OCI Research & Capabilities, Part VII

 Who Does the Innovation

When we consider what a producer's capabilities would look like, such as those listed in the “Dynamic Capabilities Interface” of the Research & Capabilities module of the Preliminary Specification, much would depend on the type of producer represented. As one could imagine a large firm such as Exxon would have a vast library of capabilities. In contrast, a small start-up would be limited to a small database in terms of what they could achieve.

Some might assume that the majority of oil & gas innovation is developed by the largest producers. However, I think that is generally untrue. Small and start-up oil & gas firms along with intermediate producers are probably responsible for the majority of 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.

For the purposes of the present work, it is enough to mention three major regularities that come out of empirical studies.

First, there appears to be a roughly log linear relation within industries between firm size and R & D expenditures (or patenting). This is, however, a rather crude approximation. On closer inspection, subject to industry differences and different measures of innovativeness, one finds better fits of quadratic and cubic relationships between size (i.e., sales or employment) and innovativeness (R&D expenditure, R&D employment, number of patents, or number of innovations); p. 1151.

Second, the size distribution of innovating firms within sectors depends on the technological characteristics of the sectors themselves. 

Third, after allowing for the effect of firm size, one still generally observes a substantial unexplained interfirm, intrasectoral variance, in terms of both R & D investments and, even more so, innovative output.. p. 1152.

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by small oil & gas producers. SAP does significant generic research in software development. However, they do very little oil & gas research. On the other end of the scale People, Ideas & Objects have completed substantial oil & gas specific research and have commenced the development of oil & 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 many usable innovations. And it may be the lack of financial resources that motivate smaller firms to innovative problem solving on the other end.

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

There are three obvious caveats for the interpretation of these results.

• The first relates to the fact that the statistical proxies cannot capture aspects of technical change based on informal learning. 
• The second is that some (generally undetermined) part of the intrasectoral variance in innovative performance must be attributed to differences in actual lines of business (and thus in opportunity, appropriability) which are, nevertheless, statistically classified within the “same” industry.
• Thirdly, some firms may not patent or innovate but still engage in substantial R & D which is simply devoted to keeping up and adapting to what other competition are doing.  p. 1152.

In summary, it shows that money is not necessarily a determinant of innovative success. All producers need to be represented in the innovative oil & 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 use the factor in many of the interfaces. I am only highlighting it here to show how the Research & Capabilities module influences the elements that make up the revenue per employee calculation. As you’ve seen in the other modules, the factor variances are large between producers. These variances show that there is a large asymmetry between 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 the competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the industry participants. Laggard companies' ability to improve their competitive position helps them to establish new positions within their industries. These laggard companies generally move forward faster through imitation of leading companies. However, the primary differentiating component of competition based on innovation is attributable to the firm's innovative capability.  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 they 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 diminished through Information Technology during the 2000’s.

There is a paradox related to innovation, whether it is based on imitation or strict Research and Development. Companies can copy others' innovations in industries with minimal asymmetry (where competitors are all the same). While industries that are asymmetric (such as oil & gas) or have large variances in their capabilities are best served by differentiating themselves through the pursuit of Research and Development. People, Ideas & Objects assert oil & gas is asymmetric due to large variances in revenue per employee.

This is why capabilities are critical to the oil & gas industry's success. They differentiate themselves through research, development and 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 whom they are needed. They do not need to worry about being exposed to potential competitors through the Joint Operating Committee. It should be clear from this analysis that those that attempt to mimic others' capabilities will spend extensive resources to do so. This is as much or more than it would cost to develop these capabilities on their own. However, those that copy will remain static in their competitive position within the industry. It's just not that easy to copy someone else, and it's not that valuable to their firm. Developing innovative and profitable oil & gas producers demands research and development to be undertaken when markets are asymmetric.

The Outlook for Innovation

Our discussion now summarizes Professor Giovanni Dosi’s research and applies it to the oil & gas industry. To show the potential of developing People, Ideas & Objects ERP software.

Professor Giovanni Dosi asserts that the makeup of industries and companies is not solely due to the endogenous force of competition. Innovation and imitation also make up industry structure.

Market structure and technological performance are endogenously generated by three underlying sets of determinants.

Each of the following three components is evident in the marketplace of an oil & gas producer today, as reflected in:

• The structure of demand.

Satisfying the insatiable demand of the global energy marketplace is critical to society's advancement. American and western as well as Chinese and developing societies face real challenges in sourcing adequate long term energy sources. The long term demands on energy producers have never been so significant.

• The nature and strength of opportunities for technological advancement.

The nature and opportunities for technological advancement lead one to believe mankind has never faced the level of opportunity and acceleration possible today. The industrial mechanization of the past 100 years combined with the anticipated mechanization of intellectual pursuits markedly appreciates human life. Energy availability will be a critical element of this advancement.

The ability of firms to appropriate the returns from private investment in research and development.

