Langlois, Innovation and Process Part V

This is our final post of Professors Richard Langlois', Paul Robertson and David Jacobson's January 2008 paper "Innovation Process and Industrial Districts". Our review of this paper, in which Langlois et al introduced the concept of Industrial Districts (ID). A term which is similar in many ways to the concept put forward by Professor Carlota Perez of Small Knowledge Intensive Enterprises (SKIE). Both SKIEs and IDs contain many of the same attributes that People, Ideas & Objects user communities and specifically the Community of Independent Service Providers (CISP) are designed to provide. 

One of the benefits in reviewing Langlois et al paper is our ability to reflect upon how the Draft Specification captures the natural or cultural ways and means of the Joint Operating Committee. Monday's discussion of the way a drilling contracts transactions are designed and implemented was introduced. Simply by selecting which firm will provide which services, the producer or drilling contractor. What hasn't been captured is the full extent of the Draft Specifications application in the act of designing, monitoring and managing "transactions". I will post a detailed review of this tomorrow to help better understand the scope of this "transaction design" thinking.

In many ways the CISP would be considered sub-sets of either SKIEs or ID's. They, with the assistance of the Draft Specification, would provide the innovative oil and gas producer with the means to effectively manage and operate their assets . An innovative oil and gas producer would be focused on the core competitive advantages of their unique asset base and the scientific and engineering capabilities that are made available to them. The dynamic nature of the ID's would be enabled through the Draft Specifications Resource Marketplace, Accounting Voucher, Knowledge & Learning, and Research & Capabilities modules and the Military Command & Control Metaphor (MCCM).

Two significant developments in the application of ID's to oil and gas. Are the risks associated with too high of embeddedness are minimal due to the scientific nature of the industry. The logarithmic decline curve and scope of the sciences involved will provide a check and balance against any over confidence. This will be the case particularly in the sense that the demand for energy is insatiable. The second development is the application of the MCCM to the ID. Having a governance model and structure available to the ID will have a direct effect in assisting the search and discovery of ideas and solutions.

5. Conclusion: Innovation and The Future of Industrial Districts. 

Langlois et al note in their conclusion the value of the concept of ID's to innovation in oil and gas.

As we have shown, much of the attractiveness of compact, highly-localized areas of production results from their ability to reduce search costs, but this is accompanied by the risk that the knowledge available in any given district may be substandard. But new information and communications technology (ICT), may make it possible for firms to draw more cheaply and effectively on diverse sources of knowledge and therefore to increase their access to innovative ideas (as well as their ability to market their own innovations if they wish) (Langlois, 2003; Christensen, 2006). This may not undermine all aspects of the operations of IDs because differentiation and specialization retain their importance, and proximity is useful in just-in-time and other lean ways of organizing production. For innovation, however, an ability to tap wider sources of knowledge quickly and cheaply can reasonably be expected to allow firms all along supply chains to consult more broadly than in the past. Improvements in ICT and new search techniques, many of them associated in one way or another with the Internet, not only increase access to knowledge but may force innovation on firms that in the past could shelter in IDs. Because their customers can be better informed, firms in IDs need to keep up to date in order to maintain competitiveness. p. 20

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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BP, Transocean and Halliburton

In the May 2004 Preliminary Research Reports Abstract I wrote:

Oil and gas is entering a phase of complexity, risk and reward particularly in:

• The mature Western Sedimentary Basin.
• The Artic, a harsh and remote area.
• Heavy oil.
• Offshore operations, Pacific and Atlantic.

The scope of operations of an oil and gas concern is geographically, politically and scientifically diverse. The hierarchy limits the detail and focus to deal with the political and technical difficulties of each facility. Expecting an organization with the constraints to innovate is foolhardy.

The hierarchy has created "information overload", which in turn has created a paralysis in decision-making, directly affecting the capacity to change and or innovate. The hierarchy's bureaucratic, complex and conflicting lines of authority have muddled accountability. The ability to identify success / failure, to share those experiences, and to learn from them has diminished and is not progressing. Calgary, as a collective group of independent producers is discovering constraints to its ability to drill wells in the prairies. How can an industry with these constraints consider the complexities of the geopolitical, technical and operational concerns in the frontier areas of oil and gas.

The identification of this problem was not the purpose of the Preliminary Research Report. There was strong general consensus that the problem was correctly identified. What the Preliminary Research Report provided was the proof that by identifying and supporting the Joint Operating Committee, as the key organizational construct of the innovative oil and gas producer, was the solution to this problem. Proving the JOC was the solution was the controversial aspect of the report, and the reason that management fought to have it eliminated from the marketplace. It conflicts with managements interests.

Management has had their turn and chose to do nothing regarding solving the identified and agreed to issues. Six years have past and they have contributed nothing to the development of these ideas. In a reasonable world one would assume at least some support. Based on our first quarter funding drive and the fact that management are now running around with their hair on fire, no funding will be forthcoming. Investors and shareholders must take this opportunity and seize the active management of the industry from the current bureaucracy. Or watch as their holdings are destroyed by the actions of BP and other producers.

Clearly they can't deal with today's complexity. And here, as reflected in this Wall Street Journal video of testimony by BP, Transocean and Halliburton, they cant even determine who's fault it is, comical.



