OCI Research & Capabilities, Part IX

 Controlling Operations Through the Job Order System

I have a few more comments to make about the coordination of markets through the “Dynamic Capabilities Interface” of the Research & Capabilities module. It might seem that we are contradicting ourselves when we criticize the bureaucracy yet put in place such extensive coordinating mechanisms to control an oil & gas field operation. The difference between bureaucracy and operational control is a matter of decision rights and authority. One of them, the bureaucracy, is redundant. I will also show the appropriate level of control implemented in the People, Ideas & Objects system is implemented through the Job Order system. 

Multilateral and multi-frac wells are large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not something you want to have but necessary. The need to integrate the oil & gas and service industries to the level discussed here in the Preliminary Specification is a complex and expensive undertaking. One that fits within the Preliminary Specifications budget. And also within the scope of the People, Ideas & Objects fourteen module application in its initial commercial release. The scope of change we create when we recognize the Joint Operating Committee as the key Organizational Construct here is dramatic. To achieve integration between the oil & gas and service industries, we need to have this type of approach to make operations successful. 

It is in Professor Langlois' paper “Competition through Institutional Form: the Case of Cluster Tool Standards.” that he strikes the right approach in terms of the issue of the Preliminary Specification and these software developments. 

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

In terms of operational control the “Dynamic Capabilities Interface” provides a means to have everyone on the team focused on the same plan. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means to monitor, execute and control the plan. In the “Planning & Deployment Interface” as throughout the Preliminary Specification users will have access to the “Job Order System” of the People, Ideas & Objects application. This will provide the ability for a member of the operational team, with the operational authority designated in Industrial Command & Control, to issue a Job Order. This will enable them to execute any operation. Nothing is done during the field operation without the appropriate Job Order being issued. 

This next quote is from a Berkeley study from 1989. This was a time when the Japanese and the Americans fought over dominance in microchip manufacturing industries. Apparently the two industries were configured quite differently, as Berkeley notes below. And it is the Americans that dominate the industry at Japanese capitulation. The organizational structure of these industries is interesting over thirty five years later. Professor Richard Langlois' paper "Capabilities and Vertical Disintegration in Process Technology: The Case of Semiconductor Fabrication Equipment."

In one of the few contemporary academic examinations of this industry, a study by the Berkeley Roundtable on the International Economy concluded that;

with regard to both the generation of learning in production and the appropriation of economic returns from such learning, the U.S. semiconductor equipment and device industries are structurally disadvantaged relative to the Japanese. The Japanese have evolved an industrial model that combines higher levels of concentration of both chip and equipment suppliers with quasi-integration between them. Whereas the American industry is characterized by levels of concentration that, by comparison, are too low and [by] excessive vertical disintegration (that is, an absence of mechanisms to coordinate their learning and investment processes) (Stowsky, 1989, p. 243) p. 6.

My point in highlighting this is that we rely heavily on the decentralized service industry marketplace to provide the oil & gas industry with the products and services it needs. We however, also provide the Joint Operating Committee with high levels of coordination of any operation during times it employs the service industry. This is not a contradiction. One is a market, the other is the market's operation. The oil & gas industry depends on a highly innovative service industry and this will be expected in the marketplace. It also demands precision in its field operations. Innovation will arise from both, however, not at the expense of control and coordination. In Professor Langlois’ paper “Organizing the Electronic Century.”

Thus in radio it was not the case that an integrated path of learning within a large firm gave rise to innovation; it was rather that innovation, channeled within a particular structure of property rights, contained the path of learning within a single large firm. p. 16.

Modularity in Systems and Organizations

We have discussed modularity many times in the Preliminary Specification. With fourteen modules in the specification we have relied heavily on modular principles to ensure usable systems. We will now take modularity deeper. We have discussed the unique organization created to complete a field operation. These unique organizations are derivatives of the Joint Operating Committee and include service industry members. They are authorized, controlled and operated in the People, Ideas & Objects system through the “Dynamic Capabilities Interface,” “Planning & Deployment Interface,” “Industrial Command & Control,” “AFE,” and “Job Order” systems to name a few. These make up a modular system that is part of the “modularity” benefits we are seeking to achieve in this temporary organization and the Preliminary Specification.

