The Influence of Inertia on Innovation

We are continuing with our review of Professor Langlois paper “Institutions, Inertia and Changing Industrial Leadership." As we move to identify and support the Joint Operating Committee in the manner that is described in the Knowledge & Learning module of the Preliminary Specification. Change from the status quo bureaucracies is seen as difficult and troublesome. How that transition occurs is through two possible alternatives. One the existing producers can atrophy and die a slow and painful death. Or alternatively, the decision can be made to build the Preliminary Specification and move to the Joint Operating Committee as the innovative construct of the oil and gas industry. If only it was that easy. The decision to make the change is the appropriate choice to make however there are other considerations that need to be made.

One of those considerations is the inertia that exists within the current institutions. Many of the producers have been developed through an era of low energy prices where the survival skills were needed. Innovation was not something that was rewarded and as such did not exist. Now that we are within reach of the era of insatiable energy demand, the need for innovation is the key and that must become the culture of the firm. Therefore in the Knowledge & Learning and other modules of the Preliminary Specification, whether it is by atrophy or by decision, the development of the culture and the Preliminary Specification will always be an “outside” of the mainstream kind of development.

Overall, then, inertia exerts two principal influences on the ability of firms to cope with innovation. Inertia is often a product of successful adaptation to earlier innovation, as a firm develops ways of operating that appear to be so well suited to its internal and external environment that it sees no reason to change. In many instances, this adaptation may prove so effective that the firm can retain a total cost advantage for a prolonged period despite using an outdated technology because it can still capitalize on its master of compatible support and ancillary operations, while firms adopting a new, and technically more efficient technology, are still wrestling with the expensive process of acquiring the endogenous and exogenous institutional backup necessary to gain full value from the innovation (Hannan and Freeman, 1989). p. 7

There is no doubt that we will have difficulties in developing and implementing the technologies involved in the Preliminary Specification. And there will be times when the costs seem to outweigh the benefits. However, in the long run is there a choice other than to pursue these changes? And this fact needs to form the commitment that people have to make to ensure the necessary changes take place. There will always be those that resist the changes, and there is little that can be done about that. What is needed is for those that can make the change to follow through.

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behaviour involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9

After all we are not talking about minor changes to the floor plan for accounting. We are exercising wholesale changes to the oil and gas industry by adopting the Preliminary Specification, and fully utilizing the Joint Operating Committee. Change that is as significant as that which is represented by the change in energy prices and the global demand structure we face. This will not be done successfully in a fashion that smooths over the rough edges.

Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10

Creative destruction has such a profound ring to it. It's times like these that we see the scope of change and the need for change clashing with the desire for change. Some might look back and say that the North American gas business refused to change, and as a result change was forced upon it. Who knows.

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11

It is as I have suggested that People, Ideas & Objects will be there one way or the other.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Choice is Simple

They, the management, have effectively managed the natural gas business in North America. The Deer in the headlights response to the natural gas prices shows that the level of “inertia” in the oil and gas industry is strong. It is to muddle along. Take what is given and survive for another day. Is this the appropriate footing for the innovative oil and gas producer in the era of insatiable energy demand? With rapid depletion? Quotes are from Professor Richard Langlois paper “Institutions, Inertia and Changing Industrial Leadership."

Here we concentrate on explaining the part played by inertia in causing economic displacement. We argue that inertia is often a rational response for firms or governments even after an important innovation becomes available, and that changes in economic leadership, whether on the level of the firm or the nation, may be inevitable when there is significant innovation. p. 4

Its not that the decline in natural gas prices were something that shocked the marketplace. Everyone knew that overproduction was occurring. And its not that the methods that People, Ideas & Objects Preliminary Specification implements are that innovative to stop overproduction. Its just that the way that the business is run needs to change, the inertia has to be overridden with the methods and means that are detailed here in the Knowledge & Learning and other modules.

There is a range of explanations of inertia. One set is the "real" or, in the narrow sense, "economic" explanations that look to abstract variables like demand levels, factor endowments, and relative prices to justify the failure of some organizations to change. A second reason for inertia is simple incompetence, when managers are either too stupid or too idle to adopt desirable new methods. p. 4

We’ve seen the devastation that low natural gas prices have brought to the shareholders in the industry. What’s the plan for the future? Will it all be ok tomorrow? Or should we begin to rebuild the business from the basis of the Preliminary Specification? A basis that deals with the issues that are prevalent in the oil and gas business. One that provides an innovative footing for the future when demand outstrips supply. And then we will be better able to deal with the issues and opportunities of that day.