The oil & gas industry is moving closer to earth science and engineering principles. Innovation, research and development in both the producer firm and the market are and will become more commercial in nature. It is on the basis of the success or failure of these factors that will determine the success or failure of the producer firm within the industry.

By codifying the earth science and engineering capabilities within the “Dynamic Capabilities Interface” the producer begins the process of documenting what it can achieve. By using the “Planning & Deployment Interface” either through the Research & Capabilities or Knowledge & Learning modules, the producer will be able to deploy those capabilities at the right time and with the resources they have developed. We have drawn the analogy of a football team and how they design and communicate plays as to how these modules will work in the People, Ideas & Objects Preliminary Specifications Research & Capabilities module.

OCI Research & Capabilities, Part VI

 Research Into the Underlying Sciences

Our discussion of the Research & Capabilities “Research Budget Allocation Interface” offers the innovative oil & gas producer the opportunity to control the costs of research and innovation conducted within their firm. Professor Giovanni Dosi asserts that businesses commit to innovation due to both exogenous scientific factors and endogenous accumulated capabilities developed by their firms. We have discussed in detail how capabilities are handled in the Research & Capabilities module of the Preliminary Specification. We'll now discuss how the research end of the module is managed.

With the “Research Budget Allocation Interface” we can provide a global view of the firm's capabilities 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 being undertaken in the scientific arenas. This would enable the producer to “commit to innovation due to exogenous scientific factors.”

It would be worthwhile to quickly recall the major processes managed in the Research & Capabilities module. We have the “Ideas Marketplace Blog” providing an environment where the service industry actively develops original and innovative products and services with input from producers. We have the “Dynamic Capabilities Interface” where the firm documents what it 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, but 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 critical qualifications.

• First, the link between science and technology runs also from the latter to the former. It has been noted, for example, that the development of scientific instruments has exerted a major impact on subsequent scientific progress. In general, however, the scope, timing, and channels of influence of technological advances on science have a different nature from the more direct influence of scientific discoveries on technological opportunities.
• Second, 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, applied, and 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 such as public agencies (e.g., the military) (p. 1137).
• The selection criteria of markets and / or techno-economic requirements of early users. (NASA, and the Pentagon in the early days of integrated circuits, FDA requirements in the case of bioengineering, and the technical needs of the American Navy in the case of Nuclear Reactors.) (p. 1137).
• The trial and error mechanisms of exploration of the new technologies, often associated with Schumpeterian entrepreneurship. p. 1137.

There is not a doubt that we need an interface here. An interface similar to the “Research Budget Allocation Interface” would be appropriate. And maybe we only need a second “page” within that interface. One for internal or endogenous budget items and one for exogenous budget items. The key here is to note that the greatest value is attained in the early stages. 

Innovating on the Science

Continuing our discussion of the “Research Budget Allocation Interface” and the two-page format. It is expected that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. The process that the user of this interface will document is the capabilities of the research being conducted within the firm and the broader scientific community. By way of the football analogy 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 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 develops into innovations that populate the “Dynamic Capabilities Interface". These innovations in turn populate the various Joint Operating Committees. Professor Dosi (1988) asserts that much of a firm's innovativeness is dependent on technology more than science, and has several implications.

First, the specificity, cumulativeness, and tacitness of part of the technological knowledge imply that both the realized opportunities of innovation and the capabilities for pursuing them are to an extent local and firm specific. Second, 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. Moreover, the innovative opportunities in each economic sector will be influenced by the degree to which it can draw from the knowledge base and the technological 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.

In addition, we learned that copying another firm's ideas or capabilities has little to no value. In contrast, copying others' capabilities can be as challenging as building their own. We now learn that innovation depends on the firm's technology. Thus, technology facilitates or constrains a producer's innovations. Therefore copying capabilities, without a foundation or base of technology and capabilities to support what is being reproduced, is useless. And if you have that innovative and technological base, copying would not be productive or motivating. We need to consider the time frame necessary to maintain these capabilities in the near future. What level of idea generation will be necessary to maintain and generate value in oil & gas? The value of the capability and its iterative pace of change will be endogenous, unique and most likely confusing to those attempting to copy them. Professor Dosi notes.

New 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 of a producer includes ERP systems used within an organization. As the petroleum industry is science-based, it would be in the producer's interest to remain open and flexible in both their scientific and business approaches. This is the strategic position a producer can maintain with the People, Ideas & Objects Preliminary Specification.

Highlighting the speed at which a producer firm can implement innovations. From 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 developed, tested, procedurally complete, approved and authorized processes in terms of what innovation they should adopt, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use in the Knowledge & Learning module.

