Encana's Form of Corporate Socialism

This past week we saw a number of 2009 annual reports being published. The majority of them reflecting the difficulty in the oil and gas business during the "great recession". One particular company, Encana Corporation caught my attention. There are a family of 800 pound Gorilla's in their report, one issue stands above the rest, which ties into a paper that I recently read. The paper is written by Professor David Bardolet of Bocconi University, Professor Dan Lovallo of the University of Sydney, and Professor Richard Rummelt of UCLA. The paper is entitled "The Hand of Corporate Management in Capital Allocations: patterns of investment in multi- and single- business firms." This is another paper from the April 2010 edition of the Oxford Journal of Industrial and Corporate Change .

So why does Encana get singled out for this special treatment? Simply this issue needs to be addressed, and they did everything they could to avoid addressing it. Looking at the report their is no discussion of this issue in the message from the CEO. There is no discussion of the issue in the Management Discussion and Analysis. Only in the notes to the financial statements will the issue be brought up, and none of the press releases reflect the point.

The issue is that for U.S. Generally Accepted Accounting Principles (GAAP) their is a $14.6 billion write down of the assets. This creates a $5.5 billion loss for all of 2009. However, as a Canadian company they have the option to report under Canadian GAAP rules and these show a profit of $1.862 billion. Just a small variance. Those that understand accounting for oil and gas will appreciate the ceiling test under Full Cost accounting. Both countries apply the same general principles for the ceiling test, the U.S. system has fewer exceptions and that is the cause of the $14.6 billion difference. What the management don't seem to realize is they will need to be explaining this anomaly in their reporting until such time as the timing differences in the Canadian reporting system expire. That could be as little as one year, or as much as the natural life of the firm, who knows, apparently not the management.

Reviewing the other Canadian firms that may report similar differences in the timing of their ceiling test write downs. I found no other material anomalies between Canada and U.S. reporting. So why has Encana been affected so materially whereas their peers have no such effect? Is it because they are "un-conventional" gas producers? Is there something inherently different in that classification that would cause these write-downs? We'll never know. As the management, led by the CEO, have taken the opportunity to be completely silent as to the anomaly. Why not take this as a teaching moment to inform and educate your investors as to why their assets have been impaired? Management doesn't think that way. They prefer to cower in the corner hoping that no one notices.

Encana defines it's strategy as a "low cost, margin maximizing natural gas producer". Whatever that means. The point of this post, and the branding of Encana as a form of corporate socialism, is based on the one size fits all strategy of this large bureaucracy. I will assert that the write down of $14.6 billion of its assets is a major hit to the firm. One that places them in the position of having to seriously address their asset base. An asset base where  its natural gas production declined by 3%. If "non-conventional" gas is such a lucrative and valuable business model, why are the reserve valuations and production in such decline. From the paper.

One possibility is that our study of “averages” misses the blockbusters. That is, multi-business firms might subsidize CNU businesses because, once in a while, one of them really takes off. We cannot completely discount this possibility or measure precisely the extent of this phenomenon. However, our study of the dynamics of these segments in Section VI suggests that multi-business firms are really not that successful in finding and nurturing these blockbusters. p. 19

By using the Joint Operating Committee as the key organizational construct, strategy can be set at the asset level. If the "low cost, margin maximizing natural gas producer" strategy doesn't fit the asset, a more appropriate one can be set for that asset. This assumes that we build the Draft Specification for the innovative oil and gas producer. Enabling them to manage their assets in that fashion. The use of generic global strategies is what firms did in the twentieth century, not today.

Our results are roughly consistent with the account of “corporate socialism” developed in the corporate finance literature. Some of the work in this line (e.g. Wulf, 1999; Rajan et al., 2000; Scharfstein and Stein, 2000) stresses the agency conflict between division managers and corporate headquarters. Division managers are portrayed as rent-seeking agents that try to obtain additional compensation (in the form of extra capital allocations, among others) from corporate headquarters. They try to do so by overstating their divisions’ prospects or by engaging in direct lobbying. In turn, corporate headquarters might decide that avoiding this inefficiency in resource allocation is not worth the cost of increased monitoring or low morale and thus accede to their demands. In particular, Scharfstein and Stein (2000) make the point that managers from weaker divisions have a stronger incentive to engage in firm politics given that their demands for capital investment cannot be argued so effectively solely on the base of a prospect’s quality. Therefore, those managers end up receiving more investment capital than they should and that creates the comparative difference with their stand-alone peers in the same industry.

The corporate socialism argument rests on a complex set of relationships among various agents within the corporation. A simpler theory is offered by the literature on cognitive biases. In particular, the allocations observed in this study can be explained as a consequence of behaviors called “naive diversification” and “partition dependence”. Naive diversification (Benartzi and Thaler, 2001)—also known as the “1/n heuristic”—is the tendency for individuals to be biased toward even allocations. p. 19

Just to be clear the authors point out that this applies to oil and gas as much as it does any other business.

Partition dependence is a consequence of naive diversification when the decision-maker faces a particular partition of the set of choices. In the case of capital allocations, this partition of choices would be the organization of the business units within the company. p. 19

And here the authors make it abundantly clear how these decisions are made.

Naive diversification and partition dependence are well-observed phenomena in other fields of human decision-making. For example, Benartzi and Thaler (2001) found a similar effect in both laboratory and field data studies of investment in 401(k) plans. When asked to choose between investing in a stock or bond fund, many individuals choose to invest 50% in each. When asked to choose between two stock funds and a bond fund, many individuals choose to spread allocations equally among the three funds, which creates an aggregate investment that is more heavily weighted (2/3) to stocks. Bardolet et al. (2009) found strong naive diversification and partition dependence effects in managers facing hypothetical capital allocation tasks. The naive diversification account applied to internal capital markets would predict a tendency toward equal allocation among all the business units in a firm, thus underweighting factors that would demand more uneven allocations (such as growth rates, profitability, etc). The experimental character of Bardolet, Fox and Lovallo’s study shows that even in situations where social and political factors are not in play (i.e. a laboratory environment) those two biases are enough to cause a tendency toward even capital allocations among all business units, thus corporate socialism is a sufficient but not necessary explanation of inefficient allocations. pp. 19 - 20

What I am asserting is that the capital allocations at Encana fall within the corporate socialism phenomenon. This has led to bad capital allocation decisions being made across the organization. Either too much capital was used in the development of the reserves, or the capital spent did not develop enough reserves to support the costs. Now those chickens have come home to roost in that the capital costs are too high to support the reserves held, forcing the write down. Those familiar with the nuances of the Full Cost ceiling test will realize the material nature of Encana's problem.

