Lazonick on Chandler Part I

I introduced Professor Lazonick's paper the other day, it can be downloaded from here. I will be reviewing this paper in multiple posts. Professor Lazonick is from the University of Massachusetts at Lowell and based on a review of the bibliography for this paper, has been writing on the topic of innovation for over two decades. This is the first that I am aware of Professor Lazonick's writings, and we will definitely have to take a look at some of his other papers.

Lazonick starts off with an appropriate reference to Joseph Schumpeter about the importance of innovation.

More specifically, since, as Joseph Schumpeter (1934, 1950) recognized, innovation drives economic development. p. 1

Economic development from the point of view of greater productive capacity to produce oil and gas. How does the oil and gas industry produce more with the same volume of inputs? This is highly dependent on innovation and the capability to innovate that the industry develops. Lazonick notes Chandler;

Chandler (1990: 594) then goes on to articulate in two paragraphs, which I quote in full, what I consider to be the essence of his theory of innovative enterprise, including its contribution to the growth of the economy as a whole, that he had distilled from his trilogy. p. 2

Such organizational capabilities, of course, had to be created, and once established maintained. Their maintenance was as great a challenge as their creation, for facilities depreciate and skills atrophy. Moreover, changing technologies and markets constantly make both existing facilities and skills obsolete. One of the most critical tasks of top management has always been to maintain these capabilities and to integrate these facilities and skills into a unified organization—so that the whole becomes more than the sum of its parts. p. 3

Such organizational capabilities, in turn, have provided the source—the dynamic—for the continuing growth of the enterprise. They have made possible the earnings that supplied much of the funding for such growth. Even more important, they provided the specialized facilities and skills that gave the enterprise an advantage in foreign markets and in related industries. Because of these capabilities the basic goal of the modern industrial enterprise became long-term profits based on long-term growth—growth that increased the productivity, and so the competitive power, that drive the expansion of industrial capitalism. p. 3

2. The theory of innovative enterprise

The Preliminary Research Report, the Draft Specification and all of the work done at People, Ideas & Objects points directly at the Joint Operating Committee (JOC). The reason for this is that People, Ideas & Objects have determined that the JOC is the ideal organizational construct of the innovative energy producer. Lazonick summarizes why an organization like the JOC is that innovative construct for oil and gas, better then I have seen elsewhere.

A business enterprise seeks to transform productive resources into goods and services that can be sold to generate revenues. A theory of the firm, therefore, must, at a minimum, provide explanations for how this productive transformation occurs and how revenues are obtained. These explanations must focus on three generic activities in which the business enterprise engages: strategy, organization, and finance. Strategy allocates resources to investments in developing human and physical capabilities that, it is hoped, will enable the firm to compete for chosen product markets. Organization transforms technologies and accesses markets, and thereby develops and utilizes the value-creating capabilities of these resources to generate products that buyers want at prices that they are willing to pay. Finance sustains the process of developing technologies and accessing markets from the time at which investments in productive resources are made to the time at which financial returns are generated through the sale of products. p. 4

Chandler noted that "strategy follows structure". One of the key attributes of using the JOC is that it enables the strategy to be unique and specific to the property represented. In order for the value to be earned, each facility, each zone of oil and gas requires that a different strategy be implemented. One that is unique and develops the value based on the facts and the situation at the property.

With the structured hierarchy, and its close cousin the bureaucracy, the focus is on the corporate entity. This is reasonable until we discover the conflict associated with many corporate entities represented in each JOC. To eliminate the conflict at the JOC it is important to remember that consensus at the JOC is driven by financial interests. If the strategy and structure are both focused on the same organization, this conflict between corporate entities disappears.

The last attribute is equally important. To establish finance at the JOC does not seem to be an issue until it is realized the oil and gas finance mechanisms are focused on the corporate entity. The Financial Marketplace module of the Draft Specification moves the finance function from the corporate entity to the JOC. This enables proper matching of investments and returns based on the strategy and organizational alignment noted.

