OCI Research & Capabilities, Part XI

 Economic Growth Through Organizational Change

There is no question about how economic growth will occur. That is because of organizational change. But I think that it is intended to be as a result of constructive action and would never occur as a result of atrophy and inaction. In Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism, Schumpeter, Chandler, and the New Economy.” he reflects on this point. 

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1776, 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 (Young 1928; Richardson 1975). p. 3.

With the selection of ERP systems like SAP the bureaucracy has secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with. In his book “The Dynamics of Industrial Capitalism, Schumpeter, Chandler, and the New Economy.” Professor Langlois notes.

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6.

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm can take advantage of its opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they can populate these capabilities with the various Joint Operating Committees that they have an interest in. Reducing the cost of innovation experimentation while opening up the assets of the firm to innovations.

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

The quote above captures so much of what we should be concerned with. I think it also shows that using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil & gas producer requires focusing on their competitive advantages of their land & asset base, and earth science & engineering capabilities. The Research & Capabilities module focuses on the producers' earth science & engineering capabilities. It provides the means to document them, expand them, deploy them, and most importantly innovate upon them. Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27.

As we have learned “knowledge begets capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil & gas industry. Systems that use computers for storage and processing. Which is the work they do best. And the work people do best consists of "knowledge, skills, experience" to which we add ideas. We note the distinct competitive advantages people have over computers. Consisting of leadership, issue identification and resolution, creativity, collaboration, research, design, planning, thinking, negotiating, compromising, financing, observation, conflict and contradictions, spontaneity, reasoning and judgment to begin the list. The Research & Capabilities module enables producer capabilities to be captured and deployed in innovative ways. 

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27.

And

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27.

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects brings to the oil & gas industry. However, I believe that the conclusion is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason Research was grouped together within a module with Capabilities. They have strong interactions with one another. 

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46.

As we move to the Knowledge & Learning module, we will discuss the deployment of these capabilities in the Joint Operating Committee.

Two Primary Processes of Innovation

We have discussed operations coordination and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is one of the things that is covered in the module, and innovation is another. To refresh our memory, the primary process of innovation in the Preliminary Specification is as follows. 

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team develops original and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface." This enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate unnecessary "trial and error" learning repeated in each and every Joint Operating Committee. Learning can be done once, reducing the amount of repeated experimentation that is unnecessary. As I stated this is the primary process of innovation in the Preliminary Specification. 

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

In this survey, we examine the operations of innovation processes within industrial districts by exploring the ways in which differentiation, specialization, and integration affect the generation, diffusion, and use of knowledge in such districts. p. 1.

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description. 

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.

To limit the opportunities to act upon these types of discoveries would leave spontaneity out of the oil & gas industry. When faced with the knowledge provided to the user by the “Dynamic Capabilities Interface” some things may become obvious. Serendipity and spontaneous order are economic terms. We should adopt them here to ensure a dynamic and innovative industry. 

But there is more in this secondary process. We are building on the already well established earth science & engineering capabilities of the producer firms of the Joint Operating Committees. This broadening of the scope of users occurs at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes in “Innovation Process and Industrial Districts.”

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2.

And

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The result is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7.

What is therefore needed is a means to capture innovations that arise from this secondary process. Whether they are in the service industry or earth science and engineering fields. A means to turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee field tested their own innovations based on ideas heard elsewhere. The "Lessons Learned" page of the “Dynamic Capabilities Interface,” where specific Joint Operating Committees can document their spontaneous changes.

Conclusion

The Research & Capabilities module documents the earth science and engineering “capabilities” of an innovative and profitable producer firm. Capabilities are those firm's knowledge, skills and experience. People, Ideas & Objects have added “ideas” to that list. Capabilities have also been defined as “knowledge begets capabilities, and capabilities beget action.” These are the cornerstones of an innovative and profitable oil & gas producer in the 21st century. Capabilities are developed here in the Research & Capabilities module. These capabilities enable, enhance and provide innovations development and deployment for publication through the Knowledge & Learning modules pertinent to their Joint Operating Committees. 

The Research & Capabilities module enables the producer firm to structure a division of labor between those that develop the research and innovations within the producer firm. It also enables those to deploy innovations within Joint Operating Committees. This is the major process of innovation that is carried out in the module. Another major process is that it provides the innovative oil & gas producer with the ability to move knowledge and capabilities to where decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil & gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires. 

Bringing new knowledge and capabilities into the organization provides economic growth. Deployment of that knowledge to the right people at the right time is a producer's challenge. These are the roles the Research & Capabilities module undertakes in a producer firm.