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 progress of these studies and research is monitored in the “Research Budget Allocation Interface." This interface also has a page that monitors the scientific community's research. When these studies and research are concluded and capabilities are enhanced they are published to the “Dynamic Capabilities Interface” of the Research & Capabilities module. Then they are populated with all the information necessary to document and implement the capability. We have drawn a football analogy here in order to illustrate 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 pertinent attributes tagged in the Research & Capabilities module) will therefore have access to xyz capabilities in the “Dynamic Capabilities Interface.”

The key limiting factor 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 Joint Operating Committee is doing two things. Executing operations and making operational decisions. They are not field testing experiments as lab rats. It's imperative that this distinction be made and the proper documentation be handed off from the research and study to those that will implement it. Once the capability is documented, tested, proven and procedurally implemented it will be available to be implemented the next time the operation is conducted. This is anywhere it is pertinent within the producer firms' Joint Operating Committees. We'll discuss this point in the Knowledge & Learning module.

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

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138.
• Second, 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.

Considering the complexity of processes as described here, this brings to mind the Research & Capabilities module would be insufficient from the point of view of feedback from the Joint Operating Committees. Particularly because of 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 innovation within the producer firm. Having windows on the research developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and let's not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the service industry state of affairs. (For emphasis I quote again from Dosi (1988), as above "to which it can draw from the knowledge base and the technological advances of its suppliers and customers.") Theirs will be a rich medium of information of what is happening in the innovative oil & 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. They will have these capabilities available to other members of the Joint Operating Committees. They 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.

Call appropriability those properties of technological knowledge and technical artifacts, of markets, and of the legal environment that permit innovations and protect them, to varying degrees, as rent-yielding assets against competitors' imitation.

Appropriability conditions differ among industries and among technologies: Levin et al. (1984) study 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, and (f) superior sales and service efforts.

Levin et al. (1984) find that for most industries, "lead times and learning curve advantages, combined with complementary marketing efforts appear to be the principal mechanisms of appropriating returns for product innovations" (p.33). Learning curves, secrecy and lead times are also the major appropriation mechanisms for process innovations. Patenting often appears to be a complementary mechanism which, however, does not seem to be the central one, with some exceptions (e.g., chemicals and pharmaceutical products).(p. 1139).

Oil and gas producers focus on process innovations. Dosi observed that "lead times, secrecy and learning curves are relatively more effective ways of protecting them.” Which brings up a valid point. Assume that one of the capabilities published through the Knowledge & Learning module was the capability to fracture shale. Just because it is published doesn't mean it can be copied. Through experience and "learning curves," the "team" has developed the capability. Just because a football team sees the design of other teams' plays does not mean they can implement the same plays and win the Super Bowl. They will have to work on building the right talent and practice implementing the capabilities necessary to execute that capability. This is before they can successfully complete it. The same would be the case for anyone observing another producer's capabilities in a Joint Operating Committee. They’ll understand the explicit knowledge of the other producers. As that will be all that can be captured. Tacit knowledge, learning from doing, can’t be captured in any medium and is inherent in the producer firm's resources. It is the successful deployment of tacit knowledge that producers should seek to provide to their Joint Operating Committees.

Professor Dosi notes that Levin states that “whereby the control of complementary technologies becomes a rent-earning firm-specific asset.” 

In general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation as well as innovation, 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 (for evidence on the cost of imitation relative to innovation, see Mansfield, Mark Schwartz, and Samuel Wagner 1981; Mansfield 1984 and Levin et al. 1984). This 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 is required by each producer to develop on their own. If the costs of duplication are as steep as the costs of developing internal capabilities, producers should rely on internal process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear of copying?

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

When we discuss the Research Budget Allocation Interface of the Research & Capabilities module it feels that we are at the heart of the innovative oil & gas producer. Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation" 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 & gas producer can have a quantifiable and replicable innovation process within their domain. Something necessary in the difficult energy era we find ourselves in today.

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

Recently I stated that the people operating on the Joint Operating Committee are not experimental lab rats. That leaving 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 experiments. 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 gain a learning experience to the ultimate solution or capability.

Our next interface is the “Experiments Interface". This 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 allows users to manage a project from start to finish. Where capabilities can be developed as expected by the firm. Both interfaces will allow users to control and manage the firm's development at the speed of market and science.

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

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

A dynamic, innovative, accountable and profitable oil & gas producer must therefore be tuned to the market and science.

OCI Research & Capabilities, Part V

 Earth Science and Engineering Capabilities of Producers

People, Ideas & Objects software application modules enable producer firms and Joint Operating Committees to focus on their core competitive advantages. The innovative and profitable oil & gas producer's land & asset base, as well as its earth science and engineering capabilities. The Research & Capabilities module of the Preliminary Specification is the key module for producers focusing on their earth science and engineering expertise. We have discussed the “Planning & Deployment Interface” of the module. Now we begin the discussion on 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 module's review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. Research & Capabilities is about the acquisition of capabilities, their documentation, and 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 when the producer firm needs to implement its capabilities for experimentation and its sole benefit.

