Professor Giovanni Dosi on Innovation Part V

When we consider what a producers capabilities would look like, such as those that are listed in the “Dynamic Capabilities Interface” of the Research & Capabilities module of the Preliminary Specification. Much would depend on the type of producer that is represented. As one could imagine a large firm such as Exxon would have a vast library of capabilities, and a small start up would be limited to a small database in terms of what they were able to achieve.

Some might assume that the majority of the innovation in the oil and gas industry is developed within the larger producers. However, I think that is generally considered to be untrue. The small and start up oil and gas firms along with the intermediate producers are probably responsible for the majority of the innovations in the last 20 - 30 years. Professor Giovanni Dosi’s reference to the Schumpeterian hypothesis, “that bigness is relatively more conducive to innovation, that concentration and market power affect the propensity to innovate” and his rejection of that premise is evident in his paper’s following three points.

• First, although “there appears to be roughly a log linear relation within industries between firm size and R & D expenditures,” upon closer investigation, “estimates show roughly non-decreasing return of innovative process to firm size.” This is probably attributable to the fact that very large and very small firms conduct most R & D. p. 1151
• Second, although the expenditures in R & D incurred by large firms are impressive from a total expenditure perspective, the aggregate expenditures of small firms on a global basis becomes far greater in aggregate than the large business. p. 1151
• Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size. p. 1152

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by the small oil and gas producers ability to punch above their weight. In the software development business, SAP does significant generic research in the software development arena. However, they do very little in terms of specific oil and gas research. On the other end of the scale People, Ideas & Objects have completed substantial oil and gas specific research and have commenced the development of oil and gas software with the publication of the Preliminary Specification. And I can assure you that at this time we are a very small firm, proving Professor Dosi’s first and third points.

If we look at Professor Dosi’s second and third points together. It is clear that money is not necessarily a determining factor in innovation. Although large firms spend impressively on R&D, that does not produce a number of usable innovations. And it may be the lack of financial resources that motivate the smaller firms to innovative problem solving on the other end.

Professor Dosi (1988) provides three caveats to the three differences noted.

• Statistical proxies cannot capture aspects of technical change based on informal learning. p. 1152
• Secondly, “differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms. p. 1152
• Thirdly, many firms are expending significant research dollars in keeping up with other firms innovations.  p. 1152

Or in summary, proof that money is not necessarily a determinant of innovative success and that all producers need to be represented in an innovative oil and gas industry.

One element that we have not discussed in our review of the Research & Capabilities module is the factor of revenue per employee. We are using the factor in many of the interfaces, and I am only highlighting it here to show how the Research & Capabilities module influences the elements that make up the calculation of revenue per employee. Recall in the other modules that there are large variances in the factor between producers. These variances show that there is a large asymmetry between the producers. It is this asymmetry that is the topic of our discussion.

It was through the review of Professor Giovanni Dosi’s paper “Sources, Procedures and Microeconomic Effects of Innovation” that we learned of the asymmetry effect. That each successful innovation creates an asymmetry effect, or an overall increase in competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the participants of the industry. The ability of laggard companies to improve their competitive position helps to form new positions within their industries. These laggard companies are generally able to move further quicker through their imitation of leading companies. However, the primary differentiating component of competition based on innovation is attributable to the innovative capability of the firm.  ie. a laggard will remain a laggard without the direct and active development of innovative appropriability conditions.

Professor Dosi finds these points difficult to quantify and prove, but states these may be tacitly understood. People, Ideas & Objects asserts that that was the case in 1988 at the time this paper was written, however, the laggards ability to “keep up” or even “catch up” may have progressively diminished through the application of Information Technology during the 2000’s.

There is a determining paradox for the ability to innovate based on imitation or on the basis of strict Research and Development. Companies can copy others innovations in industries with minimal asymmetry, (where competitors are all the same). Whereas industries that are asymmetric (like oil and gas) or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development.

This is why the focus on capabilities is critical to the success of the oil and gas concern. They are able to differentiate themselves by research and development and focusing on capabilities. Passing these capabilities on to the Joint Operating Committee through the Knowledge & Learning module allows the producer to initiate these capabilities “just in time,” where and to who they are needed. This can be done without the concern that they are exposed or risked to potential competitors through the Joint Operating Committee. It should be clear through this analysis that those that would attempt to copy others capabilities will be expending extensive resources to do so, as much or even more then it would cost to develop the capabilities on their own. However, those that chose to copy will remain static within their competitive position within the industry. Its just not that easy to copy someone else, and it's not that valuable to their firm. When markets such as oil and gas are asymmetric, Research & Development are the ways in which to differentiate capabilities and build an innovative and profitable oil and gas producer.

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.

Professor Giovanni Dosi on Innovation Part IV

Research Into the Underlying Sciences

Our discussion of the Research & Capabilities “Research Budget Allocation Interface” offered the innovative oil and gas producer the opportunity to control the costs of the research and innovation conducted within their firm. We know from Professor Giovanni Dosi that businesses commit to innovation as a result of both the exogenous scientific factors and endogenous accumulated capabilities developed by their firms. We have discussed in fairly good detail how the capabilities are handled in the Research & Capabilities module of the Preliminary Specification. I want to continue to discuss how the research end of the module is managed.

With the “Research Budget Allocation Interface” we are able to provide a global view of the capabilities that the firm have under development. As was mentioned, this interface will provide the user with the ability to see areas that might otherwise fall through the cracks. What is needed now is a similar interface that would give a view of the research that is being undertaken in the scientific arenas that enable the producer to “commit to innovation as a result of exogenous scientific factors.”

It might be important to quickly recall the major processes that are being managed in the Research & Capabilities module. We have the “Ideas Marketplace Blog” providing the environment where the service industry is actively developing new and innovative products and services with input from the producers. We have the “Dynamic Capabilities Interface” where the firm is documenting what it is capable of and can achieve. These capabilities are deployed through the “Planning & Deployment Interface” in the Research & Capabilities or Knowledge & Learning modules and lastly we have the “Research Budget Allocation Interface.” There are more processes under management in the Research & Capabilities module, I only wanted to highlight the pertinent ones for the discussion that follows here on the scientific nature of the business.

Professor Dosi concludes that scientific input into the innovation process is evidence of the importance of factors exogenous to competitive forces among private economically motivated actors. This is subject to two important qualifications.

• Science and Technology are self-fulfilling in their developments.
• Scientific advances play a major direct role, especially at an early phase of development of new technological paradigms. p. 1136

These points support Dosi’s (1988) assertion that “general scientific knowledge yields a widening pool of potential technological paradigms,” where the greatest value is attained in the earlier stages. Professor Dosi analyzes the specific mechanisms through which a few of these potential paradigms are actually developed economically, subsequently applied, and that often have become dominant in their industry. The process of selection depends on the following factors.

• The nature and interests of the bridging institutions between pure research and economic applications. (p. 1136)
• Institutional factors that drive the technology or science, such as (the military) (p. 1137)
• The selection criteria of markets and or techno-economic requirements of early users. (p. 1137) (NASA, Pentagon the FDA and Nuclear Reactors for the Navy.)
• Trial and error associated with the Schumpterian entrepreneurship.