Looking at operations in the field through the lens of modularity can help us deal with complexity and simplify the interactions between the different situations and people. From Professor Richard Langlois' paper “Modularity in Technology and Organization.” 

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 19.

Having difficult systems interconnections is a minor issue when compared to the real problems that people will have with systems that are too complex and too “different” each time they go to use them. As Professor Sydney Winter of the Wharton School of Business in his paper “Towards a Neo-Shumpterian Theory of the Firm” notes.

Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. (p.85) p. 9.

It is therefore imperative that we apply modularity theory to the design of the temporary organizations that make up these derivative organizations. From Professor Richard Langlois' paper “Modularity in Technology and Organization.”

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 19.

Remember we span the oil & gas industry and the service industry. The marketplace and the firm. To achieve the efficiency and effectiveness of interactions between the two industries, this approach is necessary. To incorporate modularity into the systems we build we have certain design considerations to include. In terms of the temporary organizations we are creating here for these operations, I think the key focus will be on standards. 

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

• An architecture specifies what modules will be part of the system and what their function will be.
• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. pp. 22 - 23.

The Costs of Operational Efficiency

We moved on from modularity to discuss “Dynamic Transaction Costs” in the Research & Capabilities module of the Preliminary Specification. We have discussed these costs in other modules by creating an account in the chart of accounts. This account specifies these costs when and where they are incurred. They are particularly relevant to the discussion in the Research & Capabilities module as Professor Langlois describes them “Transaction Cost Economics in Real Time” as;

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-versa. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99.

Constructing a temporary operational organization derivative of the Joint Operating Committee and populated with service industry representatives. This organization is based on the capabilities established in the “Dynamic Capabilities Interface” of the Research & Capabilities module. It is possible to incur "Dynamic Transaction Costs.” We are looking for an increase in economic performance from the oil & gas industry. We expect the division of labor and specialization to be strong elements of how increased performance is achieved. Having coordination and organization built into the “Dynamic Capabilities Interface” is how the oil & gas producer will achieve these higher levels of performance. In Professor Langlois “Transaction Cost Economics in Real Time.”

It is, Marshall says, 

a general rule, to which there are not very many exceptions, that the development of the organism, whether social or physical, involves an increasing subdivision of function between its separate parts on the one hand, and on the other, a more intimate connection between them. Each part gets to be less and less self sufficient, to depend for its well being more and more on other parts... This increased subdivision of functions, or "differentiation," as it is called, manifests itself with regard to industry in such forms as the division of labor, and the development of specialized skill, knowledge and machinery: while "integration," that is, a growing intimacy and firmness of the connections between the separate parts of the industrial organism, shows itself in such forms as the increase of security of commercial credit, and of the means and habits of communication by sea and road, by railway and telegraph, by post and printing press. (Marshall, 1961, IV.viii.1 p.241). p. 101.

So in essence we have three major processes that incur dynamic transaction costs. One is the move from the firm to the Joint Operating Committee as the coordinator of operations. Secondly, the enhanced division of labor and specialization brings a further “subdivision of function between its separate parts.” And thirdly the movement to increase reliance on the marketplace. Therefore it is necessary to capture the role and responsibilities of everyone involved in the operation. This is to ensure that tasks are completed with operational objectives in mind. It will be this level of operational control that provides the Joint Operating Committee with successful operations. 

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

I would argue that the lack of operational organization by the oil & gas industry in today’s marketplace results in conflict between the oil & gas companies and the service industry. Leading to cost overruns. And if Marshall is correct, as he has over a century of proof, the solution will require an advanced and culturally enhancing number of Organizational Constructs. And in oil & gas that must involve the Joint Operating Committee the legal, financial, operational decision making, communication, cultural, innovation and strategic framework of the industry.

What are Capabilities?