What I wrote in 2004 was summarily rejected by management. They clearly had their own ideas. Those ideas have now failed and are on display to the rest of the world. Blaming management was what we were entitled to do then, it doesn't solve the problem and at some point managements failure will become obvious to the world. Then the shareholders and investors will be expected to have acted, therefore the time is now to fund People, Ideas & Objects.

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Langlois, Innovation and Processs Part IV

Today our review of Professor Langlois' paper "Innovation Process & Industrial Districts" will look at part 4., the negative effects of embeddedness. Embeddedness is defined as "the degree to which individuals or firms are enmeshed in a social network". Langlois "investigates the effects of social embeddedness on innovation". Noting that;

Furthermore, there may be a relationship between the degree of embeddedness in the industrial district and innovation. It has been suggested that innovation increases as embeddedness increases, up to a point, and that beyond that point further embeddedness results in reduced innovation performance at the firm level (Uzzi, 1997; Boschma, 2005).3 Thus, depending on circumstances, participation in an industrial district can either encourage or impede innovation.

Therefore certain levels of embeddedness in each community of practice is necessary. These communities of practice would consist of local, regional, national and international communities. With access and participation in each by those that work within oil and gas and the service industries. What Professor Langlois explores in this section of the paper is the extent that embeddedness can be under / overdone.

4. Negative Effects of Embeddedness

Oil and gas' difficulty is the escalating earth science and engineering effort contained within each barrel of oil. With finite human resources, the Preliminary Research Report suggested that the industry turn away from its "banking" mentality of providing fixed returns on investments, and focus on its scientific attributes to generate value. These scientific difficulties are understood through out the industry. Much is being learned by everyone by BP's actions in the Gulf of Mexico. It is this learning and sharing of information in each of the communities of practice that Langlois refers to as embeddedness.

Much of impetus behind innovation may nevertheless derive from events outside a district - as a result of innovations developed elsewhere and of shifts in consumer demand. The survival of firms, and of entire IDs, therefore depends largely on their ability to adjust to external development. Indeed, Piore and Sabel's (1984) championing of industrial districts was based largely on their contention that small firms with generic equipment are more flexible in responding to shifts in demand than large, capital intensive firms with substantial investments in dedicated equipment. p. 14

BP's current failures will benefit the industry as a whole. Many will ask why the Gulf has to be exposed to such environmental risk? Here I think that Langlois intimates at where some of the problem may lay.

Nevertheless, the factors underlying successful innovation in some industrial districts may turn out to be weaknesses depending on the broader innovation environment within a trade or industry. Firms in an ID may simply be slow to notice changes arising outside their district because they do not have good external channel of communication. As Marshall (Loasby, 1990) recognized, close relationships among firms and their workers could reduce their access to knowledge developed outside the district and their willingness to consider ideas from unfamiliar or distant sources. p. 15

and

Paradoxically this failure of firms is possible after their IDs have had a period of market leadership. they become over-confident and suffer from what Alberti (2006) calls "success myopia". The result is that trends in innovation (and not just innovation per se) in an ID tend to suffer from inertia - that once tendencies develop, they are harder to stop or to reverse than might be the case if knowledge were generally collected far and wide and if new knowledge were not generated to accommodate implicitly standardized local interfaces. this can lead to severe, perhaps fatal difficulties when the district is not at the leading edge or when consumer tastes have changed. p.15

Definitely sounds like the Gulf of Mexico. Those that are not familiar with the oil and gas industry are frustrated by the efforts of BP. Why not just turn the well off? Why didn't someone think of these problems and have them solved in case of this type of event? Why are actions being taken at such a slow pace? It seems so elementary and yet the industry never considered the possibility of a blow out preventer failing in 5,000 feet of water.

In defense of the industry, the science has become pre-eminent. The Gulf of Mexico shows exactly the extent of these difficulties and tomorrow will not be any easier. Looking at the logarithmic decline curve of a reserve report focuses the mind and in my opinion limits the risks of the possibility of overconfidence. However, the scope of the overall sciences is too great for the means of organizational structures being currently employed. The scientists are working as hard as they can, it's the organizational constraints of the bureaucracy that are causing these problems. Then I could be biased towards building systems to identify and support the Joint Operating Committee in a fashion as described in the Draft Specification. Langlois would suggest that the level of embeddedness is "not enough" for the situation in the Gulf of Mexico.

Boschma (2005) argues that "too much and too little proximity are both detrimental to learning and innovation. that is, to function properly, proximity requires" just the right amount of distance between actors or organizations. geographic proximity, for example, may enhance inter-organizational learning and innovation though in the absence of geographic proximity other forms of proximity may substitute for it. On the other hand, too intense proximity, geographic and otherwise, can result in lock-in. Proximity / embeddedness can evolve over time too, from not enough, to just enough, to too much, suggesting a link between the issues of embeddednesss and life cycle considerations. p. 15

I am not suggesting that a free-for-all of ideas being thrown at BP would have helped. Ideas developed without structure and governance are useless to any of the firms residing in any community of practice. This is an area where the Draft Specifications Military Command & Control Metaphor (MCCM) would enable the right type of ideas to percolate to the top. For example, if, the MCCM was in play in the situation in the Gulf of Mexico. Having everyone in the global oil and gas and service industries designated with a "name, rank and serial number" (etc.) would allow those ideas from participants who work in offshore oil and gas, who are senior engineers, who are intimate with sub-sea operations, be found instantly. In addition if there was a community of practice that existed with the MCCM implying some structure, would the social embeddedness of these individuals have thought of and possibly thought through some of the issues that would have arisen? I think so, but then again I am biased.

