Note to Reader. I am publishing the "Plurality" document I frequently refer to in this blog. This will enable searching based on the text within the entire document. The word count is approximately 35,000 words and is provided as background for the discussions.
A number of technology changes have occured since it was originally published in 2004. IBM has chosen not to support this effort, and as a result I am replacing the components of the technology architecture as the opportunities and needs require. We are moving to the Sun strictly for their support of Java, and the synergies of the visions. As I recently noted, Ingress would be the database that we will use. Other then that, I have chosen to host the entire development and operating environment on Sun's Grid and as funds become available we will secure those resources.
References are to the literature noted in the bibliography. So here it is, warts and all. I hope you enjoy it, any and all comments are welcomed and appreciated.
Thank you
Paul Cox
Summary and application to oil and gas firms of Dr. Giovanni Dosi’s article. “Sources, Procedures and Microeconomic Effects of Innovation.” September 1988, Journal of Economic Literature Volume XXVI pp. 1120 - 1171
Introduction
Dr. Giovanni Dosi’s article discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Dr. Dosi’s theories that make them directly applicable to oil and gas are the innovation theories application to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas firm’s search, and production of, hydrocarbons. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition.
With the substantial upward revision in pricing of oil and gas commodities, new microeconomic models are developing based on these pricing realities. It is this research’s assumption that the search, discovery and production of hydrocarbons and the underlying earth sciences and engineering will develop faster than in the past, and at the same time, become more of a differentiation between the producer’s capability. Consistent with the revisions in the underlying sciences is the need for the development of alternative organizational structures and processes designed to support the acceleration of scientific and technical innovations. It is the understanding and application of the sciences that would be enhanced through collaboration through the joint operating committee, ultimately leading to an enhanced overall innovativeness for the producer. Mr. Matthew R. Simmons (http://www.simmonsco-intl.com/) states the science and technology of oil and gas is second only to the the space industry.
Petroleum companies’ business models have begun to undertake significant transformations in the form of higher risk profiles and different assumptions regarding the allocation of capital risks. These are accurately reflected in Encana’s Greater Sierra and Cutbank Ridge properties in Northern British Columbia, and the commercial development of the oil sands in Alberta.
Dr. Dosi’s paper discusses and asks what are “the sources of innovations opportunities, what are the roles of markets in allocating resources to the exploration of these opportunities”? (p. 1121).
This research in oil and gas attempts to focus the points of:
- The main characteristics of the innovation process.
- The factors that are conducive to or hinder the development of new processes of production and new products.
- The processes that determine the selection of particular innovations and their effects on industrial structures.
- There are two major issues identified by Dr. Dosi:
- The first issue is the characterization in general of the innovative process.
- And second, the interpretation of the factors that account for observed differences in the modes of innovative search and in the rates of innovation between different sectors and firms, and over time.
Dr. Dosi then makes the statements that,
“The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:” (p. 1121)
- “Capabilities and stimuli generated with each firm and within the industry of which they compete.”
For the purposes of this research in oil and gas the focus will fall primarily on the organizational capability of the firm. It should also be emphasized that innovations are based on both the firm and the industry. Co-ordination of the capabilities and stimuli of both the firm and the industry would therefore need to be advanced through changes in the organizational structure. (p. 1121)
- “Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.”
“Additional issues include the conditions controlling occupational and geo - graphical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulations, tax codes, patent and trademark laws and public procurement.)” (p. 1121)
Based on the capabilities and stimuli of innovation present in the oil and gas sector, particularly the microeconomic effect of the commodity prices, it is reasonable to conclude that independent producers of oil and gas would be an area where significant innovation can and needs to occur. The primary reasons for the future enhanced innovation is due to the following analysis of the industry.
The capacity to enhance reserves is significantly more challenging than as little as five years ago. Exploitation is generally expected to continue, however, an enhanced role for various degrees and types of exploration is expected to commence. The energy frontier brings many new risks and complexity in the area of technical, political and the environment. These account for much of the changes in stimuli and capability that Dr. Dosi states are required to facilitate further innovation.
Secondly, the microeconomic trends associated with changes in the relative prices of outputs. Oil and gas prices are beginning to reflect the scarcity, importance and value of these commodities to society.
Although Dr. Dosi states that the majority of his paper is based on a products improvement and development. It is just as appropriate for internal and external business processes, and the organizational structure of an oil and gas firm to be redefined to enable, and facilitate innovation. This innovation would further the development of the scientific infrastructure of oil and gas exploration and production. That is the hypothesis and purpose of this research paper and Dr. Giovanni Dosi’s theory will be described in the following sections with its specific application to oil and gas.
Searching for innovation - The General Patterns
In his analysis Dr. Dosi asserts that the amounts of capital expended in the pursuit of research and development is augmented by a large indirect expenditure of “learning by doing” (p. 1124) and “learning by using” (p. 1125). These costs are tacitly incurred and difficult to identify and quantify, and that countries, industries, companies and individuals can and do innovate at different rates.
These costs are further quantified by classifying these into the following four categories:
- “Formalized costs and processes of search whose costs are measured.” (p. 1125).
- “Informal processes of diffusion of information and of technical capabilities.” (p. 1125)
- Those particular processes of internalizing what is learned from externalized processes of learning by doing and learning by using.