Here, we concentrate on the influence of institutional variables on inertia. Institutions may either retard or encourage innovation. If the institutional structure is unsuited to a new technology and inert, change will be difficult to implement. When existing institutions are flexible or well adapted to the requirements of an innovation, however, change will be accomplished relatively easily. p. 5

Now is the time to retire the bureaucracies to their permanent Florida vacation. They have forcefully resisted People, Ideas & Objects at every opportunity. I don’t see any opportunity for cooperation, nor do I see any need for their cooperation. This can be done by the people who make the industry work. The entrepreneurs, the movers and shakers and the people who know there has to be a better way. The alternative is as Professor Langlois states a slow and painful atrophy.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

The choice therefore is simple. Either way People, Ideas & Objects will be providing the future oil and gas industry with systems based on the Joint Operating Committee. It’s up to those in the industry today to decide if they want to atrophy and die, or make the change.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Change and Cognitive Dissonance

We continue our discussion on the forces of change in the Knowledge & Learning module. We pick up the discussion around the topics of inertia and equilibrium and how they are managed in the Preliminary Specification. To achieve higher levels of economic performance we know that it requires a reorganization of the resources of both the service and oil & gas industries. We have been discussing these changes here. Our problem comes about as a result of the fact that our society is very advanced and the ability to increase our performance needs to have the necessary software in place first. Without the software no change will take place, and the management of the oil and gas industry are aware of this and are using it to assure that their current positions are never challenged. This has made for a particularly difficult situation for the industry to advance.

Should there be the changes that are suggested in the Preliminary Specification? Should we continue with the SAP perception of what an oil and gas producer is? What is the vision of the oil and gas producer in the era of insatiable energy demand? These are questions best left for others to answer, all I can do is continue to offer the solutions based on the Joint Operating Committee. I would suggest that today’s topics of inertia and equilibrium can best be described in the industry as stagnant and disjointed. But then I am biased. The quotations are from Professor Richard Langlois paper “Institutions, Inertia and Changing Industrial Leadership."

Several features of punctuated equilibrium stand out. Firstly, it is a lengthy process. Even the revolutionary or transitionary phase, in which two or more alternatives vie for success, may be prolonged for decades, or eons in the case of speciation. Secondly, the process, like Schumpeter's: creative destruction," is one of replacement. When there is punctuated equilibrium, the extinction of a species or discrediting of a scientific theory are not enough; there must be a new species available to take over the territory or a new theory to account for the phenomena that the old theory was once thought to explain. Thirdly, each period of punctuated change requires a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents. This shift might be accomplished internally, if the old agents adapt their behavior to meet the new conditions, or externally if they are supplanted by a new group of agents. Finally, inertia plays a central role in punctuated equilibrium by ensuring that change proceeds by fits and starts rather than smoothly and evenly. pp. 2 - 3

The Preliminary Specification provides for the second item in this quote of “there must be a new species available to take over the territory or a new theory to account." And it also provides a vision for the third item in the Langlois’ quote of “a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents.” As we noted yesterday in how the accountants would be motivated to form new and innovative service offerings to their producer clients. So we would be well on our way to making the transition to the environment that is described in the Preliminary Specification, despite the actions of management.

I am also operating from two fundamental assumptions that lead me to come to the conclusion that these changes will take. That the stuffing of another ream of paper in the printer is how the system is fed in the oil and gas industry today. That is, the ERP systems that operate today are woefully inadequate for the needs in the era of insatiable energy demand in which we are about to find ourselves in. And that high levels of cognitive dissonance occurs when people read the Preliminary Specification. That is to say it resonates with their understanding of what an oil and gas system should be, and they desire it.

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3

I know that management need to be vigorously displaced, however the inertia to change will be strong to replace the stagnant and inert systems that so poorly serve the needs of the people, producers, Joint Operating Committees, service industry participants and society in general.