For instance, decentralized systems of innovation ( including industrial districts may be at a disadvantage in generating genuinely systemic innovations (Teece 1986), that is, innovations that require the development of new components as well as new ways of integrating components In such a case, the location of much of the relevant knowledge within a tightly coupled systems is likely to facilitate innovation. This need not mean a single vertically integrated firm, but it does mean that lead or coordinating firms - in modern terminology, systemic integrators - must possess a wise range of knowledge or capability and must indeed "know more than they do' (Bruisoni, Prencipe, and Pavitt, 2001). They also need to be powerful enough to force other firms to follow their lead. p. 16

Seeing who has been designated as the "Red Adair" in offshore blowouts would have helped before and after a situation like this. And maybe this individual foresaw the difficulties in offshore blow out preventer's. And allocated a small budget of his engineering firm to research the idea that these could fail. And maybe they would have been well on their way to solving the problem when the incident happened. The alternative today is that the engineering firm would have had to fully developed the solution and marketed it throughout the industry for the oil and gas firm to turn their thumbs down on the idea. As we see in the Gulf today, we can't work this way anymore. Langlois notes;

In addition, their reliance on local standards can impede efforts by firms in an ID to indigenize innovation form outside, again raising the costs of adjustment and the time required. Finally, firms with a mature ID that do develop innovations may not only find it difficult to generate interest within their ID but are poorly placed to market their innovations externally. p. 16

Without these communities of practice in place, where is BP today? The costs of this disaster may seriously impede the firm. BP could face costs in the range of $10 billion with additional damage to the wells reserves. All because management didn't foresee that the innovations of offshore drilling moved ahead of the science. In the scenario that I provided before, where the engineer proposed a solution to what he saw as faulty offshore blow out preventer's. In today's marketplace management will thumb its nose at these ideas. In the future it may solve the problem and eliminate these costs.

People, Ideas & Objects asserts in the Draft Specification that the oil and gas producer is concerned with their asset base and application of the scientific and innovation capabilities of the marketplace. This is represented in the Resource Marketplace, Knowledge & Leaning, Research & Capabilities, and Accounting Voucher modules and the Military Command & Control Metaphor being extended to the communities of practice. If BP adopted this strategy of focusing on their assets and capabilities, where would they be today?

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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Professor Thomas Malone on Organization

Taking a quick break from our review of Professor Langlois' paper "Innovation Process and Industrial Districts" we have a quick article and video series from MIT Professor Thomas W. Malone. We covered another video of Professor Malone's back in February of 2006, in both instances he is promoting the ideas that are part of his book "The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life".

MIT Sloan Management Review are providing this article and video series entitled "A Billion Brains are Better Than One". One of the first points that is made is it's not about the technology.

Well, sure, executives and everybody else knows about the new kinds of technologies that keep popping up. But there’s a key perspective that a lot of people don’t really get yet, which is that these new technologies change the essence of organizations.

Moving to the Joint Operating Committee (JOC) is only possible through the use of the new Information Technologies. But the real value resides in the interactions that can occur between people and organizations. When we structure the Joint Operating Committee with the Draft Specification is when we begin to generate that value.

There is also the scope of these changes. Through our review of Professor Carlota Perez we have been able to map the impact that technologies have on the long term economy. Creative destruction is the term that best describes this process of renewal. The Information & Communication Technology Revolution (ICTR) provides the equivalent impact of the industrial revolution. And people within the oil and gas industry can fully participate in this by joining People, Ideas & Objects here.

To a greater degree than any technologies since those that enabled the Industrial Revolution, we’re now in the midst of a transformation in how businesses are organized. And the changes are not in production technology, but in coordination technology.

This is not a short term one off type of arrangement. This is a permanent change in the way that the oil and gas industry will operate and organize itself. I see a 40 year cycle of innovation and iterative development being generated by these communities. That is the scope of the possibilities. Malone notes;

You don’t think the corporate world understands the distinction you just made?

No, I don’t. Most people still think of technology as something that we use to do the same old things, not as something that changes the things we can do in the first place.

and

The change to more decentralized businesses is well underway. I think there’ll be ups and downs. Some companies will go up, down, backwards and sideways. It’ll be a complex process, something that will take place over decades. But it is one of the most profound changes that we’ll see in the first half of the 21st century.

Being part of that change is what gets me up in the morning. We stand at a point in time in which we can participate in positive change. Where the scope of what can be achieved in the next few decades is unimaginable. This can only happen as a result of the full deployment of Professor Carlota Perez "Small Knowledge Intensive Enterprises" (SKIE) or Professor Richard Langlois' "Industrial Districts" or People, Ideas & Objects Community of Independent Service Providers (CISP). Only then can we optimize what Professor Malone says are the benefits of this type of organization.