There is little doubt in my mind that we need an interface here. An interface that is similar to the “Research Budget Allocation Interface” would be appropriate. And maybe we only need to establish a second “page” within that interface. One for the internal or endogenous budget items and one for the exogenous budget items. The key here is to note that the greatest value is attained in the earlier stages.

Innovating on the Science

I want to continue on with our discussion of the “Research Budget Allocation Interface” and the two “pages” format. Recall that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. What I want to discuss is the process that the user of this interface will be involved in in documenting the capabilities from the research that is being conducted within the firm and the greater scientific community. By way of the football analogy that we raised earlier, I want to show how this documentation would be done.

Ultimately the objective of the “Research Budget Allocation Interface” is to augment the firm's “Dynamic Capabilities Interface” or to enhance the firm's overall capabilities. The Dynamic Capabilities Interface documents what the firm is capable of. Then based on geological zones or other applicable criteria the user selects, the pertinent criteria are used to populate these capabilities to the appropriate similar Joint Operating Committees through the Knowledge & Learning module. The football analogy would come into play here in that the design of a play is committed to writing in which the team studies it, and each team member learns their role, and then executes the play in the manner in which it was designed.

As the firm continues, research from the endogenous and exogenous areas become innovations that populate the “Dynamic Capabilities Interface” which in turn populate the various Joint Operating Committees. Professor Dosi (1988) continues to assert that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacitness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific.” Secondly, the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” This is further defined by the technological and scientific capabilities, and “the advances made by suppliers and customers.” (p. 1137) In the third paragraph of the previous section we documented that we have three processes that deal with these variables under management in the Research & Capabilities module.

Recently we also learned of the difficulty for a firm to copy another firm's ideas or capabilities provides little to no value. On the contrary the effort to copy anothers capabilities is as potentially difficult as building their own unique capabilities. We now learn that innovation is dependent on the technology that supports the firm. That is the technology both enables and / or constrains the innovations of the producer. Therefore copying capabilities, without a foundation or base of technology and capabilities to support what is being copied is useless. And if you have the base then copying would not be productive or motivating.

Professor Dosi notes “New technology paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations and ease with which they are achieved.” p. 1138. The technology that a producer has includes the ERP systems used within the organization. When the business is a science, as it is in oil and gas, it would be in the producers interest to remain open and flexible in both its scientific and business approach. This is the strategic position that a producer would be capable of maintaining with People, Ideas & Objects Preliminary Specification.

I now want to highlight the speed at which a producer firm is able to implement innovations. From the point in time of the research and discovery, to the actual implementation of the innovation there is little in terms of time or bureaucracy standing in the way of the proven innovation being implemented across the firm. When the time comes for people to use the latest approved and authorized processes in terms of what innovation they should use, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use.

To review the process; we have the firm conducting a variety of studies or research through Work Orders and AFE’s to enhance their capabilities. The day to day of these studies and research are monitored in the “Research Budget Allocation Interface” which also has a page that monitors the scientific communities research. When these studies and research are concluded and capabilities are enhanced they are added to the “Dynamic Capabilities Interface” of the Research & Capabilities module where they are populated with all of the information necessary to document and implement the capability. We have drawn a football analogy here to the playbook of a football team. A team member only needs to look at the playbook (the Planning & Deployment Interface) to determine what their role is during any play. The “Dynamic Capabilities Interface” is sorted through a variety of different attributes with geological formation being one of them. In the Knowledge & Learning module any Joint Operating Committee that produces from xyz formation (or other attribute) will therefore have access to xyz capabilities in the “Dynamic Capabilities Interface.”

The key limiting determinant in terms of time is the amount of effort necessary to take the research or study from its raw form and turn it into a usable capability. The people within the Joint Operating Committee are doing two things. Making operational decisions and executing the operations. They are not field testing experiments as lab rats. It's important that this distinction be made and the proper documentation be handed off from the research and study to those that will execute it. As once the capability is documented, it will be immediately available to be executed the next time that the operation is conducted anywhere it is pertinent within the producer firms Joint Operating Committees. We will also have more to discuss on this point in the Knowledge & Learning module.

With this process in mind, we note that Professor Giovanni Dosi suggests two separate phenomenon are observed:

• 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

This brings to mind that the Research & Capabilities module, with the complexity of processes as we detailed here. Would be deficient from the point of view of having any feedback from the Joint Operating Committees. Particularly from the first phenomenon noted above. Therefore we need to open a third “page” in the “Research Budget Allocation Interface” that is a window on the “Lessons Learned” from the Knowledge & Learning module. That way what is being learned on a day to day basis in the Joint Operating Committees can “bring forward new opportunities for product development and productivity increases.”

The individual user(s) of the Research Budget Allocation Interface of the Research & Capabilities module will be at the forefront of the innovation that occurs within the producer firm. Having windows on the research that is developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and lets not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the state of affairs in the service industry. Theirs will be a rich medium of information of what is happening in the innovative oil and gas industry. The concern that many will have is that this information is then codified into further capabilities which are subsequently published through to the various relevant Joint Operating Committees. There they will have these capabilities available to the members of the JOC’s who will be able to see and use the capabilities, which will include participants of other producer firms.

Professor Dosi (1988) notes a study conducted by Richard Levin et al 1984, in which they studied “the varying empirical significance of appropriability devices of (a) patents, (b) secrecy, (c) lead times, (d) costs and time required for duplication, (e) learning curve effects, (f) superior sales and service efforts.” Professor Dosi (1988) observed, “that lead times and learning curves are relatively more effective ways of protecting process innovations, and patents a more effective way to protect product innovations.” Dosi concludes. “Finally, there appears to be quite significant inter-industrial variance in the importance of the various ways of protecting innovations and in the overall degrees of appropriability.” (p. 1139)

Oil and gas producers are focused on process innovations which Dosi observed “that lead times and learning curves are relatively more effective ways of protecting them.” Which brings up a very valid point. Assume that one of the capabilities that was published through the Knowledge & Learning module was the capability to fracture shale. Just because it is published doesn't mean that it can be copied. The “team” has practiced and built the capability from previous experience and “learning curves” and that is how the capability exists. Just because a football team sees the design of other teams plays does not mean that they will be able to implement the same play. They will have to work at building the right talent and practice to implement the capabilities necessary to execute the capability before they can successfully complete it. The same would be the situation for anyone observing another producers capabilities in a Joint Operating Committee.

Professor Dosi notes that Levin states that the control of complementary technologies becomes a “rent-earning firm-specific asset.” Dosi states “in general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation a creative process, which involves search, which is not wholly distinct from the search for new development, and which is economically expensive - sometimes even more expensive than the original innovation, and applies to both patented and non-patented innovations.” (p. 1140)

With the fast changing science and technological paradigms and steep trajectories of the industry, the need to have the capability to innovate will be needed for each producer to develop on their own. If the costs of duplication are as steep as the costs of developing the internal capabilities, the producers should then rely on their process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear that someone will copy them, in order to protect them?