Further research on the anomalies we have identified seems warranted. In particular, it seems worthwhile to try to identify the relative importance of incentives, inertia, and biases towards even allocations in driving this result. One step in this direction would be a study which included data on corporate incentive mechanisms and changes in administration. p. 20

If they wanted to study Encana, one should also study the cognitive bias towards promoting pretty young blonde's to executive vice-president positions. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Putting Strategy into Practice

Strategy + Business have published "Putting Strategy into Practice" which is a summary of an article published by Harvard Business Review (HBR). The value in this post is that Booz & Company are sponsoring the free distribution of a series of articles entitled "HBR's Must Reads on Strategy". This 143 page .pdf is a collection of 10 articles from Professor Micheal Porter and others that have been published in HBR in the past two decades. A valuable resource to add to your virtual library.

I only want to highlight only the Strategy + Business article today, I'll be reviewing the other articles for content in the near future. The reason that I want to highlight the article is contained within this quote.

Of all the false distinctions that dog business thinking — leadership versus management, profitability versus growth, short term versus long term — the most pernicious is the separation of strategy (where the company should go) from execution (getting there). Strategy without execution is daydreaming. What good is a blue ocean to one who cannot swim? Execution without strategy is pointless, even dangerous. What profit is there in doing the wrong things well?

People, Ideas & Objects has taken the position that the innovative oil and gas producer's strategy should focus on their unique asset base and their inherent capabilities in terms of the earth sciences and engineering disciplines. This is further extended by expanding the role and capabilities of the marketplace of service providers. Capabilities in essence are the means in which to execute strategy.

But the article is also worth celebrating more generally — because it is a harbinger of the closing of that false gap between strategy and execution, and of a new understanding of the role of capabilities in driving strategy.

In our recent review of Professor William Lazonick's paper on Chandler we reviewed his "Social Conditions of Innovative Enterprise" contained within his framework of the "Theory of Innovative Enterprise". Recall the framework provides for analyzing the roles of strategy, organization and finance. The social conditions which include decision rights, organizational integration, and financial commitment resonate with the ideas in this HBR article.

The gathering of this data began in 2002, with a question: How does a company design its organization to generate results and successfully adapt when circumstances change? Neilson and his coauthors articulated four “building blocks” that mattered most in the execution of any kind of strategy: decision rights, information flow (including metrics), motivators, and of course the “lines and boxes” structure of an organization chart.

The Draft Specification proposes the innovative producer need this type of integration. Here we have substantial documentation supporting the changes necessary to move to the Joint Operating Committee, the legal, financial, operational decision making, cultural and communication frameworks of the oil and gas industry. In the preparation of this HBR article the authors, who work at Booz & Company, set up a website to capture this information from their clients. Eventually they documented 125,000 profiles within their database.

Here’s what the data showed, when combined with in-depth studies of 31 client companies: Decision rights and information flows had twice as much impact on the success of a strategy as did changes in structure or motivators. Not only that: Executives introducing strategic change should address the questions of decision rights and information flow first. Once a company makes the structural change and fills the boxes of the org chart with names, the opportunity to make changes in the more critical areas vanishes. Any plans to “get to that later” evaporate. Says Gary Neilson, “We have not seen any exceptions to this pattern in our client work.”

Decision rights and information flows are the domain of the Joint Operating Committee. It is therefore the place in which we need to start. Structure and motivators are important as well and need to recognize, define and support the Joint Operating Committee.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Chandler The Role of Business in the ...

Professor Alfred D. Chandler published a document entitled "The Role of Business in the United States: A Historical Survey" in the Winter 1969 version of "Perspectives on Business" from MIT Press. This paper chronicles how the economy developed. I find it surprising in many of the things that are not generally known or understood about the role and function of finance in the early years.

For a paper on the historical role of business in America to provide a solid foundation for discussions of the present and future, it must examine a number of questions: Who were the American businessmen? How did they come to go into business? How were they trained? How broad was their outlook? And, of even more importance, what did they do? How did they carry out the basic economic functions of production, distribution, transportation, and finance? How was the work of these businessmen coordinated so that the American economic system operated as an integrated whole? Finally, how did these men and the system within which they worked adapt to fundamental changes in population, to the opening of new lands, resources, and markets, and to technological developments that transformed markets, sources of supply, and means of production and distribution? The answers to these questions, as limited as they may be, should help to make more understandable the present activities and future capabilities of American business. p. 23

I want to highlight the role of what has to be the key determinant in the development of the economy, the Merchant. Specifically, the role of the merchants in financing business development and trade. This enabled much of the development of the corporation, the separation of ownership and management and the speed, scope and scale of the structured hierarchy. Without the critical skills and capital of the merchants, it is doubtful that the hierarchy would have been able to rise to such prominence.

The colonial merchant was an all-purpose, non-specialized man of business. He was a wholesaler and a retailer, an importer and an exporter. In association with other merchants he built and owned the ships that carried goods to and from his town. He financed and insured the transportation and distribution of these goods. At the same time, he provided the funds needed by the planter and the artisan to finance the production of crops and goods. The merchant, operating on local, inter-regional, and international levels, adapted the economy to the relatively small population and technological changes of the day and to shifts in supply and demand resulting from international tensions. p. 24

and

Only a few of the great landowners and leading lawyers knew the larger world. It was the colonial merchants who, allied with lawyers from the seaport towns and with the Virginia planters, encouraged the Revolution, brought about the ratification of the Constitution, and then set up the new government in the last decade of the eighteenth century. p. 24

The Merchants were the key to the development of the economy. In this paper Chandler documents how effectively the Merchants expanded economic activity to the point where the scale and scope was beyond theirs and their extended families reach. How this eventually created the "Manager" and developed the concept of the separation of management and ownership. It is noted the professionalism of the managers and their development during this time. Management replacing direct ownership as the means to effective management. Yet what is clear in the history, and is plainly clear today, is that management have no financial stake in the firm. Interestingly Chandler notes this is not the first time that this has been an issue.

In many ways, the managers were more of an elite than the earlier businessmen had been. Even though this elite was based on performance rather than birth and played a critically constructive role in building and operating the world's most productive economy, its existence seemed to violate basic American democratic values. At the same time, its control of the central sector of the American economy challenged powerful economic concepts about the efficacy of a free market. After 1930, the managers came to share some of their economic power with others, particularly the federal government. Nevertheless, they were forced to do so not because of ideological reasons, but because they failed by themselves to assure the coordination and growth of the economy, the basic activities they had undertaken after 1900. p. 35

In 2010 it is clear the division between ownership and management is as great as it ever has been. Management hold the reigns of power and have advanced their concerns over the shareholders. Leaving the ownership generally dissatisfied. Government, particularly the Obama administration, believes they are the natural progression to takeover from management. I think networks, and particularly People, Ideas & Objects and the Community of Independent Service Providers provide the best alternative to the innovative oil and gas producer.