It is through the Preliminary Specification that we are able to see that the development and use of the Joint Operating Committee is an important innovation for the oil and gas industry. By moving to the use of the systems defined in the Preliminary Specification producers, Joint Operating Committees, service industry participants, people and society will all benefit. That from many different perspectives, and in many aspects the changes that arise are a result of what can only be described as a significant innovation. It also has an equal and opposite effect in terms of the response from the established management. They don’t want wholesale change of this scale. Change that will have the effect of reducing the demand for their skills.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Specialization and the Division of Labor

We want to discuss specialization and the division of labor with respect to the Joint Operating Committee and what we can expect to occur in the future as a result of the demands for more energy. Quotations will be from Professor Richard Langlois’ paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism."

It will be through the “Dynamic Capabilities Interface” that the specialization and division of labor is most apparent. The volume of vendors and suppliers that will be used to conduct an operation will be higher than it is currently. Through the further specialization of tasks in the field, the Dynamic Capabilities Interface will need to capture the explicit knowledge of those that are in the field. This specialization and division of labor is necessary in order for there to be an expansion in economic output.

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

I would suggest the extent of the possible changes in the current market is constrained by the use of the current ERP technologies. Having SAP or other ERP systems that do not focus on capabilities or specialization is the issue. When we look at modules like the Resource Marketplace module of the Preliminary Specification and see the “Gap Filling Interface” and note that its sole purpose is to expand the division of labor and specialization in the Resource Marketplace. These are what are needed to lift these constraints from the marketplace and enable these interactions to develop. 

But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization. Rather it is an argument that, in a population sense, large vertically integrated firms are becoming less significant and are joining a richer mix of organizational forms. pp. 3 - 4

We have with the Preliminary Specification the coordination of the operation in the Knowledge & Learning module by the Joint Operating Committee. We also have the full extent and encouragement of the market in the Resource Marketplace module. It is not by accident that these two modules are working together to provide both rich markets and strong operational control for the Joint Operating Committee. 

Industrial structure, then, is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. Industrial structure is an evolutionary design problem. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organization's - governance structure - bring with them their own costs, which need to be taken into account. But technology clearly affects organization. Like a biological organism, an organization confronts an environment that is changing, variable and uncertain. Also like biological organisms, business organizations differ in the mechanisms they use to process information and to deal with variation and uncertainty. Nonetheless, as James Thompson (1967, p. 20) argued, all organizations respond to a changing environment by seeking to "buffer environmental influences by surrounding their technical cores with input and output components." pp. 6 - 7

Or as we like to say, SAP is the bureaucracy. To enable the market, specialization, the division of labor and the coordination of operations requires that the technology and the organization be in place. We can all agree that the Joint Operating Committee is the organizational construct. It is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the innovative producer. And with the modules of the Preliminary Specification we should begin to agree that this is the technology that is necessary to put these ingredients together. 

The role that the Joint Operating Committee will have in coordinating the operations in the field and how the People, Ideas & Objects Preliminary Specification needs to identify and support these markets and changes. We want to discuss how these changes will come about and the probable speed at which they will occur, given if everything these markets need in terms of market supporting institutions were available. Our quotes come from Professor Richard Langlois paper “Institutions, Inertia and Changing Industrial Leadership.”

Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase. pp. 36 - 37

It is the profit motivated accountants that see the opportunity to make a substantial change for their clients and their own personal situation. One that is more enduring and profitable. That is the motivation for the change that will make the transition in the marketplace for the accountants. And it will be the similar changes that are made in the field service offerings. They will see alternative ways of organizing their firms, or have new firms start up, and provide for a further specialization of their skills, experience and knowledge. 

Thus the vanishing hand is driven not just by changes in coordination technology but also by changes in the extent of markets - by increasing population and income, but also by the globalization of markets. Reductions of political barriers to trade around the world are having an effect analogous to the reduction of technological barriers to trade in the America of the nineteenth century (Findlay and O'Rourke 2002). Is this a revolution or the continuation of a long - standing trend? Again, the answer depends on one's perspective. My argument is that, just as the American "globalization" after the Civil War was revolutionary in its systemic reorganization of production toward standardization and volume, the new era is revolutionary in its systemic de-verticalization in response both to changes in coordination technology and to plain-old increases in the extent of markets. pp. 52 - 53

As we have discussed the need for these markets to grow and to change must have a dedicated software development team available to support the growth and change. The Joint Operating Committee, the producer firm and the service industry marketplace all need to have People, Ideas & Objects available to change the software to meet these growing and changing needs. Without the ability to have the technology changed will leave the situation in a stagnant and unchanging environment. Despite the demands for change nothing will happen without the software being changed first. 

