OCI Knowledge & Learning, Part VI

 Two Major Innovation Processes

We turn now to innovation with Professor Richard Langlois' paper “Innovation Process and Industrial Districts." There are two primary innovation processes within the Preliminary Specification. One is within the Research & Capabilities module and the other is here in the Knowledge & Learning module. Each process works in different ways to capture innovation in a manner that is effective and efficient for both producer firms and the Joint Operating Committee. 

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1.

In the Research & Capabilities module innovation is developed through the research and application of earth science & engineering to the assets of the firm. These innovations are then refined to ensure that they are proven capabilities which the firm can deploy. They are then listed in the Dynamic Capabilities Interface, tagged with their characteristics, and deployed to their related and appropriate Joint Operating Committees. To ensure that no testing or development of the innovation is repeated in every Joint Operating Committee, only fully developed and tested capabilities are included in the interface. 

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1.

The second major innovation process is contained within the Knowledge & Learning module of the Preliminary Specification. It is a hands-on, ad-hoc type of innovation due to evolving knowledge expected in the marketplace. Even with the tight operational control we will establish in the Knowledge & Learning module. It is possible and advantageous to have high levels of innovation within an organization. With a strong command and control environment the ability to get an operational command decision to introduce some updated tool, or procedure is easily attainable. It’s not like someone has to wander around looking for someone with authority to implement an idea. With Industrial Command & Control and the Job Order System it will be obvious who has the appropriate authority and responsibility for implementing an innovation. The Joint Operating Committee holds operational decision making authority and is motivated by financial gain.

Once any changes and innovations have been implemented in the Knowledge & Learning module it is necessary to assess their impact on the operation. Updates to the “Lessons Learned” interface will be necessary. This will ensure that the firm whose capability was used for the operation is informed of the updated innovation and its results. This will enable the producer to update their capability in their “Dynamic Capability Interface" for use elsewhere in their organization.

Operational Control and Freewheeling Markets

A recent McKinsey Newsletter begins with “In a world of unprecedented volatility, the unprepared will be sorely tested.” Let's hope that no oil & gas firms are caught unprepared without an innovative oil & gas ERP system like People, Ideas & Objects. As we enter the era of insatiable energy demand, with a fixed earth science & engineering resource base, reorganization through specialization and the division of labor is the only manner in which we can approach the situation at hand. “Unprecedented volatility” will provide remarkable opportunities for those using the People, Ideas & Objects Preliminary Specification. I believe it will be necessary to own the oil & gas asset, but also have access to the software that makes it profitable. Such are the times we find ourselves in. 

In his paper “Innovation Process and Industrial Districts” Professor Richard Langlois discusses Industrial Districts. Which are small geographically located groups of vendors that work together to produce products and services. They are for all intents and purposes the same as what we have described as the service industry or marketplace that a Joint Operating Committee would access during an operation in the field. 

As we have shown, much of the attractiveness of compact, highly-localized areas of production results from their ability to reduce search costs, but this is accompanied by the risk that the knowledge available in any given district may be substandard. But new information and communications technology (ICT), may make it possible for firms to draw more cheaply and effectively on diverse sources of knowledge and therefore to increase their access to innovative ideas (as well as their ability to market their own innovations if they wish) (Langlois, 2003; Christensen, 2006). This may not undermine all aspects of the operations of Industrial Districts because differentiation and specialization retain their importance, and proximity is useful in just-in-time and other lean ways of organizing production. For innovation, however, an ability to tap wider sources of knowledge quickly and cheaply can reasonably be expected to allow firms all along supply chains to consult more broadly than in the past. Improvements in ICT and new search techniques, many of them associated in one way or another with the Internet, not only increase access to knowledge but may force innovation on firms that in the past could shelter in Industrial Districts. Because their customers can be better informed, firms in Industrial Districts need to keep up to date in order to maintain competitiveness. pp. 19 - 20.

In the previous quote the customer was the Joint Operating Committee. The expectation through the Research & Capabilities and Knowledge & Learning modules is that the marketplace or Industrial Districts will be state of the art in terms of their capabilities. And that may not be the case, and probably will not be. International firms operate in the service industry. And these form the foundations of Industrial Districts. The firms are usually local, and to assume they can organize themselves in a manner that optimizes the Joint Operating Committee needs is possibly incorrect. In a comment made to the editor of Capitalism and Society, Professor Richard N. Langlois wrote a comment in response to an argument made Professors Giovanni Dosi, Alfonso Gambardella, Marco Grazzi and Luigi Orsonigo (2008). 

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120). p. 3.