As this discussion of strategy, organization and finance show, the culture of the oil and gas industry is based on the Joint Operating Committee. The closer we move to that conceptual model, the greater the alignment, efficiencies and other attributes become. In addition to the focus on the culture of the JOC, there needs to be a revision in another attribute of culture of the energy industry. The culture that we want to change is what Lazonick and Chandler call the optimization culture, and is applied to the oil and gas industry in this post. 

I see the two cultures as being mutually exclusive. One, the JOC, being developed to deal with the unique requirements of the partnerships represented in oil and gas. And the optimization culture exists as a result of the "easy" energy era that existed in the 1980's and 1990's. There was a demand to survive commercially during this "easy" energy era. Innovation was the last thing that people thought of. Optimization for the survival of the firm was the skill that was rewarded. Lazonick notes;

The problem is, however, that the optimizing firm is not an innovating firm; indeed it can be characterized as an un-innovating firm. p. 5

How do we change from an optimizing to an innovative culture? What we do know is that software defines and supports the organization. Therefore to change the organization requires that we build the software first, and that is what we are doing at People, Ideas & Objects. Review of the remainder of Lazonicks paper will provide more answers, and I think that Lazonick and I are not talking about a wholesale change from optimizing to innovating. I would rephrase it for the purposes of the communities represented by People, Ideas & Objects as from where we are today; innovating on top of optimization, to change it to a culture of optimizing on top of innovations.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Value

Number eight of eight in our "Focused on" series looks at the value proposition of People, Ideas & Objects. Noting how the costs of ERP systems have escalated. Where the business models in which they are sold provides People, Ideas & Objects with the opportunity to provide substantial competitive advantages.

The People, Ideas & Objects Value Proposition

Big ERP application costs have soared in the past few decades. Based on selling a generic solution to each producer, the business of selling big iron applications have been lucrative for the chosen few vendors. On the other hand producers are frustrated by the extensive one-off costs associated with customizing, supporting and operating these applications within their firms.

What if the software development costs associated with customization were aggregated for their use over the entire industry. People might argue that a producers competitive advantages would be diminished by everyone having access to the same software. I argue that the innovative oil and gas producers competitive advantages are based on their earth science and engineering capabilities applied to their asset base. Each producer holds a unique and mutually exclusive asset base to all other producers. As a result of this argument, the costs of custom development, although large in terms of aggregate, are infinitesimal in terms of a specific producers production base. This is the future of software and the value that People, Ideas & Objects is designed to provide.

In the marketplace today support costs are substantial as each producer must attain a capability to deal with any and all contingencies. Does the quality of a Java programmer have a direct impact on a producers reserves or production profile? Of course not, then why does the innovative oil and gas producer need to employ the Java programmer directly?

People, Ideas & Objects offers a compelling and competitive value proposition. Our funding is based on the software development and cloud computing costs, plus an element of profit for People, Ideas & Objects. A fundamentally different business model to the big iron ERP vendors. A business model that deals with the two critical conflicts in software, those conflicts being the source code and the software developers customers. Traditionally as more customers use the software, the costs to change the software code become progressively larger, and the costs to deploy the changes more difficult. People, Ideas & Objects eliminates these two conflicts by providing a software development capability and service based on cloud computing. If users determine that an application function is redundant and should be replaced, they won't get an argument from us.

As a result of the Information & Communication Technology Revolution (ICTR), software defines and supports organizations. It can be the glue that holds things together, it can be the cement that stops any change or innovation, and it can be the tools oil and gas investors need to develop their own organizational definitions. An organizational definition that provides enhanced ownership control, compliance and governance over the current bureaucracies methods. A software development capability as defined by People, Ideas & Objects is a necessity to operate in the dynamic and innovative oil and gas industry.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Proof

Number seven of eight in our "Focused on" series looks at the academic proof supporting the transition to People, Ideas & Objects. How the academic community in general, and the key leadership within that community specifically, are actively promoting similar concepts.

The Proof

To summarize and provide proof that the academic community is squarely of similar mindset we need to only highlight the "Chandlerian Perspective". Consisting of the following three simple facts.