We continue our review of Professor Richard Langlois’ research through the Research & Capabilities module of the Preliminary Specification. It is in the “Dynamic Capabilities Interface '' that we are seeking to document the "what" and "how,” or implicit knowledge, of the earth science or engineering capability, or operation the Joint Operating Committee will undertake. It is worthwhile to note at this point that tacit knowledge cannot be documented. Tacit knowledge will be invoked through the Job Order system. The depth of “knowledge, skills and experience" and ideas documented in the “Dynamic Capabilities Interface'' includes the members of the Joint Operating Committee, their roles and responsibilities, and field operations personnel. Detailing what and how they need to do their jobs to achieve the operation objective. In a paper entitled “Transaction Cost Economics in Real Time'' Professor Langlois notes:

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

That’s an effective way to state what we're trying to achieve here. The “Dynamic Capabilities Interface” is a collection of capabilities the firm has for getting things done. 

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

In this discussion as well as in any and all oil & gas field operations. Autopilot doesn't exist for these tasks. And the implications of the next quotation are far reaching. 

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

It will need to be the explicit instructions contained within the “Dynamic Capabilities Interface” that guide the field operation. Conscious attention necessary to follow the program is necessary. However, this is also about innovation. Further innovation can be achieved by using the Job Order system. 

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

It has been a long and difficult process to describe exactly what we capture in this interface. Capabilities are difficult to quantify and qualify. Added to that difficulty is the need to keep innovation at the forefront of the producers' and Joint Operating Committees' capabilities, and the challenge ahead is clear. We continue our review of Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” with our focus centered around earth science and engineering capabilities and those from the marketplace of service industry offerings. 

One thing that can be stated for certain is that the Preliminary Specification is consistent with the industry culture. No producer firm seeks to internalize free market capabilities. The capital nature of the equipment, the geographical range of operations and the skills of the people employed would require the producer to have such extensive operations that they would lose focus on the task at hand, finding and producing oil & gas reserves. Using the service industry as a market is the only choice. The approach People, Ideas & Objects is proposed in the Research & Capabilities module. Is to control operations with military precision. 

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

The “Dynamic Capabilities Interface” has never been conceived as a static repository of information. On the contrary it is a dynamic interface where the capabilities are constantly being updated as a result of changes in the market, the producer firm or Joint Operating Committee. These dynamic changes are reflections of the actions taken by these participants and are populated through a variety of inputs. 

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. 

The mysteries of the trade become no mysteries; but are as it were in the air and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvement in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighborhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its materials. (Marshall, 2961, IV .x.3, p. 271) p. 120.

It is the job of the producer firm in some instances and the Joint Operating Committee in most instances to effectively and efficiently coordinate and control the operation. The marketplace must have the latest capabilities. In an Information Technology environment in which we find ourselves, that is not the issue. Having the people involved on the same page, understanding the proper command and control structure, the means to execute the operation and the appropriate objective is the issue. And that issue is handled in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. Yet at the same time, because we rely on the market, and are structured for innovation we can still rely on the benefits of both.

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

And

"Vertical integration, I argued, might be most conducive to systemic, integrative innovation, especially those involving process improvements when demand is high and predictable. By contrast, vertical integration may be less desirable - and may be undesirable - in the case of differentiation or autonomous innovations. Such innovations require less coordination, and vertical integration in such cases may serve only to cut off alternative approaches. Moreover, disintegration might be most beneficial in situations of high uncertainty: situations in which the product is changing rapidly, the characteristics of demand are still unknown, and production is either unproblematical or production costs play a minor role in competition. In such cases the coordinating benefits of vertical integration are far outweighed by the evolutionary benefits of disintegration." pp. 120 - 121.

If running a successful oil & gas company was easy everyone would do it. We certainly are moving into a challenging time for a challenging business. Those that want to step up will need the organization defined and supported by the software the firm and Joint Operating Committee use. Software that documents the producer firm's earth science and engineering capabilities. And the service industries' market offerings. Software like People, Ideas & Objects Preliminary Specifications Research & Capabilities module.

OCI Research & Capabilities, Part VIII

 Professor Richard Langlois on Capabilities

Introduction

Research & Capabilities module controls two material processes. The first is to divide labor between research and development and the execution of the resulting capabilities. This process is separated into Research & Capabilities and Knowledge & Learning modules. The other material process is to move knowledge to the area where decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes the following in his paper "Modularity in Technology and Organization." 

A notable recent exception is Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 27.