We noted the paradoxical dilemma producers face in oil & gas exploration and production. Ensuring profitable operations everywhere and always is their primary role in a capitalist society. With oil & gas we must also provide evidence that we did not waste any resources that future generations may depend upon. We can prove to future generations that we did not waste these resources when produced profitably. Passing a viable, prosperous and healthy oil & gas economy on to them for their needs. While ensuring consumers receive the lowest energy costs. Innovation satisfies all of these requirements. It will be the producers' profitable operations that fund the enhanced innovations necessary to fulfill these needs. These are the overall objectives of the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. 

OCI Research & Capabilities, Part X

 Technology's Impact, 

We now want to discuss the “Dynamic Capabilities Interface” from a different perspective. One in which we take a more high-level look at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic service industry as a marketplace. It defines and supports the framework to execute field operations with military precision. These two seemingly contradictory objectives are attainable when we realize field operations are a temporary snapshot of the marketplace’s offerings. Upon completion of that operation, that organization and its capabilities will no longer exist. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization used for that specific field operation. 

We want to maintain all elements of a dynamic and innovative service industry. The Preliminary Specification has provided for this by ensuring the service industry receives strong support from the oil & gas industry in the Resource Marketplace module. This is also necessary for the energy industry to ensure that society's energy demands are met. In the Preliminary Research Report we discussed Professors Anthony Giddens and Wanda Orlikowski's Theory of Structuration and Model of Structuration. People, society and organizations must move together or fail. It should be asked if these societal demands for energy can be met by the current oil & gas organizations? Technology will have a role in this. From Professor Orlikowski’s paper "The Duality of Technology: Rethinking the Concept of Technology in Organizations."

The structurational model of technology is intended to punctuate key aspects of the technology phenomenon, and suggest typical relationships and interactions surrounding its development and use. Even though casual associations may be postulated and investigated, the premises of the structurational model caution us against undue determinism. While expected relationships may hold empirically for certain organizations in certain historical and socio economic conditions, the ever present ability of actors to alter the cycle of development, appropriation, institutionalization, and reproduction of technology with organizations must be understood dialectically, as involving reciprocal causation, where the specific institutional context and the actions of knowledgeable, reflexive humans always mediate the relationship. p. 423

To achieve organizational performance necessary to meet society's demands, technologies must be implemented first. This was one of the key findings of the Preliminary Research Report. We live in a time and place where technology plays such a significant role in our day-to-day lives. To change our organizations, we must first change technology. Professor Richard Langlois picks up this theme in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

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.

So where are we? The People, Ideas & Objects Preliminary Specification supports innovative and dynamic markets. This will enable the oil & gas industry to meet energy demand. But neither the demand for the product nor the software exist. More than 23 million cars were sold in China last year. The same number will be sold this year and next. The point is that energy markets are developing and the demand will grow. The question will be who will volunteer to keep their economy stagnant due to energy shortages? And just as the energy market develops, the software needs to be developed as well. 

People, Ideas & Objects resolves the paradox producers face regarding oil & gas commodities. Higher commodity prices provide financial resources for innovation. Ensuring consumers have the lowest energy costs possible. We provide producers with production discipline that ensures all production is produced profitably everywhere and always. Creating healthy, prosperous oil & gas, service and tertiary industries. Which can be passed along to future generations. Our obligation to the future is not to waste oil & gas resources by producing them unprofitably. By producing them profitably we can prove that we did not waste them. Consumers' value proposition from oil & gas consumption is 10 to 25 thousand man hours per barrel of oil equivalent. Which provides 27 to 68 times the world's population in mechanical effort. Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999). Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and to a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5.

There will be significant changes in the markets during the time we are developing the People, Ideas & Objects software. Changes to be captured in the software. There is never an ideal time to approach these changes, however, now with approximately $94 billion, as a minimum, in annual revenue shortfalls, from deficient commodity prices (please review the decentralized production model), the time has well past for the industry to act. 

Tacit Knowledge

We emphasize the way the Research & Capabilities module captures producer firm capabilities. In providing for the capture of these capabilities the Preliminary Specification is limited by the attributes of the different types of knowledge and the culture of the oil & gas industry. These two forces have formed the way the Research & Capabilities module deals with knowledge and its capture. It is in Professor Richard Langlois’ paper “Capabilities & Governance the Rebirth of Production in the Theory of Economic Organization” that he states the following.

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.

We’ve discussed before that tacit knowledge cannot be captured in written form. Therefore the “Dynamic Capabilities Interface” can only refer to others' tacit knowledge. Tacit knowledge is deployed in the Research & Capabilities and Knowledge & Learning modules through the Job Order system. Since it is knowledge that “normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use.” There are three critical elements for coordination of operations in these two modules of the Preliminary Specification. 

• The explicit Knowledge captured in the “Dynamic Capabilities Interface.”
• The “Planning & Deployment Interface” including AFE’s and Job Orders.
• Industrial Command & Control.

