Professor Richard Langlois on Capabilities Part III

What are Capabilities

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

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

That’s an effective way to state what it is that we are trying to achieve here. The “Dynamic Capabilities Interface” is a how-to database of capabilities the firm has for getting things done. Or;

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

In this discussion as well as in any and all oil and gas field operations. The ability to do any of these tasks on autopilot doesn’t exist. And the implications of the next quotation is far reaching.

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

It will need to be the explicit instruction contained within the “Dynamic Capabilities Interface” that guides the field operation. The conscious attention necessary to follow the program is a necessity. However, this is also about innovation. If there is an opportunity for further innovation there is the Job Order system in which to invoke the change in orders.

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

It has been a long and difficult process to detail what it is exactly that we are capturing in this interface. Capabilities are a difficult concept to quantify and qualify. Add to that difficulty is the need to keep innovation at the forefront of the producers and Joint Operating Committees capability, and the challenge ahead is well defined. We continue on with our review of Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” with our focus on obtaining the earth science and engineering capabilities and those from the marketplace of the service industry offerings.

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

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

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

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. The mysteries of the trade become no mysteries; but are as it were in the air and children learn many of them unconsciously. good work is rightly appreciated, inventions and improvement in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its materials. (Marshall, 2961, IV .x.3, p. 271) p. 120

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

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

and

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

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

The Impact of Technology, 

We now want to discuss the “Dynamic Capabilities Interface” from a different perspective. One in which we are looking more high level at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic service industry marketplace, and defines and supports the framework to execute field operations with military precision. These two seemingly contradictory objectives are attainable when we realize the field operations are a temporary snapshot of the marketplace’s offerings. Once that operation is complete, that organization for the field operations and its capabilities will never exist again. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization that was used for that specific field operation.

We want to maintain all of the elements of a dynamic and innovative service industry. The Preliminary Specification has set out to provide for this by ensuring the service industry receives strong support from the oil and gas industry in the Resource Marketplace module. This is also necessary for the energy industry to ensure that the demands of society, in terms of energy, are met. Once this financial marketplace recession is over the demand for energy will resume a steady pace. In the Preliminary Research Report we discussed Professors Anthony Giddens and Wanda Orlikowski theory of Structuration and model of Structuration. That people, society and organizations must move together or there will be failure. It should be asked if these societal demands for energy can be met by the current oil and gas organizations? Technology will have a role in this. From Professor Orlikowski’s paper.

Interaction with technology influences the institutional property of an organization, and this influence is more likely to be reinforcing rather than a transforming one. (p. 235 The Duality of Technology: Rethinking the Concept of Technology in Organization). 

In order to achieve the organizational performance necessary to meet society's demands, it will require the technologies to be put in place first. This was one of the key findings of the Preliminary Research Report. We live in a time and a place where technology plays such a significant role in our day to day lives. That to change our organizations requires that we change the technology first. This same theme is picked up by Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

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

So where are we? The People, Ideas & Objects Preliminary Specification is designed to support innovative and dynamic markets that will enable the oil and gas industry to meet the surging demand for energy. But neither the surging demand nor the software exists. More than 10 million cars were sold in China last year. Probably the same number will be sold this year and next. The point is that the markets for energy are developing and the demand will grow. The question will be who will be the first to volunteer to keep their economy stagnant due to a lack of energy? And just as the markets for energy develop the software needs to be developed as well.

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

There will be significant changes made to the markets during the times we are developing the People, Ideas & Objects software. Changes that will need to be captured in the software. There is never a best time in which to approach these changes, however, now with approximately $94 billion in annual opportunity costs, (please review the decentralized production model) the time has well past for the industry to have acted.

Tacit Knowledge

We are now going to reinforce the way in which the Research & Capabilities module captures the capabilities within the producer firm. In providing for the capture of these capabilities the Preliminary Specification is limited by the attributes of the different types of knowledge and the culture of the oil and gas industry. These two forces have formed the manner in which the Research & Capabilities module deals with the knowledge and its capture. It is in Professor Richard Langlois’ paper “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History” that he states the following.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359 

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

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

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

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Richard Langlois on Capabilities Part II

Operational Control through the Job Order System

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

Multi-lateral and Multi-frac wells are rather large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not a nice to have but a necessity. The need to have the software integration of the oil and gas and service industries to the level discussed here in the Preliminary Specification is a large and expensive undertaking. One that fits within the scope of the Preliminary Specifications budget. And also within the scope of the People, Ideas & Objects eleven module application in its initial commercial release. The scope of change that we are creating here is dramatic. To achieve the integration between these two industries needs to have this type of approach to make it successful. 

