have suggested, and the industry concurs with me, that greater recognition of the Joint Operating Committee as the organizational construct provides value within the industry. Through this review, Langlois has taken us down some roads that we otherwise may have travelled on our own. I am certain that we would have discovered many of the same pitfalls that Langlois discovered and noted in his many papers. The use of "production" costs and "transaction" costs as clear classifications of costs managed by two "sub-organizations" either the Joint Operating Committee (production costs or market) or Military Command and Control Structure (transactions costs or firm).

I would like to end this research of Professor Langlois with the note that I will be writing more about his theories as we progress. I have added him to the stable of excellent research that is being conducted by Dosi, Perez, Romer, Winter and Schumpeter. Recall that Langlois is a recipient of the Schumpeter Prize, a well earned attribute. In closing with this final entry on Capabilities and Governance I want to highlight some of the salient quotations. They are;

"The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved." pp. 21

and

"If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion." pp.21

and

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

"Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals." pp. 17

These last quotes of Langlois reflecting to me the role that industry needs to help define and develop. A process of coordination that will be an inherent part of the software development process. A coordination process that industry can and will benefit from without the perceived costs of loosing any competitive advantage. A process that can evolve with the shared cooperation that comes from an enhanced competitive understanding. One that will identify the key competitive criteria as the producers land base, and the capability to explore, produce and exploit these much needed energy resources.

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

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

And industry can then achieve many of the promised benefits.

"... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities." pp 19

"If by contrast, the old configuration of capabilities lies within large vertically integrated organizations, creative destruction may well take the form of markets superseding firms. History offers many examples of both." pp. 21

These changes are needed, and based on my current marketing, much desired. People know intuitively the time is now to proceed in these directions. A time to realize many of the benefits that are promised through their Public Petroleum Data Model, Royalty Simplification, Petroleum Accountants Society of Canada and Canadian Association of Petroleum Land-man and other standardizations.

"If however, change is autonomous - if change can take place in separate subsystems without greatly affecting the way those subsystems are connected together - then markets, which can take advantage of specialized and decentralized knowledge, may be at a relative advantage. Here the issue of standards enters the picture: for standards are typically ways of fixing the connections among subsystems so that change is channeled in autonomous directions. Langlois and Robinson (1992, 1995) call this kind of structure a modular system." pp. 22

"But more quantitative empirical studies also suggest that differential capabilities, and therefor production costs, are significant variables for explaining the boundaries of the firm. In Graham Walker and Donald Weber's (1984) empirical study of the make-or-buy decision, the most important explanatory variable turned out to be the indicator for differential firm capabilities, that is, for production costs." pp. 22

Technorati Tags: Capabilities, Governance, Langlois, Military-Command, Genesys, Software, Strategy

photo courtesy David Sifry

Capabilities and Governance Part III

Professor Langlois' Slides (mentioned before here) # 178 provides an interesting quotation from G. B. Richardson

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

This comment captures very succinctly the reason that I am so closely reviewing this. I have suggested that the Joint Operating Committee is the ideal organizational construct and I now have strong concurrence of that concept in industry. I have recently suggested the Military Command analogy provides a management framework for the command and control mechanisms, and is a possible replacement of the hierarchy. And that is also receiving strong support in the industry. I now have stumbled into the collective works of Professor Langlois et al and can see things in a different perspective that provides the clear definitions of how this software will need to be built.
II Production and Governance: the Post-Coase literature.
A. Historical Sources of the Neglect of Production in the Post-Coase Literature.

The clear definition of production costs being incurred by the Joint Operating Committee and the transaction costs being incurred by the Military Command structure is a fairly clear and well established classification for the purposes of this review. Why is it that Langlois et al want to establish such a tie-in of these classifications with the governance and capabilities views of the firm? I will attempt to clarify for myself and my readers the validity of these theories in relation to the Joint Operating Committee and the Military Command Structure.

"Production costs determine technical (substitution) choices, but transaction costs determine which stages of the productive process are assigned to the institution of the price system and which to the institution of the firm. The kinds of costs are logically distinct; they are orthogonal to one another. As a result, issues of economic organization - such as the boundaries of the firm - cannot turn on considerations of production costs. Present-day theory has not only bought into this view but has arguably reinforced the separation." pp. 10

In a nutshell, the boundaries of the firm can not be defined by production costs. The methods the industry will use to organize its production is through the ability of transaction costs to determine the origin of the production cost from the market or the firm.
B. Production, Coordination, and Incentives in Present-Day Theory.