I go into a lot of the details about this in my book The Future of Work (Harvard Business School Press, 2004). But the short version is that I think we’re likely to see these changes first in the places where the benefits are most important. The benefits of having lots of people make decentralized decisions are that people are more highly motivated, they work harder, they’re often more creative. They’re willing to be more inventive, to try out more things. They’re able to be more flexible when they can adapt to the specific situation in which they find themselves rather than having to follow rigid rules sent down from on high that may or may not apply in this particular situation. And often, they just plain like it better.

and

But in a knowledge-based and innovation-driven economy, in high tech, R&D-oriented industries, the critical factors of business success are often precisely those benefits of decentralized decision making: freedom, flexibility, motivation, creativity.

The question is how do these changes come about. First by becoming a member of this community. Second we secure the necessary funding to support the communities in the long term. These are the themes of which we are writing about here. The current management of oil and gas will not participate in this revolution in which they are not a part of. They have chosen a form of organizational self-selection. These communities appeal to the investor / shareholder in oil and gas. And collectively the People, Ideas & Objects and associated communities provide these investors with the means in which to organize and manage their oil and gas assets.

I actually think the changes will happen more often from new companies, new organizations that are started on a different basis right from the beginning. They won’t always work. It’s not always a good idea. But in the cases where a decentralized way of working actually works better, those new companies will have an advantage. They’ll grow or be replicated by lots of other similar companies. And eventually, the old companies that haven’t figured out how to change themselves will either be acquired or go out of business or belatedly imitate the new ways of doing things.

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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Langlois, Innovation and Process Part...

Today in our third installment of Professor Langlois paper "Innovation Processes and Industrial Districts" we discuss Transaction Cost Economics (TCE). Which are an important element of the Draft Specification. In 2009 Professor Oliver Williamson of Berkeley won the Nobel Prize in Economics for TCE, reflecting the heightened importance of this topic. Wikipedia defines the term here. Of note, once we have completed our review of Professor Langlois we will be moving on to a review of Professor Oliver Williamson. [Professor Williamson has the majority of his material behind pay walls and therefore are not freely available. I therefore will not be able to provide access to the documents.]

Professor Langlois talks about his concept of "Dynamic Transaction Costs" which he describes in his paper "Transaction Cost Economics in Real Time".

This paper attempts to place the theory of the boundaries of the firm within the context of the passage of time. More precisely, it resurrects and places in a modern frame some of the insights of the classical and Marshallian theories of organization. The modern reinterpretation of those theories centers around the 'capabilities' view of the firm. Taken together with governance costs, the capabilities of firm and market determine the boundaries of the firm in the short run.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firms capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them.

Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at the firm and market as alternative -- and sometime overlapping -- institutions of learning. p. 99

This discussion of Dynamic TCE is important to the oil and gas industry. At today's energy prices the average upstream employee generates approximately $4.1 million in annual revenue. (Based on Total's production of 2.34 mboe / day, 16,005 employees and today's prices.) Oil and gas is a capital intensive industry. The number of people that are employed in the global oil and gas industry is small compared to most industries. It is this nature of the oil and gas business that brings the relevance of Langlois' theories. To be innovative, will be costly, to employ the style of marketplace dynamics discussed in this paper will also be costly. However, the ability to increase the productivity of the employees and Industrial Districts (ID) will require these investments, and the funds will not necessarily be a large percentage of the costs incurred in the oil and gas industry.

3. Life Cycle Considerations

To help us recall the terms of the discussion Langlois brings in this excellent summary.

Inspired by Adam Smith’s discussion of the benefits of the division of labor, a number of classic accounts of the life cycle have associated the development of decentralized production systems with an increase in the extent of the market (Young 1928; Stigler 1951). In Stigler’s version, for example, firms start out vertically integrated because small markets do not permit specialization. An increased extent of the market permits the spinning off of those stages of production that benefit from increasing returns, thus generating the potential for an industrial district. As an industry ages in Stigler’s account, declining demand for the industry’s output would lead to an eventual reintegration. It is the central insight of transaction-cost economics since Coase (1937), however, that production costs alone cannot determine whether the division of labor will be coordinated through markets (as in an industrial district) or internally within vertically integrated firms. Transaction costs also matter. And technological change is one important source of transaction costs. p. 10

The oil and gas industry is not subject to a decrease in demand and therefore provides no opportunity for reintegration. I would argue that the scientific demands of energy exploration and production are poorly served by the "integrated" bureaucracies. Moving to a greater market orientation, as in the Draft Specification, will marginally affect production costs, and materially enhance the value in designing transactions as the Accounting Voucher module provides.

I want to reinforce these points by pointing out that the majority of field operations are conducted by third parties. Designing transactions is currently done in standard oil well drilling contracts where the chairman of the Joint Operating Committee selects each element of the wells drilling will be provided / conducted by the oil well drilling firm or the producer. Designing transactions are not foreign to the earth science and engineering resources in oil and gas, they are foreign to the administrative or ERP systems that the producer uses. I consider the Draft Specification is aligning the systems to the culture of the industry. Langlois notes that this leads to.