However, this deployment of one's capabilities to the Joint Operating Committee also imputes that a greater level of co-dependency exists. Partners in the Joint Operating Committee will have other specialized resources available to commit to the projects, and suppliers will have contributions as well. As the Preliminary Specification seeks to eliminate the current overbuilt, redundant, unshared and unshareable capabilities being built within each siloed corporation. The proposed alternative in the Preliminary Specification is to rely on the advanced specialized contributions of the partnerships to bring about the most innovative solutions to the Joint Operating Committee.

When we are discussing the Research Budget Allocation Interface of the Research & Capabilities module it feels that we are at the heart of the innovative oil and gas producer. Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” has clearly identified the key factors that make a firm innovative. By instilling his work within the modules of the People, Ideas & Objects Preliminary Specification, the innovative oil and gas producer is able to have the quantifiable and replicable process of innovation within their domain. Something that I think is necessary for the difficult energy era that we find ourselves in today.

The vision that has been laid out in the Preliminary Specification provides a coherent way in which the producer would operate in this difficult energy era. These processes are to support the innovative oil and gas producer and are based on the research that has been conducted here at People, Ideas & Objects. What is also clear in the research is that the lack of the processes that identify and support the innovation will lead to no innovation at all. A producer that was originally constructed in the easy energy era. An era that was focused on cost control can not function in the innovative and difficult energy era that is here, or just around the corner. The difficulty in managing these oil and gas concerns, with conflicting constructs and demands will only intensify.

Recently I stated that the people who are operating in the Joint Operating Committee are not experimental lab rats. That to leave a capability that was untested and untried for them to sort out was counter to the purpose of the “Dynamic Capabilities Interface,” the Knowledge & Learning module and the Joint Operating Committee. They are there for execution and not for the purpose of developing concepts or experimenting. To use the football analogy the Joint Operating Committee is game day, and what the research and study area needs is a metaphorical practice field. One in which the opportunity to explore failure is welcome and where a producer can attain a learning experience to the ultimate solution or capability.

With that it sounds like it's time for another interface. And we’ll call this the “Experiments Interface” which will list the number of experiments and document the type and expected results of any and all experiments being conducted by the firm. This will be a comprehensive interface, much like the “Research Budget Allocation Interface” in that it will also have many similarities to a project management interface. This will provide the users with the ability to manage the project from start to finish in a manner that the capabilities are able to be developed as expected by the firm. These two interfaces will enable the users to control and manage the firm's development at the speed of the market and the science.

I am not asserting that efforts in the past were not innovative or moved the science substantially. The issue People, Ideas & Objects is raising is that the pace and speed of the science’s development in the near to mid-term, and particularly the long term, will accelerate based on the fact that, globally, reserve replacement continues to be progressively more challenging, and the prices realized for the commodities have begun to reflect these challenges. The bureaucracies are unable to handle the workload. Professor Dosi concludes with.

Finally, the evolution of the economic environment in the longer term, is instrumental in the selection of new technological paradigms, and, thus in the long term selection of the fundamental directions and procedures of innovative search. p. 1142

Therefore being in tune with the market and the science is the only safe place for the innovative and profitable oil and gas producer.

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.

Professor Giovanni Dosi on Innovation Part III

Where and How Innovation is Implemented

In this section we want to reinforce the point that innovation will develop from the interactions and collaborations in the “Planning & Deployment Interface.” We noted that the people assigned to the project would discuss the project and raise any issues that they may have and innovation would stem from these interactions. This process that is captured in the “Planning & Deployment Interface” is how the Preliminary Specification reduces innovation to a defined and replicable process.

Professor Dosi notes that innovation is developed through the interactions between the “capabilities and stimuli” and “broader causes external to the individual industries such as the state of science.” These are captured in the “Planning & Deployment Interface” (capabilities and stimuli) and the Work Order system (state of science) of the Research & Capabilities module of the Preliminary Specification. As time passes the producer augments their capabilities with the findings from their research undertaken in the various Work Orders that are issued. Capabilities are then implemented in the day to day activities that the Joint Operating Committee is involved in. It is the interaction within the producer firm and JOC, and the broader causes that create the innovations.

We take the concept of a trajectory, define it, and apply it to oil and gas. The definition of a technological trajectory is the activity of technological process along the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as the compromise, and the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil and gas is accurately reflected in the commodity pricing. Higher commodity prices finance enhanced innovation. These “trade-offs” are very much an engineering approach and therefore I want to reiterate the point that they are “defined as the compromise, and the technical capabilities.”

These trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, People, Ideas & Objects would assert that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations.

Therefore the ability to collaborate in the “Planning & Deployment Interface,” and elsewhere, of the Research & Capabilities module is critical to the innovativeness of the producer firm. And by extension, this would also apply to the Joint Operating Committee through the “Planning & Deployment Interface” in the Knowledge & Learning module. Innovation is as much an engineering discipline as it is anything else. That is how we can reduce it to a defined and replicable process.

Every organization has to deal with the two distinct and differing types of work that need to be done. Simply the two types of work are the need to execute and the need to develop the firm's capabilities for the future. These two roles have been separated in the Preliminary Specification with the Knowledge & Learning module, or Joint Operating Committee, concerning itself with execution. And the Research & Capabilities module, or producer firm concerned with developing its capabilities. This division of labor and specialization regarding these two types of work is the topic of this discussion.

We have noted that innovation was in many ways an engineering approach to problem identification and resolution. We however want to focus these innovation efforts in one area of the firm. Making sure that they are concentrated where they are most useful and the least harmful. And that is in the “Dynamic & Capabilities Interface” of the Research & Capabilities module. It is at that location that the focus can be on innovation without the impact affecting the day to day operations of the Joint Operating Committees. Only when an innovation is proven to be worthwhile should it be written up as a new capability in the Dynamic Capabilities Interface, and therefore available to be populated into the Knowledge & Learning module for use in the day to day of the Joint Operating Committees. Professor Giovanni Dosi notes;

Organizational routines and higher level procedures to alter them in response to environmental changes and / or to failures in performance embody a continuous tension between efforts to improve the capabilities of doing existing things, monitor existing contracts, allocate given resources, on the one hand, and the development of capabilities for doing new things or old things in new ways. This tension is complicated by the intrinsically uncertain nature of innovative activities, notwithstanding their increasing institutionalization within business firms. p. 1133

These support the “how to do things” (the JOC) and “how to improve them” (the producer firm). This dichotomy reflects the challenge of improving the processes and products through trial and error, with heavy emphasis on the error. The ability to accurately predict the success or failure of a new idea contains inherent high risks and hence high rewards. This is one of the constraining factors in implementing innovative thinking, in that no one wants to be proven wrong. Whereas, even if the idea fails to test the theory, the failure may ultimately lead to and may be one of the keys to discovery.

By containing the innovation within the producer firm in the manner that the Research & Capabilities “Planning & Deployment Interface” does. Limits the contamination that might occur if innovation were attempted in the areas where execution is expected. This division of labor is necessary between the oil and gas firm and the Joint Operating Committee. As well, we know there are two types of people, those who are able to function best in either of these two environments. Any time these people are asked to operate in the environment that they are not oriented to, they feel uncomfortable and perform poorly.

This maybe shows a contradiction in the People, Ideas & Objects software. We assert that the software aligns the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. This claim that the innovation framework is part of the Joint Operating Committee is consistent with the fact that once the producer has proven the innovation is valid, then the Joint Operating Committee is the means in which it is implemented and executed throughout the producer firm through the “Planning & Deployment Interface” in the Knowledge & Learning module.

