We now continue on with our review of Alfred D. Chandler's work. A review of the historical development of the corporation through the last century. This posts notes the publication of a
new issue of Industrial and Corporate Change that is dedicated solely to Chandler for this purpose. This represents a large body of work which our review is being aggregated under the "
Chandler" label of this blog.
Much has changed in the past few decades when the seven sisters (Shell, BP, Chevron, Texaco, Exxon, Mobil, and Amoco) were dominating the oil and gas industry. They were able to generate much of the oil and gas reserves and production in the world due to the fact that they had the size and scale necessary to manage huge libraries of geological and production information and data. Floors of buildings were dedicated to the storage of this data and large departments were dedicated to maintaining these libraries. Next to these large investments were the geological scientists and engineers that were able to access these libraries of information and apply their knowledge on a global scale. These began to fade from prominence in the early 1980's, and today this information is provided through any number of systems that are generally available for a few thousand dollars per month. What was once a competitive advantage in the storage and use of scientific data, has been replaced by the pure scientific capabilities of the earth scientists and engineers.
So powerful were these libraries that most of the geologists trained at the seven sisters, and who had early access to these libraries, are predominately the heads of the independent producers today. Such was the power of those libraries that one could learn enough about a region, that the geologist or engineer could leave the firm, either purchase the property or buy some land and take the chance they would become successful. Chandler notes similar developments in all large businesses.
Indeed, Chandler’s earlier historical work on US railways highlighted the role of these large enterprises in training such manufacturing magnates as Andrew Carnegie and Edgar Thomson. But the importance of established firms as “incubators” and learning for the entrepreneurs who subsequently guided the formation and entry of new firms within the same industry suggests that the barriers to entry emphasized by Chandler were surmountable by individuals or firms able to transfer and improve on the knowledge that they acquired in established firms. p. 21
Although it was and is a science based business, the science today is pure in terms of its application. That is to say, it's more of a scientific theory that drives the start-up success in the business. Large producers are limited to picking off the start-up at the right time where the science is established and the value is not yet fully recognized. This has become a multi-billion dollar game of high risk, high reward science and knowledge based business. It is reasonable to assume that these databases and information were developed throughout the many decades that the seven sisters existed. However, I was only witness to their existence in the late 1970's and the demise of their effectiveness by Information Technology (IT).
This post deals with the paper "
Alfred Chandler and knowledge management within the firm" written by Berkeley Professor David Mowery. However, I want to start with a document that is also included in this Oxford Journal "
Introduction to Management Innovation: Essays in the Spirit of Alfred D. Chandler Jr." by Professor William Lazonick and Professor David J. Teece. I will start with a few quotations from Lazonick and Teece and then move to review the paper of Mowery.
Through a prodigious body of work that included the volumes, Strategy and Structure (1962), The Visible Hand (1977), and Scale and Scope (1990), Professor Chandler made the study of the evolution of business enterprise integral to the study of the evolution of economy and society. His work combined detailed historical investigations with grand sociological syntheses. As a result, Chandler’s study of the modern business enterprise invited social scientists and business academics as well as historians to contribute to our understanding of a central institution of our time.
and
In memory of a great scholar and in honor of his intellectual legacy, Industrial and Corporate Change is publishing this special issue of essays that build on Chandler’s work. We have chosen “management innovation” as the unifying theme of this special issue to emphasize the Chandlerian contribution to the analysis of the ways in which people who exercise strategic control over the allocation of resources put in place organizational structures that can enable an enterprise to prosper and grow.
This last quotation placing the context of the review that we are doing on the geological libraries of the seven sisters. Today the geological and engineering issues and the opportunities in the oil and gas are all known. What isn't known is how to solve or take advantage of them. For example tight gas formations hold significant volumes of natural gas. Most people know where the tight gas resides in the world, the ability to develop them into commercial fields is the trick. Now as the development of packers and multiple fractures on lateral wells becomes more commonplace, the science moves onto other issues. Maintaining a competitive advantage in this environment is temporary, and the firm needs to move quickly through the sciences or have the capability to aggregate oil and gas reserves by acquisition.
Sustainable competitive advantage in the large corporations that emerged from the historical processes analyzed by Chandler typically rested on more than technological capabilities alone. Instead, it was the creation of technological and organizational capabilities through corporate investments in management, manufacturing, and marketing, as well as the managerial ability to recognize the business contexts to which these capabilities were best suited, that differentiated successful from unsuccessful corporate performance over the long run. p. 2
I believe that all sizes and all types of producers would be advantaged by having People, Ideas & Objects
Draft Specification built. In addition to having access to the geological and engineering technologies and capabilities, Mowery notes the
organizational capabilities were necessary as well. Today the barriers to entry are not so much
just the sciences, but also the ability to be in compliance with the various regulations and governance frameworks that govern the modern corporation. Recall we are moving the Compliance & Governance frameworks of the hierarchy to align with the five frameworks (legal, financial, cultural, communication and operational decision making) of the Joint Operating Committee. It is therefore in everyone's best interests that the
compliance and governance required be provided to all participants in the oil and gas industry. What I am seeing is the past barriers to entry being the access to the geological libraries of the seven sisters being replaced by today's barriers of the compliance and governance frameworks of the modern corporations. This is unnecessary and an impediment to progress in the oil and gas industry.