- The adoption of innovation, which is embodied in the capital equipment employed and intermediate inputs sourced from other industries.
Each of these four categories of the costs of innovation can be directly or indirectly applied to the organizational structure. And this research would restate a salient point of Giddens (1984) structuration theory; and ask how much of an oil and gas company’s innovativeness is attributable to the capabilities defined by the organizational structure?
Dosi then sets the stage with his research questions:
First the nature of the process of a firm in taking a promising technology, or economic opportunity and seeing it to its actual development. “That is, what do people actually do? How do they search? Why do sectors differ in their search procedures and effectiveness?”
“Second, one needs to determine the direction that technological change is taking society? Are there other factors in the patterns of technological change?” (p. 1125)
Thirdly, Dosi asserts there is a “propensity to innovate” that needs to be identified and asserted as to what a company is “capable of” which is not easily replicated, and different based on unique and mutually supporting internal (the organizational structure) and external components. Stating that these are the result of two identified phenomenon, which will be discussed in the next section. (p. 1125)
In oil and gas varying rates of capability can best be compared by analyzing revenues per employee as an indicator of innovation. For example, Canadian Natural Resources Ltd.’s (CNRL) 2002 annual report reports it has achieved almost $3 million in production revenue per employee whereas during 2001, a time of higher oil and gas prices, Vintage Petroleum Ltd attained approximately $950,000 in revenue per employee. These differences in performance are imputed to be the overall net result of the cumulative investments, in both organizational and science based capabilities, and innovativeness of the firms. In 1980 this factor was calculated for Aquitaine Company of Canada Ltd, which was one of the first to attain the level of slightly over $1 million revenue dollars per employee. This therefore does not reflect well on the performance of Vintage and reflects, that all things considered, CNRL has achieved three fold productivity increases in comparison to Vintage and of comparatively high performing firms in the industry during the early 1980’s.
These disparities in revenues are assumed by this research paper to be a result of the cumulative direct and indirect investments by these firms in innovative capability, again all things being equal. Questioning of this factor will be conducted to dispute the conclusions contained within this report, however, this paper asserts that production revenue per employee is an effective means of determining a company’s capability regarding the application and use of the appropriate sciences and innovativeness. With respect to Dr. Dosi’s work, what is it that CNRL does and Vintage doesn’t do that creates such disparity?
Innovation: The characteristics of the search process.
Much analysis has been undertaken to determine the actual outputs from innovation and compare those to the input costs and attempt, as one does in today’s technology environment, to determine a return on investment on technology, innovation, research and development.
Dosi reviews a number of studies that focus on quantifying the output part of the equation. These are comprehensive in their number, heterogeneous in their conclusions, yet, Dosi feels he has been able to find a number of threads that determine which factors or characteristics are influential and of crucial importance in the economics of technological change.
Problem solving of technical paradigms, the purpose of innovation.
Dosi states (1988) “In very general terms, technological innovation involves or is the solution to problems.” Dr. Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Dr. Dosi (1988) describes “on the part of the inventors who discover the creative solution.” (p. 1125). This statement accurately describes this authors opinion regarding the collaborations that should be undertaken by the SJOC.
It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? Clearly some companies are more effective at this process then others, but this research in oil and gas asks, is there a means for an organization to provide a quantum increase in its ability to innovate that leads to higher trajectories of performance based on production revenue per employee?
Genesys® has documented and identified the issue regarding the IBM Workplace / WebSphere toolset, and its effect on corporate ERP systems and has proposed a solution to industry based on a fundamental value proposition. These solutions are documented in this research and the February 2003 ERP proposal contained in this reports appendix. Oil and gas firms should seek to undertake these solutions as the beginning of their move towards a more innovatively capable organizational structure.
Dr. Dosi asserts a crucial point in that technology and sector specific variety of knowledge, based on innovative search, implies different degrees of tacit-ness of the underlying knowledge of the innovative success. This helps to explain the differences across sectors of the typical organization’s capabilities to conduct research and innovative activities. Whatever the knowledge base on which innovation draws, each problem solving activity implies the development and refinement of “models” and specific procedures.
Dr. Dosi believes there is an underlying strong tie-in between the natural sciences and the development of technologies. Using the Aristolian and Platonic “paradigms” of understanding of science, when these scientific paradigms are proven to be more complex or different, the underlying technology change can replicate that seen in the natural sciences.
This researcher asks, if the knowledge of the underlying oil and gas sciences increases in its understanding, what organizational structure can best facilitate innovation? Would “any” organizational structure have a requirement to parallel the changes and developments in the sciences? How are the scientific problems, the refinement of models, the discovery and success of innovative thinking communicated throughout a bureaucracy? Self-organizing teams, as represented by the joint operating committee, provide the most effective and efficient means of organizational structure.
Technological Paradigms and Patterns of Innovation: Technological trajectories.
The definition of a technological trajectory is the activity of technological process along the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as the compromise, and technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” This research assumes the technical trade-off in oil and gas is accurately reflected in the commodity pricing. (p. 1128)
These trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, this paper 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 which will provide companies with fundamental innovations.
An excellent example of this would be the discovery of the north-south orientation of horizontal under-balanced drilling in the Jean Marie formation of British Columbia, where knowledge and collaboration lead to a fundamental low cost solution to a technical problem. This simple change, reflecting the effect of the thrust of the Rocky Mountains, has lead to significant findings and deliverability of gas.