Therefore the interface elements of the “Dynamic Capabilities Interface” will contain knowledge of “what” and “how” regarding the earth science or engineering capabilities, production or operation of the concern. Times when tacit knowledge needs to be documented will have to be replaced by rich media and references to the appropriate individuals. This is for the operation to be undertaken. We note that knowledge is often “distributed knowledge carried out by multi-person tasks.” All of these tasks should be captured for one operation and included as one capability in the interface. Dealing with these different types of knowledge is how the Research & Capabilities and Knowledge & Learning modules' “capabilities” are defined.

A Critique of the Bureaucracy

As I stated earlier, the industry culture also influences the design of modules. These cultural conditions reference the boundary of firms and markets and determine future changes. Since we are dealing with the service industry, all but the smallest number of producers source their field operations from the market. We are consistent with the industry culture. Nonetheless Professor Langlois notes three factors are of importance. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices made. From Professor Richard Langlois in “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History.”

The pattern of existing capabilities in firms and markets. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 7.

The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 7.

The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 7.

The service industry was robust and dynamic prior to oil & gas producers' antics from 2017 onwards. Wholesale destruction has been exercised to the point where there is no faith, trust or belief in what producers say and do. Producers must actively rehabilitate the service industry with their financial resources is a necessity. Service industry providers who watched as their rigs were cut up for scrap metal to eat, while producers chanted in harmony to “muddle through” have learned once, and are not falling for it again. 

People, Ideas & Objects sees the development of the Preliminary Specification as the initiation of this rebuilding effort. Oil & gas producers need to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings. 

The question is why focus on oil & gas capabilities? I think it is because we have lost the ability to respond to market signals and initiate original and innovative thinking. These next two points will ask the difficult questions in terms of “what” and “how” the industry has operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil & gas producer, and particularly the Joint Operating Committee, to act in their best interests. 

In the Preliminary Research Report I suggested that the oil & gas industry was not fundamentally different from the former Soviet Union in terms of its ways and means. Following through the motions and determining “best practices” shows a high level of stagnation within the industry. We see natural gas prices deteriorate from 6 to 1 boe which is its traditional pricing structure and heat equivalent. To as high as 40 to 1 in 2023. Producers watch but don’t act and another decade of waste goes by. Producers, in their most robust obtuseness, complain about the service industry. It's as it was in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil & gas industry for so long, no one knows what it looks like. From Professor Richard Langlois' book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9.

To reinstate the market and the dynamism of the market system in the oil & gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. At the start. The Research & Capabilities module is designed to enable the systemic thinking necessary for earth science and engineering capabilities of the producers and Joint Operating Committees. This is to act dynamically, innovatively and market-wise. 

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Peter Klein “Economic Calculation and Limits of Organization.” 

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21). p. 13

This is one aspect of the industry we are actively working against. It is also the most powerful. Bureaucracies control the budget and exercise it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of oil & gas research the Preliminary Specification has, and there are none. They all get financed through relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy is too conflicted to do the right thing in this regard. The decision to fund People, Ideas & Objects will have to be taken out of officers and directors hands and handed over to investors. After all they have some performance related concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil & gas industry to an impressive and productive scope and scale. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means to deal with the future demands of society's energy needs. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We'll have far to travel if we choose to continue to fail due to the substantial consumer's value proposition from oil & gas. Bureaucracies have failed before, and when they fail, they leave it to bond holders and investors to clean up their mess. In addition, management looks for greener fields elsewhere. 

OCI Research & Capabilities, Part IX

 Controlling Operations Through the Job Order System

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

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

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

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

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

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

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

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

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

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

Modularity in Systems and Organizations

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

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

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

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

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

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

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

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

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

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

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

The Costs of Operational Efficiency

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

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

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

It is, Marshall says, 

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

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

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

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

What are Capabilities?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And

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

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

OCI Research & Capabilities, Part VIII

 Professor Richard Langlois on Capabilities

Introduction

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

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

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

During our review of Professor Giovanni Dosi we learned about technical trade-offs. And how these trade-offs facilitate industries' innovation in the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & gas, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms that will provide companies with fundamental innovations. There are many knowledge-based and collaboration-focused interfaces in the Preliminary Specification. This makes the People, Ideas & Objects ERP system the ideal candidate for an innovative oil & gas producer.

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

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

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

Organizations That are Unique and One-off Derivatives

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

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

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

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

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

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

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

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

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

Control and coordination of operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And

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

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

OCI Research & Capabilities, Part VII

 Who Does the Innovation

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

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

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

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

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

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

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

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

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

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

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

In summary, it shows that money is not necessarily a determinant of innovative success. All producers need to be represented in the innovative oil & gas industry. 