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Learning, Then Operational Control

We now want to talk about some of the learning elements of the Knowledge & Learning module of the Preliminary Specification. Having tight operational control during operations leads to a situation where the chance for learning may seem limited. However, the very temporary nature of the operation should lead to the dynamics of the marketplace providing for further learning opportunities. Quotations are from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time."

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. (Marshall, 2961, IV .x.3, p. 271) p. 120

In many ways the characteristics of a learning environment are different from that of an environment designed for operational control. Professor Langlois talks about getting everyone on the same wavelength as one of the objectives of operational coordination. And we have done that by unifying everyone around the capabilities in the “Dynamic Capabilities Interface." This by its nature is counter to the needs of a learning organization.

In this sense, the ability of a large organization to coordinate the implementation of an innovation, which is clearly an advantage in some situations, may be a disadvantage in other ways. Coordination means getting everyone on the same wavelength. But the variation that drives an evolutionary learning system depends on people being on different wavelengths - it depends, in effect, on out-breeding. This is something much more difficult to achieve in a large organization than in a disintegrated system. Indeed, as Cohen and Levinthal (1990a, p. 132) point out, an organization experiencing rapid change ought in effect to emulate a market in its ability to expose to the environment a broad range of knowledge gathering 'receptors'. p. 120

So how is it that these two opposing and contradictory objectives are paired together in one module? There are phases of when the team is being put together, understanding what the operation is and learning the capabilities that are going to be deployed. Bringing in the latest field operations staff and equipment to the job. These are the times in which learning is occurring throughout the group. Then the operational control phase begins in which nothing but the execution of the plan is the concern of the group. The learning is over for the period in which this is happening. There is however, a point at the end of the execution in which the group should input the lessons that they learned into the “Lessons Learned Interface."

How would learning proceed in a system of decentralized capabilities? As I have already suggested, progress would take place autonomously within the decentralized stages. There would be no need for integration unless a systemic innovation offering superior performance arrives on the scene. Indeed, as we have seen, fixed task boundaries and standardized connections between stages might make innovation difficult with the existing structure, requiring a kind of creative destruction. (Schumpeter, 1950). p. 121

The “Lessons Learned Interface” is presented to the people who are representatives of the participant producer firms in the Joint Operating Committee. Results are also presented in the Compliance & Governance and Research & Capabilities modules of the producer firms for all of the Joint Operating Committees they participate in. There they can update the specific capabilities in the “Dynamic Capabilities Interface” and members of the governance team can see if there are any systemic errors being made throughout the organization.

Although they are at opposite ends of the innovation scale. Operational control and learning within one module make sense when the feedback from those operations is critical to future operations. Learning is a part of innovation and it must update the capabilities of the firm and Joint Operating Committees in order to build value for the long term.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Defining Tacit and Explicit Knowledge

We now want to discuss how capabilities are viewed by the users of the information in the interfaces of the Knowledge & Learning module of the Preliminary Specification. After all the amount of information contained within a capability listed within the “Dynamic Capability Interface” to conduct a certain operation would be detailed and it would be inefficient to have everyone reading the same text over and over again. That is why we have computers. We also want to discuss the different types of knowledge (tacit and explicit, or formal knowledge) and note the deficiencies in recording tacit knowledge. I’ll be quoting from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time."

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

When the user is presented with a view of the capabilities within the “Planning & Deployment Interface” they are provided with several different views of the same data. One is the comprehensive view of the capabilities (explicit knowledge) which includes the full extent of the capabilities. Another is just the changes that have been made since the last time the user viewed the document. This can be presented to the user by fading the already viewed text by 50% so that only the new information stands out. Leaving the user to learn just what has changed in the capabilities since the last time they were viewed. There should also be some annotations for the user to learn who authored the changes and when they were authored so that if there are any follow up questions they’ll know who to contact.