1. Technical innovation & Organizational Innovation are interdependent.
2. New Forms of Business organization & institutional arrangements are invented to solve specific economic problems.
3. Organizational & Institutional innovation is an evolutionary process - nothing guarantees "We get it right every time."

To consolidate all of the excellent research that we have reviewed on this blog would be impossible. In addition to our current review of Alfred D. Chandler, we have reviewed the works of (in order of importance to the work of People, Ideas & Objects). Professor's Carlota Perez, Richard N. Lanlgois, Carliss Baldwin, Giovanni Dosi, Oliver Williamson and many others. [Williamson winning last years Nobel prize in economics for Transaction Cost Economics.] All of these authors are focused on the impact of technology and organizational change.

Much of this academic review has been applied to the development of the Draft Specification. The Draft Specification provides a sound vision of how the problems facing the industry are resolved by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This vision sets out to define the boundaries of the firm and markets, how transactions are designed, how modularity in the specification creates a more specific division of labor and how these attributes affect science-based businesses.

One of the key break-through's of the Draft Specification is the use of marketplace's in the modular specification. There are three marketplaces, Resource, Financial and Petroleum Lease, in the specification. Importantly we have learned from Professor Ronald Coase that markets are created. This is a further extension of what we learned in the Preliminary Research Report     that software defines and supports organizations. As a further development in this area, we recently learned of a concept put forward by Professor Carliss Baldwin of "Actionable Transparency". Instead of confusing the reader I will leave it to their desire to further review the concept by selecting this label.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Risk

A quick posting today. Number six of our "Focused on" series.

The Risk

The risk is that if we don't act in a timely fashion, the global productive capacity of the oil and gas industry could decline. We are already at a stagnant level since 2005, to decline would be a serious issue that seems so unnecessary. Exxon has stated that $20 trillion in capital is needed over the next 20 years to meet the market demand for oil and gas. I think we should organize ourselves first, otherwise we risk wasting time and money. Organizing ourselves around the Joint Operating Committee, the legal, financial, cultural, communication and operational decision making framework of the global oil and gas industry.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Opportunity

During our first quarter budget drive, we documented 30 compelling reasons for industry to financially support People, Ideas & Objects software developments. These 30 compelling reasons are now codified into eight "Focused on" entries explaining our priorities and values. This is the fifth entry in this series and attempts to codify the opportunity that the Information Technology & Communication Revolution provides. Particularly through the lens that Professor Carlota Perez provides.

The Opportunity

There's more at play in terms of business opportunities then the insatiable demand for energy and high(er) energy prices. As energy producers see the long term prospects for oil and gas being quite lucrative. We also find ourselves at a period of time in which the economy is restructuring around the Information & Communication Technology Revolution (ICTR). Since 2005 we have closely followed the writings and ideas of Professor Carlota Perez. A summary of her work would show that now is the opportunity that provides for a revolutionary restructuring of all industries based on ICTR.

So if you are an earth science or engineer in oil and gas, or, in the business, economics and administration of oil and gas there are substantial opportunities for people to establish not only a career, but also a service offering based on defining and supporting the People, Ideas & Objects software developments. It is my opinion that people should view this opportunity as a complete and new beginning of oil and gas. One in which everything has to be invented and developed.

Highlighting the key points of Professor Perez' work is best left to a review of this blog's archives and her papers. (Note: Professor Perez has a new paper published that I will be reviewing soon. It can be downloaded from here.)This is the fiftieth article of ours on her work. Perez' research makes up a substantial body of work that provides real value for people who want to take advantage of these once in a lifetime opportunities. Posts highlighting her work can be aggregated under the Perez label.

Two areas that we have not covered in enough detail are the effect of the .com meltdown and the general maturation of the underlying Information Technologies. As Professor Perez states, revolutionary technologies are introduced through two phases, Installation and Deployment. Between these two phases is a period she calls the "Turning", in which the ICTR begins to lift all boats. The "Turning" was the .com meltdown. Reality is that now is the beginning of a potentially thirty year Deployment phase where Information Technology will remake all industries, and particularly oil and gas.