Expecting the service industry to provide the Joint Operating Committee with “conscious organization” of disparate firms and organizations is incorrect from the point of view of operational control. The Knowledge & Learning “Planning & Deployment Interface” use of the Industrial Command & Control, AFE, and Job Order systems enables organization within the Industrial District. And in turn, it provides the Joint Operating Committee with... From Professor Langlois comment to Capitalism and Society.

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets. pp. 3 - 4.

We are discussing the coordination of markets or service industries during a field operation. How the Joint Operating Committee organizes markets to ensure performance. We want to discuss the changes in roles and responsibilities within those markets and the Joint Operating Committee. How those changes came about and are implemented within the Joint Operating Committee. Through further specialization and division of labor, innovation is introduced into field operations. The Knowledge & Learning module of the Preliminary Specification uses Industrial Command & Control (ICC) to coordinate the markets. This will also reveal the "gaps" that need to be filled with innovative positions. From Professor Richard Langlois' paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6.

In each marketplace module (Resource, Petroleum Lease, Financial) there is a “Gap Filling” interface. These are for identifying and publishing “gaps” in market offerings. In addition, they publish ideas about where “gaps” exist within the producer firm and Joint Operating Committees. Each of the “Gap Filling” interfaces is essentially the same interface and that interface can be viewed to determine its effect on the current Joint Operating Committee. Once these “Gaps” are filled by market participants they'll be populated with resources under Industrial Command & Control. This will assign roles and responsibilities within the chain of command for field operations. This is a manual and deliberate process. It is not spontaneous as we might think it is. It is as Professor Langlois stated in the previous quote “or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization -- more internalized and centrally coordinated forms.”

The underlying assumption, normally unspoken, is that relevant background institutions — things like respect for private property, contract law, courts — are all in place. Whatever transaction costs then arise are thus the result of properties inherent in “the market” itself, not of inadequacies in background institutions. There is generally a tacit factual or historical assumption as well: that the relevant markets exist thickly or would come into existence instantaneously if called upon. p. 3.

There is only one way for the oil & gas industry to become more productive. That is through specialization and the division of labor. Particularly in the earth science & engineering disciplines. People, Ideas & Objects have approached the issue of the insatiable demand for energy and the somewhat constrained resource base of earth sciences and engineers. This has been done through specialization and the division of labor. To approach this issue without ERP software in this day and age would be the same as using stone age tools. The effect of pooling the technical resources of the participants in the Joint Operating Committee is the beginning of specialization and division of labor. This is necessary to increase industry output. 

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7.

Knowledge & Learning is the module name. Even though it appears to pursue both operational excellence and innovation simultaneously. There is a time element where operational control fixes all variables and locks them down. That is a time when operations are conducted for efficiency. Other times and in other ways the module remains open and flexible to change to allow for the second major process of innovation within the People, Ideas & Objects Preliminary Specification to occur. 

But even in “developed” economies, novelty and change creates the sorts of gaps that call for business groups, including less-formal sets of “intermediate” relationships, as, for example, in geographic (or, increasingly, “virtual”) industrial districts. In this sense, the economics of organization generally can learn from the literature on business groups outside the developed world. The problem of gap-filling in highly developed economies differs from that in less-developed economies because the path ahead is cloudier, which suggests that more-decentralized organizational structures may be more successful at the cutting-edge of technology. p. 29.

OCI Knowledge & Learning, Part V

 Change and Cognitive Dissonance

We continue our discussion of the forces of change in the Knowledge & Learning module. We discuss inertia and equilibrium and how they’re managed in the Preliminary Specification. To achieve higher levels of economic performance we know that it requires a reorganization of the resources of both the service and oil & gas industries. Our problem came about because our society is very advanced and increasing our performance requires the necessary software in place first. Without software in place no change or improvement in performance will occur. Officers and directors in the oil & gas industry know this and use it to ensure their current positions are never challenged. They’ve done this by never changing their ERP software. Or they have implemented SAP to reinforce their methods. This has made it particularly difficult for the industry to advance. 

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

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

The Preliminary Specification provides for the second item in this quote of “there must be a new species available to take over the territory or a new theory to account." And it also provides a vision for the third item in Langlois' quote of “a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents.” As we noted, the service providers and service industry representatives would be motivated to form new and innovative service offerings to their producer clients and the Joint Operating Committees. So with these we would be well on our way to the transition to the environment described in the Preliminary Specification. This is despite officers and directors' actions. 

I am also operating from two fundamental assumptions that lead me to conclude that these changes will occur. That the stuffing of another ream of paper in the printer is how the system is fed in today’s oil & gas industry. That is, the ERP systems that operate today are woefully inadequate for the needs in the era of insatiable energy demand in which we’re about to find ourselves in. These systems have no future. And that high levels of cognitive dissonance occur when people read the Preliminary Specification. That is to say it resonates with their understanding of what an oil & gas system should be, and they desire it. 