Uncertainty and Risk in Innovation

Continuing on with our innovation review of the Research & Capabilities module of the Preliminary Specification. We note that the “Dynamic Capabilities Interface” enabled the innovative oil and gas producer to isolate the innovation activities within one area in their firm. This enabled the various Joint Operating Committees to focus on execution of what was known, which of course included what was proven new and innovative. We now want to talk about the uncertainty and risk associated with innovative search. Something that I think that most producers are familiar with, however, something that will become more commonplace as the demand for innovation by the producer increases.

What is clear to me is the role that software will play in the enabling of innovation within the oil and gas firm. Throughout this discussion in the Preliminary Specification it is evident that software plays a critical role in the future oil and gas firm. Software is able to define and support the quantifiable and replicable processes of innovation. For the oil and gas industry to conduct any level of innovation without having the software, as defined here by People, Ideas & Objects, will be leaving the innovations outcome to chance. Such is the nature of software in the 21st century.

Whether it is geological or engineering in nature, the pursuit of these sciences bring to the oil and gas business certain elements of risk and uncertainty. Add to this the commercial nature of the oil and gas business and you have an atmosphere where innovation is for those who can take the heat. Professor Dosi suggest this is the appropriate environment for innovation.

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134

Let's be clear, the uncertainty resides in both the scientific and business realms. I am not of the opinion that the two can be separated, as is done in other systems such as SAP. This is maybe why the industry has been poorly served, in my opinion, by the business systems that operate today. They don’t recognize the innovative and scientific basis of the business and therefore are unable to support an innovative oil and gas industry. If the commodity prices are allocating the financial resources to fuel innovation. The industry will need to have the systems and procedures installed in order to manage the innovation. Systems such as what are described in the Preliminary Specification. With the low costs of knowledge and collaboration being the two commodities that affect the technological trajectories, having interfaces such as the “Planning & Deployment Interface” of the Research & Capabilities module will be a necessity.

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base  and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge. p. 1135

We now turn to the research area of the Research & Capabilities module in the Preliminary Specification. What we are particularly interested in, is to take control of the financial costs of the innovative activities that are being conducted within the producer firm. A firm of any size would have a variety of projects being conducted. With the volume becoming unmanageable quite quickly if there was no control over the amount spent and the type of activity. There are cost controls that are set in place in the People, Ideas & Objects Preliminary Specification such as AFE’s and Work Orders, and these will control the research undertaken in the firm. The interface that we are talking about does not replace those, it only centralizes the information for a clearer understanding of the activity and its funding.

Your firm may become involved in many projects that seek to find new knowledge and capabilities regarding the oil and gas business. Some of these activities may be rather large and will certainly be the focus of the firm and will have no difficulty in attracting the attention of the firm. Some however may be small and will be important from the perspective that the capability is just as pertinent to the firm, but don’t attract the attention. Nonetheless, these capabilities needs to be included in the day to day of each and every operation of your firm, and as such needs to be documented in the “Dynamic Capabilities Interface.” How does the firm manage the various projects within a firm to ensure that the money spent and all of the projects are documented within the capabilities of the firm?

Within the Research & Capabilities module we will have the “Research Budget Allocation Interface” that will assist in dealing with the costs of innovation and the volumes of projects the firm is involved in. If an AFE is raised with some element of the costs including the partnership doing some joint research or innovative activity, this activity should be populated in the “Research Budget Allocation Interface.” Or, if a Work Order is raised to conduct some study, that too will be populated into the “Research Budget Allocation Interface.” The purpose of this interface is to ensure that there is no duplication of the research undertaken, if there is then the costs could be saved. It is also to document the ongoing status of the project. And ensure that the results of the project are documented within the “Dynamic Capabilities Interface” of the Research & Capabilities module.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Although this may appear like a simple interface, in the proper hands it would be a very powerful tool. It would provide a global view of the firms activities in the area of innovation and show the overall progress that the firm was making. It would also show where unrelated innovations might occur. Lastly it might show where some opportunities lay. Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs.

The “Research Budget Allocation Interface” would provide a window on both the “different incentive structures and different opportunities within the producer firm. Making for a powerful tool in terms of guiding the innovative oil and gas producer.

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.

Professor Giovanni Dosi on Innovation Part II

Innovations Key Factors, A Scenario

I want to take a look at Professor Giovanni Dosi’s “key factors” of innovation in the context of the scenario that we used recently during our review of the Partnership Accounting module. Recall that we had a number of producers who were joining together through the Work Order system to participate in an engineering study. This Work Order system was discussed in the Partnership Accounting module to highlight the manner in which it eliminated the logistical accounting difficulties that impede the development of these working groups. I now want to discuss how the efforts of working groups are added to the capabilities of the producer and are managed in the Research & Capabilities module of the Preliminary Specification.

Upon completion of the working group the producer firm will have a unit of knowledge that has been developed from the efforts of the group. Professor Carliss Baldwin provides us with some clarity here with her “knowledge begets capabilities, and capabilities beget action” comment. What is needed is for the producer to have a central repository for all of the knowledge of the producer that is accumulated through the various working groups and other “key factors” in which they acquire knowledge. This will be called the “Dynamic Capabilities Interface” in the Research & Capabilities module and will detail the source of the knowledge, the key factor, how it was acquired, and what it involves. This will be captured within a wiki style interface. This interface is also sorted by geological zone and other technical criteria, and will be populated to the Knowledge & Learning module for deployment to the appropriate Joint Operating Committees when required. Organizing a firms and Joint Operating Committees capabilities is the beginning of developing, deploying and effectively managing them.

Within any module of the People, Ideas & Objects application the user will be able to right click their mouse and select from a contextual menu of actions. These actions will include the ability to begin a Work Order, raise an AFE, prepare a Joint Venture Agreement etc. If the user can take action on the capabilities listed within the “Dynamic Capabilities Interface” then we have achieved the process that Professor Baldwin states is necessary. Having this information centralized for the producer, and the specific information for the Joint Operating Committee helps to concentrate the knowledge within one location within the firm. There will be little confusion as to where to find the answer to a specific question. When the user finds what they are looking for, the detail of the knowledge or capability should be specific enough as to define a process as to how it is successful implemented. Understanding that knowledge is never static, the ability to update the information with lessons learned would be part of the users responsibility. Recall updates from the Lessons Learned Interface is also done for the Joint Operating Committee in the Knowledge & Learning module.

The ability to annotate and reference the material within the “Dynamic Capabilities Interface” would make this more usable. In addition, with the tools that are available today, such as search, makes the information more valuable. What is truly valuable is the types of tools that will be available tomorrow. We are beginning to see some of these tools enter the consumer space with the iPhone’s SIRI virtual assistant. The first step however will be to acquire the knowledge and make it actionable through the ERP system of People, Ideas & Objects. Then we will be able to add these tools as they become available in the future.

If all that we were to do with the capabilities aspect of the Research & Capabilities module of the Preliminary Specification. Was to document the capabilities in the “Dynamic Capabilities Interface” then we would be wasting a lot of people’s time. The purpose in documenting the capabilities is so that we can deploy them, and that brings in the “Planning & Deployment Interface” which is the topic of discussion here.