The Depression clearly demonstrated that the corporation managers alone were unable to provide the coordination and adaptation necessary to sustain a complex, highly differentiated, mass production, mass-distribution economy. The coming of the Depression itself reflected population and technological developments. p. 35

I think the eight hundred pound Gorilla in the room is that management have no stake in this game. If failure occurs then shareholders and debtors will pay the price and management will fend for themselves. Whether it is at another firm, or their vested pension that provides them with their continuity, either is satisfactory. The point is that with no skin in the game, what is keeping management at the table.?

They have proven unwilling to fund People, Ideas & Objects software developments, why do the hard work when a new pension statement has just arrived? We are foolish to expect anything more of management, they are there for the good times and their history shows they are incapable of bridging critical economic changes such as what we are facing today.

Just as the Merchants began the whole process. Applying their capital and skills to the economy. Future development of our economy is in the investor and shareholder hands once again. Society dictates, and I hear it in the Tea Party movement, that this process be renewed.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Chandler on Decision Making

In the March 1973 Journal of Economic History Professor Alfred D. Chandler presented a paper entitled "Decision Making and Modern Institutional Change". A few days ago I commented on the velocity of productivity in the volumes and speed of decision making and idea generation in oil and gas. The origins of these comments were the Google video of CEO Eric Schmidt, and the term velocity as used by teams of Agile-Scrum developers. Velocity is the key metric in determining the through put of the software development team. In this paper Chandler also discusses the concept of velocity and attributes it as the key success of the large firms over the past 100 years. I think many of the points that Chandler makes can also be applied today. A time when the challenges to the large firm are significant. Chandler notes;

The potential of the new means of transportation and communications could only be fully realized through new methods of organization. The operation of the railroad and telegraph systems required the operation of a complex managerial structure to assure steady and continuing flows of information and orders essential to guide the movement of trains, traffic and messages. Because of greater speed and fewer trans-shipments, a railroad car could make in two days the round trip that required a stage coach or canal boat a week. By careful coordination of flow within and between the large railroad enterprises, the time involved decreased still more. As the rate of traffic flow increased, so did output per worker and per unit of capital and equipment used in the movement of goods. p. 6

The Information & Communication Technology Revolution (ICTR) is assumed to be beginning its long process of impacting businesses now. Although these technologies have facilitated enhanced speed in all organizations, new methods of organization are necessary to enable greater speed and velocity. The movement to new methods of organization has been resisted by the current management, as it conflicts with their established power. People, Ideas & Objects has had no success in convincing management of the need to change to the JOC. Theirs is a static world where, as we will begin to see in the current annual report season, is commencing on a period where their speed and innovativeness are inadequate to meet even elementary financial performance. Specifically I think that higher operating and capital costs will be directly attributable to their lack of speed. And their large balances of indebtedness are long term constraints to their viability. Particularly during times of interest rate increases. All that management have done is fully valued their debt and obligations. I have asserted on this blog before, as the financial performance of the current bureaucracies deteriorate, the innovative producer supported by the People, Ideas & Objects software application and the Community of Independent Service Providers will enable the innovative producer to purchase many of these assets from these bureaucracies. But the software has to exist first.

The briefest of historical sketches of the rise of large scale managerial enterprise in American transportation's, communications, distribution and production, emphasize that the economies of scale within the firm resulted far more from speed then size. It was not the size of an enterprise but the velocity of throughput that permitted economies that lowered costs and increased output per worker and per machine and so provided the classic, competitive advantage. Speed brought size, but size in no sense brought speed. p. 9

Clearly the bureaucracies size and lack of increasing velocity are the issues. Such were the advantages of size and speed that Chandler notes;

Once such economies were attained, the large managerial, multi-unit enterprise rarely disappeared. p. 10

Therefore the problem can simply be rectified by increasing their size and speed. If only things were so simple.

Increased velocity in turn intensified the need for complex managerial organization. p. 11

In a dynamic, connected and virtual world it is easy to focus on the problem of today. Our focus however needs to be on larger issues as we have little that we can do to influence performance by focusing on the short term. This change in culture from optimizing today to innovative will not be an easy process. It however begins by the investor / shareholder seizing the industry from management through the process mentioned above. The process of seizing the control of the industry begins by building the necessary software and communities that will ultimately support the innovative producer.

The senior executives at the top attempted to focus their energies on the critical decisions concerning present and future allocation of resources. p. 11

As we reflect on the performance of the industry over the past year. We see the economy beginning to show signs of real life. One that may be as a result of the enhanced efficiencies and innovativeness brought about by the ICTR . Demand for energy will begin to grow again. Energy prices will respond, and the reallocation of the financial resources dedicated to innovation will increase. We should look back on the history of the hierarchy and realize two things. One is the significant contribution it has made to society in terms of our quality of life.

The dominance of our society by this and other large-scale organizations is one characteristic of the twentieth-century that distinguishes it from all others. The enormously increased speed and volume of economic activity is another. p. 15

And secondly realize that we stand on the shoulders of several generations of giants. If the bureaucracy degrades as a result of the forces aligned against it. How far will society degrade. We need to act to begin to develop the new organizational methods necessary to carry us for the foreseeable future.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Chandler on Organizational Capabilities

In a 1992 paper entitled "Organizational Capabilities and the Economic History of the Industrial Enterprise" Professor Alfred D. Chandler's summaries his work. Through this blog's review of Chandler, it is hoped that we gain insight into the role of the organization in the economic development of Western based businesses. Chandler's paper certainly provides that understanding and I highly recommend reviewing it for your own benefit. There are two other references to note here today. Both are in direct contrast to the firms that are noted in Chandler's paper, and lastly we will reference Professor William Lazonick's conclusion in "The Chandlerian Corporation and the theory of innovative enterprise".

The first reference is that Fitch has revised it's outlook for Royal Dutch Shell to negative from stable. Putting their AA+ credit rating in doubt due to Shell's medium term cash flow projections. These projections assume that Shell will be able to increase their production by 600,000 barrels by 2014 and prices will average $60.00. If Shell were able to increase their production by 600,000 barrels per day and earn only $60.00 in terms of an oil price, why would Fitch put them on notice? To me there seems to be more to the story then what Fitch is stating. Possibly they don't see the 600,000 barrels per day as "possible". This downgrade of Royal Dutch Shell strikes me as odd, after all the firm is only carrying a 15.5% net debt to capital ratio. Are the analysts seeing more in terms of difficulty in the oil and gas industry?

