McKinsey on Creative Destruction

This article (click on the title of this entry) is a discussion with Richard Foster, a former McKinsey consultant and author of the book Creative Destruction: Why companies that are built to last under-perform the market - and how to successfully transform them".

Some time during the past few years we seem to have forgotten many of the lessons that we learned about the business cycle. That we were now sophisticated enough to suggest that the elimination of the down cycle was within our toolkit of economic control.

Let’s start by looking back. In the 1970s, we had the “Nifty 50”—invulnerable companies that couldn’t possibly lose, and of course they all did. It will be the same today; there will be surprising losers, and survival will come down to simple things, like cash and margins. If you’re a low-margin company without a lot of cash or perhaps with too much leverage, you will not make it. Someone will figure out how to do better.

In the oil and gas industry we have a lot of firms that are in the situation where they have leveraged themselves into losing propositions. We have the piggies, where I have highlighted these firms folly. These firms will fail. Companies like CNRL have incurred so much debt ($26 billion) the last time they reported and $3 billion in working capital deficiencies. How will they survive a long down draft of economic activity? They can't and that is what the process of renewal will undertake to do for the managers that deceived themselves about their control of the business cycle.

The market moves much quicker then the companies are able to change. A process of renewal is therefore necessary in order to make the changes demanded by the market moves. It is critical there be a clear definition of the market and firm in an industry. The Draft Specification designates a clear separation from the market and firms based on the research conducted by Professor Richard Langlois.

There can be periods—5, 7, 10, even 15 years—when that isn’t the case, [firm performance exceeds the market] but corporate performance always reverts to a lower level than the market because the economy is changing at a faster pace and on a larger scale than any individual company so far has been able to do without losing control. That’s the challenge: to create, operate, and trade—to divest old businesses and acquire or build new businesses—at the pace and scale of the market without losing control.

I have incorporated the ideas of Professor Langlois to define new organizational structures. These also require a new division of labor in order to expand the productivity and performance of the industry as a whole. We have limited resource and much to do, if we do not consider these important issues we might best leave the situation to the bureaucracies that exist today. Please review this research if you feel change is needed.

The renewal of companies within industries is well captured in the next quotation. I don't know why it is necessary for the current governments to stop these changes, but using the taxpayer money to prop up old zombie corporations is, to me, a waste.

New, young companies that have conserved cash and have solid and often expanding margins surge ahead. When this happened in the ’70s, companies such as The Limited, The Gap, Home Depot, and John Malone’s TeleCommunications Inc. sprung from the burned forest. After the crash of 1987, Microsoft, Oracle, and Amgen took off. Then in the ’90s, we had the Internet companies. Creation will happen again and will again leave behind the big guys trying to rely solely on operations.

It is also suggested that our economic systems have failed. Those with political agenda's are suggesting that something involving greater input by government is required. President Obama is also suggesting that he has the means to balance his budgets within his current term, clearly he sees things that are not there. Nonetheless the capitalist system is by far the best method of organization, one that deals with the failures and builds anew.

Equity was a very clever invention, and we are not going to give it up. This is the way people are. This is the way commerce works and will continue to work unless capitalism ends. And that won’t happen, regardless of what you read in the press.

Technorati Tags: People's Firm Market Change Trends

Henry Ford on service

A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large." - Henry Ford

Granted these words are in excess of 100 years old. Services still hold the higher margins that sustain a long term profitable operation. And it is reasonable to assume that the same will hold true in the future. Providing the Community of Independent Service Providers (CIPS) with the profitable operations that are necessary to support the innovative oil and gas producer.

The ideas that could make a difference in the day to day operation of a producer. Are locked away in the organization which is unable to exact the changes necessary to release this potential. The employee of the firm is constrained by authority and reach to make the necessary changes to the systems. It is removal of these constraints that I have designed into the Draft Specification.

Is the future of our organizations more of the same in terms of the ability to make the necessary changes. A future in which the sciences and engineering are evolving at a rapid rate, and will continue to do so, how will the organizations keep up. Clearly the bureaucracy can't and has decided that it won't pursue any reorganization of the industry. Therefore they will not be a part of the solution.