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

I know that the officers and directors need to be vigorously displaced, however the inertia to change will be strong to replace the stagnant and inert systems that so poorly serve the needs of the people, producers, Joint Operating Committees, service industry participants and society in general. And this is represented in our value proposition which shows $94 billion in incremental revenues and profits irretrievably lost for the 2012 calendar year. Similar revenue losses will be incurred each year this bureaucracy is in place. Which in 2023, when seen through producers specious accounting, is valid. Continued operations in the face of such value destruction has set the stage for "vigorous displacement.”

They, the officers and directors, have effectively mismanaged the oil & gas business in North America. In the oil & gas industry, "inertia" is strong, as shown by the deer in the headlights' response to collapsed natural gas and chronically depressed oil prices. It is to muddle along. Take what is given and survive another day. Is this the appropriate footing for an innovative oil & gas producer in the era of insatiable energy demand? With the rapid depletion and high costs of reworking shale gas reserves, there must be a better way. And that is the decentralized production model of the Preliminary Specification. Quotes are from Professor Richard Langlois' paper “Institutions, Inertia and Changing Industrial Leadership." 

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

And

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

Now is the time for the bureaucrats to retire to Florida permanently. They have forcefully resisted People, Ideas & Objects at every opportunity. And as indicated, unchangeable organizational structures were implemented. I don’t see any opportunity for cooperation, nor the need for cooperation. This can be done by the people who make the industry work. Entrepreneurs, movers and shakers and people who know there is a better way. The alternative to the Preliminary Specification has been a slow and painful atrophy. Intermixed with the bureaucrats' secondary business model of repeated bankruptcy.

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

There is a perception that moving away from the status quo bureaucracy will be difficult. How that transition occurs is through two possible alternatives. Existing producers can atrophy and die slowly. Or alternatively, the decision can be made to build the Preliminary Specification and move to the Joint Operating Committee, People, Ideas & Objects key Organizational Construct. There are seven Organizational Constructs that establish an innovative, performance and profitability culture in oil & gas. The decision to make the change is the appropriate choice to make, however there are other considerations to be made.

One of those considerations is the inertia within the current institutions. Many producers were developed in an era of low energy prices where survival skills were needed. Innovation was not rewarded and did not exist within the producer firm itself. Now that we are within reach of the era of insatiable energy demand, innovation is the key. This must become the firm's culture. Therefore in the Knowledge & Learning and other modules of the Preliminary Specification, whether it is by accident or by deliberate decision, the development of the innovative culture and the Preliminary Specification will always be an “outside” of the mainstream kind of development. Transitioning between these two eras would be difficult for any business to deal with. It is now clear that oil & gas can’t, won’t and will not ever make such a radical change to their underlying business. Higher commodity prices are the source of financial resources to support an innovative oil & gas industry. This is the polar opposite of the skills necessary to prosper in the survival, or low energy price era. Industry's counter argument is that they’re highly innovative. Which is incorrect. Any and all innovations can be identified and sourced directly from the service industry, not the producers.

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

After all, we are not talking about minor changes to the accounting floor plan. Using the Joint Operating Committee and adopting the Preliminary Specification, we are making wholesale changes to the oil & gas industry. Change that is as significant as energy prices and the global demand structure. This will not be done successfully in a way that smooths over the rough edges. 

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

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

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

As I have suggested, People, Ideas & Objects will be there one way or the other. 

One More Kick at the Bureaucracy

It is at the Joint Operating Committee that bureaucracy has little to do. Therefore it seems opportune to discuss the fact that the bureaucracy needs to fade from the scene for operational work to be done. Our discussion carries on with the theme of kicking the bureaucracy and highlights how they have failed in the past. This is a brief review of Professor Alfred P. Chandler's work through Professor Richard Langlois' writings in “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History.”

It is at the Joint Operating Committee that all industry business is conducted. That is to say that most field operations are commanded and controlled as proposed in the Knowledge & Learning module of the Preliminary Specification. Therefore it will naturally be where everyone will be trying to stick their fingers in to be part of the action. We can be certain that the bureaucracy will assert that they need such and such a report by midnight. Let's be mindful of their ways and means and ensure that doesn’t happen. 

One group that People, Ideas & Objects directed our message to is oil & gas industry investors. As Professor Chandler notes in his work, capital starts everything. Chandler's review of corporate history shows merchants' role. Investing their capital and skills, merchants started the ball rolling. I see no reason why we can’t turn to oil & gas investors in the same way. I expect that they will lead in this next phase of the industry. 