The second article that I want to draw attention to is from John Hagel on his blog "Edge Perspectives". His commentary reflects how the future economic conditions will have fundamental changes in the ways that industries are organized. What is clearly stated as the competitive advantages of firms in the past 100 years are no longer present in his future perspective. A future perspective that is consistent with the Draft Specification's view of the oil and gas industry.

Although these three introductions appear at first to not have any relevance to one another, they are all saying the same thing. Chandler notes the past was developed at different times and with different technologies, today the oil and gas producers are having difficulty in times of robust commodity prices and the future as Hagel notes, is always uncertain.

While understandable, these efforts to read near-term indices also present very significant risks.  We continue to be seduced by near-term news, while losing any perspective on longer-term trends. These longer terms trends tell a very different story and suggest that we may be lulled into complacency by the short-term news of recovery.

and

There is absolutely no reason to believe that the long-term performance erosion will not continue.

Those two references of Hagel's are certainly in line with the long term perspective taken at People, Ideas & Objects. We have consistently highlighted the work of Professor Carlota Perez and the accuracy of her prescient analysis of the long wave economic developments. Hagel is stating clearly that today we are experiencing these forces and now is the time to shift our focus to them.

The Power of Pull suggests that we are going through a fundamental shift in the source of economic value creation.  In the past, economic value creation depended on proprietary knowledge stocks.  The challenge for any company was to acquire some proprietary knowledge, rigorously protect it to make sure no one else had access to it, and then as efficiently as possible extract the economic value from this proprietary knowledge stock for as long as possible.  As change accelerates and uncertainty grows, though, knowledge stocks depreciate at a more rapid rate.  In this kind of environment, the key to economic value creation shifts to the ability to participate in a growing number of diverse knowledge flows to more rapidly refresh our knowledge stocks.

The Community of Independent Service Providers (CISP) is exactly what he is talking about. Participation as an independent entrepreneur that develops and implements the "knowledge stocks" of the innovative oil and gas producer is what the CISP is about. These people will also be the ones that work closely with the People, Ideas & Objects developers to instill their knowledge into the tools they will use to define and support the innovative oil and gas producer.

The good news is that there is a pragmatic migration path that can move us from where we are today to where we need to be in a world of pull.  Small moves, smartly made, can in fact set big things in motion. To pursue this path, though, we will need a sense of direction, harness different forms of leverage and deploy platforms that can accelerate the pace of change.

These small moves could be made by following this process to join the CISP. In the past week we provided a comprehensive review of Professor William Lazonicks work on Chandler. I want to close this post with a reference from Lazonick's conclusion that shows these changes are inevitable. Inevitable to everyone but the bureaucracies that are resisting these changes.

In the 2000s, it can fairly be said that the Chandlerian corporation has ceased to exist. In historical retrospect, Alfred Chandler uncovered the dynamics of a historically-specific business model that drove the development of the world’s richest economy. The essence of capitalism is, however, as Schumpeter recognized, change. The work of Chandler has provided us with a deep understanding of the foundations of US economic power in the middle decades of the last century. His work does not provide us with a roadmap for understanding the business models that have become dominant in the first decades of the 21st century. There is a need for us, who seek to build on the Chandlerian legacy, to remain committed to the integration of theory and history. My claim is that, with its focus on strategic control, organizational integration, and financial commitment, “the theory of innovative enterprise” is a potent framework for analyzing the process of change. It is a framework that, through the integration of theory and history, can enable us to “catch up with history” so that we can analyze the present as an evolving reality before the present as history passes us by. p 29

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Lazonick on Chandler Part IV

Part IV of what has turned out to be a phenomenal paper, reviews Lazonick's "Part 3. Social Conditions of Innovative Enterprise" of "The Chandlerian Corporation and the theory of innovative enterprise". I indicated in an earlier post that the Joint Operating Committee and the application of the Draft Specification were consistent with Lazonick's Strategy, Organization and Finance; which make up his framework for "Social Conditions of the Innovative Enterprise". In this post I want to go into more detail as to how I see these three social conditions provide value for the investor / shareholder. Value in using the JOC through application of the People, Ideas & Objects Draft Specification and Community of Independent Service Providers (CISP).

Before we begin I want to make a quick note to highlight one attribute of the Draft Specification. In order to make the Draft Specification functional we needed to develop an alternative governance structure to replace the hierarchy. That is the Military Command & Control Metaphor (MCCM) used at the Joint Operating Committee to give the necessary structure for it to operate. Without this structure it would be difficult to implement any plans or to enable any actions. This MCCM replacement structure adopts a pooling of the resources available from the various producers represented at the JOC. This pooling of resources is further augmented by the objective (ie not affiliated with any one producer) and JOC focused pool of CISP that the JOC hires directly. All of these resources adopt a military styled command structure based on their education, experience, skills and the chain of command determined by the JOC representatives.

3. Social conditions of innovative enterprise

Lazonick provides in his social conditions a clarity in how the system is workable when strategy, organization and finance are aligned.

The theory of innovative enterprise provides a framework for analyzing the roles of strategy, organization, and finance in generating the competitive advantage of one firm over another within the same industry (see e.g., Carpenter et al., 2003; Lazonick and Prencipe, 2005; Lazonick, 2009a: ch. 2).... As I have shown in this work [for syntheses, see Lazonick (2003, 2004b, 2007)], the theory of innovative enterprise permits us to identify three social conditions that may support the transformation of strategy, organization, and finance into innovation across the industries and constituent enterprises that characterize the national economy. Even in the highly globalized world of the 21st century, the social conditions of innovative enterprise differ across nations characterized by distinctive economic institutions for governing the allocation of resources, employing labor, and financing investment. pp. 14 - 15

In the Preliminary Research Report it was noted financial interest at the JOC drove consensus and collaborative decision making. People, Ideas & Objects appeal is to the investor / shareholder in oil and gas. It is these individuals that we are attempting to provide an alternate organizational structure, the JOC supported by this software development capability and community, to manage their assets. I therefore see the participants who are sitting at the JOC the individuals that directly own the working interest or their designated proxy. With that in mind lets begin the review of Lazonick's social conditions of the innovative enterprise.

If the shareholder / investor is the one sitting at the JOC, representing their interests, based on the culture of the industry, they are endowed with the operational decision making authority for that property. These decision rights are critical to Lazonick's first social condition.

