Specialization and the Division of Labor

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

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

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

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

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

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

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

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

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

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

It is the profit motivated service providers and service industry participants that see the opportunity to make a substantial change for their clients and their own situation. One that is more enduring and profitable. That is the motivation for the change that will make the transition in the marketplace for these groups. They will see alternative ways of organizing their firms, or have new firms start up, and provide for a further specialization of their skills, experience and knowledge.

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

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

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

Learning, Then Operational Control

Having tight operational control during operations leads to a situation where the chance for learning may seem limited. However, the very temporary nature of the operation should lead to the dynamics of the marketplace providing for further learning opportunities. Quotations are from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time."

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

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

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

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

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

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

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

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

Defining Tacit and Explicit Knowledge

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

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

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

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

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

Getting a handle on these interfaces is of premier importance to the innovative and profitable oil and gas producer. This may seem to be an academic exercise for some, however, these are core to the value of the Joint Operating Committee and the producer firm. It is the actions and interactions that are derivative of these capabilities that will determine the success or failure of the innovative and profitable oil and gas firm.

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

and

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

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

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

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

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

Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” Provides us with a focus on the topic of tacit knowledge and how that is handled in the Knowledge & Learning module of the Preliminary Specification. Recall that tacit knowledge can not be captured in the “Dynamic Capabilities Interface." Only explicit knowledge can be captured there. The fact that you can only capture “text book” knowledge is a limitation that all systems must deal with. The knowledge that is captured in the “Dynamic Capabilities Interface” is very rich and includes the information necessary to undertake the operation from the point of view of all of the people that will be involved. Included in that information is the roles and responsibilities of the individuals who will undertake the command and control of the operation. They are the ones with the tacit knowledge of the operation.

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

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

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

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

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

Modularity and Interdependency

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

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

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

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

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

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

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

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

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

As people work on both ends of the data in these modules. Engineers and geologists within the producer firms developing the capabilities in the “Dynamic Capabilities Interface." And engineers, geologists and service industry representatives in the Joint Operating Committees on the “Lessons Learned” interface. Data and information will be updated and changed from all the participants involved in both innovation and operational control.

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

Separate and Distinct

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

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of the capabilities of their respective firms. They are the ones that are field testing the capabilities that the engineers and geologists are developing. Once these ideas are proven and developed into usable and valuable technologies and processes, then they are added as capabilities into their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. There they, depending on the selection of the producers criteria, might be populated to the Joint Operating Committee that is in that zone, or available for use with multi-frac technology, and will be available to the members of those JOC’s.

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

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

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

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

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

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

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

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

Innovation Meets Field Coordination

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If one considers how the Knowledge & Learning module enables the producer to implement their capabilities. Calling them a competitive weapon is a reasonable perspective.

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.

Capabilities as the Focus

Our first paper of Professor Langlois’ is “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” In this paper he introduces capabilities as a new theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is its focus on production.

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

The capabilities approach picks up and builds on the transaction cost approach that we have been discussing throughout the Preliminary Specification. It also builds on the boundary of the firm and markets.

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research p. 7.

To build the capabilities of the oil and gas producer to conduct their own field operations is impractical and inefficient. Sourcing the field operations needs of the producer from the service industry is the only viable solution. Deployment of those capabilities becomes the issue in the innovative oil and gas industry. Particularly when the basis of competitive differentiation is on the earth science and engineering principles the oil and gas business is based. “What” and “how” those capabilities are developed and deployed are critical elements of the oil and gas producers competitive differentiation. The Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification organize these capabilities in a manner where innovation is the priority.

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 6

Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer is the first step to this innovative setting. The Knowledge & Learning module is a Joint Operating Committee focused module. There the participants in the JOC are able to review the capabilities of the various firms that are members of the JOC. Enabling them to make the operational decisions based on the right information at the right time with the right people.

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31

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

Innovation Supported by a Software Development Capability

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

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

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

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

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

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

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

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

Deploying Innovations

It is important to recall that innovation is not research. Research is being conducted in the Research & Capabilities module and when the research is proven, added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate criteria to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the Joint Operating Committees are similar to the way that football teams plays are developed and executed. We want to use the analogy of the football coach who is motivated to win, selects the plays from a long list of possible plays of what the team can execute.

Professor Giovanni Dosi 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. For the purposes of this discussion the perception of some sort of opportunity is realized through the members of the Joint Operating Committee reviewing the capabilities that are presented to them through the Knowledge & Learning module. The listing of capabilities presented from the various producers that are participants in the Joint Operating Committee would provide a depth of opportunity that was previously unqualified and unquantified. The incentives would be performance based and focused around the possibility of increasing the trajectory of revenue per employee.