Because ID's do not comprise an entire market, their role in the generation of technical standards is complex. The relatively close levels of association between firms in an ID can ease the setting of standards within the district because much of the agreement may be achieved informally and the limited number of firms within an ID makes it easier to bring the interested firms together. Furthermore when there are only a few integrators who are determining overall design, less discussion may be needed to achieve commonly accepted interfaces between components. The effects of concentration on overall industry standards are less clear-cut and an industry may fragment into a number of groups dominated by local standards without agreement being reached on an overarching set of standards because there is sufficient volume of output within each ID to allow for self-sufficiency. As a result, while ID's may accelerate innovation along certain trajectories, they may also encourage myopic behavior in the gathering, generation and use of new knowledge. pp. 12 - 13

In this discussion I hope that I have highlighted the nature of how the Draft Specification enables the greater market orientation. By moving closer to the cultural influences of the business, increased dynamic transaction costs will be minimal. That is to say the major impediments to the ways and means of the industry operating in a more innovative fashion. Is 1) management who are focused on the firm, and 2) the ERP systems that are designed from other industries or early stage technologies [SAP]. People, Ideas & Objects provides the industry with the opportunity for a greater innovative footing. By identifying and supporting the industry standard Joint Operating Committee and its culturally systemic ways.

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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Langlois, Innovation and Process Part II

Today we discuss the second part of Professor Richard N. Langlois' January 2008 working paper "Innovation Process and Industrial Districts". A summary of the first part of this series would highlight how the service industry, Community of Independent Service Providers (CISP), users and producer firms would re-organize themselves to facilitate innovation. With the producer firms focusing on their core competitive advantages of 1) a unique asset base and 2) application of the scientific and engineering capabilities available to them. Producers would be able to increase their reserves and deliver-ability. The knowledge, tacit and codified, residing in the "Industrial District" (ID), or Small Knowledge Intensive Enterprise (SKIE) of which the CISP would be considered a part of. As Professor Langlois noted, these communities may be organized in local, regional, national and international fashion with communication being encouraged between each.

Today we are discussing the enhanced division of labor and specialization necessary to expand the economic output of the oil and gas industry. With energy demand projected to be insatiable, the focus of the industry is changing. The scientific capability of the oil and gas industry is somewhat fixed and to increase output will therefore require new forms of organization. People, Ideas & Objects proposes to build the software that identifies and supports the industry standard Joint Operating Committee as the key organizational construct of the innovative producer. Within the software it is implicit that the enhanced division of labor and specialization is a key output of the Draft Specification.

2. Specialization and Embeddedness in Industrial Districts

Differentiation, Specialization and Integration

It is an economic fact that growth is achieved through Adam Smith's division of labor and specialization. To take the energy industry to drill a well may currently require over 1,000 specialized individuals when we consider the scope of individuals from the drilling firms billing accountant to the rig hands, to the geologist engineers and staff at the member firms of the Joint Operating Committee. To move to a higher level of performance will require a more defined and broader division of labor and specialization. How this comes about is suggested in Professor Langlois' discussion of ID's. Moving the majority of the science based capability to the market is the logical choice when we consider the real competitive advantages of producers are resident in their asset base.

The Resource Marketplace module of the Draft Specification facilitates Langlois' ID's. The point that I am attempting to focus on is the need to have the necessary systems in place to support the innovation based market. In addition, a software development capability such as contemplated by People, Ideas & Objects, is necessary to continue the iterative developments within the marketplace, based on the ideas of the greater oil and gas community. 

As adaptation usually takes time, a system that is optimized in the sense that there is near-perfect efficiency in the integration of inputs is probably not only stable but static and hence endangered if the surrounding environment is unstable (as is almost always the case). It is important, therefore, that an industrial district actively generate change in its internal relationships and in those with the outside world, and that it is flexible enough to absorb change without serious losses in efficiency. Inability to change either or both of the internal and external relationships contributed to the decline of such industrial districts as the textile and fashion district of Como (Alberti, 2006) and the eyewear manufacturing district of Belluno (Camuffo, 2003). p. 4

Flexibility has its costs and these directly affect performance. That is a given, and a static industry is a dying industry. I think that Professor Langlois clearly shows the risks and shows that a balanced approach may be the best strategy. We run risks and rewards in whichever direction we take. And maybe the optimal strategy is an ability to pre-select the balance of these criteria within the systems we build. Irrespective of the choices made. The key criteria is an enhanced specialization, division of labor and a capability to further enhance the division of labor and specialization.

Embeddedness and Centralization

In our first quarter 2010 budget drive we proved the management within oil and gas will not act to develop the Draft Specification. Alternatively we have turned to the investor / shareholder as the source of our budget funding. Oil and gas investors have the opportunity through People, Ideas & Objects to build the infrastructure necessary to manage their oil and gas assets in the most profitable manner. [The stated objective of the CISP.] Langlois ID's and Perez' SKIEs facilitate this form of organization through the industry standard JOC.

Because of their structure, industrial districts offer important benefits in innovation processes. For one thing, the high levels of differentiation and specialization allow firms, in the Smithian fashion, to focus on aspects of the supply chain in which they are especially competent. p. 5

What was able to be achieved through the hierarchy and "bigger is better" organizational thinking has been lost in the past 25 years. Bureaucracies were known to be inefficiently efficient, and for the past 100 years society has benefited greatly. We now see the multitude of stakeholders of these large corporations disenchanted by the performance of these organizations. Society is concerned about the environment, consumers are demanding more, better and faster service, and shareholders are being treated as poorly as could possibly be conceived of just a few years ago. The only benefactors appear to be the management. Their lack of financial support for the ideas represented in People, Ideas & Objects ensure that their way will remain unchallenged.