In the framework that I have developed, the social condition that can transform strategy into innovation is strategic control: a set of relations that gives decision-makers the power to allocate the firm’s resources to confront the technological, market, and competitive uncertainties that are inherent in the innovation process. For innovation to occur, those who occupy strategic decision-making positions must have both the abilities and incentives to allocate resources to innovative investment strategies. Their abilities to do so will depend on their knowledge of how the current innovative capabilities of the organization over which they exercise allocative control can be enhanced by strategic investments in new, typically complementary, capabilities. Their incentives to do so will depend on the alignment of their personal interests with the interests of the business organization in attaining and sustaining its competitive advantage. p. 15

In reading this I am struck by what Professor Carlota Perez said about "new" organizational constructs being "Common-Sense". Those with a reasonable understanding of oil and gas operations can see the nature of this ownership / control mechanism at work in the strategic control social condition. When a JOC is formed it is by agreement. Included within the agreement is an operating procedure with the means spelled out as to the decision making authority under the agreement for that JOC. Therefore the use of the JOC meets the first social condition necessary in Lazonick's framework.

This second social condition is not present in the oil and gas industry today. There is substantial conflict between the JOC and the bureaucracy. The bureaucracy, which represents the operator, conducts all or most of the operations as if it were their own. The JOC is relegated to a few ceremonious meetings to make decisions based on the agreement in hand. It is then the bureaucracy that essentially implements the will of the JOC within its annual operations. There is no pooling of human resources and the non-operator is relegated to spectator status for the better part of the year. This situation can not be sustained when the operators are required to develop their internal capabilities to deal with all of the individual possibilities and contingencies within the areas they operate in. There are not enough engineers and geologists available to meet the needs of each producer building redundant silo's of capabilities that may or may not be required. The Resource Marketplace Module deals with breaking down these silo's and the development of the means to dynamically pool the resources of the producers represented in the JOC. These resources are further augmented by the CISP and the service industries to develop this dynamic capability.

The social condition that can transform organization into innovation is organizational integration: a set of relations that creates incentives for people to apply their skills and efforts to organizational objectives. The need for organizational integration derives from the developmental complexity of the innovation process—that is, the need for organizational learning—combined with the imperative to secure high levels of utilization of innovative investments if the high fixed costs of these developmental investments are to be transformed into low unit costs. Modes of compensation (in the forms of promotion, remuneration, and benefits) are important instruments for integrating individuals into the organization. To generate innovation, a mode of compensation cannot simply manage the labor market by attracting and retaining employees. It must be part of a reward system that manages the learning processes that are the essence of innovation; the compensation system must motivate employees as individuals to engage in collective learning. This collective learning, moreover,cumulates over time, thus necessitating the sustained commitment of financial resources to keep the learning organization intact. p. 15

The Financial Marketplace Module looks to move the financial structure of the industry away from supporting the corporate entity and moves it to directly support the JOC. This implies that, within reason, the property represented would source their bank debt from one bank for all producers. This could be extended to include each working interest owner securitizing the asset on an exchange. (Please see the Compliance & Governance Module for further information on this point.) The point being that strategy and finance need to be aligned. Producers at the JOC are currently conflicted by varying degrees of financial flexibility based on the size of the producer and its financial situation. The size of the producer has no bearing on the innovativeness at the JOC or its upside. A small producer may be more inclined to drag its feet if left to fund their commitments through general bank assignments on the corporation, whereas, the bank representing the JOC could be better positioned to mitigate its risks through a general assignment of the specific JOC.

The social condition that can transform finance into innovation is financial commitment: a set of relations that ensures the allocation of funds to sustain the cumulative innovation process until it generates financial returns. What is often called “patient” capital enables the capabilities that derive from collective learning to cumulate over time, notwithstanding the inherent uncertainty that the innovation process entails. Strategic control over internal revenues is a critical form of financial commitment, but such “inside capital” must often be supplemented by external sources of finance such as stock issues, bond issues, or bank debt that, in different times and places, may be more or less committed to sustaining the innovation process. pp. 15 - 16

Lazonick is talking about more then what the Financial Marketplace Module of the Draft Specification considers. The financing mechanisms are one of the key areas where additional value, flexibility and innovativeness can be generated from. But what Lazonick notes here as the social condition is the role of the CISP . These people are not affiliated with one individual supplier or one individual producer. They are independent as their name reflects. They have not been constrained by the Exxon or Schlumberger way. And I am not stating that those firms ways are wrong, the CISP is independent of that. Their focus is on the needs of the JOC and the ability to be innovative and support this software development capability as well as the JOC.

In yesterday's post I offered the "Velocity of Productivity" as a new concept to consider for the future. This is the domain of the CISP in terms of ensuring that the value of the industry, the JOC and the software development are all consistent with social conditions that Lazonick correctly asserts are necessary for Strategy, Organization and Finance to be in alignment.

Lastly as I indicated in the first part of this post the Military Command & Control Metaphor is a critical concept in making these "Social Conditions for the Innovative Enterprise" work. Without structure there will be failure. What is needed is a means to extend the structure of the JOC to include the producers represented, the CISP and the suppliers who make the industry function. The broadening of the scope outside of the current "operator-only" methodology is a necessity due to the resource constraints, particularly the engineering and earth science resources of an innovative oil and gas industry. What we need to do is introduce a different means of organization in order to expand the potential output of the oil and gas industry. The MCCM and Lazonicks "Framework for Social Conditions of the Innovative Enterprise" are the means to do that.

People, Ideas & Objects and the Community of Independent Service Providers need to see this financial commitment from the oil and gas investor and shareholder. We are offering a more effective manner in which to manage the oil and gas resources of the producer firm, and this effectiveness will not come about without the commitment's from these producers. Management have proven time and again that they will not fund these developments. There's is a situation that compromises the separation of management and ownership to the benefit of management. Why would they support an effective means of managing oil and gas assets.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Velocity of Productivity

Velocity of productivity is an idea that came to me as a result of watching this YouTube video of Google CEO Eric Schmidt. As with many of the talks that he gives, this one provides some tangible ideas that can be built upon, I highly recommend watching the entire video, particularly the Q & A.



Of interest he notes the explosion in information has happened. During the beginning of time to 2003 Schmidt states 5 Exabytes of data were generated. In just the past seven years we are now producing 5 Exabytes every two days! This fact got me thinking about the type and pace of work that was being done in 2003. How in many ways it seems that the past seven years feels like several generations difference in terms of the scope of the changes. It seems we should ask ourselves how much more productive we are today in comparison to 2003? Once we ask that question, you begin to wonder how we will maintain our productivity growth in the future, or, how will we deal with the demand for increased productivity velocity.