Ideally I see the ability of a firm to deploy their capabilities as a key competitive advantage. The organization of that competitive advantage will be the focus of the management of the firm. It should also be noted that there is a similar “Planning & Deployment Interface” in the Knowledge & Learning module for the Joint Operating Committee. The analogy that I would like to use and have developed in the Preliminary Specification is directly applicable to the game of American football. Where the coach can call in a play and the team is able to execute that play based on their known capabilities, roll and skills on the team. I want to draw a direct analogy for the person who plans and calls on the capabilities of the firm or Joint Operating Committee in the “Planning & Deployment Interface.”

First we need to bring in the Military Command & Control Metaphor and understand that the role of the individual, as designated in that structure becomes a critical part of the planning and deployment of the firm or JOC’s capabilities. There can be only one Quarter Back and you need many Down Lineman. Filling the various roles in order to take the actions that are needed is as important as the capabilities themselves. The Military Command & Control Module (MCCM) imposes a chain of command across the multiple producers represented in the JOC, or firm and enables them to operate the pooled resources of these firms.

The “Planning & Deployment Interface” will take the three critical aspects of the firm / JOC and arrange them within a web like interface for the user to develop the actions they desire. The three critical aspects are the people represented in the MCCM, the capabilities and the time frame. Having selected the personnel that you want to execute the action that you have in mind, their available time becomes known to the interface from each individual's calendar. Selecting the capabilities from the Research & Capabilities, or Knowledge & Learning, module is then drawn into the interface. From there the user is able to “process” the information and based on the variables given determine when the work would be able to be completed. Then they may select additional resources to fill deficiencies in areas where the capabilities suggest they need more resources, conduct more studies to determine certain unknowns or proceed with the project.

Upon proceeding with the project the people who were selected by the user in the “Planning & Deployment Interface” are given the job to do. They are provided with an understanding of what and how and who will be involved in completing the project. Not that it should be a simple matter of execution, but they should at this time have everything provided within the “package” they receive from the “Planning & Deployment Interface.” That package should be comprehensive and detailed such that it is all that they need to be able to focus on the successful completion of the task.

The quality of the documentation of the capabilities will be the determining factor in how successful the project will be. If the detail contained in the “Dynamic Capabilities Interface” is of rich media, detailed and provides the user with a good understanding of what is required then the communication from what is expected and what is understood is not at variance. The people will be able to see clearly what it is that the project is about and how they are expected to complete the task.

The innovative and capable oil and gas producer is in need of the ability to document and deploy their capabilities in an efficient and effective manner. Here is a way in which the deployment is planned and executed with an understanding or “meeting of the minds” based on the quality of the documentation in the “Dynamic Capabilities Interface.” It being not just a repository of data that might be used someday by someone. But a living source of quality capabilities in which the producer or JOC depends on to make sure that the execution of their projects are successful.

Who ever it is that implements the project through the “Planning & Deployment Interface” will be selecting the various capabilities documents from the “Dynamic Capabilities Interface.” When they do this they will be able to ensure that the capabilities they select reflect the “final” status necessary for the project. If there is further documentation that needs to take place or more work is needed to advance the state of the capabilities that are selected, these attributes can be added. This would have the effect of keeping the documentation up to the state of the capability within the firm or the Joint Operating Committee. Recipients of the information, once the “Planning & Deployment Interface” was processed, would be able to compare the capabilities information they received with the previous version they viewed, and determine quickly how the capability has changed from that previous version. This could be done by way of differing colored text or some other means. Then they could assess what impact and consideration that change would have on their portion of the task and if they were to have any issues as a result.

Just as with the selection of the various capabilities the resource selection would have any updated information regarding the capabilities of each individual. If the completion of a course or program, the successful implementation of other capabilities etc would be available to the user who initiates the “Planning & Deployment Interface.” This information could be incredibly detailed and include the contributions that the individual made to the “Lessons Learned Interface” in both the Knowledge & Learning, and Research & Capabilities modules. Their performance reviews from previous tasks and any comments about the role they undertook in previous assignments. This information should be available for in-house staff, resources that are pooled through the various Joint Operating Committees that a firm participates with, any suppliers and vendors or contractors that the firm or JOC may have hired to work on the task.

The timing of the project and its completion are somewhat flexible based on the number of resources that are put on the project. This makes for a bit of a paradox, as if the team gets too large you lose the cohesiveness that the team needs to rely upon. Understanding that the people that are resourced into these tasks are probably assigned to multiple projects, and their participation is somewhat constrained by these limits, the time line may reach beyond what is initially the target.

Lastly the “Planning & Deployment Interface” has been about the known knowns to this point. There are a variety of known unknowns and unknown unknowns. To document these, if possible, is the role of the team members once the project interface has been processed and assigned. Recall that Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” A section of the interface should be set aside where the team can collaborate on these points and provide some innovative solutions for the producer or JOC.

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? I think the development of the “Planning & Deployment Interface” as described here would provide the producer and Joint Operating Committee with these sought after abilities.

Focusing on the Producers Earth Science and Engineering Capabilities

People, Ideas & Objects software application modules enable the producer firms and Joint Operating Committees to focus on their core competitive advantages. These being the land & asset base, and the earth science and engineering capabilities of the innovative and profitable oil and gas producer. The Research & Capabilities module of the Preliminary Specification is the key module for the innovative producer to focus on their earth science and engineering competitive advantages. We have been discussing the “Planning & Deployment Interface” of the module and now we want to discuss how the producer maintains the pace of change in the underlying sciences and technologies.

The simple answer to this question is that the producer and particularly the Joint Operating Committee will not have the distraction of the long term acquisition of scientific and engineering research and capabilities development affect the day to day implementation of the knowledge of the firm or Joint Operating Committee. Recall at the beginning of this modules review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. The Research & Capabilities is about the acquisition of capabilities and their documentation, and the Knowledge & Learning is about their deployment, implementation and execution. The fact that there is a “Planning & Deployment Interface” in the Research & Capabilities module may lead to some confusion, however, it is there as there are times in which the producer firm needs to implement the capabilities that it has for experimentation and its sole benefit.

This separation of the time horizon for the Research & Capabilities to take the long term perspective, provides the appropriate mindset for the producer firm to focus on the overall development of the earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and mapping the necessary changes within the “Dynamic Capabilities Interface” will communicate the changes from the organization to the various Joint Operating Committees that need that information on those capabilities. These changes and the communication of the changes to the appropriate people in a timely fashion will provide a means of increased performance for the producer and JOC. Providing a foundation for the producer to further build and implement their competitive advantages of earth science and engineering capabilities.

Restating for clarity purposes. That is how the Research & Capabilities module enables the producers to develop, implement and integrate advanced capabilities within their organization. The research undertaken by the firm should not interrupt the day to day of the operation. However, when the research augments the firms capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. These capabilities as they are listed in the“Dynamic Capabilities Interface” will be available to be selected on related criteria in the “Planning & Deployment Interface” of the Knowledge & Learning module. If the research conducted by the firm is unresolved or undetermined in its conclusion then it would not belong in the “Dynamic Capabilities Interface.” If it remained unresolved or undetermined then it would indicate that further work was required and therefore remain open in a Work Order for completion or resolution.