We should also point out the quote from Professor Carliss Baldwin of Harvard University. That “knowledge begets capabilities and capabilities beget action” and how this captures the objective of what we are after in the module. We need to remember to keep this focus in mind when working in the “Dynamic Capabilities Interface.” That the knowledge we bring into the interface is designed to initiate action. 

During our review of Professor Giovanni Dosi we learned about technical trade-offs. And how these trade-offs facilitate industries' innovation in the 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 asserts 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. There are many knowledge-based and collaboration-focused interfaces in the Preliminary Specification. This makes the People, Ideas & Objects ERP system the ideal candidate for an innovative oil & gas producer.

Lastly we should note that when markets such as oil & gas are asymmetric, research & development are the ways to differentiate capabilities and build an innovative oil & gas producer. 

It was during the Preliminary Research Report that we identified two key elements that we should discuss here in the Research & Capabilities module of the Preliminary Specification. The first was that the oil & gas industry was moving away from an easy energy era where producers could provide bankable returns on investments. Moving towards a much more difficult scientific base for the business based on earth science and engineering capabilities as key competitive advantages. The other element in the Preliminary Research Report was that organizations are defined and supported by the software they use. And we coined the phrase "SAP is the bureaucracy” to reflect this fact. Therefore in order to change the organization it is necessary to change the software that defines the organization first. If we want an innovative and profitable oil & gas producer, the first step is to set out in the software the elements of what that producer will look like. 

In addition, the industry needs to improve its overall performance in order to meet the challenges it faces in the near future. We have detailed these challenges elsewhere. The division of labor and specialization have been the methods People, Ideas & Objects have used to solve these difficulties. For specialization and division of labor to work consistently, it is necessary to standardize the roles and responsibilities of individuals. Producers need to consider the effect that will occur when they employ People, Ideas & Objects, our user community and their service providers' permanent software development capability to maintain that standard across the North American producer population through the Research & Capabilities and Knowledge & Learning modules interfaces. 

Organizations That are Unique and One-off Derivatives

It is in the Research & Capabilities module that we define and support the science basis of the oil & gas business. How the firm's earth science and engineering capabilities are acquired, developed, innovated upon, tested, prepared for implementation and documented for deployment. It is with that in mind that we begin our review of Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” 

Also, focusing on capabilities brings to the fore the idea that routines and similar rule-based forms of institutionalized knowledge may be important building blocks of economic organization. As a result, the capabilities approach arguably connects more fully with the New Institutional Economics, in which rule based guides to action like norms and conventions play a fundamental role, than do approaches that take the transaction as the unit of analysis. p. abstract.

It is in the context of a scenario that we note that a producer documented the internal and external components of the capabilities needed to conduct multi-lateral and multi-frac shale gas operations. Through a series of tests and trials they have been able to secure these processes to the point where the capabilities are deployed successfully to their various Joint Operating Committees. This process documentation in the “Dynamic Capabilities Interface'' is subsequently populated in all shale zones of all the Joint Operating Committees they participate in. And is available to be deployed at the Joint Operating Committees who know they can rely on a fully tested process based on their publication in the “Dynamic Capabilities Interface.” By selecting the relevant capabilities everyone from the engineers and geologists in the Joint Operating Committee to the lease hands on the drilling rig can see their role and responsibilities in making the operation a success. It is through the Knowledge & Learning “Planning & Deployment Interface'' that the individual capabilities are accumulated and the program is designed to be executed. 

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research p. 4.

What we have not discussed in the Research & Capabilities or Knowledge & Learning modules is a key element of the “Planning & Deployment Interface,” the AFE. It will naturally be the AFE that is a large part of how the business and operational end of the deployment is initiated. Therefore the AFE template is part of the “Planning & Deployment Interface." Budgetary control of operations is attained through the AFE. From Professor Richard Langlois' paper "Capabilities and Governance and the Rebirth of Production in the Theory of Economic Organization."

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 34.

For clarity the marketplace or service industry is the source of the capabilities, with operational coordination coming from the producer firm and Joint Operating Committee. The oil & gas business is a science. Having everyone read from the same, unique in each instance, operational plans will not only be necessary, but the only way to succeed. 

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 3.