How does the individual who sees a better way to operate a certain property. Exact these changes in the systems that support the producer. Clearly this individual needs to be empowered to have the systems accommodate their needs. The producer firm is focused on their competitive advantages of applying their scientific and engineering capabilities to their asset base. The service provider supports these tasks with both the People, Ideas & Objects software applications, and as a member of the Community of Independent Service Providers.

With the objective of the software and services being to provide for the most profitable operations of the producer firm. The user is the critical point of all these organizations success. In order to begin these tasks we need to source the 100 users to move the Draft Specification to the Preliminary Specification . It is these 100 users who will have the greatest advantage in selecting the appropriate areas for themselves in establishing their service offerings. These people can start with this process and join me in making this real.

Technorati Tags: People's Community Development Entrepreneurial Value-Proposition

I've found the outrage.

Click on the title of this entry to be taken to a CNBC snip on the beginning of the outrage of the U.S. decline.

I have avoided commenting on the lunatic Obama Nation, and this will be the only one. President Obama should be locked up in a looney bin.

Social Collapse - Best Practices

This article provides a fascinating and entertaining story. It is written by Dimitri Orlov and is well written and topical. He has the unfortunate experience of living through the decline in the Former Soviet Union (FSR). And quite bluntly suggests that it's the Americans (where he now lives) or the West's turn.

In my original thesis I asked if the American economy was potentially headed down the same road as the FSR, Orlov says yes. It was also in my thesis that I made it quite clear of what I thought of Best Practices. Needless to say I don't have anything positive about this ridiculous practice that businesses some time waste their time on. But the title of this resonates loudly with me.

Orlov's article is located here. He has also written a book "Reinventing Collapse" and has another article located here .

But this talk is about something else, something other than making dire predictions and then acting all smug when they come true. You see, there is nothing more useless than predictions, once they have come true. It’s like looking at last year’s amazingly successful stock picks: what are you going to do about them this year? What we need are examples of things that have been shown to work in the strange, unfamiliar, post-collapse environment that we are all likely to have to confront. Stuart Brand proposed the title for the talk – “Social Collapse Best Practices” – and I thought that it was an excellent idea. 

To make the fundamental wholesale changes that are contemplated in the Draft Specification assumes this level of collapse of the old systems. And who wouldn't encourage the demise of the redundant and pathetic performance of the bureaucracy.

In organizations, especially large organizations, “best practices” also offer a good way to avoid painful episodes of watching colleagues trying to “think outside the box” whenever they are confronted with a new problem. If your colleagues were any good at thinking outside the box, they probably wouldn’t feel so compelled to spend their whole working lives sitting in a box keeping an office chair warm. If they were any good at thinking outside the box, they would have by now thought of a way to escape from that box. So perhaps what would make them feel happy and productive again is if someone came along and gave them a different box inside of which to think – a box better suited to the post-collapse environment.

Now I know why I am considered an outsider. It all makes so much sense. Here is the box that I have custom tailored to those that are concerned about the industries performance and the effect that a lack of energy has on society, please join me here .

Here is the key insight: you might think that when collapse happens, nothing works. That’s just not the case. The old ways of doing things don’t work any more, the old assumptions are all invalidated, conventional goals and measures of success become irrelevant. But a different set of goals, techniques, and measures of success can be brought to bear immediately, and the sooner the better.

This has to go down as one of the more valid calls to action for this system to be built.

We are always either months or years away from economic recovery. Business as usual will resume sooner or later, because some television bobble-head said so.

So if your question is "are we here yet" you'll now know the answer. What is terminal failure can not be resurrected by all the money from all the printing presses.

Right now the Washington economic stimulus team is putting on their Scuba gear and diving down to the engine room to try to invent a way to get a diesel engine to run on seawater. They spoke of change, but in reality they are terrified of change and want to cling with all their might to the status quo. But this game will soon be over, and they don’t have any idea what to do next.

Please join me here.

Technorati Tags: People's Call-to-action Failure Development

So much to do, so little time.