We’ve all seen the football coach on the sidelines with the list of hundreds of plays that can be called during the game. Selection of the appropriate play will help to move the team towards its goal of winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee has probably been the case for many in the industry. The ability to select and execute them in the manner that the football coach is able to, and have them communicated to the team members for precise execution in the half second that it takes is the rarity. There is no reason why each and every Joint Operating Committee should not have this type of efficiency. An efficiency in the ability to select and execute the capabilities that are made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user is able to select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and resource it from the Military Command & Control Metaphor. Since the capabilities are listed from various firms in the Joint Operating Committees special considerations will need to be made in terms of the resource requirements. The “capabilities” that are selected are for company x, and available from company x, not necessarily for Joint Operating Committee xyz without the involvement of x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. From there the execution of the capabilities can take place.

We have drawn the analogy of a football coach who reviews his list of plays, selects one, and calls it for the team to execute, to the “Planning & Deployment Interface” of the Knowledge & Learning module. The ability for a Joint Operating Committee to have this style of communication and understanding of what needs to be conducted may be necessary in the near future. With the insatiable demands for energy and the ever increasing demands of earth science and engineering work needed with each barrel of oil and gas produced. The amount of work required for the JOC will need to be conducted in a highly organized and controlled manner.

Adding to this level of increased workload for the Joint Operating Committee is the field and service industries are going through their own innovative cycles. The problem is that if each Joint Operating Committee is left to deal with each of these issues on their own, then there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. This is something that needs to be avoided. However, the JOC needs to be deploying the latest state of the art proven technology in the most capable manner.

If we look over the previous discussion regarding the Research & Capabilities and Knowledge & Learning module we can see how these “things” are filtered out and dealt with. The Joint Operating Committee is being provided with the most up to date capabilities from the producer firms that have a financial interest in the property. It is those producers that are expending the research to expand their understanding of the earth science and engineering on behalf of all of their interests in all of their JOC’s. Taking the trips down the blind bunny trails once and only once on behalf of all the JOC’s. Not having each and every JOC discovery the blind bunny trail on their own. Then developing the capability to the level necessary for the inclusion in the "Dynamic Capabilities Interface" where it will be used successfully by all of the JOC’s they have an interest in.

This process helps the Joint Operating Committee to focus on the property. To eliminate the noise of what is going on in the larger oil and gas arena for the moment and deploy the innovations that are known to add value. It is as when the coach calls the play the only concern is to ensure that you execute your part of the play in the manner that it is designed. There may be times back on the practice field to fiddle with some changes, but for now it's time to run the play as it was designed. This is the business of the “Planning & Deployment Interface” in the Knowledge & Learning module.

Professor Giovanni Dosi asserts 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)

These implications that Professor Dosi notes are reflected in the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enabling the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with 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.” Providing the producer with the best of both worlds.

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.

Deploying Capabilities, Not Hoarding Information

It is best that we start this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published earlier in the Research & Capabilities module and are noted here for clarity purposes. The first is from Professor Richard Langlois.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

As well we have Professor Carliss Baldwin’s “Knowledge begets Capabilities, and Capabilities beget Action.” There is also the quotation from Professor Richardson that capabilities are the “Knowledge, Experience and Skills” (1972, p. 888) to which we at People, Ideas & Objects have added “Ideas.” And this next quote from Professor Langlois helps to bring the clarity we need.

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

With respect to information, we have all seen how information, and more specifically secrets, within the oil and gas industry can travel from one producer to another at a rather rapid pace. No one should be surprised to learn that what they thought was confidential to the firm, has somehow leaked and became well known throughout the industry. It is sometimes more difficult to communicate information through the organization then it is to get information across the industry. The question therefore becomes how is proprietary information, and more importantly these proprietary capabilities that are available within the producer firms, deployed on an as needed basis within the various Joint Operating Committees.

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another is not as easy, and may be not worthwhile doing. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.”

Within the Knowledge & Learning module we are operating within the Joint Operating Committee. Populated with the capabilities from each of the participating producers through the “Dynamic Capabilities Interface" of the Knowledge & Learning module. It may be a concern to some producers that the publication of these capabilities to other producers representatives in the Joint Operating Committee would lead to the leakage of proprietary information or loss of knowledge or capabilities. That may be, however the nature of capabilities are such that they can’t be copied by a simple matter of recording the text. As we have discussed elsewhere, the development of capabilities is the results of research and application of the resources of the firm in a determined and purposeful manner to achieve an outcome. Copying the plans or instructions would not provide you with the means to achieve the objective. You can’t copy the “pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities.” What we have to make sure that we don't lose is the ability to deploy the right information, knowledge or capability at the right time and at the right place. Knowledge, information and capabilities need to be employed and deployed when and where they are needed and required. That is the competitive advantage, deployment of the dynamic capability, not hoarding of information.

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.