After all it is the investors who have the most to lose. Bureaucracy has no stake in the firm. If a crisis strikes a firm, bureaucracy resumes elsewhere. Investors will shoulder the costs. Bureaucracy currently holds the reins, and they know their options exist elsewhere. Ownership, like merchants, needs to start over. Starting over begins with supporting People, Ideas & Objects and the Preliminary Specification.

The possibility of a bureaucratic failure is not new, it has happened before. Professor Chandler noted that the bureaucracy had failed before. During the great depression, a time when the government had to increase its involvement in the economy. Bureaucracy may not see the larger picture, and fail again. Since 2008 we've seen many changes. The oil & gas industry has certainly changed. Information technology is also having an effect. The time to act is now as there is much work to do.

OCI Knowledge & Learning, Part IV

 Defining Tacit and Explicit Knowledge

We now want to discuss how capabilities are viewed by the users of the information in the interfaces of the Knowledge & Learning module of the Preliminary Specification. A capability listed within the "Dynamic Capability Interface" would contain a great deal of information regarding the operation. It would be inefficient to have everyone reading the same text repeatedly. And that is why we have computers. We want to also discuss the different types of knowledge (tacit and explicit, or formal knowledge) and note the deficiencies in recording tacit knowledge. I’ll quote Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time." 

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

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

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

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

Getting a handle on these interfaces is vital to a dynamic, innovative, accountable and profitable oil & gas producer. Although this may seem like an academic exercise to some, they are core to the Joint Operating Committee and the producer's values. It is the actions and interactions that are derivative of these capabilities that will determine the success or failure of an innovative and profitable oil & gas firm. 

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

And

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

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

Additionally, we can use the football analogy to describe how a property employs X capability. Everyone has access to that capability and can review the explicit information contained within the document. This includes engineers and geologists from the various producer firms that participate in the Joint Operating Committee. It also includes field operations representatives contracted to provide services. Everyone works from the “same page” in terms of operations expectations. 

Upon selection of X capability, people's roles and responsibilities are assigned through Industrial Command & Control through the "Planning & Deployment Interface." This will impose a chain of command on how the operation is run and who has what authority over what operation. Additionally the AFE associated with the operation will be included with the “Planning & Deployment Interface'' to impose budgetary control over the operation. Lastly the Job Order system is made available to implement the commands to execute the operation. It is here, the “Planning & Deployment Interface'' where the operational budget, command and control, execution and authorization are planned for and managed. As we have mentioned elsewhere, innovation and free markets are what we seek to establish in the service industry and the greater oil & gas industry. This however does not preclude high levels of tight operational control during large, costly, critical science and technologically based operations. 

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

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

A brief note to mention in the Preliminary Specification. Our software will capture the implicit knowledge of industry administration & accounting. And our user communities service provider organizations will deliver our software in combination with their tacit knowledge in the form of their services. From Professor Richard Langlois’ paper “Capabilities and Governance the Rebirth of Production in the Theory of Economic Organization.”

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. pp. 13 - 14.

Direction, or command and control, is exercised through Industrial Command & Control, the AFE associated with the operation and the Job Order System of People, Ideas & Objects Preliminary Specification. Having these three tools available allows tacit knowledge to be deployed in a highly controlled environment. With Industrial Command & Control, multi-person tacit knowledge can be mobilized and coordinated effectively. The AFE controls the program budget. And the Job Order System enables the execution and documentation of individual orders and commands. The “Dynamic Capability Interface'' provides the resource for all people to determine their role and responsibility. This will ensure everyone is on the same page regarding the operation's objectives and deliverables. Lastly, any element of the Preliminary Specification will be able to be right clicked to invoke an accounting or administration process that a user may need to support the operation. An example might be a dynamically generated, or live, actual cost to date for AFEs.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints as one competitor is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. Moreover, the costs that can make transacting difficult, and may lead to internalization, can go beyond those that arise in the course of safeguarding against opportunism or damping moral hazard through monitoring or incentive contracts. In such a world, economic activity may be afflicted with "dynamic transaction costs," the costs that arise in real time in the process of acquiring and coordinating productive knowledge. (Langlois 1992; Langlois and Robertson 1995) and which are different in nature from the transaction costs that are caused by problems of aligning incentives. This, in turn, implies that capabilities may be interpreted as a distinct theory of economic organization.pp. 14 - 15.

Members of one firm may quite literally not understand what another firm wants from them (for example, in supplier contracts) or is offering them (for example, in license contracts). In this setting, the costs of making contacts with potential partners, of educating potential licensees and franchisees, of teaching suppliers what it is one needs from them, and the like become very real factors determining where the boundaries between firms will emerge. p. 19.