This separation of the long term horizon for Research & Capabilities. Provides the appropriate mindset for the producer firm to focus on the coordination of the market and overall development of earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and map the necessary changes within the “Dynamic Capabilities Interface” to communicate these changes from their organization to their various Joint Operating Committees that need that information. These changes and communicating the changes to the appropriate people in a timely fashion will increase performance for the producer and Joint Operating Committee. Establishing a foundation for the producer to further build and implement their competitive advantages in earth science and engineering capabilities.

Restating for clarity. That is how the Research & Capabilities module enables producers to develop, implement and integrate advanced capabilities within their organization. Research undertaken by the firm should not interrupt the day-to-day operations. However, when research augments the firm's capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. As documented in the "Dynamic Capabilities Interface," the Knowledge & Learning module will allow selection of capabilities based on the appropriate and related criteria. 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 to prove, troubleshoot and implement the capability. Therefore, they remain open within a Work Order until they are resolved, completed or terminated.

How and Where 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 they may have where capabilities and innovation would stem from these interactions. This process 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 issued. Capabilities are then populated to the Joint Operating Committee's day to day activities. It is the interaction between the producer firm and Joint Operating Committee, and the broader causes that create the innovations. 

We take the concept of a trajectory, describe it, and apply it to oil & gas. A technological trajectory is defined as 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 & gas is accurately reflected in commodity prices. Higher commodity prices will 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 industries' innovation on changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & 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 that 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. And this is how we can reduce it to a defined and replicable process.

Every organization has to deal with two distinct and differing types of work that needs to be done. Essentially, 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, concerned with execution. And the Research & Capabilities module, or producer firm concerned with developing its capabilities through market coordination. This division of labor and specialization regarding these two types of work is the topic of this discussion.

We have noted that innovation was an engineering approach to problem identification and resolution. We however want to focus these innovation efforts on one area of the firm. Making sure they are concentrated where they are most useful and 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 affecting the Joint Operating Committees' day to day operations. Only when an innovation is proven worthwhile and its implementation procedures defined should it be written up as an additional capability in the Dynamic Capabilities Interface. This capability is therefore available to be populated into the Knowledge & Learning module. It is available for use in the day to day operations 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

It supports both the "how to do things" (the Joint Operating Committee) and the "how to improve them" (the producer firm). The dichotomy reflects the challenges of improving processes and products through trial and error. The ability to accurately predict the success or failure of an idea contains inherent high risks and hence high rewards. This is one of the constraining factors in innovative thinking, in that no one wants to be proven wrong. While, even if the idea fails to test the theory, the failure may ultimately lead to and 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." Limits contamination if innovation was attempted in areas where execution is expected. Eliminates the high cost of innovation when repeated trial and error is conducted again and again in different areas of the same organization and over repeated timeframes. This division of labor is necessary between oil & gas firms and their Joint Operating Committees. We know there are two types of people, those who function best in either of these two environments. Any time either of these people are asked to operate in an environment they’re not oriented to, they feel uncomfortable and perform poorly.

This reflects 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. However, we also have innovation as an Organizational Construct. In contrast to the Joint Operating Committee, the producer develops innovations through its capabilities. Organizational Constructs, including the Joint Operating Committee, seek to establish, support and define a culture within North American oil & gas producers and the greater oil & gas economy. Creating an alternative to today's bureaucratic and non-performing culture.

Uncertainty and Risk in Innovation

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

What is clear is the role software will play in enabling innovation within the oil & gas firm. Throughout this discussion in the Preliminary Specification it is evident that software plays a critical role in the future oil & gas firm. Software defines and supports quantifiable and replicable innovation processes. The lack of this software constrains the industry. For the oil & gas industry to conduct any level of innovation without software, as defined here by People, Ideas & Objects, will leave the innovation 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 brings to the oil & gas business certain elements of risk and uncertainty. Add to this the commercial nature of the oil & gas business and you have an atmosphere where innovation is for those who can take the heat. Professor Dosi suggests 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

Uncertainty exists in both scientific and business realms. I am not convinced that the two can be separated. This is perhaps why the industry has been poorly served, in my opinion, by business systems today. They don’t recognize the innovative and scientific basis of the business and cannot support an innovative oil & gas industry. If commodity prices allocate financial resources to fuel innovation, the industry will need systems and procedures installed to manage innovation. Systems such as those 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 (Mansfield et al. 1977). p. 1134

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

A producer firm may become involved in many projects that seek new knowledge and capabilities regarding the oil & gas business. Some of these activities may be rather large and will certainly be the focus of the firm. They will have no difficulty attracting the firm's attention. Some however may be small and important from the perspective that the capability is just as pertinent to the firm, but don’t attract the attention. Nonetheless, these capabilities need to be included in the day to day of each and every operation of your firm, and as such need 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". This will help deal with innovation costs and the volume 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 will 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 also documents the project's ongoing status. And ensure that the project results 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 right hands it would be a very powerful tool. It would provide a global view of the firm's activities in innovation and demonstrate the overall progress that the firm was making. It would also show where unrelated innovations might occur. Lastly it might show where some opportunities exist. Professor Dosi (1988) states

Clearly, the commitment of resources by profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives. Are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both? Jacob Schmookler in his classic work, argued that the serendipity and universality of modern science provide a wide and intersectoral indifferent pool of opportunities that are exploited to different degrees in each economic activity according to differential economic incentives, and in particular, to different patterns of demand growth (Schmookler 1966).