One of the key points that I noted in the October 2006 Final Research Report was the manner in which the command and control of the firm was not being tossed to the four winds in favour of the joint operating committee. It is specifically suggested that the command and control of the firm is supported through what I have called the Military Command style of management. A Military Command analogy that would enable a pooling of the industries resources and capabilities. Reducing the redundant duplication of capabilities that is built into each and every producer. The redundant duplication of capability necessary to conduct the operation of the producers assets. This has the effect of diluting the overall industry capability, decreasing the speed of operations and increasing the production and transaction costs of operations.

With Langlois' clear definition of "production costs" and "transaction costs." Langlois et al permits the experienced oil and gas worker to clearly discern the two separate components of the "firm" and its redefined boundaries. Boundaries that clearly fall into the two types of costs (production & transaction) and management functions (Joint Operating Committee & Military Command like matrix structure).

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

and

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

Here we have justification and need for the Military Command style of management control. Without the ability to organize the people in the manner that best suits the opportunity, co-ordination of the work would not occur. Production knowledge is a fundamental component of the tacit knowledge of the people in the organization. Each representative on the Joint Operating Committee operating in their respective disciplines know intuitively how to get the work that needs to get done, done. However, is that enough? It would appear to me that there is a role for the authorization, authority, policies and procedures to provide a framework of how oil and gas operations are conducted for company X. And this can be asserted through the Military Command type recognition of Generals to Privates. I would certainly stand guilty of Langlois et al's following quotation in asserting the Joint Operating Committee as the key, and only, organizational construct. However, clearly to do so, I would be incorrect as their are essentially two different organizations operating in two separate domains. Those that deal with production costs (JOC) and those that deal with transaction costs (Military Command). And each of these organizational domains need to be defined and supported in the software. A software application that identifies and supports the legal, financial, operational decision making, cultural, and most importantly the accountability frameworks of the oil and gas producer.

"Largely in a quest to make Coase's ideas more "operational," this literature has arguably both narrowed his explanation for the firm and moved its focus away from issues of coordination, especially qualities coordination. More precisely, both the issue of capabilities and the issue of the coordination of production - in the sense of aligning the knowledge and expectations of the parties who need to cooperate in production - have been overshadowed by a dominant interest in issues of incentive compatibility." pp. 12

and

"If, by contrast, the transacting parties were to pool their capital into a single enterprise in whose profits they jointly shared, the incentives for unproductive rent-seeking would be attenuated. And, because such unified organizations would choose the more productive specialized technology, they would win out in the competitive struggle against the contractual alternative." pp. 13

and

"If, however, assets are specifics, or if opportunism becomes possible for other reasons, it may be efficient to place the residual rights of control in the hands of only one of the parties by giving that party ownership of both sets of assets. In general, the owner ought to be the party whose possession of the residual right minimizes rent-seeking costs, which typically means the party whose contribution to the quasi-rents of cooperation is greater." pp. 14

and

"All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy." pp. 14

These last few quotes providing valuable information on how this software will be developed. I will be following this entry up with Capabilities and Governance Part V in the next few days. This will speak to the role of contracts as coordinating devices.

Technorati Tags: Genesys, Langlois, Software, Research, Capabilities, Development

The Public Petroleum Data Model

I am in receipt of a January 2007 publication from Nickels Publications. This month's issue is on Petroleum Software with the sub-title Upstream Data Surge, and focuses specifically on the Public Producers Data Model (PPDM). A non-profit organization dedicated to standardized data and database schema's for upstream oil and gas. PPDM provides a forum for software companies and producers to standardize the data set for oil and gas. They provide the Data Definition Language component of SQL to build the database for this data. PPDM have extended much of this into the standardization model necessary for the transactions between producers to be standardized. This brochure can be downloaded from the home page of their website.

I have written about PPDM before and those comments are here, here and here. I have now deprecated the comments that I made regarding the use of PPDM and I am now essentially supporting the data model. It would be a mistake to ignore the fine work of these people. The change of heart is based on the comments made by the Chairman of PPDM Arthur Boykiw:

"A second worry is monopoly. As common data standards are developed, oil and gas producers do not wish to see them become the private property of one or two software vendors."

I concur with Art's comments in terms of the standardized data model. There is no conflict between the data model and the copyright that I hold. Using the Joint Operating Committee as the key organizational construct uses a different perception of the data within the model than a system developed for the hierarchy would. As I indicated in the Final Research Report this copyright is a benefit for the energy industry, enabling it to focus on the right solution.