The capabilities will include the explicit knowledge of the operation and the necessary information of whom is responsible for the tacit knowledge. Having this information updated by reviewing only the clear text will enable the user to get up to speed on the changes within seconds. Since the capabilities will be the source for all of the people who are working on the operation everyone will be on the “same page” in terms of the most up to date capabilities and the individuals who are responsible for them.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does." p. 106

Getting a handle on these interfaces is of premier importance to the innovative oil and gas producer. This may seem to be an academic exercise for some that will not bear any fruit. However, these are core to the value of the Joint Operating Committee and the producer firm. It is the actions and interactions that are derivative of these capabilities that will determine the success or failure of the innovative oil and gas firm.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm’s physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

and

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108

So what do we have so far in the Knowledge & Learning module. I thought it might be a good time to take a quick review of the situation and the module from the point of view of the Joint Operating Committee. Providing a summary look at the methods of how the information is provided and used by the people who work within the JOC and the service industry, and those that will have access to the various interfaces of the Knowledge & Learning module of the Preliminary Specification.

It should be that each capability that is listed in the “Dynamic Capabilities Interface” be given a serial number that is unique within the entire oil and gas industry. That way when they are presented to the Joint Operating Committee there will be no confusion as to the number of the capability that is selected. This technically isn’t an issue, however, with the interactions between multiple producers in multiple Joint Operating Committees it is probably a necessity.

Recall we have the football analogy that the operational decision is made to employ x capability on the property. Then everyone has access to that capability and are able to review the explicit knowledge that is contained within the document. This includes the engineers and geologists from the various producer firms that participate in the Joint Operating Committee, and the field operations representatives that have been contracted to provide services. Everyone working from the “same page” in terms of expectations in terms of what the operations is going to be.

Once the decision is made to employ x capability, the capability is selected in the “Planning & Deployment Interface” where the people are assigned their roles and responsibilities in the Military Command & Control Metaphor. This will impose a chain of command in how the operation is run and who has what authority over what operation. Additionally the AFE associated with the operation will be included with the “Planning & Deployment Interface” to impose the budgetary control over the operation. Lastly the Job Order system is made available to implement the commands to execute the operation. It is in here, the “Planning & Deployment Interface” where the operational budget, command and control, execution and authorization are planned for and managed. As we have mentioned elsewhere, innovation and free markets are what we are seeking to obtain in the service industry and the greater oil and gas industry. This however does not preclude high levels of tight operational control during the times when it is required.

The People, Ideas & Objects Preliminary Specification moves the innovative oil and gas producer to the “decentralized production model.” Where the ability to shut in marginal production is possible during times of volatile energy prices. The decentralized production model, as we have discussed in other modules, also reduces the operational and overhead costs of the shut in production so that the cost is minimal to the producer firm. It is during the time of low oil and gas prices that the Joint Operating Committee can review the capabilities provided by the participating producers in the “Dynamic Capabilities Interface.” This review will be to determine which capabilities can be deployed that will reduce the JOC’s cost of operating, or enhance the revenues and return the property to production and profitability sooner.

Making operational control, and review & deployment of the participating producers state of the art capabilities some of the key attributes of the Knowledge & Learning module.

We now want to take a quick look at a paper from Professor Richard Langlois entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” In particular we want to focus on the topic of tacit knowledge and how that is handled in the Knowledge & Learning module of the Preliminary Specification. Recall that tacit knowledge can not be captured in the “Dynamic Capabilities Interface." Only explicit knowledge can be captured there. The fact that you can only capture “text book” knowledge is a limitation that all systems must deal with.

The knowledge that is captured in the “Dynamic Capabilities Interface” is very rich and includes the information necessary to undertake the operation from the point of view of all of the people that will be involved. Included in that information is the roles and responsibilities of the individuals who will undertake the command and control of the operation. They are the ones with the tacit knowledge of the operation.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359 

This direction, or command and control, is exercised through the Military Command & Control Metaphor (MCCM), the AFE associated with the operation and the Job Order System of People, Ideas & Objects Preliminary Specification. Having these three tools available allows the tacit knowledge to be deployed in a highly controlled environment. The MCCM enables the multi-person tacit knowledge to be mobilized and coordinated efficiently. The AFE allows control over the budget of the program. And the Job Order System enables execution of the individual orders and commands. The “Dynamic Capability Interface” provides the resource for all the people to determine their role and responsibility, and ensure that everyone is on the same page in terms of the objectives and deliverables of the operation.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints as one competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. Moreover, the costs that can make transacting difficult, and may lead to internalization, can go beyond those that arise in the course of safeguarding against opportunism or damping moral hazard through monitoring or incentive contracts. In such a world, economic activity may be afflicted with "dynamic transaction costs," the costs that arise in real time in the process of acquiring and coordinating productive knowledge. Members of one firm may quite literally not understand what another firm wants from them (for example, in supplier contracts) or is offering them (for example, in license contracts). In this setting, the costs of making contacts with potential partners, of educating potential licensees and franchisees, of teaching suppliers what it is one needs from them, and the like become very real factors determining where the boundaries between firms will emerge. pp. 359 - 360 