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 for the innovative oil & gas producers.

OCI Research & Capabilities, Part IV

 Key Factors in Innovation, a Scenario

Review of Professor Giovanni Dosi’s “key factors” of innovation in the context of a scenario we used recently during our review of the Partnership Accounting module. Recall that we had a number of producers who joined 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 way it eliminated logistical accounting difficulties that impeded the development of these working groups. Working groups add to the producer's capabilities 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 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 implicit knowledge of the producer. This knowledge is accumulated through the various working groups and other “key factors” in which they acquire knowledge. The “Dynamic Capabilities Interface” in the Research & Capabilities module will detail the source of the knowledge, the key factors, how it was acquired, and what it involves. This will be captured in a wiki-style interface. This interface will also be sorted by geological zone and other technical criteria. It will be populated into the Knowledge & Learning module for deployment to the appropriate or relevant Joint Operating Committees when required. The first step in developing, deploying, and effectively managing a company's and Joint Operating Committee capabilities is to organize 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 create 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 in one location within the firm. There will be no confusion as to where to find the answer to a specific question. When the user finds what they are looking for, the details of the knowledge or capability should be detailed enough to define a process for how it is successfully implemented. Understanding that knowledge is never static, the ability to update the information with lessons learned would be part of the user's responsibility. Updates from the Lessons Learned Interface are 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 render this more usable. In addition, the tools available today, such as search, make the information more valuable. What is truly valuable are the types of tools available tomorrow. We are beginning to see some of these tools enter the consumer space with the iPhone’s SIRI virtual assistant or Chat GTP. The first step however will be to acquire knowledge and make it actionable through the ERP system of People, Ideas & Objects. We can add these tools as they become available in the future.

If documentation was all that we did with the capabilities aspect of the Research & Capabilities module of the Preliminary Specification, within the “Dynamic Capabilities Interface” then we would waste a lot of people’s time. The purpose of documenting capabilities is to deploy them. This brings in the “Planning & Deployment Interface” which is the topic of discussion here.

Ideally I see a firm's ability to deploy its capabilities as a key competitive advantage. The organization of that competitive advantage will be the focus of the firm's management. 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 American football. Where the coach can call in a play and communicate that to the team to execute that play. This is based on their known capabilities, roles and skills on the team. I want to draw a direct analogy for the person who plans and calls upon the capabilities of the firm or Joint Operating Committee in the “Planning & Deployment Interface.”

The Industrial Command & Control method of organizing dynamic Joint Operating Committee resources in the Preliminary Specification. Understands that the role of the individual, as designated in that structure, becomes a critical part of the planning and deployment of the firm or Joint Operating Committee capabilities. There can only be one Quarterback on the team, and you need many Down Linemen. Filling the various roles to take the actions needed is as critical as the capabilities themselves. Industrial Command & Control (ICC) imposes a chain of command across the multiple producers represented in the Joint Operating Committee, or firm. This enables them to operate with the pooled resources and capabilities of these firms.

The “Planning & Deployment Interface'' will take the three critical aspects of the firm / Joint Operating Committee and arrange them within a web-like interface for the user to develop the actions they desire. Having the right people represented in the Industrial Command & Control, having the right capabilities, and having an appropriate time frame are all critical factors to consider. Having chosen the personnel to execute the action you envision, 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 can “process” the information and based on the variables given determine when the work can be completed. Then they may select additional resources to fill deficiencies in areas where 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 explicit 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.” Application of their tacit knowledge and their "skills, knowledge, experience and ideas" to complete the program. That package should be comprehensive and detailed such that it is all that they need to focus on the successful completion of the task. 

The quality of documentation of the capabilities will determine how successful the project will be. If the detail contained in the “Dynamic Capabilities Interface” is rich media-based, 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. People will be able to see clearly what the project is about and how they are expected to complete the task.

The innovative and capable oil & gas producer needs the ability to document and deploy their capabilities efficiently and effectively. Here is a way in which the deployment is planned and executed with an understanding or “meeting of minds" based on the quality of the documentation in the “Dynamic Capabilities Interface.” It is not just a repository of data that might be used someday. But a living source of quality capabilities which the producer or Joint Operating Committee depends on to ensure the execution of their projects is successful.