Technology: Freely available information or specific knowledge.
Dr. Dosi notes that although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from another company is not as easy, and may indeed not be worthwhile doing. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.” Therefore why bother, and why not just focus on the need to increase the company’s own unique and specific competitive sources and directions. (p. 1132)
This also imputes that the free flow of information between producers through collaborations in the joint operating committee would increase the knowledge, yet not expose anyone of the specific organizations to any specific losses of key knowledge or proprietary information or capability.
Information’s shelf life expires faster each day. Knowledge and information need to be employed and deployed where and when they are required. This research’s collaborative method of employing the intellectual property might facilitate a greater value, to the participating producer, and would provide the groundwork for future innovations and expansion of the underlying engineering and earth sciences. And although no specific proof of this can be sourced at this time, today’s hierarchical organizational structure is the impediment to the speed of innovation developments, its adoption and application, and it is asserted through this paper that this is tacitly understood.
Dr. Dosi (1988) cites the dichotomy of Adam Smith in that organizations are comprised of those that “system learning effects on economic efficiency by way of the division of labor, and the degrading brutality of repetitive and mindless task simply for some workers. These support the “how to do things” and “how to improve them” (p.1133).
This dichotomy reflects the challenge of improving the processes and products through trial and error, with heavy emphasis on the error. The ability to accurately predict the success or failure of a new idea contains inherent high risks and hence high rewards. This is one of the constraining factors in implementing innovative thinking, in that no one wants to be proven wrong. Whereas, even if the idea fails the ability to test the theory, the failure may ultimately lead to and may be the key to discovery.
Society dictates certain norms employed by staff is, to do as they are told and in some cases not to think. Even if they do think of other ways, cultural influences may silence otherwise worthwhile suggestions and innovations. This is the area that needs to be fully comprehended and why Dr. Wanda Orlikowski’s model of technology structuration needs to be considered. It states that technology is a component of society and organizations, and therefore society and human resources have to move forward in concert, and that power needs to be asserted to affect change. An imbalance in the three components leads to failure. If all staff became innovative overnight, it would probably precipitate the rapid decline of a firm.
Dr. Dosi asserts that the structure of financing innovation is constrained by the budget process, rules and meta rules that companies will spend x% of sales on research and development, and that this style of thinking curtails these factors when interest rates are high or profits are low. These facts help to precipitate the need for a longer-term approach to innovation. Dr. Dosi asserts organizations need to move beyond the next quarter’s performance criteria and build sustainable competitive advantages for the future. With the current low interest rate environment, and the essentially free access to information are two key drivers for a major trend in innovation. Companies unprepared for the outcomes of their competitor’s innovative investments may discover problems earlier then they expected. Nonetheless the purpose in budget rules and regulations are how managers seek to control the future and reduce the uncertainty inherent in innovative search without eliminating it.
A strong balance needs to be achieved in dealing with the difficulties of managing an enterprise in the future. As described above, the day-to-day management must be handled properly, yet the future is highly dependent on innovations in the sciences of oil and gas. Can the hierarchical structure of today’s organization continue to serve these two disparate objectives? Does the firm need to employ alternate styles of organizational structure that serves both ends of this phenomenon?
Opportunities, incentives, and the inter-sectoral patterns of innovation.
Discussing the nature of the opportunities and knowledge on which innovations are drawn. And the manner that incentives lead profit motivated actors to innovate and or imitate. It is Dosi’s argument that the innovation process helped to explain why sectors differ in their modes and rates of innovation. Moreover, firms within each industry differ in their propensity to innovate. This research in oil and gas is extending this thinking to further define the industry as a “cluster” as Dr. Michael E. Porter has documented in his work on competition, and his definition of a cluster being a local area that has developed significant competitive abilities that competes on a global scale. Silicon Valley is an example of a cluster in high technology.
To facilitate the effective and efficient means of competition within a cluster requires collaboration amongst its participants. This is the key to extending the reach and understanding of the science within the cluster for the benefits of each organization. It is the cluster vs. cluster that is the basis of the competitive force in the near future, especially as many of the independent producers that this research is directed at are in pursuit of international opportunities.
It should also be questioned that in the search for oil and gas, how much of the scientific capability of a producer is dependent on a standard or historical basis of competitive understanding and capability, and how much is based on a future understanding of cooperation within a cluster and / or competition against unknown and unseen global participants?
Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Dr. Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovative inputs. Using the factor of revenue per employee helps to define and clarify the value in assessing the observed inter-sectoral differences of an oil and gas company in investment outcome. This also reflects that “different incentive structures” and “different opportunities” are also the product of the organizational structure. This is made explicit in this research paper by invoking Giddens structuration theory. This paper is stating the ERP system that tacitly and explicitly supports the bureaucratic hierarchy is also a component of Dosi’s (1988) “different incentive structures” and “different opportunities” as they indirectly affect the capacity to innovate.
Technological opportunities: Exogenous Science and Specific Learning.
Technological paradigms have been directly linked with major scientific breakthroughs, from the discovery of the transistor to the development of modern computer technologies. Dr. Dosi is stating that these links between science and technology have been very evident since the days of Leonardo da Vinci and Galileo. What was unique to the 20th century was that the need to generate and utilize scientific knowledge, was internal to, and often a necessary condition of the development of new technology paradigms. Up until the end of the 19th century, most technological innovations were the developments of imaginative craftsmen. Many of the 20th century developments were the result of multiple disciplines, such as physics and microelectronics, whose scientists were awarded the Nobel Prize in 1962 for the semi-conductor.