We should remember that the participants in any operation will be derived from a variety of organizations. They will be as a result of a pooling of the partnership represented by the Joint Operating Committee. And the representative members of the field service industry who are providing services to the operation. All of these people have the tacit knowledge that is necessary for the operation to be completed. It needs to be coordinated and directed in order for it to be made effective. It is with these four tools the “Dynamic Capabilities Interface,” the Military Command & Control Metaphor, the AFE and the Job Order System that tight operational control of any oil and gas operation will be available to the Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Modularity and Interdependency

We have been discussing modularity between the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. How the knowledge, skills, experience and ideas flow from the producer firms through to the Joint Operating Committees. From the development of innovative initiatives to operational control. We now want to discuss what is needed from a modularity point of view in order to attain these benefits. Quotes come from Professor Richard Langlois paper “Organizing the Electronic Century."

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 5

But this flow is also interactive. To start the process, the capabilities that are listed in the “Dynamic Capabilities Interface” are populated by relevant criteria through to the Knowledge & Learning module. However, there are lessons learned by the Joint Operating Committee in the course of the operation. And these lessons are captured in the “Lessons Learned” interface of the Knowledge & Learning module which is also populated to the Compliance & Governance module. Having direct knowledge of the operation updated to the capabilities of the producer firm in the “Dynamic Capabilities Interface” is necessary for further deployment of those capabilities. The two versions of the “Lessons Learned” interface are provided for the two different organizational constructs. One for the producer (Compliance & Governance) and one for the Joint Operating Committee (Knowledge & Learning).

Users of this information are seeking different purposes for this information. Although the environments in which the two modules are operating (Research & Capabilities and Knowledge & Learning) use the data and information in different ways. Research and innovation vs operational control. High levels of interdependency and interaction on the quality and quantity of the data and information contained within these modules exists.

Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7

• An architecture specifies what modules will be part of the system and what their function will be.

• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.

• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 7

As people work on both ends of the data in these modules. Engineers and geologists within the producer firms developing the capabilities in the “Dynamic Capabilities Interface." And engineers, geologists and service industry representatives in the Joint Operating Committees on the “Lessons Learned” interface. Data and information will be updated and changed from all the participants involved in both the innovation and operational control. Providing the appropriate input and real life involvement and development of ideas and oil and gas reserves. After all, oil lives in the minds of oil men and women.

We now shift gears from a discussion of modularity to dynamic transaction costs. It is through the interactions that are developed in the Research & Capabilities and Knowledge & Learning modules that the capabilities of the producers and the markets will change. These changes will initiate what Professor Richard Langlois calls “dynamic transaction costs.” Included in these costs will be the necessary costs of the software development capability provided by People, Ideas & Objects. Without the ability for the software to change, the organization will remain fixed and stagnate. It is a requirement that the innovative oil and gas industry obtain the dynamic software development capabilities that People, Ideas & Objects is proposing. That way their organizations will remain flexible and change with their needs.

The Joint Operating Committee, using the Knowledge & Learning module will be accessing the capabilities of the participating producers. They will deploy these capabilities in the service industry and develop the land and asset base of the Joint Operating Committee. During the course of its history there will be times where they will not have access to the capabilities they need. The quotes are from Professor Richard Langlois “Transaction Cost Economics in Real Time.”

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's 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. p. 99

Throughout the Preliminary Specification we have chosen to deal with the “dynamic transaction costs” by recording them in an account labeled as such. This will help the producer firm or Joint Operating Committee to identify and begin to control these costs when they are incurred. It is reasonable to assume that in the innovative and change oriented environment that is the future of the oil and gas industry significant “dynamic transaction costs” will be incurred. And that these would fall predominantly on the Joint Operating Committee in the Knowledge & Learning module. As there would be minimal deployment of their own capabilities by the producer for their own account in the Research & Capabilities module. I am implying that the “dynamic transaction costs” will be incurred for the “persuading, negotiating and coordinating with, and teaching others” in order to acquire those capabilities.