Whoever implements the project through the “Planning & Deployment Interface” will select the various capabilities documents from the “Dynamic Capabilities Interface.” When they do this they can ensure that the capabilities they choose reflect the “final” status necessary for the project. If there is further documentation to be completed or more work is needed to advance the state of the capabilities selected, these attributes can be added. This would keep the documentation up to date with the state of capability within the firm or the Joint Operating Committee. Recipients of the information, once the “Planning & Deployment Interface” was processed, could compare the capabilities information they received with the previous version they viewed. They could also 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. They could also assess if they had any issues as a result. Please review the Blockchain Module for implementation of the technical infrastructure necessary for this feature. Updates to the capability will be written to an additional "block" on the chain. Ensuring differentiation between updates, their authors, etc. can be determined.

As with the information regarding the different capabilities, the resource selection would include any updated information regarding the individual's capabilities. 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 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 their roles in previous assignments and projects. This information should be available for in-house staff, resources pooled through the various Joint Operating Committees that a firm participates in, and any other vendors or contractors that the firm or Joint Operating Committee may have hired to work on the task. This will be at the discretion of the producer firm.

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

Lastly, the "Planning & Deployment Interface" has focused on the known unknowns. There are known unknowns and unknown unknowns. After the project interface has been processed and assigned, it is the responsibility of the team members to document these, if possible. Recall that Professor Dosi states

In very general terms, technological innovation involves or is the solution of problems." Dosi defines 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 problem automatically. Solutions to technological problems involve the use of information derived from experience and formal knowledge. p. 1125, 1126

Certainly, the "solution" of technological problems involves the use of information drawn from previous experience and formal knowledge (e.g. from the natural sciences); however, it also involves specific and uncodified capabilities on the part of the inventors. p. 1126

A section of the interface should be set aside where the team can collaborate on these points and provide innovative solutions for the producer or Joint Operating Committee.

It is therefore asked specifically, how can the knowledge, information and capability of oil & gas firms solve 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.

OCI Research & Capabilities, Part III

 Professor Giovanni Dosi on Innovation

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. One of our objectives in the module is to establish a clear division of labor between computers and humans. Formulating ideas, making decisions and collaborating are captured in this module. Leaving the mundane transaction, data management, storage and processing tasks to computers. This I think is an appropriate division of labor in terms of the dynamic, innovative, accountable and profitable oil & gas producer. There is also a strong division of labor and specialization in producer firms' technical resources. This is done to mitigate resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois' comment that we are "moving knowledge to those with decision rights” as being the primary process that the Research & Capabilities module captures. And, that a user can right click at any time within the module and initiate any standard ERP action. This includes initiating a Work Order or AFE on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

Professor Giovanni Dosi's paper discusses innovation's role in the market economy. It 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. As a consequence, the firm also gains an additional structural competitive advantage by decreasing the cost and/or increasing capabilities of their products beyond those of its competitors. Professor Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation:”

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.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. p. 1121 

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts for their technical resources. This is 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 some might take on the topic. However, I think Professor Dosi’s point here should be taken as the key criteria for the industry's direction 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 competition." The ability to sustain the state of the art oil & gas capabilities on the basis of what a producer earns from oil & gas production is a direct result of those capabilities, but also their land & asset base. However, shouldn’t those capabilities also earn a return on investment above and beyond oil & gas production?

It’s only reasonable that the producer firm approaches the operation of some technically difficult task with the appropriate capabilities. Innovation requires that producer capabilities be the base on which innovations can be leveraged. Professor Dosi's research identifies innovation's key factors. 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. Which documents the contractual obligations that the producer is required to meet in terms of commitments to their various Joint Operating Committees that the producer is a participant in. And to leverage the capabilities of working interest partners who are likewise committed. This interface is placed in the Petroleum Lease Marketplace module to document contractual legal obligations. This interface will also be populated in the Research & Capabilities module.

Innovations Two Major Issues

We will now deal with the first of two major innovation issues, Professor Dosi notes:

Typically 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. p. 1121

What you're capable of depends on what has been purposely developed within your firm. These capabilities have evolved over time and can be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more efficient through a variety of different means. The firm's ability to develop these capabilities is limited by what the oil & gas service industry can provide. If they have only x number of rigs available, only so much work will be done. If the rigs can only drill shallow wells, the producer's science will be constrained by the service industry's capabilities. 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 will be reduced to the same level as the others. The marketplace for producers in terms of their technical resources and capabilities has an enabling and constraining limit on what producers can do. 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 greater oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog-like interface where members of both industries can post ideas of products and services that might be of interest to the producer firms. Producers may then support these ideas with funding and product direction to develop them into a product or service. This will enhance the capabilities of the producers. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from each producer's lessons learned. The "Gap Filling Interface" allows producers to anonymously identify gaps in service industry offerings. Filling gaps is the process of expanding specialization and division of labor. Offering new products and services based on a further defined division of labor. Or how the Research & Capabilities interface organizes information by geological zone, or other criteria. This is so that only those pertinent zones are populated for the individual Joint Operating Committees through the Knowledge & Learning module.