Not only is the volume of productivity increasing, the work that we are doing is changing. Ideas and decisions are the two areas where computers are unable to affect any change. Making ideas and decisions the type of work that we can do effectively is the business of People, Ideas & Objects and the Community of Independent Service Providers (CISP). I see the pace or velocity of ideas and decisions being the area that will now be influenced by the Information & Communications Technology Revolution (ICTR). Using the metrics of the information explosion, we can almost map the 200 fold increase in information directly to the volume of decisions that will be made in seven years. Therefore, however many decisions you make today, multiply it by 200 to get a feel for the number of decisions that will be made in seven years. Whether these assumptions are reasonable or not is not the point. Clearly what is in process today is the velocity of our productivity is accelerating on a logarithmic scale.

In the video Schmidt states the only constraint to doing his job as CEO is time zones. Noting that all CEO's should be operating at that level. It becomes obvious to me that if we accelerate our idea and decision making velocity, our only constraint are time zones. Spending time getting to the office in the morning to meet attendance requirements will be a destruction of up to 3 hours of our day. A day where the velocity of productivity does not afford this type of luxury to be expected of managers. When location is not a constraint, "what's an office" is maybe a question that should be asked.

Based on this slight diversion in thinking! I see the economy is responding to what Professor Carlota Perez has always maintained. The old economy ceases to be able to carry the weight of society, and the new economy is robust enough to carry the substantial weight of the old economy and much, much more. We see these factors in many of the technology companies earnings surprises and I expect the pull of a more robust and exciting ICTR based economy will begin to draw people into higher velocities of productivity.

I would like to invoke elements of the vision of the Draft Specification. Three of the modules, the Petroleum Lease, Resource and Financial "Marketplace" modules are using the marketplace as the metaphor for where people interact. The user vision involves the use of Avatars, both virtual and real, in which people can interact within those marketplaces. More information on these elements of the Draft Specification are available through the review of this blogs archives and our User Vision. Without this type of environment, purpose built for the oil and gas industry, our productivity velocity will not reach its full potential.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Oracle Stack - Oracle Consulting

We continue on our review of the Oracle product and servicing offerings that will comprise the People, Ideas & Objects application offerings and infrastructure. This post deals with the services that Oracle Consulting provides, and as such we may need to access from time to time. The key point that I want to make in this post is the potential for conflict between the use of Oracle Consulting and services that are, or may be provided by members of the Community of Independent Service Providers (CISP).

People, Ideas & Objects strategy with regard to our use of Oracle Consulting services is of a critical nature. The need to establish the policy that if anything is in conflict between the use of Oracle Consulting and the CISP, the Oracle Consulting conflict will be removed. This policy is to establish the Community of Independent Service Providers as the key resource of People, Ideas & Objects. And as our review of Lazonick's paper "The Chandlerian corporation and the theory of innovative enterprise" has noted, the CISP are a critical resource of the innovative oil and gas producer. People, Ideas & Objects, of all the various communities should lead by example and respect the importance of developing this resource.

The one area that I foresee this conflict policy not having an effect is in the area of the Fusion Application stack itself. Our developers have the opportunity to leverage off of the work done by Oracle and this can only be done in a substantial way by engaging them directly through Oracle Consulting. The same can be said for the support of the hardware at our proposed Cloud Computing facility. Oracle, now with Sun hardware, are unique in providing service and support to their hardware and software offerings.

The area that I see the CISP providing the unique services is in the understanding of the user. This is carried forward by bringing that understanding in defined enhancements to the People, Ideas & Objects application modules. Defining the software and providing the services to support the innovative oil and gas producer. 

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Lazonick on Chandler Part IIIb

This is our third post from Lazonick's paper "The Chandlerian Corporation and the theory of innovative enterprise." In our past two blog posts we have learned some interesting things that are directly relevant to People, Ideas & Objects. In the first post we noted the three generic activities that require alignment; strategy, organization and finance. How the Draft Specification provides for these three activities. And the differences between two corporate strategies defined as "optimizers" and "innovators". Noting that Lazonick defines optimizers as non-innovators. In the second post we determined that the business of the oil and gas business required substantial investment to attain the necessary innovative strategic footing. How today the current bureaucracies are unwilling and incapable of making these investments. And that the investors / shareholders in oil and gas have the opportunity to form their own new and revised organizational ways and means around using the Joint Operating Committee as the key organizational construct, and the People, Ideas & Objects software development capability.

In the Preliminary Research Report it is noted that the higher commodity prices are a reallocation of the financial resources to support innovation. It is the product revenues from oil and gas sales that fuel the innovations. Financing of innovation through debt, equity or profits would be too costly and would generally be inadequate in terms of affecting the performance of the industry. A much larger source of funding is required to fuel the type of innovation that the oil and gas needs. Innovation is a profit generating activity. This fact becomes clearer in today's review of Lazonicks paper.

2. The theory of innovative enterprise cont

In the first quarter of 2010 People, Ideas & Objects attempted to fund its budget needs for the calendar year. As we are aware, the total sum of these activities generated $0.00. This in direct contrast to the 30 compelling reasons supporting why we should be funded. I have pointed to this funding failure as a fact that proves the bureaucracy will never fund these developments. The point is that this environment needs to be created and supported. As Schumpeter noted "innovation drives economic development."

The optimizing firm may calculate, on the basis of prior experience, the risk of a deterioration of current market conditions, but it has no way of contemplating, let alone calculating, the uncertainty of returns for conditions of supply and demand that, because innovation is involved, have yet to be created. The fact, moreover, that the optimizing firm will only finance investments for which an adequate return already exists creates an opportunity for the innovating firm to make innovative investments that, if successful, can enable it to out compete optimizing firms. Indeed, in the future optimizing firms may find that the cause of the “poor market conditions” that they face is not the result of an exogenous shift in the industry demand curve but rather the result of competition from innovating firms that have gained competitive advantage while their own managers happily optimized (as indeed the economics textbooks instructed them to do) subject given technological and market constraints. p. 9

Therefore I see the existence of two fundamentally different oil and gas industries for the next 10 years. Those that are optimizing and atrophying, and those that are innovating and growing. A key difference is the use of the People, Ideas & Objects software that supports and defines the innovative oil and gas producer. The critical role of the Community of Independent Service Providers (CISP) in enabling oil and gas innovation. And the direct investments in innovation that are needed.