Dr. Dosi then 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 important qualifications.
- Science and technology are self-fulfilling in their developments.
- Scientific advances play a major direct role, especially at an early phase of development of new technological paradigms.
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. Dr. Dosi analyzes the specific mechanisms through which a few of these potential paradigms are actually developed economically, subsequently applied, and that often have become dominate in their industry.
The process of selection depends on the following factors (p. 1136):
- “The nature and interests of the bridging institutions between pure research and economic applications.” (p. 1136)
- “Institutional factors that drive the technology or science, such as (the military)”. (p. 1137)
- The selection criteria of markets and or techno-economic requirements of early users. (p. 1137) (NASA, Pentagon the FDA and Nuclear Reactors for the Navy)
- Trial and error associated with the Schumpeterian entrepreneurship.
Dr. Dosi (1988) continues on to assert that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacit-ness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific”. Secondly, 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”. This is further defined by the technological and scientific capabilities, and the advances made by suppliers and customers. (p. 1137)
How can the oil and gas sector sponsor or drive this capability, is this happenstance, or is there an invisible hand at work. If there were a more direct approach in innovation, what would the effect be?
Dr. Dosi (1988) references Scherer who states that this “inter-industry component must be attributed to upwards of a 42.5% variance in industry.” This research paper is imputing that innovation should now be considered an operating strategy that provides a significant means of competitive differentiation. The idea of technological paradigm bound industry and innovation is consistent with the findings of Simon Kuznets (1930) and Arthur Burns (1934) about a “secular retardation in the growth of output and productivity from the gradual exhaustion of technological opportunities along particular trajectories.” (p. 1138)
“New technology paradigms stimulate and reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations and ease with which they are achieved.” This is stated as the possible reason why we have not seen an approach to a “stationary state”. (p. 1138). Or has the theory of constraints now invoked the “Limits to Growth.”
Two separate phenomenon are observed as a result of this:
“First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases.” (p. 1138)
Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries”. This paper extends this phenomenon to include the organizational structure and the method of parsing out tasks and roles based on the processes requirements. (Accountants, engineers, geologists etc.) (p. 1138)
How much of the current domestic capability of the oil and gas industry in Canada can be further exploited as the base of science and innovation? And can this “cluster” provide an international producer with greater competitive capabilities in the global marketplace? What is the plan to house this capability, and will the bureaucracy as represented in the structured hierarchy survive and prosper with global competitors? Is there an understanding and/or expectation that the constraints that bind the organization, such as the ERP system, will inhibit the transformation to a new global competitiveness?
Ronald Reagan said about implementing Reaganomics, “if not us, then whom, and if not know, then when.” This paper asks the same question regarding the proposed organizational structure and technical ERP developments of Genesys® in oil and gas.
Appropriability of technological innovations.
In light of the previous statements, what are the incentives to invest in the discovery of innovations and there development? Will these depend on the incentives that interested and motivated agents perceive in terms of expected economic returns? Dr. Dosi calls “appropriability” these properties of technological knowledge and technical artifacts, of markets and the legal environment that permit innovations as rent yielding assets against competitor’s imitation.
Dr. Dosi (1988) notes a study conducted by Levin et al 1984, in which they studied the varying empirical significance of appropriability devices of patents, secrecy, lead time, costs and time required for duplication, learning curve effects, superior sales and service efforts. Levin found that the “lead times, learning curve advantages combined with marketing efforts appear to be the principle mechanisms of appropriating returns from product innovations. The most appropriate for process innovations were learning curves, secrecy, and lead times”. Dosi (1988) also observed, “that lead times and learning curves are relatively more effective ways of protecting process innovations, and patents a more effective way to protect product innovations.” Levin concludes that there appears “to be quite significant inter-industrial variance in the importance of the various ways of protecting innovations and in the overall degrees of appropriability”. (p. 1139)
Levin states that the control of complementary technologies becomes a rent-earning firm-specific asset. Dr. Dosi (1988) states “in general, it must be noticed that the partly tacit nature of innovative knowledge and its characteristics of partial private appropriability makes imitation 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 then the original innovation, and applies to both patented and non-patented innovations.“ (p. 1140)
The driving forces of technical change.
Dr. Dosi summarizes that businesses commit to innovation stemming from exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.
Dr. Dosi’s (1988) general point is that “the observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other”. (p. 1141)
What opportunities are and will be constrained by not adopting a more innovative organizational structure? If the geological and engineering sciences progress in a substantial manner in the next 5 years, (and there is no evidence to support that it will or will not) how will oil and gas companies adopt, employ, test and prove these science’s development without an enhanced capacity to innovate.
How much of the drive towards innovation is the beginning of the understanding necessary to expand the science? How much of an inducement are the current commodity prices providing the global competition to innovate? Based on the proposed technical and organizational changes of this research, the ability to establish a forum where the science and technology is collaborated between the organization and sponsored research institutions would facilitate greater internal innovative capability based on its scientific and technological capability.