I see the future in many ways being an extension of the individual. The scope of an investors domain would be much smaller and be a direct function of his / her own capabilities. A move toward a much more hands on type of operation. Management is redundant, compromised and has lost the motivation to act on its stakeholders best interest. I foresee the management role being codified in the People, Ideas & Objects software that the investor uses to manage their operations. This assumes substantial administrative performance is provided to the investor.

The stakeholders that would benefit from this need to orchestrate this monumental change through active financial support of People, Ideas & Objects. With the Community of Independent Service Providers being a critical element of the embeddedness and a "virtual" Industrial District. 

Strong ties (Granovetter, 1973) among workers, including managers, can increase the amount of information available to firms and the readiness of people to share what they know when relationships gain a dimension of friendship to counterbalance the competitiveness among firms. p. 5

Communities of Practice and Knowledge Diffusion

To suggest that the oil and gas investor / shareholder, organized around the JOC, supported by the CISP and other ID's -- as represented in the Resource Marketplace module of the Draft Specification, is a fundamental and bold redrawing of the ways and means of the oil and gas industry. One that is based on an understanding derived from 30 years of working in oil and gas, utilizing the capabilities of the mature Information Technologies and steeped in the academic research conducted here. One sees a vision of how the industry could operate in a more natural and logical manner. One consistent with the culture of the industry, the JOC, that is summarily ignored by SAP and other systems vendors. A vision that deals with issues and opportunities that are open and available to those in the changed oil and gas industry. However, does this vision provide the enhanced division of labor and specialization that we are seeking?

When embeddedness is strong, the creation of communities of practice (Wenger, 1998; Brown and Duguid, 2000) generates competences that, although possessed by individuals, are collective in that they are based on a set of practices that is common to all members of a community. These competences (both tacit and codified) can transcend firm boundaries and become characteristics of an entire industrial district. As Marshall (1975, 197) wrote of nineteenth century Britain, “To use a mode of speaking which workmen themselves use, the skill required for their work ‘is in the air, and children breathe it as they grow up’”. p. 6

Langlois defines a risk associated with a limited distribution of the Industrial District. The limited division of labor and lack of significant levels of specialization obstruct the opportunity for this type of community to develop to their full potential.

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

Although Langlois talks about networks and IT, not at the level needed for this discussion. Critical to the success of this type of industry re-organization will be a software development capability that is an active and involved member of the communities, ID's, SKIEs, CISP etc. This software development capability is what People, Ideas & Objects is proposing we build for these communities.

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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Langlois, Innovation Process Part I

Continuing on with our review of Professor Richard N. Lanlgois, we begin our review of "Innovation Process and Industrial Districts". This is a working paper that was published in January 2008 that deals with what are called "Industrial Districts" (ID) and is his contribution to the book "Handbook of Industrial Districts by Giacomo Becattini, Marco Bellandi, and Lisa De Propris". For the purposes of People, Ideas & Objects, ID's picks up on Professor Carlota Perez' Small Knowledge Intensive Enterprises (SKIE) which as you may recall, our Community of Independent Service Providers are a subset of. In our last few posts we were able to summarize the application of many of Langlois' theories in the Draft Specification.

Key to the success of the Draft Specification is the understanding of what the innovative oil and gas producers competitive advantages are. These are simply the unique asset base they hold and the direct application of the earth science and engineering capabilities available to them. It is considered that some of the engineering and earth scientists would be directly employed by the producer firms, however, there would be a pooling of these resources by the producers represented in the Joint Operating Committee (JOC). This pooling would be augmented by the service industries and a capability resident in the SKIE or ID in the local, regional, national and international communities.

Within an innovative oil and gas industry things will need to change based on the development and understanding of the sciences. Development, identification and analysis of this dynamic capability is what is being discussed in this paper by Professor's Robertson, Jacobson and Langlois.

Typically the Third Italy is dominated by production occurring in industrial districts. The districts are geographically defined productive systems, characterized by a large number of firms that are involved at various stages, and in various ways, in the production of a homogeneous product. A significant feature of industrial districts is that a very high proportion of firms within them are small. A characteristic of the industrial district is that it should be conceived as a social and economic whole. In industrial districts, social institutions are as important as economic. From Dansen and Whittam glossary of terms.

I am familiar with the Italian sun-glass manufacturers "Industrial District". It is in a region of Italy where the population of small towns are organized in a manner described in the definition. Most of the manufacturers and parts suppliers are working out of modified garages in their homes. The article that I read reflected that this enabled the Italians to focus on design and why they are regarded as the top designers. 

I find this paper challenges us in identifying many of the deficiencies and issues that remain unresolved in this proposed community / software development project. Many of the questions that should be asked are being openly discussed in this paper and provides us with the beginning of a discussion that addresses the question of "what's next". How will this community sustain itself and what are its risks and opportunities. Difficult questions and decisions that are needed to be resolved before they are discovered or happened upon. 