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.

Professor Giovanni Dosi On Innovation Part I

Introduction

It is through Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” that we will view the Research & Capabilities module. A couple of things that jump out at me in the module are the division of labor between computers and humans. Formulating ideas, making decisions and collaborating are the activities that are captured in this module. Leaving the mundane transaction and data management tasks to the computers. This I think an appropriate division of labor, and I wonder at times what SAP’s thinking is on this. There is also a strong division of labor and specialization in the technical resources of the producer firm. This is done to mitigate the resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois comment that we are “moving the knowledge to those with the decision rights” as being the primary process that the module captures. And lastly, that a user can right click at any time within the module and initiate any standard ERP type of action on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

To the topic of innovation, Professor Giovanni Dosi’s paper discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi note:

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts with the costs of their technical resources with the implicit assumption that they would generate a return on the investment in the firm's capabilities. We also discussed the differences between what is acceptable practice today (with overhead allowances) and the different positions that some might take on the topic. However, I think Professor Dosi’s point here has to be taken as the key criteria as to the direction the industry takes on the issue. You are “investing to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competitions.” The ability to sustain the state of the art oil and gas capabilities on the basis of what a producer earns from oil and gas production is a direct result of those capabilities, however, shouldn’t those capabilities also earn a return on investment above and beyond what the oil and gas production provides?

It’s only reasonable that the producer firm is going to approach the operation of some technically difficult task with the appropriate capabilities. Innovation requires that the capabilities of the producer be the base on which the innovations can be leveraged. What Professor Dosi has defined in his research is the key factors that innovation requires. We will discuss these key factors and how they are integrated within the Research & Capabilities and other modules of the Preliminary Specification.

One housekeeping duty is to note that there is a “Capabilities & Commitments” interface in the Petroleum Lease Marketplace module. This documents the contractual obligations that the producer is required to meet in terms of commitments to the various Joint Operating Committees that the producer is a participant in. And to leverage the working interest partners capabilities that are likewise legally committed. This interface is placed in the Petroleum Lease Marketplace module to document the legal obligations that are contractually defined. This interface should also be populated in the Research & Capabilities module.

Innovations Three Key Factors

We will now deal with the first of the three key factors of innovation, Professor Dosi notes:

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Capabilities and stimuli generated with each firm and within the industry of which they complete.

What you are capable of is wholly dependent on what has been purposely developed within your firm. These capabilities have developed over time and are able to be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more capable through a variety of different means. The ability of the firm to develop these capabilities is limited by what the oil and gas service industry is capable of providing. If they have only x number of rigs available, then only so much work will be done. And if the rigs are only able to drill shallow wells then the science of the producer will be constrained by the capabilities of the service industry. Furthermore, if the producer is a state of the art earth science and engineering wonder in a sea of producers who are barely able to successfully drill shallow wells, then the state of the art producer is reduced to the same level of the others. The marketplace of the producers in terms of their technical resources and their capabilities have an enabling and constraining limit on what the producer is capable of. Innovation is leveraged from this base.

The question therefore becomes how do we broaden the base of not only the producer but the service and oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog like interface where members of both of the industries can post ideas of products and services that might be of interest to the producer firms. Producers may then act to support these ideas with funding and support to develop the idea into a product or service to augment their capabilities. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from the lessons learned by each producer. The "Gap Filling interface" where the producer can anonymously publish where they see gaps in the service industries offerings. Enabling the service providers to prepare new products and services based on a further defined division of labor and specialization. Or how the information within the Research & Capabilities interface is organized on the basis of geological zone, or other criteria, so that only those pertinent zones are populated to the individual Joint Operating Committees through the Knowledge & Learning module.

Recently in the Partnership Accounting module we discussed the accounting attributes of the Work Order system in forming working groups amongst industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers. The ability to strike these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how the producers will develop their capabilities and innovativeness. Since the costs and the results are shared the industry as a whole advances. Leaving the producer open to further potential innovations. I see this as an area that will increase in terms of activity, if, the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting modules Work Order does.

The second key factor that Professor Giovanni Dosi defines as necessary is as follows.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

Again these only make sense in terms of being critical to enabling the capabilities and innovations of the producer firm. The question becomes is how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors to enhance innovation?

The first key factor that I want to address is the “supply of technical capabilities, skills, engineers etc.” That raising the quantity and quality of the earth science and engineering technical resources of the industry is possibly one of the three top issues of the industry. How does the Research & Capabilities module specifically increase the supply of these resources? As we have stated here many times the need to rely on the standard economic tools of an enhanced division of labor and specialization are the keys to solving this problem.

The issue is that these technical resources are limited in their supply for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources are somewhat constrained. Add to that the volume of earth science and engineering effort in each barrel of oil is increasing as time passes. Using specialization and the division of labor we can achieve a higher throughput from the same resource base. That is the basis of the solution used in the Preliminary Specifications Research & Capabilities module.

If we look at the way the industry is structured today, with each producer building the capabilities needed to address every possible contingency within their organization. The overbuilding of earth science and engineering capabilities is the result and this internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable on an industry wide basis. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee are able to pool their technical resources to meet the properties demands. Eliminates the overbuilding of capacities in each of the producer firms, and enables the producers to deploy the formerly unused and unusable surplus capacity.

Each producer will also need to specialize in some area of the earth science and engineering disciplines. The need to cover off the global scope of technical requirements is an extensive undertaking today. The future will require further specialization and division of labor be undertaken in the technical disciplines. Without choosing to specialize and using the pooling concept, the producer firm will be faced with such an onerous task of attempting to cover the global scope of these technical requirements as to be unprofitable. The “pooling” approach we are taking here in the Research & Capabilities module is of necessity.

That’s the first element of the division of labor and specialization that is inherent in the Preliminary Specification. The second element deals directly with the ability to organize the technical resources in a manner that deals with how the “bread and butter” geology and engineering is done in the industry. With a dedicated software development capability such as that which is People, Ideas & Objects competitive offering, the ability to organize new service based offerings to meet the demands of the industry's bread and butter earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the throughput of the industry from the same volume of resources, and also enhance the quality of the resources. As we have stated many times at People, Ideas & Objects, software will define and support this future division of labor and specialization.

Regarding the “facilities for the communication of knowledge” as a key factor of innovation. The Research & Capabilities and the Knowledge & Learning modules are collaborative information systems that are “industry-wide” in their implementation. A review of the many interfaces that are mentioned here showed that the development and sharing of knowledge, which are critical for the development of the individual producers capabilities and innovativeness, are systemic throughout this module.

Lastly we need to develop an interface in the Research & Capabilities module that allows the producer to interact with the academic and research areas of the earth science and engineering disciplines.

We now want to document the last of the key factors that Professor Giovanni Dosi states are necessary to support innovation. And then begin a discussion on these key factors and how they are implemented in the Research & Capabilities module of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

It's only logical that innovation will spring from advanced markets with labor mobility, legal protection and capital markets. It's one thing to have these facilities provided, its another to have them aligned within the organization. With People, Ideas & Objects we are aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment permits the producer firm and the Joint Operating Committee to attain greater speed, innovation, accountability and profitability as a result.