We should remember that participants in any operation come from a variety of organizations. They will be due to a pooling of partnerships represented by the Joint Operating Committee. And the representatives of the field service industry who provide services to the operation. All of these people have the tacit knowledge necessary for the operation to succeed. It needs to be coordinated and directed to be effective. It is with these four tools - the “Dynamic Capabilities Interface,” the Industrial Command & Control, the AFE and the Job Order System of the Preliminary Specifications Knowledge & Learning module that tight operational control of any oil & gas operation will be available to the Joint Operating Committee. 

Learning, Then Operational Control

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

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

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

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

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

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

As members of the Joint Operating Committee, the "Lessons Learned Interface" is presented to them. Results are also presented in both the Research & Capabilities and Compliance & Governance modules of the producer firm who initiated the capability. This is for all Joint Operating Committees the producer participates in. The "Dynamic Capabilities Interface" allows them to update specific capabilities. Members of the governance team can see if systemic errors are made throughout the organization. 

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

Specialization and the Division of Labor

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

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

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

I would suggest that the extent of possible changes in the current market is constrained by current ERP technologies. Having SAP or other ERP systems that do not focus on capabilities or specialization is the issue. When we look at modules like the Resource Marketplace module of the Preliminary Specification and see the “Gap Filling Interface” and note that its sole purpose is to expand the division of labor and specialization in the Resource Marketplace. In order for these interactions to develop, these constraints imposed by ERP systems must be lifted. 

But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization. pp. 3 - 4.

Rather it is an argument that, in a population sense, large vertically integrated firms are becoming less significant and are joining a richer mix of organizational forms. p. 4.

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

Industrial structure, then, is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. pp. 6.

Industrial structure is an evolutionary design problem. pp. 6.

It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organization's - governance structure - bring with them their own costs, which need to be taken into account. But technology clearly affects organization. pp. 6.

Like a biological organism, an organization confronts an environment that is changing, variable and uncertain. pp. 6.

Also like biological organisms, business organizations differ in the mechanisms they use to process information and to deal with variation and uncertainty. Nonetheless, as James Thompson (1967, p. 20) argued, all organizations respond to a changing environment by seeking to "buffer environmental influences by surrounding their technical cores with input and output components." pp. 7.

Or as we like to say, SAP is the bureaucracy. To enable the market, specialization, the division of labor and the coordination of operations require technology and organization. We can all agree that the Joint Operating Committee is the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. It is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of an innovative producer. 

The Joint Operating Committee will coordinate field operations. Furthermore, the People, Ideas & Objects Preliminary Specification needs to identify and support these markets and changes. We want to discuss how these changes will come about and the probable speed at which they will occur. This is given that everything these markets needed in terms of market supporting institutions was available. Quotations come from Professor Richard Langlois' paper “Institutions, Inertia and Changing Industrial Leadership.”

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

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

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

As we’ve discussed, these markets must have a dedicated software development team to support growth and change. The Joint Operating Committee, the producer firm and the service industry marketplace all need People, Ideas & Objects available to change the software to meet these growing and dynamic needs. Without the ability to change technology, organizations will remain stagnant and unchanged. Despite the demands for change nothing will happen without software modification first.

OCI Knowledge & Learning, Part III

 Innovation Supported by Permanent ERP Software Development Capabilities

In both the Knowledge & Learning and Research & Capabilities modules producers benefit from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through its Revenue Model and importantly, derives its quality from our user community. People, Ideas & Objects will remain unbiased as to which producer's perspective it takes. As a result, our user communities - service provider organizations are no different. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things. 

People, Ideas & Objects, our user community and their service provider organization are focused on providing Cloud Administration & Accounting for Oil & Gas. This is for dynamic, innovative, accountable and profitable oil & gas producers. Based on the Joint Operating Committee as the key organizational construct in combination with six other Organizational Constructs. Establishing this new culture across the North American producer population. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software an organization uses is a “technology paradigm” that the oil & gas industry must consider. And a permanent iterative ERP software development capability puts the industry on its own “trajectory” just as we’ve discussed here for the earth science & engineering disciplines. Professor Giovanni Dosi notes. 

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

Secondly, A rather uniform characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries. p. 1138.

Which speaks to ERP software and cloud computing attributes. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by ExxonMobil, BP or Shell? What motivation would they have for making software changes to accommodate other producers' businesses? The third party, objective nature of People, Ideas & Objects, our user community and their service provider organizations are necessary for the software to be amenable to its user communities' needs. If the producer relies on this paradigm and trajectory as a key advancement in their business, it must remain open to the needs of the community. Professor Dosi notes.