We are reminded today that we have to deal with the transition from the old economy to the new. The poorly managed companies are begining to fail and the demand for energy is affecting the energy prices in a material way. Although I suggested that the Western economies "may" go through a similar period that the Former Soviet Union experienced in the late 1980's. This was premised on the works of Sir Anthony Giddens and Carlota Perez. There is not much difficulty in gaining a consensus on this basis, but I would suggest the time to build the new systems and organizations is limited. 

Today shows why. We have three articles that suggest the energy industry will be changing again as fast as it has changed in the last 18 months. First up is the head of Total Petroleum in France talking to the Financial Times with the following prognosis. 

The world will never be able to produce more than 89m barrels a day of oil, the head of Europe's third-largest energy group has warned, citing high costs in areas such as Canada and political restrictions in countries such as Iran and Iraq.

Christophe de Margerie, chief executive of Total, the French oil and gas company, said he had revised his forecast for 2015 oil production downward by at least 4m barrels a day because of the current economic crisis and the collapse in oil prices.

He noted that national oil companies, which control the vast majority of the world's oil, and independent producers, which play a key role in finding new sources, were "substantially limited in their ability to fund investments in the current [financial] environment"

A serious problem is being created by the lack of focus by the producers. Prices and production are going to become a problem again.

Next up we have the Fox News network article entitled "IEA Sees Risk of Oil Supply Crunch From 2010 ".

LONDON--The International Energy Agency (IEA) said on Monday there could be an oil supply crunch from 2010 once global demand recovers and the impact of delayed investment crimps future supplies.

And lastly on the BBC , the market for crude oil was up today as the IEA made its comments. If anyone believes the existing bureaucracies are the way that these problems will be solved we could just sit and wait for the upturn in the prices. If we thought that this time was was more then just a recession, but an opportunity to make wholesale changes, now would be the time to start developing the People, Ideas & Objects application. 

In the past five years I have been able to think through the development of the system to create the eleven module Draft Specification . This took a lot of time and energy for me to do. Now the much needed work of thousands of people needs to begin putting some building materials on the foundation of this design. That is going to be done through participation in the Preliminary Specification . And it will take more time, possibly as much as another five years. We need to get started, so please join me here .

Technorati Tags: People's Call-to-action Development Economics Leadership

What kind of work?

Lets give some thought to the types of companies that will make up our Community of Independent Service Providers (CISP). Those people that will use the People, Ideas & Objects software application modules in their day to day servicing of their oil and gas producer clients. Those people that will interact with the developers of People, Ideas & Objects to define and build the People, Ideas & Objects applications to meet the needs of their producer clients.

Being a member of the "Community of Independent Service Providers" provides these people with two revenue streams. One being for the services provided to their producer clients. And for their time and efforts in defining and working with the developers. 

The point of this exercise is to build the systems and communities that provide the innovative oil and gas producer with the most productive and profitable means of operation. Lets' for a moment think about this. If the combination of this software and community provide the producer with the most profitable oil and gas operations, is it the ownership of the oil and gas assets that are the most lucrative, or access to the software and community the most lucrative element in the oil and gas business. I think it is the software and community and that is the primary reason that people should join this project and start building the software and the community.

Access to the Intellectual Property (IP) that makes up this system software and community is made through the license that will be signed by each member of the community. This license assigns any IP generated in the development of the application back to me, the originator of the idea of using the Joint Operating Committee. This in turn, through the license is granted back to each member of the community for them to use in an unencumbered fashion. Since all the IP is centralized and made available to everyone we are not subjected with potentially thousands of IP related claims that kill the possibility of this community developing and flourishing. I in turn use the IP to generate the necessary revenues from the producers to pay the community for their work with the developers, and the developers themselves. Producers then are paying for the software and services that the community provides separately. 

On to the subject at hand, what kind of work would the people in the community be doing? I foresee the community being very large. Essentially I do not see the industry employing anyone directly. Each individual may have their own enterprise in which they provide some value added service to the producers. These firms may be single proprietors or larger. Initially I think that all of them will be single proprietors that form as a result of this call for this community. Economically the old ways are being consumed by their failures, we can easily skip this by starting from a blank slate. The types of businesses will be in the areas of expertise you would find in the administrative, exploration and production areas. Or as I said, pretty much everyone.