In the Partnership Accounting module we discussed the accounting attributes of the Work Order system in establishing working groups among industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers or other parties. The ability to form these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how 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 innovations. I see this as an area that will increase in activity. This is if the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting module Work Order does.

The second major issue Professor Giovanni Dosi defines 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 producer firm's capabilities and innovations. The question becomes how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors and issues 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 increase the supply of these resources? As we've 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 for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources is constrained. Add to that the volume of earth science and engineering effort in each barrel of oil increases as time passes. Using specialization and the division of labor we can achieve 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 industry structure today, producers are building comprehensive capabilities needed to address every possible contingency within their organization. Earth science and engineering capabilities are overbuilt and substantial internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable industry wide. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee can pool their specialized technical resources to meet the properties' technical demands. Eliminates the overbuilding of capacities necessary to attain an operatorship classification within each producer firm, and enables producers to deploy this formerly unused and unusable surplus capacity to their chosen specialized capability.

Each producer needs to specialize in some high level earth science and engineering discipline. Today, covering the global scope of technical requirements is a massive undertaking. The future will require further specialization and division of labor to be undertaken in these scientific disciplines. Without choosing to specialize and using the pooling concept, the producer firms will be faced with such an onerous task as covering the global scope of these technical requirements as to be unprofitable. With the “pooling” approach People, Ideas & Objects has taken in the Research & Capabilities module. It is deemed necessary to avoid excess demand on diminishing resources. Demand is increasing due to enhanced exploration and production techniques needed for each incremental barrel of oil produced. An overall broadening of the science and technology necessary for exploration and production. And the objective of energy independence in North America.

That’s the first element of the division of labor and specialization inherent in the Preliminary Specification. The second element deals directly with the ability to organize technical resources in a manner that deals with how geology and engineering is done in the industry. With a dedicated software development capability such as People, Ideas & Objects Preliminary Specification, the ability to organize business service based offerings to meet the demands of the industry's earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the industry's capacity throughput from the same volume of resources. This will also enhance the quality of resources.

Regarding "facilities for the communication of knowledge” as a key factor in 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 mentioned here shows that the development and sharing of knowledge, which are critical for the development of the individual producer's capabilities and innovativeness, are systemic throughout this module. Combining their highly specialized capabilities with their partners in their Joint Operating Committees. It is the individual producers' distinct competitive advantage to augment their capabilities by coordinating the markets earth science & engineering capabilities and apply these to their land & asset base.

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:

The conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, particularly in their on interfirm competition and on demand growth, financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends, especially in the effects on changes in relative prices of inputs and outputs; public policy. (e.g., tax codes, patent laws, industrial policies, public procurement.) p.1121

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, but it's another to have them aligned within the organization. With People, Ideas & Objects we align 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 enhanced speed, innovation, accountability and profitability as a result. There are six additional Organizational Constructs that work to establish an appropriate culture for the industry to prosper. The seven Organizational Constructs include the Joint Operating Committee, Specialization and Division of Labor, Innovation, Markets, Professor Paul Romer's non-rival costs, Intellectual Property and Information Technology.

These key factors reflect that an innovative oil & gas producer must first be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the general market makeup. A key objective of the Research & Capabilities module is for the producer to achieve their greatest potential. Each producer will be able to demonstrate their own specific capabilities, and that level will depend on these key factors. Not all producers are built the same. Therefore, state of the art capabilities and highly innovative practices are not at risk 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 their competitive advantage.

This environment is the polar opposite of how the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk and regulatory compliance. And I am not suggesting a different posture be taken in terms of the industry's risk profile. Only that a more open and collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. And to begin the move to that next level of performance requires we build software that defines and supports the dynamic, innovative, accountable and profitable oil & gas producer. This is the People, Ideas & Objects Preliminary Specification.

OCI Research & Capabilities, Part II

 The Service Industry: Research and Development

One of the key points regarding the use of the Research & Capabilities module is that oil & gas producers receive 100% of the funds from oil & gas production. This entitles them to be the gatekeeper for all subsequent activity regarding 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 raise capital to fund its research and development efforts is foolish. It is clear that there must be a direct link between the service industry's research and the wallets of the customers (i.e. the producers). The service industry finds itself in difficult financial and operational conditions due to producers' activities these past decades. Capital structures have been completely destroyed. Capabilities and capacities have declined to 35% of prior levels and continue to degrade. The service industry has no faith, trust or goodwill in producers. People, Ideas & Objects argues that it is incumbent upon producers to finance the rebuilding of the service industry. This is under the principle that producers broke it, producers can fix it. To suggest that the service industry will rebuild on its own is valid. However, will that be the basis of a dynamic, innovative, accountable and profitable oil & gas producer and industry?