To the second point of the maturation of the underlying technologies. Everything from a technological point of view is in place to drive innovation. Companies like Oracle and Apple are not innovating off new architectures or technologies. They are combining the existing infrastructure in new and innovative ways that bring value to consumers and businesses. People, Ideas & Objects use of the Joint Operating Committee to identify and support the innovative oil and gas producer is the same thing. Providing architecture and technology to drive innovation.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Two points of interest.

I want to highlight two different issues or articles of interest today. The first is a video by Professor Simon Johnson of MIT making a presentation on his new book 13 Bankers. Although not directly on topic, the video provides a different perspective on the financial crisis, which has morphed itself into what is now called the debt crisis. A debt crisis that the oil and gas producers can ill afford. Professor Johnson's video makes the presentation of his issue, and it will be interesting to see how his ideas develop.



The second point of interest is a spectacular paper that I am reviewing. The paper is one of the many from the April issue of the Journal on Industrial and Corporate Change. The specific paper is written by Professor William Lazonick and is entitled "The Chandlerian corporation and the theory of innovative enterprise." The final paragraph of the document reads.

In the 2000s, it can fairly be said that the Chandlerian corporation has ceased to exist. In historical retrospect, Alfred Chandler uncovered the dynamics of a historically-specific business model that drove the development of the world’s richest economy. The essence of capitalism is, however, as Schumpeter recognized, change. The work of Chandler has provided us with a deep understanding of the foundations of US economic power in the middle decades of the last century. His work does not provide us with a roadmap for understanding the business models that have become dominant in the first decades of the 21st century. There is a need for us, who seek to build on the Chandlerian legacy, to remain committed to the integration of theory and history. My claim is that, with its focus on strategic control, organizational integration, and financial commitment, “the theory of innovative enterprise” is a potent framework for analyzing the process of change. It is a framework that, through the integration of theory and history, can enable us to “catch up with history” so that we can analyze the present as an evolving reality before the present as history passes us by.

I will be writing my review of this document in multiple parts. I am also extensively quoting the text and as such it is making for a long series of posts. In the back of my mind I think these posts would be substantially more valuable to the readers if they were to read the paper first and then review the application of Lazonick's paper to People, Ideas & Objects. So with that thought the paper can be downloaded from here.

The many points that Professor Lazonick is making are directly applicable to the oil and gas industry. Over a period of time, during the low energy prices era, the demands of the business  required optimization in order to survive. However, in the past 10 years the marketplace has changed to this new energy era we find ourselves in today. An era where demand is insatiable and supplies are constrained. Creating the higher commodity prices that re-allocate the financial resources towards the innovative oil and gas producer. The marketplace has shifted, however, the energy industry remains constrained in an optimizing mentality that is inconsistent with its needs.

The shift from optimization to an innovative footing is counter cultural. We can't get to the innovative footing the energy industry needs without Schumpeter's creative destruction being put into full force. What is also clear is that the move to an innovative footing is a substantial capital investment. Starting off with the development of People, Ideas & Objects and continuing on within each producer firm developing their own scientific capabilities. The current management are locked in the optimization mindset, and are conflicted by their reported earnings from higher commodity prices. They have poorly prepared us for the need to change, and have betrayed our interests in this constant pursuit of optimization. A constant pursuit of optimization that Lazonick shows leads to the destruction elements of Schumpeter's creative destruction.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Oracle Stack - Database and Middleware

With this post I will start to detail the various Oracle components that we will use in developing and delivering People, Ideas & Objects Draft and other Specifications. These posts will be aggregated under the "Oracle-Stack" label for future reference. I will also refresh the Draft Specification with the greater detail and information provided in these posts. Today, I want to do the easy lifting and talk about the Oracle Database and Middleware products.

What can't be said about the Oracle Database. It is remarkable that the value of Oracle is the vision that Larry Ellison continues to see for this product. Ellison is to databases what Steve Jobs is to the consumer. As it stands, the Oracle Database feature set is light years ahead of the IBM DB2 product offering. I don't know what IBM has been up to, although it doesn't appear to be too much based on the changes to DB2.