We have defined in the Draft Specification that the division of labor and specialization will need to be enhanced for their to be a more productive industry. These attributes will have to be determined by the community understanding what is necessary and what is possible. 

I probably have made the understanding of what and how the work will be done in the future a little more confused. It is a future that is not well defined as the input from the community has been very minor up to this point. My responsibility was to provide a workable vision of how I think the industry could and should operate based on the research that I conducted. The knowledge held within the user community will be necessary to optimize the system to meet the objective of being the most profitable means of a producer to manage their oil and gas assets. That is the motivation. The communities purpose is not represented in a one to one agreement that provides individuals with the employment contract. The purpose is to ensure that the community is competitive in its offerings in comparison to any other oil and gas system. This is how the members of the community will earn their living and keep moving the oil and gas industry forward. It is a value based offering, not one that is dependent on the employee - employer concept of "doing a job". Please join me here. 

In this post I am establishing a new Label and Tag for CISP. I will also summarize these thought in a new knol located here.

Technorati Tags: People's CISP Community Innovation Knowledge Strategy

Watch those productivity stats.

Click on the title of this entry to be taken to a Wall Street Journal blog on productivity. We are well within the time period where the revolutionary impact of Information and Communication Technologies are affecting individuals and societies. Organizations are failing in terms of their ability to match the progress and demands of people and society. That is my summation of both Professor Carlota Perez long wave economic theories and Professor Anthony Giddens Structuration theory. Both suggest strong revolutionary changes are needed for progress to continue. Our current economic difficulties are predicted and based on these theories.

Computer technology has developed over the last 50 years and has matured to the point where, I believe, its promise to deliver is in the immediate future. We certainly have gone through many periods of time when the technologies appeared mature enough to effect what happens, and we know that those episodes have met with limited success, and at times spectacular failure. However, if we look at the impact of technology on society it can be generally agreed that it has been phenomenal in its scope and scale.

We stand at a period of time when it is not about the technology. "It's the economy stupid" in a quote from Bill Clinton. We have proceeded along without making the necessary changes in our organizations that people and societies have demanded and technology has enabled. The bureaucracy was a remarkably effective means of organization and served us well for the many decades. Today this way of life is too slow, particularly in its time lines for making decisions. And too withdrawn from the details and needs of the business. Generic business strategies applied over long periods of time to many disparate assets; make for the earnings potential that was adequate for the business' of yesteryear. We need more in order to optimize the output of the world economy. The sustainability of the never changing bureaucracy is at its end. Instead of creating value we are actively destroying it in our day to day activities with these organizations.

Organizations are changing. What we see are the developments of people using technology to more efficiently do the things that build value. These are reflected in the current productivity statistics that modern advanced economies are now realizing. What every other statistic is showing is a steep and significant slide. Business' of all kinds are being challenged with their own useful life. Earnings are deteriorating and what can be done to solve this economic malaise is happening as a result of the installed base of technology. That's right, technology is solving the problem. The productivity stats, particularly in the U.S. are showing a counter economic signal.

For the past ten years productivity has continued in a manner that defies previous understanding of what is possible. It is clear the bureaucracies enhanced productivity is a result of the impact of Information & Communication Technologies.

And if technology can enhance the performance of a bureaucracy, just imagine what it could do if the optimal oil and gas organizational construct, the Joint Operating Committee (JOC). The legal, financial, operational decision making, communication and cultural means of the oil and gas industry were augmented with these technologies? What could be possible. To suggest that the daily commute becomes archaic would be my first hope.

It's clear to me that the technologies have matured and society has benefited. People using the iPhone and the near ubiquitous home computer are compromised in their productivity by their managers need for attendance and the unnecessary ritual of being at the office. This is not to say that the office is something that will expire in its usefulness. It may be the ideal place for teams to meet and solve the big problems they are faced with. Imagine the JOC representative engineers of the producer firms getting together to evaluate and implement a new idea that promises to unleash more value for its owners. A team meeting room may be the best possibility.