The purpose for these “dynamic transaction costs” is of course for economic progress. Recall that through the “Dynamic Capabilities Interface” and the “Planning & Deployment Interface” which includes the AFE, Military Command & Control Metaphor and Job Order are the means in which to coordinate the capabilities available to the Joint Operating Committee. It is this coordination that employs greater divisions of labor and specialization, and improved efficiency of capital that expand the economic output of the Joint Operating Committee, producer, service, and oil and gas industries.

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital' (Marshall, 1961, IV. xiii,2 p. 318) p. 101

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Separate and Distinct

Throughout the Preliminary Specification we have discussed modularity from the perspective of the different modules of the specification itself. We now want to talk about modularity from the point of view of the Knowledge & Learning module. How it isolates the Joint Operating Committee and focuses on the operations in the field. Yet provides the JOC with the most up to date information regarding capabilities from each of the participating producers. A capable, innovative Joint Operating Committee that is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the oil and gas producer.

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of the capabilities of their respective firms. They are the ones that are field testing the innovations that the engineers and geologists are coming up with. That is the primary source of the industry innovation. Whether that is through dedicated efforts of an individual producer or through collaborative efforts with others, innovation, as we learned from our review from Professor Giovanni Dosi is through the application of these resources. Once these ideas are proven and developed into usable and valuable technologies and processes then they can be added as capabilities into their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. There they, depending on the selection of the producers criteria, might be populated to the Joint Operating Committee that is in that zone, or is available for use with that multi-frac technology, and will be available to the members of that JOC for its use.

What we have been able to do with these two modules in the Preliminary Specification is to eliminate the crossover of the two different purposes of the same information. Quotations are from Professor Richard Langlois’ “Modularity in Technology, Organization and Society."

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

The producer firm is involved in the development and research into the improvement of how to better the production and reserves they hold. The Joint Operating Committee is involved in operational execution. These are two separate and unique organizational objectives that are necessary and involve, in some instances, the same people and the same firms. We need to separate these people into groups and provide some distance so that there is the ability to operate these groups as separate and distinct is possible.

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

There are more than the modules organizational constructs to guide the nature of the work within the modules. There is also the markets in which they operate. The Research & Capabilities will be an internal and academic focus that will be collaborative in the geological and engineering disciplines. Whereas the Knowledge & Learning will be steeped in the service industry offerings and operational control. These differences also help to differentiate the nature of the work within the two modules.

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

It is necessary for innovation purposes and operational control that the two modules are separated in this fashion. With the flow of information from the Research & Capabilities to the Knowledge & Learning module, and the speed at which electrons flow, the Joint Operating Committee can be assured that they have the most recent field tested capabilities available to them.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation Meets Field Coordination

The energy industry is faced with a number of issues that seem to continue from year to year. One of those issues is the costs associated with any and all field work. We have heard a variety of claims made by the oil and gas companies about the service industry, but no solutions as to how to deal with them outside of the traditional cost controls and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution for the high costs associated with field operations. Quotations are from Professor Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

We have with the Knowledge & Learning module a number of other tools that are part of the Preliminary Specification. Specifically the Military Command & Control Metaphor (MCCM) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during the course of one of these field operations. These operations of course will include members of the Joint Operating Committees participating producers as well as the employees and contractors of the service industry representatives. Having them configured in a manner in which the chain of command is recognizable immediately. Secondly there is in the Preliminary Specification the Job Order system that provides a means in which to execute the operational order within the chain of command during the field operation. These two systems provide a tight control over the entire operation. Simply no action is taken without the authorized Job Order being issued.

This tight operational control seems to contradict the free markets that we have been pursuing in the service industry. I disagree. Having tight operational control has nothing to do with free markets, and free markets have nothing to do with tight operational control. They are two separate and distinct “things” that do not affect one another. Recall that the AFE and Job Order are provided through the “Planning & Control Interface” which bring in the capabilities from the “Dynamic Capabilities Interface” that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for the people to conduct the work for the operation to be a success.

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

What we are implying with this level of operational control is that the Joint Operating Committee representatives, the earth scientists and engineers are in complete and total control of the field operation down to the water hauling driver. In a literal sense, yes, but I think you know the extent of the control that is implied with the MCCM and Job Order system. There is a command structure. Everything is documented. This level of coordination is provided as a means to offset the detail necessary for the science basis of the business to take precedence.