Industrial R&D and the product diversification that emerged from the in-house R&D facilities of many of these firms contributed to the development of the so-called “M-form” corporation (the origins and development of which in the United States were examined by Chandler in Strategy and Structure), in which corporate management and strategy formulation were organizationally differentiated and separated from functional management. pp. 2 - 3
And that is why the bureaucracy exists. What was necessary for the seven sisters to develop this "industrial R&D" demanded that size and scope be managed through the layers of management and corporate management. This is not the situation today, the technology is available to support and identify the key organizational construct of the innovative oil and gas producers, that being the Joint Operating Committee, and a more direct form of ownership where the investor or shareholder is the owner of the properties interest.
For Chandler, therefore, the efficiency advantages of intrafirm coordination underpinned the growth of large firms and increased producer concentration, and explained the differential pattern of adoption during the late 19th and 20th centuries of these new methods for administrative coordination among US industries. p. 6
What has'nt changed in oil and gas is the ability to understand and operate within the industry. The tacit knowledge that is the critical resource that makes the industry operate. Although today it is far more disorganized from the perspective that these capabilities are not housed in one location, the value of the tacit knowledge is just as important, and possibly more important today then a few decades ago. Recall one of our break-through's is that tacit knowledge drives software definition. Tacit knowledge can't be captured, but it needs to be organized.
Central to these studies is the idea of an “integrated learning base” that is rooted in the technical, functional, and managerial capabilities that are embedded in the organization rather than individuals. Chandler argued for the knowledge-based foundations of all three types of capabilities: “ . . . the large enterprise performs its critical role in the evolution of industries not merely as a unit carrying out transactions on the basis of flows of information, but, more important, as a creator and repository of product-related embedded organizational knowledge.” (2005b: 6) p. 13
The technical, functional and managerial capabilities need to be identified and supported in a software application such as the
Draft Specification. Otherwise we are destined to muddle along as the last remnants of the bureaucracy atrophy.
Chandler’s focus on a small number of established firms, most of which were founded before 1940, reflected his view that entry barriers and the development of technical capabilities within these firms precluded competition from entrants. p. 14
and
Chandler’s historical discussion stresses the contrasting paths of development of the leading German, British, and US “first-movers” in chemicals, and then considers the entry by large petroleum firms into the chemicals industry during the 1940s and 1950s, and the difficulties faced by US chemicals firms in particular in their efforts to diversify out of commodity chemicals. As was the case in electronics, the efforts of these firms to diversify into unrelated industries, ranging from oil and gas to residential construction, were consistently unsuccessful, which Chandler attributed to the importance of firm-specific capabilities and the limited applicability of these knowledge-based capabilities to very different industries. p. 15
Clearly energy's history accurately replicates these trends that Chandler discovered. Big oil and gas was able to attain scale through the management of information and knowledge. Technology has had a remarkably destructive effect on these capabilities. And today, the need to have these types of
"technical, functional and management capabilities" need to be re-developed. But not on a global scale as they were by the seven sisters. On a scale that is represented by each and every JOC. The level of focus, in order to be successful, requires that strategy and structure be appropriate for the times. This level of focus (@ the JOC) is one of the break-through's that the
Preliminary Research Report determined was necessary for the innovative oil and gas producer.
As I noted earlier, Chandler relied on a broad conceptualization of the knowledge relevant to the creation and maintenance of competitive advantage. p. 16
and
For Chandler, therefore, competitive advantage rests on more than technological knowledge alone. p. 16
In
June of 2007, which was a critical time in terms of the development of the Draft Specification. This blog reviewed Professor Richard N. Lanlgois paper "
The Vanishing Hand: the Changing Dynamics of Industrial Capitalism" in which the movement away from Chandler's visible hand of management was leading back to the invisible hand of Adam Smith's markets. Professor Langlois is one of the key researchers that was used in the development of People, Ideas & Objects. Mowery notes;
As Langlois (2003) pointed out in his survey of these developments, the “visible hand"; of Chandler’s large firms has been challenged in many industries by a revival of the “invisible hand,” as market-based coordination of transactions among vertically specialized firms partially or entirely replaces intrafirm management of these transactions. p. 18
We see through this historical perspective the work of Chandler being directly applicable to the oil and gas industry. I think we also see the need to act to reclaim what is necessary in terms of corporate organization today. As the bureaucracy atrophies, we have to deliberately replace it with something purpose built. Our focus at People, Ideas & Objects is to do just that.
In his 1973 Presidential Address to the Economic History Association (Chandler, 1973), Alfred Chandler characterized his historical research as being focused on the study of decision-making corporate strategy, and the historical development of modern industrial corporations. p. 21
and
His research on the emergence of the modern, multifunction industrial corporation emphasized the central role of knowledge management as a factor contributing to the expansion in the boundaries of the modern firm and eventually, to the development of the decentralized “M-form” organizational structure. Chandler’s later work on the long-term performance (including the collapse) of established firms in knowledge-intensive industries extended this research to cover much of the 20th century. p. 21
and
Although his research emphasized the importance of knowledge management in corporate strategy and development, it is difficult to develop testable or falsifiable hypotheses from much of Chandler’s work. His invaluable contributions to scholarship derive their force and influence from his masterful reading and synthesis of the historical evidence, rather than from the development of an analytic model or predictive theory. Indeed, as I noted earlier, Chandler’s work on modern high-technology industries failed to recognize the development of new models of competition that threatened the position of many of his older “core companies.” But the breadth of his analysis, spanning more than a century of economic development across three continents, distinguishes his historiography from that of almost any other recent scholar in business and economic history, and helps account for his lasting influence on both historical research and contemporary work on corporate strategy. By highlighting the historical forces that underpinned the growth of the large industrial firms that dominated the global economy for much of the 20th century, Chandler’s work will enable future scholars to better understand the new factors that are transforming the 21st-century economy. pp. 21 - 22
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