The volume of comment and discussion of these trends is entering the mainstream business media. It's time for action, and please join me here. At times I have highlighted the podcasts of Professor Russ Roberts. He has the Podcast EconTalk and is a Professor at George Mason University as well as a Fellow at the Hoover Institute. In his blog he made the phenomenally clarifying statement. 

Good politics requires action, constant proof that the politician is working tirelessly.

Good economics requires quiet consistency so people can plan for the future.

The times we live in are the greatest example in my lifetime of the tension between these two goals.

Technorati Tags: People's Productivity Innovation Change

Shell's van der Veer get's it.

First off I need to declare that I am a Shell brat. My father was employed with Shell Canada for over 33 years and became one of their happy annuitants. I have been raised, fed and clothed by his work at Shell, by far the best oil and gas company in the world. This is for one and only one reason, it hires the best people. I am only disappointed that I was unable to work for Shell during my career, however, I look back fondly at the times in high shool that I worked in the mail room after grade 10 and their geological lab after grade 11.

Van Der Veer has captured the proper perspective and attitude for the oil and gas industry.

Energy demand will double between now and 2050,” van der Veer said today in a presentation at a Houston energy conference. “People like to have electricity and they like to drive in cars.

This is not a political issue, it is not a business issue, its a responsibility of the oil and gas industry that needs to get done. Doubling the demand for energy is probably correct, irrespective, it is our duty to meet the markets demands. What we have been consumed with these past 10 years is maintaining the status quo stock options, bonuses, salaries and perks for management. At least that is the case in CNRL, Petro-Canada, Encana and Nexen, our four little pigs. 

Does anyone suggest that we maintain the hierarchy until 2050? Of course not. Why is it acceptable, in this time of change, that we keep the failed and ineffective bureaucracy? Other then the bureaucracy hanging on to its failed ways, no one would reasonably suggest that the bureaucrats continue on to 2050.  Things are certainly different at Shell.

The Hague-based Shell, the world’s third-largest oil company by market value, is among a handful of petroleum producers that isn’t cutting spending this year on exploration and refineries in response to the $105-a-barrel decline in oil prices.

Keeping the past alive is for those that think our best is behind us. Join me here, and lets continue the journey to at least 2050.

Technorati Tags: People's Change Organization Strategy Trends

Professor Paul Romer on Banks.

First of all Professor Romer is someone we follow pretty closely here at People, Ideas & Objects. His new growth theories are short listed each year for the Nobel Prize in Economics. In a nutshell those new growth theories provide the replacement for the old growth theories of investing in Communications, Transportation and Financial infrastructure to expand an economy. His new growth theories are none other then simply People, Ideas and Things. The precursor to the name of this project.

As one of the chief architects of "New Growth Theory," Paul Romer has had a massive and profound impact on modern economic thinking and policy-making. New Growth Theory shows that economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a "dismal science" that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer's formulation, really do have consequences. Big ones.

Professor Romer is in the February 6th version of the Wall Street Journal with an interesting article entitled "Lets Start Brand New Banks" and in the February 6th Economist Magazine with "Lets Start a Bank". Romer suggests that instead of investing to recapitalize the banking system, it would be more effective to start new banks, and capitalize them with the remaining $350 billion in TARP funds. Noting that with the fresh cash in new banks, the ability to fund up to $3.5 trillion in new lending would occur under existing banking legislation.

This type of thinking resonates with me. Why not skip the failed capital restructuring? The first half of the TARP funds did nothing to spur lending, its intended purpose. Throwing more money at the banks will only provide the same results. Doing the same thing over and over, expecting different results is ...

I have another suggestion. Lets invest in new oil and gas companies. Firms like CNRL can be picked over by those that prefer to kick dead horses for a living. What we need is new organizations based on new and more innovative organizational constructs. Just as the Joint Operating Committee is the legal, financial, operational decision making, cultural and communication frameworks of the industry. Lets build a system that provides the software and services to support the Joint Operating Committee. A system that moves the hierarchies compliance, governance, tax, royalty and SEC requirements and aligns it to the Joint Operating Committee and its frameworks. The investors would then have the tools to manage the assets that they can cherry pick off the CNRL asset auctions. Providing as clean a break as Romer suggests for the banking system. Resurrecting old dinosaurs may make for great story lines in Hollywood, but not at this time and place in terms of the future capabilities of old organizations vs. new.