Dr. Dosi discusses the relative merits of these “appropriabilities” and defines them further by classifying them as either as “market pull” or “technology push”. The justification for this research to continue is based on the market pull categorization of appropriability of innovation in today’s oil and gas market. And it is reasonable to assume that innovation in oil and gas will occur on both the producers’ behalf as well as the energy consumer.
This paper is not asserting that efforts in the past were not innovative or moved the science substantially. The issue this paper is raising is that the pace and speed of the science’s development in the near to mid-term will accelerate based on the fact that, globally and in Canada, reserve replacement has become progressively more challenging, and the prices realized for the commodities has begun to reflect these challenges. Dr. Dosi (1988) concludes this section with “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)
Inducement factors, patterns of technical change, and irreversibility.
Technology paradigms are almost immediately more effective than the previous technology. The only reason the paradigm may have been changed or created is due to a fundamental input price change. Dosi (1988) states that a fundamental implication of this view is “technical progress generally exhibits strong irreversibility features.” (p. 1144)
This paper has no other evidence than the previous statement that the proposed joint operating committee’s reorganization to include financial performance accountability would or would not provide a higher level of organizational performance, and as stated before, failure of this research’s hypothesis would ultimately lead to the appropriate solution. And that irreversibility of that performance would be evident if this research were funded further.
This research proposal and report has not been funded by industry, nor was there any information forthcoming that funding would occur. However, this paper asserts that the level of individual understanding and support within the industry that the initial research proposal attracted, is evidence of its viability and the probability of eventually proving its hypothesis valid. As stated before, failure to prove the science or innovation is at times the first step in determining success, and that the tacit-ness that the concepts put forward are sound and worthy of further study. And this initial funding failure reflects more the political structure of organizations, and not the failure of this research to prove its hypothesis. And it is stated unequivocally, that the manifestation of the political issues were as a result of the breadth and scope of organizational dynamics that is, are, or will be affected by the concepts put forward.
Genesys Software Corporation is grateful to IBM Corporation for their support in providing the toolset and licenses necessary to further pursue this research hypothesis.
The externalities of the innovation process.
There is and always has been certain elements of innovation that are developed outside of the current application of technology. Dr. Dosi cites the bicycle’s benefit from the manufacture of shotguns and the understanding of constant chemical processing that have allowed innovation to occur in food processing. Dr. Dosi refers to these as un-traded interdependencies and states they represent an important link between innovation studies and the regional economics of technical change.
Based on scientific data prepared and provided during 1945 to 1976 Pavitt, (1984) and Pave (1984) identified four major groups of manufacturing industries, namely:
- Supplier Dominated Sectors.
Most innovations are process innovation embodied, as Dosi (1988) states “in capital equipment and intermediate inputs and originated by firms whose principle activity is outside the sectors proper.” Industries such as wood products, basic metal products, agriculture, textiles, clothing, leather, printing and publishing “where endogenously generated opportunities are rather limited and so are R and D expenditures.” These industries are innovative on the process mostly and heavily focused on best practices. (p. 1148)
Innovation is primarily product innovations that enter most other sectors as capital inputs. Opportunities for innovation are generally abundant but are often exploited through informal activities of design improvement. Idiosyncratic and cumulative skills make for a relatively high appropriability of innovation, such as German machine tool makers.
Innovation occurs in both process and product where production involves mastering complex systems and the manufacture of complex products. Economies of scale are evident and abundant, firms are usually large, devote a large proportion of resources to innovation and tend to integrate vertically into manufacturing their own equipment. Industries include transport equipment, electric consumer durable, metal manufacturing, food products, glass and cement.
Innovation is directly linked to new technological paradigms made possible by scientific advances: technological opportunity is very high, innovative activities are formalized as R and D labs, investment in innovation is high, with a high proportion of the product innovation entering a wide number of sectors as capital or intermediate inputs. Firms tend to be big and include electronic industries, most of the organic chemical industries, drugs and bioengineering. Aerospace and military related activities share with science based sectors.
If science based sectors are not where the oil and gas industry currently resides it is certainly the classification that it belongs to. It is also questionable as to which category of industry oil and gas may have been considered belonging to previously, in fact many may have considered oil and gas to be a participant in supplier-dominated sectors. This research would assert that the analogy of a “bank”, where investment provides a proportional return has been the mindset for too long in the oil and gas industry. This researcher asserts that the market pull factors of appropriability have moved oil and gas definitively within the fourth category as a science based sector, and therefore oil and gas should base their organizations on the requirements of a firm within that category.
Inter-sectoral differences in innovativeness and economic performance.
Dr. Dosi discusses the phenomenon introduced in Part IV and considers the relationship between innovative activities and the dynamics of industrial structures and performances. Why do some companies attain greater value from innovations? It is this paper’s assumption that the cumulative investments made in oil and gas lead to variances between organizations as reflected in the cumulative production revenue per employee. Are there additional attributes beyond the investments that assist in making innovation in oil and gas more valuable?
Dr. Dosi’s (1988) reference to the Schumpeterian hypothesis, “that bigness is relatively more conducive to innovation, that concentration and market power affect the propensity to innovate” It is obvious that Dosi does not subscribe to this theory, and this research paper asserts that the bureaucracy of the large hierarchical structures have and may be one of the impediments for this, and if it is not an impediment to innovation, it must certainly be an impediment to the speed at which a firm can innovate.