1. Introduction.

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

An appropriate comment and one that brings to mind the difficulties in achieving this within the oil and gas industry. Geography, the different professions involved, the complexity of the business of oil and gas, and the capability of the systems that support the business have to be built to accommodate innovation. What I see is these local, regional, national and international ID's all learning and applying the knowledge that is developed and made available. These ID's are a critical resource that are available to the JOC's and are the means in which knowledge is generated and diffused as innovation.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

What more could be necessary then the generation and diffusion of new knowledge in the oil and gas industry. This is why the Joint Operating Committee takes on an enhanced role in this systems development, and why the innovative oil and gas producer needs these systems. You can't get there, to an innovative footing, from where the industry stands today. The primary focus of this software development is to enable the innovation that is necessary for the industry to meet the needs of the energy consumer. And that is simply through enhancing the knowledge, understanding, and use of ideas, a community of people focused on solving the difficult issues associated with the oil and gas business.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. These outcomes can then be relatively easily diffused among firms in the Industrial Districts (ID) because of embeddedness in a common environment. The obverse of this commonality of inspiration and ease of transmission of knowledge, however, may be an inordinately inward focus that results in an ignorance of or disdain for innovation processes in other regions or in industries not represented in the ID. Furthermore, there may be a relationship between the degree of embeddedness in the industrial district and innovation. It has been suggested that innovation increases as embeddedness increase up to a point, and that beyond that point further embeddedness results in reduced innovation performance at the firm level (Uzzi, 1997; Boschma, 2005). Thus, depending on circumstances, participation in an industrial district can either encourage or impeded innovation. pp. 1- 2

Leaving the question of the appropriateness of the concept of "industrial districts" use in oil and gas. We see the difficulty, or balance and risk associated with too much "embeddedness" and its consequences. In today's fast pace of change, the energy producer needs to be able to move with the developments in the underlying science, engineering and capabilities of the industry. Application and optimization of these to the producers asset base is the activity that generates the greatest value, the enhancement of reserves and productive capacity. Is it critical that a producer has the optimized means of drill bit manufacturing? Application of Industrial Districts or SKIEs is only a further extension of this logic or more defined division of labor.

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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McKinsey on the economy.

Yesterday we saw the markets respond negatively to the debt situation in Europe. This has had an adverse effect on the global markets with many reflecting a flight to quality. It appears to me that the effects of the various government stimulus initiatives have enabled economies to avoid the crisis from becoming to great. However, there are  those unsustainable levels of debt that are carried by most countries. This situation appears to be ignored by many administrations, including the U.S., and the need to address them seems to be the priority being asserted by investors. Loaning money out at low interest rates may be at an end. Markets will continue to reflect these concerns until such time as Professor Carlota Perez “Deployment” period is fully installed.  

McKinsey have published their Global Survey results which clearly reflect the concern for debt is substantial.   

Executives in Europe and North America are haunted by the perception of crippling public debt levels: 54 and 61 percent, respectively, think that public-debt levels will have a “significant” or “severely negative” impact on GDP growth in their home markets. In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a “positive” impact or “no impact” in their home markets.

Volatility remains high and this is reflected in yesterday’s U.S. stock exchange drop of 1,000 points, suggesting that buyers were few and far between. This volatility, unlike in 2008, will not lead to the types of economic impact that we have just recovered from. However, with large debts and the potential for higher interest rates, the long term flexibility of countries, companies and individuals is more constrained. Looking at oil and gas companies balance sheets, and understanding that these were mostly financed in short term markets, higher interest charges may constrain their capital expenditure programs. Issuing debt on longer terms will have this effect even if there is no change in market rates.

McKinsey note two positive trends that may be developing. For many decades, short term concerns drove the agenda of most companies.

Companies are shifting their strategic planning from crisis mode to a more balanced consideration of short-term profitability and long-term strategic issues: one-third now focus equally on the short and long terms, compared with one-fifth in 2009.

Information Technology being a key variable in increasing firms competitive advantage. This reflecting a timeliness of People, Ideas & Objects and associated communities. 

Technology will continue to materially reshape consumer awareness, choice, and interactivity models, and companies should be striving to tap the power of technology to improve their competitive advantage.

Let’s hope these trends continue. 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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Langlois on Chandler Part II

Part II of our review of Professor Richard Langlois' paper "Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History". Today's post looks at capabilities development from an evolutionary point of view. Langlois notes his and Chandler's preference is to focus on evolution in the development of the firm and markets capabilities. One of the major problems with moving to use the People, Ideas & Objects Draft Specification is the radical or revolutionary nature of the necessary changes. The way in which most firms are operated today is substantially different then what is contemplated in the Draft Specification. In this post I argue these changes are evolutionary and bring the oil and gas producer closer to its more natural form of organization, the Joint Operating Committee (JOC).

During the 1960's systems capabilities were limited and their applications were quite crude. Organizational developments were therefore constrained by the limitations in Information Technologies. The focus of systems development was the firm itself, and that focus was driven primarily by the compliance and governance requirements of firms (Accounting, Tax, Royalty, SEC etc). The Joint Operating Committee was secondary to the demands of the compliance and governance frameworks of the firm. This systems thinking grew over a period of time in which it included several generations of people. Through this process the administration of oil and gas became more oriented to the compliance and governance frameworks and conversely more withdrawn from the five frameworks of the JOC.