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

To suggest that the oil & gas industry should fund service industry innovations is the last thing producers want to hear at this time. But it is the long-term solution to producer problems. Micro-managing based on cost-control will get the job done to no one's satisfaction. As industry demands increase, the ability to increase capacity and capabilities will be further constrained. This is due to no one working on those capacity-related problems of today. When the time comes, the problems of today will be significantly larger tomorrow. Particularly for energy consumers.

What is needed is the Research & Capabilities module of the People, Ideas & Objects Cloud Administration & Accounting for Oil & Gas software and service. This is needed to communicate between the service industry, entrepreneurs and oil & gas producers. Communication about the needs of the producers, backed up by dollars spent to develop innovation, capacity, capabilities, services and / or products. Providing financing and 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. 

A Marketplace for Ideas

Let's review at a high level the process managed by the Research & Capabilities module of the 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 & gas. This marketplace provides the producer firm with the ability to explore ideas and participate in their development with other producers. As time passes and the producer's capabilities develop, they can deploy these enhanced capabilities to their various Joint Operating Committees. This is done through interfaces in the Research & Capabilities and Knowledge & Learning modules. What we create in the Research & Capabilities module is a window into the ideas marketplace.

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

If the innovative oil & gas producer iterates on the oil & gas industry science and technology. They will need to engage in a dynamic marketplace. One that deals in every kind of idea, good, bad, brilliant, dumb and original. For if today it takes one idea to build one unit of value, tomorrow it will demand two ideas to hold that value. In addition, it will take five ideas to build another unit of equal value. Such is the nature of where we’re heading. If you’re not participating in the marketplace of ideas, you won't participate in value.

We are seeing respect for ideas reflected in the marketplace. I have been overtly critical of the oil & gas industry's treatment of the service industries' Intellectual Property (IP). This must change and they must respect IP ownership and development if they are to benefit from a marketplace of ideas. There is no one who will participate in a marketplace if they see that oil & gas producers will continue to not respect their IP. If they risk their IP being poached by their customers, which is the case today, they will no longer participate. Therefore, the ideas marketplace will stagnate. At that time, if stagnation occurred, producers could call the service industry lazy and greedy as they did decades ago. A producer will compete and generate value by focusing on their distinct competitive advantages of their land & asset base, and coordinating the markets' earth science & engineering capacities and capabilities.

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

In the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification we noted that the nature of the modules would enable users to initiate commercial actions on the ideas and activities in these modules. This discussion deals with actions that can be generated from those ideas and activities. It also discusses 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. Doing so is still a fundamental part of our Cloud Administration & Accounting for Oil & Gas software and service. However, if that is all that we are doing then we are missing so much of what an innovative oil & 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 & gas and service industries. Participation is mandatory for success in a world where ideas and implementation will take weeks and months, not years or decades.

An application that fulfills a producer's needs in this manner must have the input and contributions of other producers and the service industry. The application installation is in multiple industries, not just one producer. The user's perspective will be a window into the industries available to them. What will be needed is the ability to have systems that can initiate actions on those ideas and actions of interest to each user of the Research & Capabilities module.

We noted the ability to right click in the Research & Capabilities and Knowledge & Learning modules on 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, 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 “The 21st Century Organization.”

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 commercial action would take the idle capabilities of the producer firm or the Joint Operating Committee and put them to use. As Professor Baldwin notes in “Modularity, Transactions and the Boundaries of Firms: A Synthesis.”

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. p. 9

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

Management vs. the Internet, round one

We live in interesting times. The Internet has had a remarkable impact on our lives in the past quarter century. As we look forward, that impact has only begun. When we discuss the impact the Internet will have on oil & gas producer capabilities, 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 seems wasteful. A cumbersome and cluttered existence defies common sense due to the slowed pace of everything. The Preliminary Specification considers the Internet as an inherent given. Align the nine frameworks of the Joint Operating Committee and producers around the Joint Operating Committee. Establish marketplaces. Keeps the work that humans do, the decisions, the ideas, and the collaborations front and center, while automating the work that computers do best. To do otherwise would be a waste of the Internet opportunity.

One of our top two research providers, Professor Richard Langlois, wrote a book "The Dynamics of Industrial Capitalism" 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 "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 emerging opportunities or creating the necessary new capabilities.” The “character” of the Internet is that it enables 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 begets capabilities and capabilities beget action.” The facilitation of knowledge and actions are the two areas where the Research & Capabilities module enables 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 Langlois notes “is the existing structure of relevant capabilities.” And here the People, Ideas & Objects Preliminary Specification has a distinct advantage in that we isolate 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 Internet innovation.

In this 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 Internet's market supporting capabilities that support the markets. Markets are the ultimate source of producers and Joint Operating Committee capabilities. Market coordination is therefore a competitive differentiation provided through Internet capabilities. It is the Internet vs. the bureaucracy.