First, although there are log linear volume of R & D expenditures and patents when compared with the size of the firm, upon closer investigation, estimates show roughly non-decreasing returns of innovative process to firm size. This is possibly attributable to the fact that very large and very small firms conduct most R&D.
Second, although the expenditures in R & D incurred by large firms are impressive from a total expenditure perspective, the aggregate expenditures of small firms on a global basis becomes far greater in aggregate than the large businesses. This is where the implementation of collaborative tools to the innovation process of large firms may be able to leverage the firm’s investment better for the producers’ own purposes.
Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size.
Dosi (1988) provides three caveats to the three differences noted.
- “Statistical proxies cannot capture aspects of technical change based on informal learning.” (p. 1152)
Collaboration is a fundamental component of informal learning, development, documentation and exploitation of knowledge. Apple Computer spends roughly $400 million per year in R & D. Hewlett Packard spends approximately $4 billion on R & D and is beginning to earn less returns on there investments. The scope of Apples innovation span operating systems and software, manufacturing and processors. This scope compares favorably, from an innovative standpoint to the efforts of Intel, Microsoft and Dell collectively.
- Secondly, differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms.
- Thirdly, many firms are expending significant research dollars in keeping up with other firm’s innovations.
These other firms do not necessarily have an internally generated capability, and hence need to find out what other companies are doing and how to implement those capabilities internally.
Another aspect that this paper submits for consideration is the amount of success that the integrated international firms (the seven sisters) have earned as a result of their previous innovations vs. their discovery of the large and prolific fields many decades ago, and how much of the international independent’s success is attributable to past innovativeness? Will a third generation of producer arise to challenge these two prior generations?
Flexibility and economies of scale.
Most of the innovation occurring during the industrial revolution has been via the technical trajectories of increasing mechanization of production and increasing exploitation of economies of scale. However, these innovations have been on the basis of the trade-off between volume of production and flexibility of the production lines.
Robotics has had a tremendous impact on the makeup and mix of production runs and flexibility, the efficiency of small production runs, and the likely increase in the importance of plant related economies of scale.
Therefore it is concluded by Dosi that the increased flexibility afforded by robotics and automation, motivated primarily through the more speculative nature of demand prediction, has had the effect of decreasing the productivity effect of additional innovations. Ultimately, however, the expectation of the innovations effect is that it will move the costs lower over the smaller production volumes. We are now clearly seeing this in the innovation and diversity of offerings in the vehicle industry.
In oil and gas we see what might be considered a parallel situation. The business cycle is more dependent on the reserve life of new reserves. With rapid three-year declines, specifically in gas, the question becomes: is this a product of the cumulative innovativeness in exploiting the technologies that have developed? Or is the use and application of oil and gas technology yet to be tested against a more exploration style mindset consistent with the risk - reward of the current market pricing of the commodities.
Either way it appears that the exploration and exploitation of oil and gas reserves has and always will be a function of the technology based on the underlying sciences. This is undeniable, and may also be the cause of the shorter-term life cycle and diminished size of new reserves, which is agreed by most to be a trend that will continue. This reserve size and deliverability is paralleled in Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes.
This researcher asks again how the structured hierarchy will facilitate the innovation necessary to exploit these smaller reserves? Are the predominately larger international independents now capable of meeting the demands of deploying their capital in progressively smaller reserve pools in an efficient and effective manner to maintain their production profiles?
Innovation, Variety, and Asymmetries among firms.
As technical paradigms are introduced companies accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of firms structural and performance characteristics also implies an analysis of the learning and competitive process through which an industry changes.
We have also seen over the past fifteen years an interesting trend that has created significant differences in the stratification of the oil and gas industry in terms of the size of the producer and their associated innovativeness. The small organization was able to purchase reserves and facilities from the open market, or their previous owners, only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the innovativeness in the larger organizations and most disturbing is the lack of concern or identification of this as an issue over the past 15 years. This may also reflect most accurately Exxon’s current difficulties, and a similar trend that might occur in the large independents.
This lack of innovativeness is not a long-term sustainable situation for either the integrated international producer or the current large international independent producer. It was the smaller innovative companies over the past 15 years that have increased their size and capacity, and through mergers and other various modifications, affected the landscape of the oil and gas cluster.
The trend of smaller producers purchasing properties appears to have come closer to its ultimate end, and I would think with the blessings of the management of the larger international producers such as Exxon. The end being that the market for properties does not provide the upside in terms of applying innovative thinking to the overall situation. However the two major problems that were unaddressed by the bureaucracies of the “Exxon’s” are now the impediments to any forward movements by the targeted audience of this report. These two impediments remain unidentified and unresolved by these larger organizations, and reflect the following two characteristics:
Firstly, the large class producers have generated little or no innovations in the past 15 years.
Secondly, the business cycle continues to shorten, with only a three-year life cycle on reserves from drilling in the western sedimentary basin.
These 2 issues make for interesting challenges in the years to come. The question will then become, how will much larger independent oil and gas companies learn to innovate in a bureaucracy? It also provides an understanding of how an organization that is able to innovate could compete more substantially, or are these capabilities and inherent positions static?
It should also be noted that few industries have the luxury of a three-year product life cycle. Companies such as Intel have been able to compete in industries with 18-month product life cycles that reflect product pricing and technical exploitation that at least parallels the scientific difficulties in oil and gas. Therefore the ability to compete on the world stage will only become exceedingly more difficult as the business cycle continues to shorten. The performance of the bureaucracy will undoubtedly be challenged soon.