An innovative strategy, with its fixed costs, results from the assessment by the firm’s strategic decision-makers of the quality and quantity of productive resources in which the firm must invest to develop higher quality processes and products than those previously available or that may be developed by competitors. It is this development of productive resources internal to the enterprise that creates the potential for an enterprise that pursues an innovative strategy to gain a sustained advantage over its competitors and emerge as dominant in its industry. p. 10

Lets be clear, the costs of these software developments are minuscule to the costs of developing the innovative oil and gas industry. The global oil and gas industry is currently a $3.8 trillion / year industry. I see a significant portion of those annual revenues being dedicated to the processes of innovation. A critical enabling resource within the industry will be the Community of Independent Service Providers, they are the ones that will have the skills and resources necessary to support the innovative oil and gas producer. They are how the energy industry evolves and matches or supports the innovations made at the producer level. Achieving the CISP's overall objective of providing their producer clients with the most profitable means of oil and gas operations. What is needed for both the software and communities to develop is to have access to these financial resources.

Such development of productive resources, when successful, becomes embodied in products, processes, and people with superior productive capabilities than those that had previously existed. But the high fixed costs that such investments entail mean that in and of themselves these investments place the firm at a competitive disadvantage until such time that, by developing and utilizing these investments, it can transform the technologies and access the markets that can generate returns. An innovative strategy that can eventually enable the firm to develop superior productive capabilities may place that firm at a cost disadvantage because such strategies tend to entail higher fixed costs than the fixed costs incurred by rivals that choose to optimize subject to given constraints. p. 10

I can not for the life of me see the energy industry as it exists today changing to the one described in the previous quote. It isn't in their organizational DNA. The process of creative destruction, or as I have detailed the two oil and gas industries, one optimizing the other innovating, is the only means that change of this scale can take place. As the optimizing firms atrophy and their earnings decline, assets will be sold to the innovators, creating a substantial opportunity for the innovative producer through this process of renewal.

If the size of investments in physical capital tends to increase the fixed costs of an innovative strategy, so too does the duration of the investment required for an organization of people to engage in the collective and cumulative—or organizational—learning that is the central characteristic of the innovation process. p. 10

and

The revenues (and not just the profits) that the innovating firm generates can be critical to maintaining its organization intact. When the innovating firm generates revenues, it has financial resources that can be allocated in a number of ways. If the gains from innovation are sufficient, the firm’s revenues create the possibility for self-financing....For the innovating firm, financial resources not only fund new investment but also enable the firm to keep its “learning” organization intact. The innovating firm can use the gains of innovative enterprise to reward its employees for their application of skill and effort to transforming technology (unbending the cost curve) and accessing markets (shifting out the demand curve). p. 13

We have commented on this blog many times before about the mechanical leverage that man has achieved over the past century. 18,000 man hours of labor is contained within each barrel of oil. To convert this factor into the number of man years of physical effort that is offset each year for each American, that number is 385. That is; each American receives the equivalent benefit of 385 man years of physical effort per year. Truly surprising and something that has to be maintained by ensuring that the oil and gas is available to continue to provide the offset. The point in raising this is to ask the question, at what point in time do we achieve an equivalent level of leverage in terms of intellectual thought? And as importantly, how do we get there? I know the first two steps are to gain a software development capability and secondly begin the development of the Community of Independent Service Providers.

The innovation process, that is, can potentially overcome the “constrained-optimization” trade-offs between consumption and production in the allocation of resources as well as between capital and labor, and even between enterprise and society, in the allocation of returns. It is for this reason that innovation can form the foundation for equitable and stable economic growth, or what I have called “sustainable prosperity” (Lazonick and O’Sullivan, 2002; Lazonick, 2009a). p. 14

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Oracle Stack - Oracle Fusion Applications

Continuing on with our review of the Oracle product offerings and defining which of their applications and architectures are to be included in the application modules of People, Ideas & Objects. In a previous post, we adopted wholesale the Oracle Database and Middleware product offerings. In another post we noted the Application Integration Architecture and how the Community of Independent Service Providers could use these tools to aid in the accounting integration of a producers system. All of the discussion of the Oracle products and architectures is being aggregated under the Oracle-Stack Label on this blog. Once our review is complete we will be updating the Draft Specification.

Oracle Fusion Applications are a difficult product to commit too since they don't exist as of yet. However, what we can determine from Oracle is that the project is providing the kind of application infrastructure that is necessary to build the Draft Specification and deliver it through the cloud computing paradigm. Oracle Fusion Applications and Middleware are using the best parts of the Agile / Scrum development methodology, and therefore consistent with our approach to development. There are no cultural differences between the Oracle methods and those that were proposed in People, Ideas & Objects developments.

Critical to the success of the Oracle Fusion Applications is their use and application of the Oracle Middleware stack. This is the way that applications are built in most architectures and is consistent with what we were proposing to do before we joined Oracle as a customer. Java Enterprise servers provide the necessary infrastructure and control of information that makes not using a Java Enterprise server, redundant. Recreating the wheel each time a project is started is counter to the Java way.

It is clear in many of the videos and documents that I viewed that the web is the centre of the user experience. All of the application demonstrations and presentations reflected this web centered delivery. Using standard web browsers, Oracle Fusion Middleware and Applications gains this ease of use and universality of access. Making the user experience robust in the cloud computing paradigm. We will need to determine if the web platform provides the level of access control and security necessary to meet our potential producers needs. It is reasonable to assume that if Oracle is using the browser this extensively, they've cracked the security problems and are satisfied with the control. The user having browser access would be a performance and ease-of-use improvement over using Java Web Start, which is the current method defined in the Draft Specification.

One of the key attributes of becoming an Oracle customer is the access to the understanding and knowledge they have in the ERP application market-space. Oracle is the largest enterprise software company. They have experience in developing, deploying and supporting their ERP application offerings. This experience is based on a history of PeopleSoft, J.D. Edwards, Siebel , BEA and Oracle Financials. Our costs may be substantially higher by using Oracle, but what we gain in doing so brings our product offering to a higher level of quality. According to videos that I viewed on YouTube Oracle has over 2,500 application developers just in the Fusion Applications development. As a result, we inherit the efforts of these people through the Java re-use attributes.

To view one of the best documents on Oracle Fusion Applications go here. Where on page five the following is noted.

The goal of Oracle Fusion Applications is to help customers transform their business into a next generation organization. This next-generation organization will have more adaptable business processes, more productive people, and more manageable systems. Next generation adaptability will come from a native service oriented architecture that allows for easier integration with other applications and configurable business processes. Embedded business intelligence, a rich, pervasive, and personalized user experience, and Enterprise 2.0 business processes will power next generation productivity. Finally centralized security, audit, and controls, and the ability to deploy applications on premise, as a service, or through business process outsourcing will deliver next generation manageability.