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

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

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. We are designed around the Joint Operating Committee, the innovative oil & gas producer, and our user community to ensure quality and determine the industry's precise needs. This is the type of application that is needed for the 21st century oil & gas producer. A vision that focuses the industry on the activities people do best. Leadership, issue identification and resolution, creativity, collaborating, researching, evaluating, planning, negotiating and compromising, observation, reasoning, judgment, and making decisions. An application that leaves computers to do what they do best: storage and process management. A software development capability designed to provide the innovative oil & gas producer with the means to provide all of their ERP software needs. 

Capabilities as the Focus

In Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization” he introduces capabilities as an emerging theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is production. References in this section are to Professor Langlois’ paper.

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

The capabilities approach picks up and builds on the transaction cost approach we've discussed throughout the Preliminary Specification. It also builds on the boundary between firms and markets. 

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

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

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent-seeking 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 reasons of history and technique, they have allocated most of their resources to the cost side. p. 6.

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

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

Field coordination meets innovation

The energy industry is faced with a number of issues that continue from year to year. One of those issues is the cost of field work. We have heard a variety of claims about the service industry. However, there are no solutions outside of traditional cost control and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution to what are believed to be high costs associated with field operations. Quotations are from Professor Richard Langlois' “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

We have with the Knowledge & Learning module a number of other tools as part of the Preliminary Specification. Specifically, Industrial Command & Control (ICC) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during field operations. Members of the Joint Operating Committees, their employees, and contractors from the service industry will be involved in these operations. Having them configured so the chain of command is immediately recognizable. Secondly within the Preliminary Specification is the Job Order system. This provides a means to execute operational orders within the chain of command during field operations. These two systems provide tight control over the entire operation. No action is taken without an authorized Job Order being issued. 

This tight operational control seems to contradict free markets in the service industry. I disagree. Tight operational control has nothing to do with free markets, and free markets have nothing to do with tight operational control. They are two separate and distinct "things'' that are mutually exclusive. Recall that the AFE and Job Order are provided through the “Planning & Control Interface'' which also brings in the capabilities from the specific “Dynamic Capabilities Interface'' that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for people to conduct the work and the operation to succeed. The following quotes are from “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. 20.

What we imply with this level of operational control is that the Joint Operating Committee representatives, the earth scientists and engineers are in complete and total control of the field operation down to the water hauling driver. In a literal sense, yes, but I think we know the extent of the control implied by the Industrial Command & Control and Job Order systems. There is a command structure. Everything is documented. This level of coordination is provided to offset the detail necessary for the scientific basis of the business to take precedence during operations. 

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. 10 - 11.

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

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

By using the Joint Operating Committee we eliminate bureaucracy. In spite of this, bureaucracy lowers the cost of qualitative coordination in a world of uncertainty, albeit poorly. It is therefore necessary to replicate and expand on that coordination in the Joint Operating Committee. 

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p. 15.

By coordinating field operations in the manner proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase control over the implementation of the science basis of the business. All while maintaining free and open markets in which innovation in the service industry can develop. From Professor Richard Langlois in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

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

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

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

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

Execution is the focus of the operation and the key competitive differentiation of the parties involved. Within the capabilities that have been decided to be implemented by the Joint Operating Committee there may be new and innovative tools and procedures to be implemented. Oil & gas business relies on geology, geophysics and engineering. Operational control at this level is necessary and a competitive advantage. From Professor Langlois’ paper “Competition Through Institutional Form: The Case of Cluster Tool Standards."

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

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

Separate and Distinct

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

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of their respective firms' capabilities. During this process, they test these capabilities that engineers and geologists are developing. Once these ideas are proven and developed into usable and valuable technologies and processes, they are added as capabilities to their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. Depending on the selection of the producers' criteria, a capability might be provided to the Joint Operating Committee in that zone, or available for use with multi-frac technology etc, and will be available to the members of those Joint Operating Committees. 

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

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

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

Organizational constructs guide the nature of work in more ways than modules. There are also markets in which they operate. Research & Capabilities will be an internal and academic focus in the geological and engineering disciplines. Meanwhile, Knowledge & Learning will be steeped in service industry initiatives and operational control. These differences also help to differentiate the nature of work between the two modules. 

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 20.

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

Modularity and Interdependency

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

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 21.

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

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

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. There are three parts to the visible design rules (or visible information). 

• 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 in contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 21 - 22.

People will approach data contained within these modules from different perspectives and roles. In the producer firms, engineers and geologists develop the Dynamic Capabilities Interface. In the Joint Operating Committees, engineers and geologists develop the Lessons Learned interface. Data and information will be updated and changed by all participants involved in a dynamic, innovative, accountable and profitable producer, Joint Operating Committee and obtain the necessary operational control.