Innovation and industrial change: Learning and Selection.
The Innovative Process and industrial structures
Dr. Dosi (1988) asserts that the makeup of industries and companies is attributable not only to the endogenous force of competition. Innovation and imitation also make up the fundamental structure of an industry, or in the case of this research, the local cluster. “Market structure and technological performance are endogenously generated by three underlying sets of determinants.”
Each of these components is evident in the marketplace of an oil and gas concern today as reflected in:
- “The structure of demand,”
The insatiable demand of the American marketplace for energy is critical to the advancement of that society. American society faces real challenges in the form of the developing third world economies, which have new and sustainable competitive advantages.
- “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 mechanization of the past 100 years combined with the mechanization of intellectual pursuits combine to markedly appreciate the value of human life.
- “The ability of firms to appropriate the returns from private investment in research and development.” (p. 1158)
This third item leaves much to be desired. Will investments in research and development become more commercial in nature? Will innovation be a critical component of the methods a company uses to compete in the very near future?
Characteristics of Innovation and Patterns of Industrial Change.
Dr. Dosi states that the rate of change and observed dynamics of industrial performance can be attributed to the following components:
- Innovative learning by single firms augmented by universities and government agencies.
This research asks: what would be the effect of increasing the exposure from a single firm, to collaborating between several firms through the joint operating committee? Would this not facilitate a marked increase in “cluster” knowledge? And would this knowledge therefore facilitate an increased rate of collaborations leading to an increased level of understanding and pace of innovativeness and scientific knowledge?
- The diffusion of innovation, the knowledge of innovative products and processes.
Extending the knowledge from one firm to a “cluster” of similar producers.
This point is critical, because a firm may call themselves innovative and participate within an innovative cluster, but that does not make the firm innovative. The internal capability leads to an advanced selection among firms, with laggard firms selecting other laggard's.
Dr. Dosi (1988) states that his general interpretative conjectures are: (And these are important considerations in determining the capability and capacity to innovate.)
Firstly “The empirical variety in the patterns of industrial change is explained by different combinations of selection, learning, and diffusion and different learning mechanisms.” (p. 1159)
Secondly “The nature of each technological paradigm, with its innovative opportunities, appropriability conditions and so on help to explain the observed inter-sectoral differences in the importance of the above three processes.” (p. 1159)
Each successful innovation creates an asymmetry effect, or an overall increase in competitive position of the entire industry. However, that does not necessarily increase the competitiveness of all the participants of the entire industry. (Here Dosi invokes the structuration theory that society is a benefactor of the organization’s efforts.) The ability of laggard companies to improve their competitive position helps to form new positions within their industries. These laggard companies generally are able to move further and quicker through their imitation of leading companies. However, the primary differentiating component of competition based on innovation in process and product is attributable to the innovative capability of the firm.
Dr. Dosi finds these points difficult to quantify and prove, but may be tacitly understood. This research asserts that that was the case in 1988 at the time this article was written, however, the laggard’s ability to “keep up” or even “catch up” progressively diminished through the application of information technology during the 1990’s. This may best be reflected in the expectation that a “laggard” such as Vintage might challenge CNRL in production revenue per employee performance.
There is a determining paradox for the ability to innovate based on imitation or strict Research and Development. Companies can copy other’s innovations in industries with minimal asymmetry, (where they are all the same). Whereas industries that are asymmetric or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development. As reflected in the earlier analysis, Vintage and CNRL are demonstrating large variances in the capabilities as participants in the industry. This reflecting that investments in the capability to innovate would be valuable and critical for the industries’ competitive performance.
Some Conclusions
The conclusion from this is clear; innovation is a competitive strategy, particularly to the local cluster of large independent producers. If this innovation is valid and employed in any industry, it will seek to further the values attained by the adopting company by increasing that company’s competitive capacities. This point forms much of the management recommendations contained within this paper.
A “best practice” provides little in terms of sustainable competitive advantage, whereas innovation places management’s focus on the organization. The best practices focus on process does not affect the issue, or invoke any change. Organizational structure mapped carefully to the most efficient process should be the objective, and the attainment of such should be the goal and realization of an increased organizational trajectory. What do organizational best practices have to do with the capability of a company or its products?
Dr. Dosi also asserts another interesting point in the application to oil and gas. The performance of innovation within an industry and its appropriability is dependent on
- The pace of innovation in the supplier sectors
- The variant conditions governing adoption.
The capability of the supporting sectors in innovating and developing new technologies, procedures, and methods to extract oil and gas have been remarkable. This is probably attributable to two things, the entrepreneurial nature of the province of Alberta, and the huge volumes of capital expenditures employed by the oil and gas sector. Yet, this has occurred in somewhat of an ad-hoc fashion, similar to what had happened during the 1800’s in developing North America. And as Dosi noted, this ad-hoc method ceased to be a means of further innovation in the 1800’s. We can then ask will the adhoc method cease to be a means of innovation for oil and gas? Companies must begin to directly fund the development of further innovations in the service sector. This can no longer be done in a non-Schumpeterian fashion, e.g. if a small supplier has an innovative idea it should be exploited by that company (such as Genesys® research). This will also have the tendency to limit the exposure of the innovation to the local cluster as opposed to the global industry. Expectations that the small service provider will be able to prove the theory and application are foolhardy in the context of the earlier discussion of success and failure. If the success or failure of the innovation by the small service provider is proven at their own costs, generally their ability to commercialize and monetize their investment is limited. This has lead to the eventual withdrawal of capital from the service sector for the purposes of further innovation, research and development.