This quotation shows that Oracle and People, Ideas & Objects are wholly consistent in terms of our approach to defining and supporting the software for the innovative oil and gas producer. Therefore, the commitment to these products and architectures is made quite easily.

Next on this topic we'll review the Oracle Consulting offerings. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Lazonick on Chandler Part III

In the first post on Professor Lazonick's paper we discussed the differences between optimization and innovation in terms of corporate culture. How in oil and gas we need to move from optimization to an innovation footing. To do so requires a substantial investment for the oil and gas producers. An investment that begins with the development of the software defined in the vision of the Draft Specification. An investment that up until today, the oil and gas industry has been unwilling to make. What I think Lazonick makes clear in this second part of our review of this paper is that the means to which to make the changes are within our grasp. All that is missing is the willingness to make the necessary investments. That willingness is a product of the innovative firms corporate culture.

2. The theory of innovative enterprise cont

Professor Lazonick begins with a comparison between what he calls the neoclassical firm and the innovative enterprise. The role of the entrepreneur and the assumptions supporting each. In oil and gas I see the bureaucracy believing theirs is a management discipline that deals with all aspects of the industry. That their management capabilities are the critical resource to the profitability of the industry.Lazonick notes;

There are two assumptions of the neoclassical theory of the firm that limit its ability to understand innovative enterprise. First, the neoclassical theory assumes that the entrepreneur plays no role in creating the disequilibrium condition that triggers the reallocation of resources from one industry to another. In the theory of the innovating firm, by contrast, entrepreneurs create new profitable opportunities, and thereby disrupt equilibrium conditions. Second, the neoclassical theory assumes that the entrepreneur requires no special expertise to compete in one industry rather than another. All that is required of the entrepreneur is that he follows the principle of profit maximization in the choice of industry in which to compete. In the theory of the innovating firm, in contrast, the entrepreneur’s specialized knowledge of the industry in which he chooses to compete is of utmost importance for his firm’s ability to be innovative in that industry. p. 6

My experience in dealing with management of the oil and gas industry is accurately captured in Lazonicks text. What management has learned is they too can control the disruptive nature of the entrepreneur, by not allocating any resources towards it, and hence avoid the disequilibrium that is created. Or so they believe. This behaviour has become systemic and has the companies actively avoiding the necessary investments in the business of the oil and gas business. Optimization is the word that everyone marches to and any producer that makes the necessary investments ininnovativeness is deemed risky.

The limiting assumption here is that the entrepreneur does not choose the firm’s level of fixed costs and the particular productive capabilities embodied in them as part of his firm’s investment strategy. In the theory of the innovating firm, the level of fixed costs manifests strategic decisions to make investments that are intended to endow the firm with distinctive productive capabilities compared with its competitors in the industry. p. 7

I referenced this article from the Calgary Herald the other day. It suggests the National Energy Board has determined that Alberta Natural Gas production will decline to 8.5BCF / day in 2012 from 12.7 today. Are we as an industry unaware of the consequences of inaction in the investments necessary for innovation? AsLazonick notes the costs of optimization eventually turn to eliminate the profit elements. The oil and gas industry in Alberta is experiencing these increased costs, of which they attribute to greedy suppliers, and the declining production values. Why, in discussing this with Canadian management, it clearly is not their fault. Imputing they are only a small part of the market.Lazonick discusses this U-shaped cost curve of the optimizers.

The assumption is that the addition of variable factors of production to the firm’s fixed factors of production results in a declining average productivity of these combined factors (i.e., the firm’s technology, which is also the industry’s technology). In deriving the U-shaped cost curve, neoclassical theorists give two quite plausible reasons why productivity declines as output expands. Both reasons assume that the key variable factor is labor. One reason is that as more variable factors are added to the fixed factors, increasingly crowded factory conditions reduce the productivity of each variable factor as, for example, workers continuously bump into one other. The other reason is that as more workers are added to the production process, the entrepreneur, as the fixed factor whose role it is to organize productive activities, experiences a “control loss” because of the increasing number of workers that he has to supervise and monitor. p. 7

It is reasonable to assume that by 2012 the Canadian producers lack of investment in innovation, and the increased costs associated with the U-shaped nature of the optimizers fixed and variable costs, will eliminate them from the marketplace. As I have indicated here on this blog before, Canada, and that is all of Canada, represents a negligible 2 percent of the readership of this blog. I can say with almost 100% assurance, when the scope of the Preliminary Specification is determined by the users, that Canada will not be represented in the functionality of the People, Ideas & Objects application. Conversely, the U.S. makes up 88% of the total users represented here. Anyone want to guess where the innovative, or profitable, elements of the oil and gas industry will be located?

Hence organization—in this case the relation between the entrepreneur as manager and the work force that he employs—becomes central to the neoclassical theory of the firm. Within the theory of the optimizing firm, the constraining assumption is that the entrepreneur passively accepts this condition of increasing costs, and optimizes subject to it as a constraint. In sharp contrast, in the theory of the innovating firm, the experience of increasing costs, as shown on the left-hand side of Figure 2, provides the firm’s strategic decision-makers with an understanding of the limits of the initial investment strategy, and with that information they make additional new investments for the strategic purpose of taking control of the variable factor that was the source of increasing costs [for an elaboration of this argument, seeLazonick (1991: ch. 3, 1993)]. An innovating firm would not take a condition of overcrowding or control loss that results in increasing costs as a “given constraint,” but rather would make investments in organization and technology to change that condition. In effect, for the sake of improving its capability to develop and utilize productive resources, the innovating firm makes strategic investments that transform variable costs into fixed costs, which the firm, in order to innovate successfully, must now endeavor to transform into low unit costs. pp. 7 - 8

Therefore investment in the productive capacity of the oil and gas industry starts here. Development of the innovative organization is deemed a necessity due to the demands of the marketplace and the increased complexity in the underlying earth science and engineering disciplines. Today we live in a sophisticated marketplace that demands the changes to organizational structure be contemplated and built within the software first. This is only the beginning of the investments that are necessary. These investments are a significant undertaking for the industry, and they are past due.

An innovative investment strategy is inherently uncertain, and investments in innovation must be made despite the existence of uncertainties concerning prospective returns. Any strategic manager who allocates resources to an innovative strategy faces three types of uncertainty: technological, market, and competitive. Technological uncertainty exists because the firm may be incapable of developing the higher quality processes and products envisaged in its innovative investment strategy; if one already knew how to generate a new product or process at the outset of the investment, it would not be innovation. p. 9

In Part III of this paper we will begin to look at the risks associated with an innovative strategy. Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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