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

What Professor Langlois is implying here is that the converse of “incentive alignment” is “qualitative coordination." The high costs associated with the service industry to do their job is in order to motivate the people and the capital to work in the industry. If we were able to better coordinate, in the manner that the Knowledge & Learning module suggests, the issues of costs and quality would be mitigated.

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

By using the Joint Operating Committee we are eliminating the use of the bureaucracy. However as the previous quote implies the bureaucracy (or firm) lowered the cost of qualitative coordination in a world of uncertainty, albeit poorly in our case, it is therefore necessary that we replicate that coordination in the Joint Operating Committee.

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

By coordinating the field operations in the manner that is proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase the control over the implementation of the science basis of the business. All with maintaining free and open markets for which the innovation in the service industry to develop.

It might seem that with the opportunity to have such strong operational control provided in the Knowledge & Learning module of the Preliminary Specification. That each and every producer will be able to compete equally. That might be the way that some perceive the situation however, the fact is in an innovative environment that may not be the case. We have clarification of these points from Professor Richard Langlois in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

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

Producers within the same Joint Operating Committee may be pursuing different strategies than their partners in that JOC. The Preliminary Specification enables a producer to pursue the most effective strategy for each property. A producer may have acquired the property while it was in production and therefore have a different cost structure. Or alternatively the producer may have an interest in the infrastructure used to deliver the gas to market whereas the other producers do not. The makeup, the strategies and the costs of each of the producers are unique and not necessarily leading them to make the same decisions based on the same criteria. However, financial gain still drives consensus.

As we noted, when the Joint Operating Committee conducts a field operation using the tools within the Knowledge & Learning module. Coordination of the capabilities is provided through the Military Command & Control Metaphor and the Job Order system. These capabilities are the knowledge, experience, skills and ideas of the people who are part of the producers in the Joint Operating Committee, and the service industry representatives hired to conduct the field operation. All of these capabilities are documented in the “Dynamic Capabilities Interface” and deployed through the “Planning & Deployment Interface."

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

Execution is the focus of the operation and the key competitive differentiation of the parties involved. Within the capabilities that have been decided to be implemented by the Joint Operating Committee there may be new and innovative tools and procedures to be implemented. The oil and gas business is based on the science of geology and geophysics and the applied science of engineering. Operational control at this level is a necessity and a competitive advantage. From Professor Langlois’ paper “Modularity in Technology, Organization and Society."

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organizational structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

If one considers how the Knowledge & Learning module enables the producer to implement their capabilities. Calling them a competitive weapon isn’t far from the truth.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Objectivity of People, Ideas & Objects

In both the Knowledge & Learning and Research & Capabilities modules producers are benefiting from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through the Revenue Model and will remain unbiased as to which producers perspective it takes. The same can be said for the Community of Independent Service Providers. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things.

People, Ideas & Objects is focused on providing the innovative oil and gas producer with ERP systems based on using the Joint Operating Committee as the key organizational construct. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software that an organization uses is a “technology paradigm” that the oil and gas industry has to consider. And software puts the industry on a new “trajectory” just as we have discussed here for the earth science and engineering disciplines. Professor Giovanni Dosi notes.

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138
• Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

Which speaks to the attributes of software. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by Exxon Mobil or Shell? What motivation would they have in making the changes to the software to accommodate your business? The third party, objective nature of People, Ideas & Objects and the Community of Independent Service Providers is necessary for the software to become amenable to the needs of its user communities. If the producer is to rely on this third paradigm and trajectory as a key advancement in their business, then it must remain open and focused on the needs of the community. Professor Dosi notes.

Similarly, new technological paradigms, directly and indirectly -- via their effects on “old” ones -- generally prevent the establishment of decreasing returns in the search process for innovations. p. 1138

Let me restate this for clarity, the indirect nature of ERP software via its effect on the earth science and engineering disciplines, will generally prevent the establishment of decreasing returns in the search process for innovations.

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. It is designed around the Joint Operating Committee, the innovative oil and gas producer and will include the user community in determining its precise needs. This is the type of application that is needed for the 21st century oil and gas producer. A vision that focuses the people who work within the industry on the activities that people do best. Collaborating, researching, evaluating and deciding. And leaves the computers to do the things that they do the best. A software development capability designed to provide the innovative oil and gas producer with the means to provide all of their ERP software needs.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.