If the innovativeness as displayed by the capabilities of the oil and gas sector in western Canada are a basis of comparison, the opportunity to leverage this technical capability and move the technical paradigm from Western Canada to a dominant global position exists. The alternative is a further extension of the current trend of the Houston based independents to the 1970’s era “branch plant management” style of operation.
An interesting outcome occurs from this. Dr. Dosi states that not all efforts are successful, many fail, and from the failure sometimes the most important lessons are learned, and all inherently understand this. The ability of an industry to learn through their collective efforts will mitigate the subsequent similar failures and their costs, and enhance the success over a larger population of companies. This “cluster” of western Canadian based international independents as Porter would call it, competes against other clusters of oil and gas producers based in Houston, Aberdeen, Moscow, Beijing, and Riyadh. This is collaboration’s benefit well described.
Returning to the comparison of Vintage and CNRL, and in reviewing the material that Dr. Dosi has established in this literature review, the acceptance of the production revenue per employee as a factor of comparison should be established. Production revenue per employee will begin to help establish, both the measure of innovativeness of a producer, and a means of direct comparison between producers. The value of this measurement tool has validity currently through;
- Application between producers.
- As a means of measuring future objectives.
- In determining competitiveness over time.
One of the more controversial aspects of this research may be the suggestion to establish the production revenue per employee factor as a means of comparison, and particularly, the manner of comparison to determine the financial viability of the producer and a pre-curser to future earnings capability.
Conclusions on the review of Dr. Giovanni Dosi.
The innovativeness of an oil and gas producer will be based on its capacity to find and produce the resources around the world more effectively than its competitors. Further expansion of earth sciences and applied engineering are required in order to maximize the producers’ opportunities and returns.
Based on Dr. Dosi’s theories as described above, innovativeness and technology will expand the use and capability of a producer by expanding their understanding of the underlying sciences.
The stimuli and microeconomic conditions necessary to facilitate innovation, being the commodity pricing and the potential as a result of the reconfiguration of the organization around the SJOC, are prevalent.
Further expansion of the sciences would be carried out in a collaborative environment to leverage the tacit knowledge of the firm’s workers in collaboration with its partners and suppliers. This needs to be carried out in a commercial context within the structure of an organization capable of facilitating the collaborations and innovativeness. This is why it is this paper’s assertion that collaborations, through the SJOC, provides the greatest hope for the company to realize the future potential increase in value from the advance in science.
Self-organizing groups have proven to be effective when common interests motivate them. The joint operating committee participants have the financial interest in the property and hence consistent motivations. Enhanced collaborations through the IBM Lotus Workplace facilities described in this research, backed up by an enterprise resource planning capable software development team, such as that proposed by Genesys Software Corporation is expected to affect the performance trajectory of the producer subscribing to this research.
If this is not the situation, what organizational structure in oil and gas could facilitate the greatest innovations? At this point no other alternative has been suggested that would be able to potentially match the structure discussed above. To suggest that the hierarchical bureaucracy could lead to substantial differentiation in the appropriability of a firm’s capacity to innovate is not valid on the surface. As described in the Orlikowski section of this literature review, it is proffered that the organizational structure is the impediment to the advancement of society and people, and if we invoke Dosi’s theory, the hierarchy’s bureaucracy is the impediment limiting the further advancement of the associated sciences of oil and gas and producers innovativeness.
Recall at the beginning of this paper it was noted that Dosi asks “what are the sources of innovation’s opportunities, what are the roles of markets in allocating resources to the exploration of these opportunities?” It should be made explicit that the revised commodity pricing of the past few years provides a significant reallocation of resources towards the further development and exploration of the underlying oil and gas sciences. This is the opportunity that exists and to a large extent is an entire new way of operating oil and gas companies in an integrated network clustered environment. These commodity-pricing effects also point out the scope and magnitude of the changes facing an oil and gas organization. The strategy and operations will be affected in ways that cannot be predicted. This is also the reason that the CEO needs to be approached, as only s/he can champion this level of change within the organization.
Therefore this research’s recommendation is that key to the endogenous capability that is a cornerstone of the innovative process, a reorganization of the hierarchical bureaucracy to self-organizing teams be undertaken. This recommendation is with the express purpose of combining the operational control of the joint operating committee, with direct accountability for the decisions the committee makes.
Quality of Dr. Giovanni Dosi’s work.
Dr. Dosi was 35 at the time this documents writing, and to have produced such a significant work at such a young age is a substantial accomplishment. Review of his Curriculum Vitae reflects that since the writing of this paper he has been recognized as possibly one of the premier thinkers in the area of innovation. In terms of the quality of this work, few papers are produced of this quality and it was a great pleasure to learn and apply this thinking to the oil and gas industry.
Dr. Dosi’s subsequent works have been more specific and detailed in certain areas that may have direct application today. The opportunity to review these documents will be one of the first tasks to complete should this research and software development be funded and continued.