The analogy that PPDM puts out is addressed in "What the heck is a data model?

"Only very rarely does a high-rise office or apartment tower collapse due to poor construction. That's because everyone in the building industry must work within the terms of a building code. In a well governed country that safety code is based on carefully-defined technical terms and standards. The alternative - a construction sector in which architects, engineers, contractors and building materials manufacturers could each define their own safety standards - would be a recipe for disaster, and also for inefficiency.

In a parallel way, the Public Petroleum Data Model defines technical standards for anyone who creates upstream petroleum software applications and administers digital information. Each technical term or standard in the PPDM is defined so that it will mesh well with all of the others. That framework of definitions is called a data model.

Much like construction designers create an enormous range of high-rises, factories, houses and so forth within the building code, software developers can work marvels to the limit of their imaginations within the Public Petroleum Data Model. Think of PPDM as the software building code for the energy industry."

In the Final Research Report I noted a technical vision that included wireless, Java, asynchronous process management and IPv6. The combined effect of these technologies is a logarithmic growth in the data of a producer. How the producer deals with this growth is an integral part of the PPDM role. A process that we can freely contribute too and expand. This alleviates many of the problems and issues of developing a data model, for this development, for the industry and the

I am looking forward to commencing these developments. So many of the basics such as the PPDM Data Model are available to us that was not used by our competitors. In addition to PPDM we have the following attributes of this development that provide significant value to our system.

• Open Source Projects
• Sun Solaris Operating System
• Ingress Relational Database
• Java
• NetBeans and Eclipse Integrated Development Environments (IDE)
• Java Enterprise Edition
• Mature
• Robust
• Capable
• Broadband Internet Access
• Ubiquitous
• High user level capabilities.
  
• Grid Computing
• Processing power
• Low costs
• Zero footprint for producers.
• PPDM's data model
• Standardized
• Mature
• Technical alignment between the producers organizational frameworks
• Legal
• Financial
• Operational Decision Making
• Cultural
• Accountability
  

If there is a golden age for the development of systems, this has to be the beginning of it.

Technorati Tags: Capabilities, Software, Strategy, PPDM

photo courtesy David Sifry

MIT Museum Soap Box

The title of this entry will take you to a video from MIT's Museum "Soap Box" series. The two speakers, Professor Daniel Nocera, and Professor Angela Belcher focus the viewer’s attention on the energy challenges facing society. I highly recommend reviewing the video, the hour and a half is time well spent.

I believe that energy is one of the commodities that people fail to understand the significance of. Professor Nocera documents how the "alleged" alternatives are woefully inadequate to replace the energy produced by the oil, gas and coal industries. His analysis is accurate as he adds up the implications of each alternatives energy capability and capacity.

There are those that subscribe to the peak oil theory. There are those that say the world has adequate supplies for a long period of time. I fall on the peak oil side, based on my thirty years experience in the industry with the caveat that I am unable to discern what good reserves look like. I am not a geologist. Nonetheless both of these camps say that we are very close to having used up half of the known worlds reserves. This is the point that the peak oil theorists explain that deliver-ability will begin to decline and be irretrievably lost. This based on their projections scheduled to occur in 2012. I suspect 2012 will also be the point in time that the innovative oil and gas producer will be in highest demand. This last point is my justification for ensuring that we organize ourselves to meet those needs.

I would also assert during this transition to higher energy prices have been as a result of the short-term deliver-ability problems. Oil and gas has been in a holding and survival strategy since 1986. The producers are unable to ramp up production as quickly as they are now producing it, making for a short-term crisis that will approximate the crisis that we will see in 50 years.

In consideration of the date of 2012, the world has precious little time, around 50 years (2057) to come up with the alternatives that will fill the demands that Professor Nocera documents so well.

Technorati Tags: Genesys, MIT-Video, Innovation, Energy

Revised Final Research Report Abstract.

Preliminary or "Peer" review of the Final Research Report has been completed. The purpose of the peer review is to capture many of the attributes and issues that the industry sees in the report and to assimilate it here. Therefore I am submitting this Revised Abstract as a precursor to approaching the appropriate decision makers in industry. The results of the peer review include the following points.

"What does the industry get."

I am asserting a revised business model then what exists in the marketplace. Investment capital is unavailable for the software developments purposes. Looking at the long-term aspects of this software solution I have concluded it requires a strong revenue stream. This revenue stream starts with the subscription deposits noted below.