The investors that are disenchanted with the treatment and results of the previous managements, should fund these software developments and build these new organizations to make them profitable and productive for themselves and society. Carl Icahn was in the Wall Street Journal on Saturday, commenting on the topic of "Capitalism Should Return to Its Roots".  Mr Icahn states:

I have initiated United Shareholders of America to empower shareholders to institute changes, and I encourage you to join our cause. A majority of the U.S. population owns shares. Their voices need to be heard -- now -- on Capitol Hill and in the boardrooms of corporate America.

Mr Icahn's difficulties in dealing with management are well documented. I can assure you that I have faced many of the same difficulties in presenting the ideas around People, Ideas & Objects to the management of oil and gas concerns. Their attempts to steal these ideas and obstruct them from being developed is known by myself, and I can assure you I do not have the scope of Mr. Icahn's resources. 

Nonetheless I think we are in a time, and have a need that makes this software development project real and timely. Please join me here. 

Technorati Tags: People's Romer Economics Call-to-action Funding Icahn

Train wreck in progress.

Looking at Canadian Natural Resources Limited (CNRL ) from the perspective of Professor Nouriel Roubini

Keep alive zombie banks and zombie corporations with balance sheets and debts that haven't been restructured, as in Japan, and you end up in an L-shaped near-depression.

Canadian Natural Resources Ltd is one of our piggies and my personal favorite. They have done nothing to earn the abusive and hostile position they have taken in the industry. Being a bully helps to identify who your friends are, particularly during the downturns. My comments over the past few months are summarized in this list. 

• Fraudulent financial statements.
  
• Losing key shareholders.
  
• Incomplete Horizon project.
  

Based on those three attributes alone, CNRL qualifies as a Zombie Corporation that Roubini defines. There are many other issues that I have commented on before and they can be read here. What I want to focus on today is CNRL's Fourth Quarter Financial Statements. Or actually the lack of them. They won't be publishing their financials until March 5, 2009! What is this? We've seen Devon Energy and Conoco Phillips report large write downs in their asset values. We've seen the reports of BP, ExxonMobil and Shell. So how come we have to wait so long for CNRL.  

I want to make it clear that the non-publication of completed financial statements is a fraudulent act. As an accountant it is well known that if your peers have issued their statements, everyone will have, more or less, completed theirs. Why has CNRL postponed the publication to March 5, 2009? There is no legitimate reason to not have issued them. The tried and true comment that the Auditors are not finished is no longer valid. Not many companies would be subject to any audit induced changes. More of an issue of pride then practice, Management can interpret and apply the regulations as well as any auditor. 

So why is this an issue. Many people within and outside of the firm know what the financials state. Many will be regulated to not indulge in any trading of the firms shares. Many won't, and that provides a distinct advantage over the other "uninformed" shareholders. This deferral of statutory reporting imputes impropriety, and a lack of fortitude by the management to face the music. I think this firm is on the verge of collapsing and does not want to let the information out. If, as I suspect, they can't make mid-month payroll, they will collapse without the need to publish those disgusting financials they tried to pass off in the prior quarter . As I noted here, those statements took on a spectacular and surreal tone. Making funny revenue adjustments is best left in the hands of the crooks, of which CNRL is obviously ready and willing to join. 

My advice is to dump this companies shares as there is significant downside for any existing shareholder. This will be the first firm in which the market for investors will be able to buy the actual oil and gas properties at auction. Purchasing these assets to start over again with the software and Community of Independent Service Providers discussed in this blog, and referred to as People, Ideas & Objects.

All this and no mention or news of CNRL's heavy oil "Horizon" fiasco. Rest assured the property is one of those that will make it into the history books as one of the greatest boondoggles of an incompetent management. But don't think they can be let off the hook, incompetence is a defense of the truly desperate. These actions will be tried in the U.S. and just like Conrad Black and many others, there will be perp walks and convictions.

Technorati Tags: People's Pig Management Failure Economics