One of the key attributes of People, Ideas & Objects use of the Oracle Database is that the database rules. These object-relational mapping strategies frighten me. I started developing to the Oracle Database in 1993 and was quickly indoctrinated to relational theory. Nothing in the object-relational world provides a stronger argument then Oracle's implementation of relational theory.

That being stated we have to live in the real world, and accept that our world includes Java. So the architecture will follow along these lines. The database rules. That is to say all data operations that create, update or delete data are done by the database, based on database related logic. Application logic will be handled by Java and it will have the object-relational mapping between it and the database provided by Oracle's Toplink. This will provide the database integrity that will be necessary for the application to operate as it is required. So in summary, the application model, when creating, updating or deleting data will defer to the relational database for its operations.

Review of "Oracle's Database" layer of applications and frameworks introduces us to clustering, warehousing, security, compression, caching, search and other services. These will all be deployed as we are working within the cloud computing paradigm. The Security & Access Control module of the People, Ideas & Objects application will incorporate 100% of the Oracle Security, Oracle Identity, access control and our Military Command & Control Metaphor. This concludes the discussion on the Database layer and now we move to the middleware.

The same discussion noted above about the database ruling the applications logic when it comes to insert, update or delete operations applies in the middleware layer of the Oracle product offerings. What's important to note is that Oracle had me at "Fusion". This is an unbelievable grouping of applications that are designed to enable the cloud computing paradigm. Controlling all the elements of the technology stack, from silicon, Java, Solaris etc, which makes the paradigm a reality. My favorite product in this layer is the Oracle Coherence offering.

Of note we will also be moving from the GlassFish application server to Oracle's offering. This provides us with a substantial boost in terms of the performance of the servers. GlassFish remains the reference implementation, but Oracle has such strength in this area, that they have placed GlassFish one tier down from their Oracle WebLogic Server Enterprise Edition product. To repeat we will be using Oracle WebLogic Server Enterprise Edition.

This covers off the two bottom layers of the Oracle product offering. As you can see it was the easy lifting due to the fact that we have adopted both layers wholesale. Addition of the Military Command & Control Metaphor will be no easier, nor more difficult as a result of these changes.

Next up will be discussion of the Applications layer of Oracle products. The next post will be on the Application Integration Architecture, specifically. Much of the thinking that went into the development of the Draft Specification has similarly been adopted by Oracle. That is to say their design and ours really resonate.

One thing that we haven't discussed is the cost associated to moving to these products. My attitude is who cares. With the oil and gas industry being a primary industry generating $3.8 trillion per year, the associated costs of Oracle licenses will be far below one one-hundredth of 1%. ($381 million) or there about's.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Product

Continuing on with our review of the eight focus areas of this project. Today I want to highlight the key benefits around the actual software application. These focus areas are compiled from our first quarter's, 30 compelling reasons that People, Ideas & Objects should be funded and developed.

The Product

People, Ideas & Objects is a customer of Oracle Corporations products. With the acquisition of Sun Microsystems, Oracle now provides the hardware and software that we will use in building and providing our software solution to the oil and gas marketplace. In the past number of years Oracle has spent greater then $39 billion in research and acquisitions to make their products the best in the marketplace. With the closing of the Sun Microsystems acquisition, Oracle's offering is now in place and will be used to develop the People, Ideas & Objects application modules and deliver the solution in the cloud computing paradigm.

Today there is also a revolution in terms of the performance of software developers. Agile / Scrum / Lean based software development methodologies are enhancing team performance by metrics of 500 to 1,000 percent. Impressive yes, but more importantly they are eliminating the issues of waste in terms of the excessive cost, chronic lateness and off specification types of issues that have plagued software development for decades. This isn't the end of the problems in software development, just the first of many steps in making the customer focus the primary concern.

One of the many things that we have learned in this blog, and seem to be discovering from many different perspectives. Is that tacit knowledge, the collective understanding held by the users in the oil and gas industry, drives software definition. To preclude the user from the developments would preclude success, literally. Tacit knowledge can't be captured. The user has to have the tools developed to enable them to use their tacit knowledge in the most effective manner. That is the product focus of People, Ideas & Objects.