OCI Knowledge & Learning, Part II

 Emulating the Small Producers Adaptability

This discussion will focus on Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation." We also metaphorically move from the “practice field” of the Research & Capabilities module to “game day” with our football analogy in the Knowledge & Learning module. In reviewing what has been written so far in the Preliminary Specification I was interested in this comment. The domain of the Joint Operating Committee is; “the ability to innovate will not only permit the oil & gas producer to find more oil & gas, increase the production of oil & gas from the field, but will also provide innovative ways in which to deploy its capital and reduce its costs.” Which seems to capture the focus that the Research & Capabilities and Knowledge & Learning modules provide the producer firm and Joint Operating Committee.

What we have so far in the Knowledge & Learning module are three interfaces. The first is the "Dynamic Capabilities Interface" which is the published version of each producer firm's capabilities. These capabilities are sorted based on geological zone, and other criteria, and published based on those criteria. Therefore each Joint Operating Committee receives access to participating producers' capabilities pertinent to that property. People, Ideas & Objects publish and subscribe model allows individuals to subscribe to specific capabilities in either the Research & Capabilities or Knowledge & Learning modules. Knowledge & Learning’s subscription model will allow subscription to all of the capabilities of the producers associated with that Joint Operating Committee.

Getting the right information to the right people at the right time. There is also a “Knowledge Area” that includes policies, procedures, operational and management information for the property. This area also includes what is commonly referred to as the well file in terms of the information contained within it. Lastly, the "Lessons Learned" interface is used by people within the Joint Operating Committee to record operations that did not meet expectations.

Let's review the three key factors of innovation Professor Giovanni Dosi notes:

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

Capabilities and stimuli generated within each firm and within the industries.

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

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

Recall that these key factors are funneled through the Research & Capabilities “Dynamic Capabilities Interface." It is there, in the producer firm, that the more significant issues of science, capabilities, microeconomic trends and public policy, etc. can be centralized and dealt with on behalf of all Joint Operating Committees that the producer has an interest in. To expect that each Joint Operating Committee would engage with these major issues would be unproductive and disorganized. By dealing with these points, and codifying them in the Dynamic Capabilities Interface the producer firm publishes the appropriate information to each of their Joint Operating Committee at the appropriate time. The Joint Operating Committee is left to deal with the property's issues and opportunities. It can ignore any noise that may or may not argue for attention. A quotation from Professor Herbert Simon,

What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it. (1971).

One of the first items in the Knowledge & Learning module of the Preliminary Specification. Is how the items within the various “Dynamic Capabilities Interfaces” of the many producers who are participants in the Joint Operating Committee are populated into the Knowledge & Learning module. As we've discussed each producer publishes the pertinent capabilities they have to the various Joint Operating Committees. Therefore the people working within the Joint Operating Committee are presented with a variety of capabilities that may be duplications and similar to others. That would be reasonable to expect. However, just as the football team's playbook may have similar looking plays, they may have subtle differences in the manner in which they are executed, etc. That would be the same as the Knowledge & Learning module.

It would also be the case that company A who is a member of the Joint Operating Committee has developed a capability for XYZ operation. This capability is considered state of the art in the industry. This capability is one of several listed in the Knowledge & Learning modules Dynamic Capabilities Interface for XYZ operation. However, the Joint Operating Committee has operational decision-making authority. It has decided to execute company B's capability for XYZ operation through the Knowledge & Learning modules fourth interface, the "Planning & Deployment Interface." The Joint Operating Committee has the operational decision making authority and therefore the choice as to how day to day operations are implemented. Performance is the driving motivation, and they are most familiar with the property. In the football analogy this may be the quarterback calling an audible.

As technical paradigms are introduced, Joint Operating Committees will accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of Joint Operating Committee structural and performance characteristics implies an analysis of the learning and competitive process through which an industry changes. Professor Giovanni Dosi notes these behavioral attributes.

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157.

We have seen over the past twenty years a trend that has created significant differences in the stratification of the oil & gas industry. This is in terms of the size of the producers and their associated innovation. The small organization purchased reserves and facilities from the open market only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the ability to innovate in the larger organizations. Most disturbing is the lack of concern or identification of this as an issue over the past decades. The combination of depressed commodity prices, especially for natural gas, and a significant overhead burden that is fixed and demands a large percentage of free cash flow to meet the regulatory and other demands of all oil & gas producers. This overhead burden has offset the innovativeness of small producers who are about to disappear from the landscape. People, Ideas & Objects see this as detrimental to North American oil & gas's long-term health and prosperity. 