You have a unique, one time, temporary organization which is derivative of the Joint Operating Committee. It is necessary to ensure that an organization understands everything it is working to accomplish.

Control and coordination of operations

We have noted how the information detailed in the “Dynamic Capabilities Interface” of the Research & Capabilities module would provide the “knowledge, experience, and skills” of the operation. That these details were provided to all of the members of the temporary organization put together for that specific operation. From the lease hands on the drilling rig to the engineers and geologists of the participating producers on the Joint Operating Committee. Everyone would be on the same page in terms of what and how the firms and market capabilities were being deployed. This section will discuss how the People, Ideas & Objects Preliminary Specification allows the innovative producer to successfully complete these field operations. Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labor between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).p. 17.

Let us also bring in the Industrial Command & Control (ICC) developed by People, Ideas & Objects. The ICC provides a means for these “pooled” technical resources within a Joint Operating Committee to immediately adopt a recognizable command and control structure. It is expected that this command and control structure would also extend to the field personnel from the field contractors hired for the operation being conducted. This would therefore provide a level of control to engineers and geologists that would attain the precision necessary. Such that once the engineer gave the approval to drill to a certain depth, the drilling would be accomplished at the point where the engineer expected it. 

In the next quotation Professor Langlois raises a compelling point about “incentive alignment.” But in essence he says that at a certain point it's not about incentives that motivate a team to succeed.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination. p. 5.

Reading this next quotation shows that we have a job to do here in the “Dynamic Capabilities Interface” of the Research & Capabilities module. That is why we need to replace this critical function done by the “firm” in the previous organization. As much as we criticize the current management they are doing the job to a certain level. And to not respect that level would be a failure on our part. What we need to do is capture what the firm does now by “lowering the costs of qualitative coordination in a world of uncertainty.”

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 6.

Revisiting the incentives issue if we put in context the conflict between the service industry and the oil & gas producers. They have been disagreeing for years about the pricing of field operations services. Read this next quotation with this in mind.

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 11.

Professor Langlois is 100% correct. Producers rely on contracts such as SLA's to incentivize contractors and it's not working. What they’re effectively doing is passing the responsibility and accountability that the producer should bear onto the vendor. Better coordination is needed. And that begins with systems like the People, Ideas & Objects Research & Capabilities module that details the capabilities of producers and field staff in a manner that constructively deals with the problems of a scientific-based business.  

What could only be described as a breakthrough was how we documented the Preliminary Specifications coordination of capabilities through the “Dynamic Capabilities Interface” of the Research & Capabilities module. This eliminates the incentive problems that the oil & gas industry faces through contracting. As we learned, coordination will provide oil & gas producers with control over field operations. Coordination through the “Dynamic Capabilities Interface” provides an alternative means to ensure the oil & gas science is effectively controlled. This is as opposed to motivating the service industry through incentive clauses in contracts. We will continue with this concept of the “incentive problem” and test it further with Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p. 12.

It is through the producer's documentation of the capabilities in the “Dynamic Capabilities Interface” of the Research & Capabilities module that "knowledge, experience and skills” are captured. From the engineers and geologists that are part of the Joint Operating Committee to those that are in the field, each should have an understanding of what is required of them from the capability that is listed in the “Dynamic Capabilities Interface.” Everyone on the team knows what is happening and what their role and task is. That is what needs to be documented in the “Dynamic Capabilities Interface” for each of these roles, for each of the capabilities captured there. 

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. p. 14.

And that becomes obvious when we consider that the capabilities available to each Joint Operating Committee, and the Industrial Command & Control used, are unique to each situation it is applied to. Using the same team to apply the same capability repeatedly should yield the same results. Therefore, if you were running a ten well drilling operation, the consistency of the capabilities and the ICC would provide the same precision and results. 

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 16.

And

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 16.

This is intrinsically true. The key to the successful implementation of any program is the level of documentation of the capability and the level of control during operation. Combined with the Industrial Command & Control, the Dynamic Capabilities Interface facilitates the operation of the producer firm and Joint Operating Committee. Recall that “knowledge begets capability and capability begets action.” And contrast this to the current situation where the producers throw more money at the service industry to incentivize them to succeed.

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.