The Preliminary Specification Part CCXXXVI (R&C Part XLVI)
Our last couple of posts have highlighted the dynamic nature of the marketplace the service industry will provide the oil and gas industry. Two days ago we noted the dynamic nature of the “Dynamic Capabilities Interface” of the Research & Capabilities module and yesterday, the changing and dynamic nature of markets during times of larger societal changes. Throughout this discussion we have noted that there may be changes to the modules in the Preliminary Specification. However we have not described how many of those changes will come about. What are the motivations, why will these changes come about? In Professor Richard Langlois paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism” he describes what could be called the “dynamic” nature of the motivation behind these changes.
Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase. pp. 36 - 37
That is to say all except for the bureaucrats, they may not be motivated by anything. I am shocked at the numb response the price of natural gas has received from the oil and gas companies. Only a few companies have scaled back production. The market system is sending them a signal, the price, that they are over producing. And nothing happens. This must be like what it was like in the former Soviet Union, no bread because everyone is in line waiting for bread. The bureaucrats can sit back and belittle the service industry as greedy and lazy, and that will sell for another year during annual report season. But for them to focus on their business and cut back production, never. Deaf, dumb, blind, stupid and numb.
At some point the accounting magic that is employed will cease to provide the veneer that covers the poor workmanship. Cash flow is not earnings. It is swapping money in for money out. It is not a measure of performance, it is a measure of activity. Without the high prices that are realized on the crude side of the business, where would these bureaucrats be? According to Professor Richard Langlois in “Institutions, Inertia, and Changing Industrial Leadership” there needs to be an alternative that is proposed to replace the old order.
Several features of punctuated equilibrium stand out. Firstly, it is a lengthy process. Even the revolutionary or transitionary phase, in which two or more alternatives vie for success, may be prolonged for decades, or eons in the case of speciation. Secondly, the process, like Schumpeter's: “creative destruction," is one of replacement. When there is punctuated equilibrium, the extinction of a species or discrediting of a scientific theory are not enough; there must be a new species available to take over the territory or a new theory to account for the phenomena that the old theory was once thought to explain. Thirdly, each period of punctuated change requires a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents. This shift might be accomplished internally, if the old agents adapt their behavior to meet the new conditions, or externally if they are supplanted by a new group of agents. Finally, inertia plays a central role in punctuated equilibrium by ensuring that change proceeds by fits and starts rather than smoothly and evenly. pp. 2 - 3
That alternative to the status quo is of course the Preliminary Specification. So what does all of this have to do with oil and gas systems. The road ahead is bumpy. As much as we would like to think that good ideas will win the day, that may not be the case. The old agents have some fight left in them. Just look at Russia today. Inertia will eventually fall to our side, however, not without a bit of a fight.
Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3
It is through the definition of the Preliminary Specification in which we achieve the point where “Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods.” Then we will have the definition of the system that provides the optimal way for the innovative oil and gas industry to operate.
For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.
Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.