People, Ideas & Objects, although not a "pure" Open Source project provides the innovative oil and gas producer with open access to the software code that makes up the application. This provides the producer with access to the software code to ensure the application is performing as it should. I foresee the energy industry hiring a member of the CISP to verify the software code for audit and other purposes. This "openness" ensures that the use of the software is consistent with the needs of the innovative oil and gas producer.

Normally I would include the Costs associated with this development as part of the Product Focus. Although our total costs are high, early projections for development of the Draft Specification are in the range of $800 to $1 billion. These costs are allocated based on a low dollar per barrel of oil equivalent per year basis. (Just $1.00 per boe / year for 2010, potentially generating $10 million in the U.S. alone.) Making subscribing producers total ERP costs a small percentage of what those firms pay today. Importantly, as we are learning in our review of Alfred D. Chandler, "Strategy follows Structure". By using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. People, Ideas & Objects enable the producer to focus on their key competitive advantages, the development and application of their earth science and engineering capabilities to their asset base.

Lastly I want to point out that the Apple iPad was released this past weekend. I think the product is a major turning point in the use of technology in business. Chaining one's self down to a desk became all the more ridiculous as a result of Apple's iPad. The ability to conduct your business anywhere and at anytime is now very real. Those producers who subscribe to People, Ideas & Objects will have direct benefit of products such as this. I recently noted some of the innovative ways that we intend to develop to these types of platforms, and have already documented some of the advantages of working with that platform.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Professor David Mowery on Chandler

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

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Focused on the Issue

Continuing on with a series of quick blog posts that summarize the 30 compelling reasons we developed during our 2010 budget drive. Compelling reasons for getting involved in People, Ideas & Objects. I have summarized these 30 reasons into eight "Focused on" summaries that started with the post Focused on the Energy Business. This will be our third post, with our second post, Focused on the User, being published yesterday.

The Issue

Since 2005 global oil and gas production has stalled. Energy prices reflect this fact, and are reallocating the financial resources to the innovative oil and gas producer. Each barrel of oil produced requires progressively more earth science and engineering effort. This trend in the increase in the scientific and engineering effort for each barrel will continue. Science and engineering is where the value in the industry is generated, and the capacity of the bureaucracy to keep up has failed.

We live in advanced societies where man has leveraged mechanical effort through the use of energy. We recently confirmed the calculation that each barrel of oil offsets 18,000 man hours of effort. This can also be restated by saying that we stand on the shoulders of several generations of giants. Energy is the lifeblood of our global economy. Any challenge in sourcing the required energy has a direct impact on our quality of life, and society will have far to fall if there is an energy shortfall. The bureaucracy in oil and gas assures us that there is plenty of oil, yet our production remains the same as in 2005. Resolution of this conflict may be as simple as management suggest, or it may be tragic.

Through research reflected in the Preliminary Research Report, the Draft Specification and this blog. The industry standard Joint Operating Committee (JOC) provides the innovative oil and gas producer with the necessary organizational construct to identify and support innovation in the earth science and engineering disciplines. The JOC includes the legal, financial, cultural, communication and operational decision making frameworks of the global oil and gas industry. Building the systems to define and support these activities is the necessary first step in beginning our approach to solve this issue.

Exxon has estimated that to meet the demand for energy, capital investments of $20 trillion will be required over the next 20 years. I believe we should approach a problem of this scope by first organizing ourselves. Otherwise we risk throwing money at the problem and getting no where. I believe we are beginning to see the beginnings of this issue affect the performance of the producers. Reporting that reserves and production continue to decline is the start of this process. After realizing the increases in prices for oil and gas, why would declines in production and reserves occur? Recently in the Calgary Herald, the Canadian National Energy Board predicts that Alberta's natural gas production will decline by 34% in the next two years. Clearly our organizations are failing society, and as the conflict reflected in our 2010 budget drive shows, bureaucrats are in control.

If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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