The Preliminary Specification has changed the behavior of producers' overhead costs from fixed to variable, based on profitable production, through implementation of our user communities service provider organizations. And established two distinct sources of revenue for producer firms. Revenues from oil & gas sales and creating markets for earth science & engineering capabilities developed by producers and charged directory to the Joint Operating Committees. Taking advantage of both of their strategic competitive advantages to generate revenue. Consisting of oil & gas sales from their land & asset base, but also deployment of their earth science & engineering capacities and capabilities to generate revenues to offset these costs.

With this structure and arrangement between the Research & Capabilities and Knowledge & Learning modules, focused around the Joint Operating Committee. It replicates the environment of a small oil & gas producer that is focused on performance. Alternatively, suggestions that further industry consolidation as the solution defies prior consolidations performance history. Globally, decentralization and disintermediation have been adopted as successful strategies in all industries. And the logic of consolidation contradicts any probability of resolving the identified difficulties North American producers are dealing with. 

Revenue Per Employee at the Joint Operating Committee

We want to discuss the calculation and publication of specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the factor's trajectory. How this financial calculation could affect those that work within the property; and the use of this information contained within the Knowledge & Learning module of the Preliminary Specification.

First of all it is understood that not all people are necessarily assigned to work for one Joint Operating Committee. There are times when people might be assigned to dozens during one month. Calculating the hours worked by the people within these Joint Operating Committees from the different companies is not going to be difficult for People, Ideas & Objects software. Within the Security & Access Control module, Industrial Command & Control, our Work Order records the time and tasks each individual performs and in turn charges that time out at a factor of the producer's calculated Revenue per Employee.

A comparison of revenue per employee over time, or its trajectory, has been discussed previously. These trajectories were key financial performance indications as to where the property was heading. Was the property accelerating its innovation or decelerating? We also broke down the trajectory into three different variance types. Volume, price, and number of employee hours variances. Each of these variances reflects a reason why the trajectory changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member assigned to the property should have access to this page and contribute ideas and suggestions on how to improve the factor. An open collaboration focused on enhancing Revenue Per Employee and its trajectory. In addition, this page could have the historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee variances and trajectories performance scored at that Joint Operating Committee.

We also learned that revenue per employee reflects the asymmetry (revenue per employee is widely variable) of asset quality within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. The comparison of revenue per employee for the same property over time however, will have a significant impact on the people that work for that Joint Operating Committee.

Professor Giovanni Dosi describes the most effective way to deal with the factor is as follows;

In very general terms, technological innovation involves or is the solution to problems. p. 1125.

In other words, an “innovative solution” to a certain problem involves “discovery” and “creation” since no general algorithm can be derived from the information about the problem that generates its solution “automatically.”

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

Members of the Joint Operating Committee can access the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms partnership. There, people could see what the firms offered in terms of their earth science & engineering issue identification and resolution capabilities. It may then be realized that some formerly unknown or recently developed and now available capability being applied to the situation in the Joint Operating Committee will yield greater productivity, or...

Deploying Capabilities, Not Hoarding Information

We start this discussion of capabilities with a clear definition of what they are. These are some of the definitions published earlier in the Research & Capabilities module and are noted here for clarity. The first is from Professor Richard Langlois in his 1992 paper “Transaction Cost Economics in Real Time” defines what capabilities are in a corporate setting. (Oxford University Press 1992)

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.

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

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

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

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, it has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another may not be worthwhile doing.

What the firm can hope to do technologically in the future is narrowly constrained by what it has been capable of doing in the past. p. 1130.

Moreover, even when licensing and other forms of interfirm transfer of technology occur, they do not stand as an all or nothing substitute for in house-search: One needs to have substantial inhouse capacity in order to recognize, evaluate, negotiate, and finally adapt the technology potentially available from others. p. 1132.

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

Deploying Innovations

Keep in mind that innovation is not research. Research is conducted in the Research & Capabilities module. When the research is proven and added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate and relevant criteria to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the Joint Operating Committees are similar to the way that a football team’s plays are developed and executed. Using the analogy of a football coach, motivated by winning, he selects plays from a long list of possible plays.

Professor Giovanni Dosi 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 inter-sectorally 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) p. 1135.

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

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

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user can select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and manage the operation from Industrial Command & Control. Scheduling and other considerations must be made regarding resource requirements since the Joint Operating Committee capabilities are from various firms. The "capabilities" are for company x, derived from company x, not necessarily for Joint Operating Committee xyz without x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. It is then possible to execute the capabilities.

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

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

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

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

Professor Giovanni Dosi asserts that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications.

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 a good extent local and firm-specific. Second, the opportunity for technological advances in any one economic activity (and, thus, also the "innovative productivity" -- were we able to measure it -- of a dollar investment in R & D) can also be expected to be specific 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 of its suppliers and customers. p. 1137.

Professor Dosi notes the implications of the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enables the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” Providing the producer with the best of both worlds.