"Sticker Shock"

The costs mentioned in the Final Research Report are the total project costs to develop a Canadian oil and gas application. These development costs are amortized over the overall number of producers that subscribe to this development. Ideally this should be the industry at large. Discussion of these initial upfront costs being subsequently equalized over the industry is something that I would support. These costs are allocated over the life of the development, with well over half the costs being incurred in the last fiscal year of development. This provides a decision / stage gate point in time over the 4 cash calls.

"The Joint Operating Committee is the appropriate organizational construct."

This involves moving the "Accountability" framework, consisting of the "reporting", "regulatory" and "compliance" sub-frameworks, over to the "Financial", "Legal", "Operational Decision Making" and "Cultural" frameworks of the Joint Operating Committee. This re-alignment of the oil and gas producers organizational focus will have the material effect of increasing the scientific and engineering capability to a higher overall industry capacity. This is based on much of my current research in Professor Langlois, Dosi, Perez and others. This will also facilitate a faster speed of implementation of corporate policies. These concepts are proven in my research noted on http://innovation-in-oil-and-gas.blogspot.com. These concepts have substantial support from the academic community, as noted under the calls to action in the Final Research Report. And it can now be said has tangible industry support.

"The myriad of permutations and combinations of a facility."

Review of the Partnership Accounting module reflects how this system could be built to accommodate the needs of the industry. How this has been handled in the past is poor. I suggest in this research report that the methods and means are at our disposal to provide the CO&O Farm-in / out, Pooling, Lease and associated mail ballots, AFE's etc. The Partnership Accounting module will have the influence on the accounting either through a strict application of the chemical makeup of the product produced, or the legal agreement, or any point in between these two extremes. This is the nut that is being cracked through the development of this software.

Review and comment on the competitive landscape.

CGI was granted a production accounting development on a shared basis between a number of the senior producers. This applications delivery is now in excess of 14 months late and is rumored not to be able to meet its requirements. The limited scope of the application and focus on the linking to each and every ERP vendor makes this a still born project in my opinion. I am also concerned with the level of expectation that these developers would therefore be available to this project. This project will hire the necessary people to make the application function in the market as expected. The people therefore who are coming to this clean slate approach, I will ensure are the best available. I also have methods and means that I can use to increase the overall capacity of the development community in Calgary.

There is now a definitive mindset in the industry regarding the packaged applications provided by SAP and Oracle. There is a general agreement that the oil and gas industry is poorly understood and represented by these vendors and their offerings. It is also agreed that these vendors consider the Canadian oil and gas industry as a niche market, not worthy of any new development investments.

IBM has now sold Qbyte, their oil and gas solution in the market. 140 producers use this solution. Many feel they were buying IBM, and hence no one ever lost their job recommending IBM. Many producers feel the current offering, which will not be supported by the purchaser in this transaction, will have ripple effects throughout the industry. These ripple effects include having an ERP system that is not supported is inconsistent with the requirements of Sarbane's Oxeley. It also makes the demand for IT services during the next 3 years seriously over subscribed.

I want to highlight the point I made in the Final Research Report regarding the copyright I hold. This is a unifying point for the industry to rally around. I am only licensing one company to develop the software and there will not be this scattered or "Venture Capital" approach to developing many solutions at the same time. All the energies of the development community and energy industry are focused on getting it "right". I can state this as no developer will be able to develop alternative systems based on the joint operating committee without a license from myself. This will disable the Venture Capital approach through the fact that Sarbane's Oxeley and general prudence would not permit producers’ employees to use a system from a pirated venture.

Development needs.

The four stage-gate cash calls are calculated on the basis of 10 subscribing producers to this offering. (Based on the minimum budget of $87.7 million.)

* Deposits of $1,000,000 ($100,000 per producer) on or before February 28, 2007
* $10.6 m / # of subscribing producers ($1,06,000 per 10 producers). Due September 30, 2007
* $19.6 m / # of subscribing producers ($1,96,000 per 10 producers). Due September 30, 2008
* $57.5 m / # of subscribing producers ($5,750,000 per 10 producers). Due September 30, 2009

An additional request for 4,000 sq. ft. in the downtown core to September 30, 2008 is required.

Contact Information

Paul D. Cox
403-467-7971
Access my email address through the profile on this blog.

Technorati Tags: Development, Reference, Research, Strategy, Proposal, Genesys, Call-to-action

Photo courtesy troels