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

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

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

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

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

The Outlook for Innovation

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

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

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

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

• The structure of demand.

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

• The nature and strength of opportunities for technological advancement.

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

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

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

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

OCI Research & Capabilities, Part VI

 Research Into the Underlying Sciences

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

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

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

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

• First, the link between science and technology runs also from the latter to the former. It has been noted, for example, that the development of scientific instruments has exerted a major impact on subsequent scientific progress. In general, however, the scope, timing, and channels of influence of technological advances on science have a different nature from the more direct influence of scientific discoveries on technological opportunities.
• Second, scientific advances play a major direct role, especially at an early phase of development of new technological paradigms. p. 1136.

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

• The nature and interests of the bridging institutions between pure research and economic applications. (p. 1136).
• Institutional factors such as public agencies (e.g., the military) (p. 1137).
• The selection criteria of markets and / or techno-economic requirements of early users. (NASA, and the Pentagon in the early days of integrated circuits, FDA requirements in the case of bioengineering, and the technical needs of the American Navy in the case of Nuclear Reactors.) (p. 1137).
• The trial and error mechanisms of exploration of the new technologies, often associated with Schumpeterian entrepreneurship. p. 1137.

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

Innovating on the Science

Continuing our discussion of the “Research Budget Allocation Interface” and the two-page format. It is expected that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. The process that the user of this interface will document is the capabilities of the research being conducted within the firm and the broader scientific community. By way of the football analogy we raised earlier, I want to show how this documentation would be done.

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

As the firm continues, research from the endogenous and exogenous areas develops into innovations that populate the “Dynamic Capabilities Interface". These innovations in turn populate the various Joint Operating Committees. Professor Dosi (1988) asserts that much of a firm's innovativeness is dependent on technology more than science, and has several implications.

First, the specificity, cumulativeness, and tacitness of part of the technological knowledge imply that both the realized opportunities of innovation and the capabilities for pursuing them are to an extent local and firm specific. Second, the opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity. Moreover, the innovative opportunities in each economic sector will be influenced by the degree to which it can draw from the knowledge base and the technological advances made by suppliers and customers. (p. 1137).

In the third paragraph of the previous section we documented that we have three processes that deal with these variables under management in the Research & Capabilities module.

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

New paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations and ease with which they are achieved. p. 1138. 

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

Highlighting the speed at which a producer firm can implement innovations. From the research and discovery, to the actual implementation of the innovation there is little in terms of time or bureaucracy standing in the way of the proven innovation being implemented across the firm. When the time comes for people to use the latest developed, tested, procedurally complete, approved and authorized processes in terms of what innovation they should adopt, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use in the Knowledge & Learning module.

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

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

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

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

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

The individual user(s) of the Research Budget Allocation Interface of the Research & Capabilities module will be at the forefront of innovation within the producer firm. Having windows on the research developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and let's not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the service industry state of affairs. (For emphasis I quote again from Dosi (1988), as above "to which it can draw from the knowledge base and the technological advances of its suppliers and customers.") Theirs will be a rich medium of information of what is happening in the innovative oil & gas industry. The concern that many will have is that this information is then codified into further capabilities which are subsequently published through to the various relevant Joint Operating Committees. They will have these capabilities available to other members of the Joint Operating Committees. They will be able to see and use the capabilities, which will include participants of other producer firms. Professor Dosi (1988) notes a study conducted by Richard Levin et al 1984.

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

Appropriability conditions differ among industries and among technologies: Levin et al. (1984) study the varying empirical significance of appropriability devices of (a) patents, (b) secrecy, (c) lead times, (d) costs and time required for duplication, (e) learning curve effects, and (f) superior sales and service efforts.

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

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

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

In general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation as well as innovation, a creative process, which involves search, which is not wholly distinct from the search for “new” development, and which is economically expensive - sometimes even more expensive than the original innovation (for evidence on the cost of imitation relative to innovation, see Mansfield, Mark Schwartz, and Samuel Wagner 1981; Mansfield 1984 and Levin et al. 1984). This applies to both patented and non-patented innovations.” (p. 1140).

With the fast changing science and technological paradigms and steep trajectories of the industry, the need to have the capability to innovate is required by each producer to develop on their own. If the costs of duplication are as steep as the costs of developing internal capabilities, producers should rely on internal process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear of copying?

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

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

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

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

Our next interface is the “Experiments Interface". This will list the number of experiments and document the type and expected results of any and all experiments being conducted by the firm. This will be a comprehensive interface, much like the “Research Budget Allocation Interface” in that it will also have many similarities to a project management interface. This allows users to manage a project from start to finish. Where capabilities can be developed as expected by the firm. Both interfaces will allow users to control and manage the firm's development at the speed of market and science.

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

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

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