What these key factors reflect is that the innovative oil and gas producer must first of all be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the greater market makeup. For the producer to attain their highest level of capabilities is the objective of the Research & Capabilities module. Each producer will be able to attain their own specific level of capabilities, and that level will be dependent on these key factors. Not all producers are built the same. The ability therefore to achieve state of the art capabilities and highly innovative practices are not something that are at risk in terms of being “copied” by other producers. Therefore a producer's willingness to participate in the collaborative environment created in the Research & Capabilities module would not risk any proprietary competitive advantage. On the contrary, based on these key factors, non-participation would limit the competitive advantage.

This environment is the polar opposite of the manner in which the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk more than anything else. And I am not suggesting a different posture be taken in terms of the risk profile of the industry. Only that a more open collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. One that enables the key factors to interact with the highly aligned and innovative oil and gas producer. And to begin the move to that next level of performance which requires that we build the software that defines and supports the innovative and profitable oil and gas producer, the People, Ideas & Objects Preliminary Specification.

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.

Round 1, Management vs. the Internet

We live in interesting times. The Internet has had a remarkable impact on our lives in the past fifteen years. As we look forward, that impact has only begun. When we talk about the impact that the Internet will have on the capabilities of an oil and gas producer, we need to consider some critical factors in those capabilities. This discussion deals with those critical factors and how they are implemented in the People, Ideas & Objects Research & Capabilities module of the Preliminary Specification.

The purpose of a bureaucracy in the age of the Internet not only seems wasteful, it is. The pace of everything is slowed to a cumbersome and cluttered existence that defies common sense. The Preliminary Specification considers the Internet as an inherent given. Aligns the nine frameworks of the Joint Operating Committee and producer around the Joint Operating Committee. Establishes marketplaces. Automates the work that computers do best and keeps the work that humans do, the decisions, the ideas, and the collaborations front and center in the modules. To do otherwise would be a waste of the opportunity that is afforded to us by the Internet.

One of our top two research providers, Professor Richard Langlois wrote a book a few years ago that we reviewed as part of our research. The first chapter was entitled “Progressive Rationalization” and our quotes are from that chapter. In this first quote he notes the correlation between “new economic opportunities” such as the Internet and the “organizational structure.”

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

If we look at the first critical factor, the new economic opportunity, which in our case is the Internet. According to Langlois the “problem of organization is bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities.” The “character” of the Internet is that it enables the collaboration within the Research & Capabilities module as we have discussed to date. Recall in our recent discussion we noted from Professor Carliss Baldwin that “knowledge beget capabilities and capabilities beget action.” The facilitation of knowledge and actions are the two areas where the Research & Capabilities module enable the user to interact and engage in the community, the producer firm and the industry. This will become more apparent as you read the Research & Capabilities module specification.

The second critical factor that Langlois notes “is the existing structure of relevant capabilities.” And here the People, Ideas & Objects Preliminary Specification has a distinct advantage in that we are isolating the short and long term perspectives of the producer firm between the Joint Operating Committee and the producer firm itself. By using the Joint Operating Committee in this fashion we are building on that innovation by leveraging the innovation of the Internet.

In this last quote from Professor Langlois he reflects on centuries of historical change and the manner in which that change came about.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. 

Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

The battle lines have been drawn. As the Vanishing Hand of the marketplace replaces the Visible Hand of management. It will be the market supporting capabilities of the Internet that supports the markets. Markets are the ultimate source of the producer and Joint Operating Committees capabilities. Market coordination therefore will be a competitive differentiation that is provided through the capabilities acquired through the Internet. It is the Internet vs. the bureaucracy. I have certainly tipped my hand as to who I think will win this war.

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.

A Marketplace for Ideas

Let's review from a high level the process that is managed by the Research & Capabilities module of People, Ideas & Objects Preliminary Specification. The module has an interface that we will call the “Ideas Marketplace Blog” which is a marketplace where people, firms and service providers actively post their ideas for new products and services to help in the exploration and production of oil and gas. This marketplace provides the producer firm with the ability to explore new ideas and participate in their development with other producers. As time passes and the capabilities of the producer develops, they are able to deploy these enhanced capabilities through to their various Joint Operating Committees through interfaces in the Research & Capabilities and Knowledge & Learning modules. What we are creating in the Research & Capabilities module is a window on the marketplace of ideas.

Now what is so significant about ideas? First it's one of the few areas that computers are unable to provide any assistance in. People are the necessary ingredient in idea generation and application. The second important aspect of ideas is that we are going to need more of them. The volume of ideas that are necessary today are an order of magnitude higher than they were a generation ago. And the volume will need to be an order of magnitude higher in just a few years time. That is the nature of ideas.

If the innovative oil and gas producer is going to be iterating on the science and technology of the oil and gas industry. They will need to participate in a marketplace that is very dynamic. One that deals in every kind of idea, good, bad, brilliant, dumb or new. For if today it takes one idea to build one unit of value, tomorrow it will take two ideas to hold that value, and five ideas to build another unit of value. Such is the nature of where we are heading. If you’re not participating in the marketplace of ideas then you won't be participating in a market of value.

We are seeing the respect for ideas beginning to be reflected in the marketplace. I have been overtly critical of the manner in which the oil and gas industry has treated the service industries Intellectual Property (IP). This must change and they must begin to respect the ownership and development of IP if they are to benefit from a marketplace of ideas. There is no one who will participate in a marketplace if they see that the oil and gas producers will not respect their IP. If they risk their IP being poached by their very customers, which is the case today, then they will not participate, and therefore the marketplace for ideas will stagnate. At which time, if that stagnation were to occur, the producers could call the service industry lazy and greedy.

Seeding the promising ideas with funding will be another role the producers will have to undertake. However, since they will be respecting the IP of the owners they will only have to fund one project, not several “me too” copycats. This will allow the owner of the product or service to fully leverage the oil and gas producer marketplace for their product or service and hence, not have to rely too heavily on initial funding.

In the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification we noted that the nature of the modules would enable the users to initiate, at any time, commercial actions on the ideas and activities in these modules. This discussion deals with those actions that can be generated from those ideas and activities and the importance of this module as an ERP system module.

ERP system modules have traditionally been focused on recording transactions and reporting those transactions to the various users of the information. To do that is still required of an ERP system but if that is all that we are doing then we are missing so much of what an innovative oil and gas producer needs. In the sense of a Research & Capabilities module, the need to deal in the marketplace of ideas is where the producer needs to have a presence and understanding of what is happening in the oil and gas and service industries. Participation is mandatory for success in a world where the speed of ideas and their implementation will be weeks and months, not years or decades.

An application that fulfills the needs of a producer in this manner has to have the input and contributions of all the other producers and the service industry as well. The applications installation is multiple industry, not just within one producer. The perspective of the user in some instances will be a window on the industries that are available to them. What will be needed is the ability to have the systems that can initiate actions on those ideas and actions of interest to each of the users of the Research & Capabilities module.

We noted the ability to right click while in the Research & Capabilities and Knowledge & Learning modules any idea or action of interest. This would bring up a contextual menu of items where the user could select the ability to initiate a Work-Order, initiate an AFE with a partner in a Joint Operating Committee, etc. The point in mentioning this is from both McKinsey and Harvard Professor Carliss Baldwin. The first quote is from McKinsey.

Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need, even if it resides in their own companies and coordinating their work with others.

Once they find something of interest the user of the Research & Capabilities and Knowledge & Learning modules should have the full scope of an ERP application at their disposal. The ability to initiate any action of a commercial nature would take the idle capabilities of the producer firm or the Joint Operating Committee and put it to use. As Professor Baldwin notes.

Changing routines, competencies or capabilities based on knowledge must cause firms to have shifting knowledge boundaries. The span or scope of knowledge available to a firm will change over time as required by its changing activities. But theories based on knowledge cannot directly explain the location of transactions. First, the domain of transactions is a domain of action: goods are made; services are performed; compensation is paid and received. But actions enter the knowledge based theories only indirectly: knowledge begets capability and capability begets action. The actions themselves lie outside the scope of these theories. 

These quotes capturing the importance of embedding these two modules within the People, Ideas & Objects Preliminary Specification. Without the ability to initiate the actions within the organizations the capabilities will be trapped. In a world where the software needs to be built to identify and support the organization first, these are important considerations.

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.

Copyright Notice

It would seem to me to be more productive to just develop the Preliminary Specification and forget about these politics and fighting with Goliath. Pretty naive eh? This is a follow on post to the one entitled “Three Times Lucky?” This copyright notice deals with the law and political facts of copyright law and the implications regarding those laws.

The Preliminary Specification, the innovation in oil and gas blog of which you are reading this, the Preliminary Research Report and other material are the Intellectual Property (IP) of Paul D. Cox. This IP has been developed at significant cost with the expressed purpose to provide the oil and gas industry with solutions to the industries issues. They are not to be used in any other form or manner other than what I deem is appropriate. All of my efforts have been to develop the marketplace for these ideas, and to help the oil and gas producer through the IP that is developed here. The laws of the countries in which we operate support these actions. Any unauthorized use of these ideas is forbidden.

I therefore place the CEO’s, CFO’s, COO’s, Officers and Directors of all of the oil and gas producers that are operating in the Canadian and United States jurisdictions on notice that any unauthorized use of my Intellectual Property is forbidden. These copyright laws are established laws, and you are lawful corporations. And yes, this notice does extend explicitly to those participants, past and present, of the Canadian Association of Petroleum Producers CIO Committee. The law applies to you as well.

Consumers of the Android operating system could care less that Google has violated Oracle's Java Developer Kit. Producers who invest millions in their ERP system will conduct significant due diligence to ensure their vendors Intellectual Property claims are valid.

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.

Three Times Lucky?

We need to take a quick break from the Research & Capabilities module to take care of some housekeeping duties.

Goliath has made the first move! Goliath is the name that I’m going to start calling the oil and gas bureaucracy. It makes them more human and puts our battle into context. Anyway it was just a matter of time before we started mixing it up. With the Preliminary Specifications decentralized production model providing $94 billion in additional revenues and profits to the oil and gas producers. Goliath wasn't looking all that attractive. Goliath needed to do something before these ideas became too prevalent in the marketplace. So now Goliath has acted and he put another pawn in place, and its Ernst & Young. Let me be the first to welcome them and to note that they join an esteemed cohort. Previous pawns included Cambridge Energy Research Associates and McKinsey Consulting. So they should honestly consider themselves privileged.

What Goliath does is he hires these firms and has them prepare some research that replicates certain elements of the Preliminary Specification, as in the Ernst & Young case, or other research of People, Ideas & Objects. Note that their research or studies are derivative of my Intellectual Property of which I am the copyright holder. They, the pawns, then proceed to publish the material as if they have some breakthrough in terms of oil and gas understanding. But then I call. Then its not so earth shattering when we compare notes. The fact that Ernst & Young has published a study that is surprisingly similar to the decentralized production model. That they pull this miraculously out of thin air. That this is highly inconsistent with the output of a big audit firm and their past papers. Makes Ernst & Young look poorly and Goliath should be ashamed of himself. Ernst & Young, who I believe understands the Intellectual Property laws, doesn’t appear however to share Cambridge's or McKinsey moral and ethical backbone.

The first mention of the decentralized production model in this blog is in January 5, 2007. You can check for yourself. The development of the idea obviously took a few years, but then I’m not as smart as those guys at Ernst & Young. The fact that both of us have topical solutions to the industries problems, at the same time, is the point. But wait, People, Ideas & Objects are a comprehensive software and service offering, and Ernst & Young are a study! Well maybe I’m not that slow after all.

The bigger picture here is that Goliath is not that well. He is old, tired and doesn’t have that much usable life in front of him. I don’t know what his exact medical issues are but there seems to be a lot of medical people around him at all times. Its understandable that he is fighting for his life. Like other bureaucracies that are faced with their ultimate demise as a result of Information Technologies, they can’t sustain too much more of a beating. As I said $94 billion in opportunity costs for 2012 alone is a distinct value proposition that People, Ideas & Objects provides the oil and gas industry. Goliath can’t sit there and do nothing in the face of such obvious value destruction. So let Goliath fight for a few more days, the game is afoot and I feel like a few good rounds with the old boy.

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.

Research in the Service Industry

One of the key points about the use of the Research & Capabilities module is that the oil and gas producers receive 100% of the funds from the production of oil and gas. This entitles them to be the gatekeeper on all subsequent activity with respect to how that money is expended. And that includes the “what” and “how” of service industry product and service innovations and offerings. In today’s capital markets little is tolerated for research and development that is not directly funded by customers. To expect that the service industry will divert its profits, or will raise capital to fund its research and development efforts is foolish. It is clear that there has to be a direct link between the research that is undertaken by the service industry and the customers (i.e. the producers) wallet.

At the same time producers don’t want to participate when the cash is simply thrown against the wall to see if it will stick. There has to be a clear direction and understanding given to the service industry as to the direction and need that the oil and gas industry has. For the past few years, at least in Canada, we have heard many of the independent producers calling out the service industry as greedy, lazy and taking advantage of the situation in the field. Implying that the demand for service in the field is so strong that the only means to control it is for the service companies to increase the prices they charge. I see this situation occurring as a result of a lack of investment in innovation by the service industry.

This situation in the field has led to “cost control” measures by the producers that have further constrained the communications between the service industry and the producers. To suggest that the industry should be funding service industry innovations is the last thing that producers want to hear at this time. But it is the long term solution to producer problems. Micro-managing and cost-controlling will get the job done to the satisfaction of no one. As the demands in the industry increase, the ability to increase the capacity and capabilities will be further constrained because no one is working on those capacity related problems today. When the time comes, the problems of today will be significantly larger tomorrow.

What is needed is the Research & Capabilities module of the People, Ideas & Objects application to provide the communication between the service industry, the entrepreneurs and the oil and gas producers. Communication about the needs of the producers, backed up with dollars that are willingly spent in order to develop the innovation, capacity, capabilities, services and / or products. Providing direction to the service industry certainly sounds more constructive than calling names, controlling costs or micro-managing. This functionality will be captured in the Research Budget Allocation Interface of the Research & Capabilities module.

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.