It is my opinion that the Draft Specification is not revolutionary in it's move to the JOC, but evolutionary. Particularly from the point of view that we are moving towards the common-sense form of organization. Leaving this systems thinking perception behind is what is necessary for the innovative producer to attain the speed of operations necessary to compete in the oil and gas industry. Langlois notes;

Drawing on many of these ideas, Paul L. Robertson and I have proposed an evolutionary theory of what we call business institutions, that is, of markets, hierarchies, and the many hybrid forms that live between and around markets and hierarchies. What drives the theory are the costs faced by various business institutions of acquiring economic capabilities suitable to the profit opportunities they face. p. 360

With the escalating scientific demands contained within each barrel of oil, the key constraint is the number of earth scientists and engineers. Can we increase the volume of these key individuals at will? Of course not, and with the potential retirement of the senior levels, this issue will only become more acute as time passes. The Draft Specification deals with the limited engineering and earth science resources by addressing the bureaucracies need to develop 100% of their capabilities in-house. These silo's of capabilities built within each firm are designed to deal with every possible contingency. The building of individual silo's within each firm introduces a redundancy that is unaffordable in the current and future oil and gas industry.

There is also the issue of the means of organization of these resources. The hierarchy provides for an advanced division of labor, however, what is needed to expand the economic output of the oil and gas industry is a more detailed division of labor. The Draft Specification deals with the earth science and engineering demands by using the Information Technologies to pool the technical resources of each producer represented in the JOC. These technical resources are further enhanced by enabling a greater role of the service industries to provide a dynamic capability through the marketplaces that support the innovative oil and gas producers. These are reflected in the Draft Specification's  Military Command & Control Metaphor, Resource Marketplace, Knowledge & Learning and Research & Capabilities modules.

Please note as well, the Draft Specification places Intellectual Property (IP) development for the industry in the hands of those with incentives to earn their benefits. The producer firm's competitive advantage is derived from their asset base and application of the firm and markets scientific capabilities to those assets. Development of the IP necessary for multi-lateral fracing and other innovations is best left to the market. A market where those that have the ideas will benefit from their development. Simply the scientific issues that face the industry will not be resolved by a bureaucracy. The difficult and timely effort necessary to develop an idea will only be undertaken by those that deem some benefit in doing so. The Draft Specification therefore respects the IP rights of individuals and corporations that are able to expand the scientific capabilities of the oil and gas producer.

Professor Langlois notes three factors are important. Application of this framework to the methods used in the Draft Specification will provide an understanding of the choices that were made.

1. The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360

2. The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360

3. The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360

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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John Hoffmeister

Former Shell Oil Company President John Hofmeister is in the news today and seems to be everywhere. Booz & Company have pre-released this article entitled "Why We Hate the Oil Companies". This article is a summary of his upcoming book by the same title, and it has some interesting points of view. Hofmeister is concerned, as we are at People, Ideas & Objects, about the demand side of the energy equation.

Total energy use in the United States has tripled in the six decades since 1950. Consumption has also shifted from manufacturing to residential and commercial use; much of this growth can be traced directly to the increased use of computers and associated servers, printers, and other devices. With the massive populations of the world’s emerging economies, the spiral of energy demand is accelerating. But both governments and the energy industry are dismally unprepared for a future of rapidly rising energy demand and insufficient sources of supply. pp. 2 - 3

And in a related article published by worldoil.com (Page 3).

More recently, despite the high oil price “wake up” call delivered to the US during the period 2005-2008, policymakers have been unable or unwilling to address the nation’s energy security, economic competitiveness that comes from affordable energy, and the potential jobs creation initiatives that a sound energy policy would and should deliver. Given the current trajectory of an aging infrastructure, decades of restrictions on drilling, failure to tackle the obstacles that prevent both more nuclear plant and clean coal plant projects, frittering at the edges of renewable energy, and avoidance of other energy “hard choices,” within the decade the nation faces an unprecedented energy abyss. p. 3

This is the clearest admission that we have seen about the energy supply situation in the U.S. Hofmeister puts the scope of the problem into focus for those, particularly the management of the bureaucracies, that deny the situation is as dire.

By 2020, there will be inadequate supplies of liquid fuels and electricity taking the nation toward inevitable gas lines, brown-outs, black-outs and extraordinary high prices. p. 3

We need to act. Spending more money to make the problems go away hasn't worked. In fact they have only wasted more time. We need to re-organize our approach to this problem. Re-organize around the Joint Operating Committee with systems and communities dedicated to supporting the innovative oil and gas producer. Otherwise.

The energy abyss will stick around for up to a full decade with all of the national insecurity, economic decline, joblessness and social malaise that accompanies energy shortages in third world countries. p. 3

I don't think that's the future we want to discover for the next twenty years. But if we leave it in the hands of the current management I think that future is certain. All that management have done is denied that the situation exists and avoided developing any solutions. After all, what harm would come to them if they had thrown a few dollars towards People, Ideas & Objects. The managements world is comfortable because they control the budget and therefore nothing can challenge their authority.

The energy industry, despite its technological, geological, chemical, physical, molecular, logistical, scientific and engineering expertise and capacity to deliver affordable energy in endless supply, given all of the natural sources of energy in this country, and the world, will be unable to supply the demand because of public policy constraints. Yet, it will bear the brunt of the blame for energy shortages. p. 3

Whether it is the fault of the public policy constraints as Hofmeister suggests, or managements inaction, either one will be the determining point. If management waits too long, and the public policy falls into line, then we'll know who the real culprit of any energy shortages is.

The nation has to come to grips with its energy future sooner, not later. The time is now not then. p. 3

I realize the tone and topic of this discussion is difficult. We however need to begin approaching these problems in a constructive manner, and that means building the Draft Specification. 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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