It is in Professor Langlois paper “Industrial Dynamics, Innovation and Development” that he strikes the right approach in terms of the issue of the Preliminary Specification and these software developments. 

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

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

This next quote is from a Berkeley study and is dated in 1989, a time when the Japanese and the Americans were fighting over dominance in the microchip manufacturing industries. Apparently the two industries were configured quite differently, as Berkeley notes below. And it is the Americans that grew to dominate the industry at the Japanese almost total capitulation. The organizational structure of these industries is interesting to see a quarter century later. 

In one of the few contemporary academic examinations of this industry, a study by the Berkeley Roundtable on the International Economy concluded that; ... with regard to both the generation of learning in production and the appropriation of economic returns from such learning, the U.S. semiconductor equipment and device industries are structurally disadvantaged relative to the Japanese. The Japanese have evolved an industrial model that combines higher levels of concentration of both chip and equipment suppliers with quasi-integration between them. whereas the American industry is characterized by levels of concentration that, by comparison, are too low and [by] excessive vertical disintegration (that is, an absence of mechanisms to coordinate their learning and investment processes) (Stowsky, 1989) p. 3

My point in highlighting this is that we are relying heavily on the decentralized marketplace in the service industry to provide the oil and gas industry with the products and services it needs. We are however, also providing the Joint Operating Committee with high levels of coordination of any operation during the times it is employing the service industry. This is not a contradiction, one is a market, the other is an operation. The oil and gas industry depends on a highly innovative service industry and this will be expected from the marketplace. It also demands precision from the field operations that it conducts. Innovation will arise from both, however, not at the expense of control and coordination.

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

Modularity in Systems and Organizations

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

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

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

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

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

It is therefore imperative that we apply modularity theory to the design of the temporary organization that makes up these derivative organizations. 

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

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

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

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

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 7

The Costs of Operational Efficiency

We move on from modularity to discuss “Dynamic Transaction Costs” in the Research & Capabilities module of the Preliminary Specification. We have discussed these costs in other modules and have dealt with them by establishing an account in the chart of accounts to specify these costs when they are incurred, where ever they are incurred. They are particularly relevant to the discussion in the Research & Capabilities module as Professor Langlois describes them as;

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

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

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

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

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

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

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Richard Langlois on Capabilities Part I

Introduction

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

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

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

During our review of Professor Giovanni Dosi we learned of technical trade-offs. And how 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, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations. There are many knowledge based and collaboration focused interfaces in the Preliminary Specification, making the People, Ideas & Objects ERP system the ideal candidate for the innovative oil and gas producer.

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

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

Unique One-Off Derivative Organizations

It is in the Research & Capabilities module that we are defining and supporting the science basis of the oil and gas business. How the earth science and engineering capabilities of the firm are acquired and documented for subsequent deployment. It is with that in mind that we begin our review of Professor Richard Langlois paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

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

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

What we had not discussed in the Research & Capabilities or Knowledge & Learning module is an important element of the “Planning & Deployment Interface,” the AFE. It will naturally be the AFE that is a large part of how the business and operational end of the deployment is initiated. Therefore the AFE template is part of the “Planning & Deployment Interface.” Having budgetary control of operations is attained through the AFE.

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

For clarity the marketplace or service industry is the source of the capabilities, with operational coordination coming from the producer firm and Joint Operating Committee. If the business is a science, having everyone read from the same, unique in each instance, hymn book will not only be necessary, but will be the only way in which to be successful.

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 6

You have a unique, one time, temporary organization which is derivative of the Joint Operating Committee. It is necessary to make sure that that organization is able to understand everything that it is working to accomplish.

Operational Control and Coordination

We have noted how the information detailed in the “Dynamic Capabilities Interface” of the Research & Capabilities module would provide the “knowledge, experience, and skills” of the operation. That these details were provided to all of the members of the temporary organization that was put together for the purpose of that specific operation. From the lease hands on the drilling rig to the engineers and geologists of the participating producers of the Joint Operating Committee. Everyone would be on the same page in terms of what and how the capabilities of the firms and market were being deployed. We now want to discuss these points further and relate how the People, Ideas & Objects Preliminary Specification enables the innovative producer to successfully complete these field operations.

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

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

Here in the next quotation Professor Langlois raises an interesting point about “incentive alignment.” But in essence he is saying that at a certain point its not about a matter of incentives that motivates a team to succeed.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination. p. 11

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

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

Going back to the incentives issue for a moment. Lets put in context the conflict between the service industry and the oil and gas producers. They have been in disagreement for a number of years as to the pricing of the services for field operations. Read this next quotation with this in mind.

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 14

Professor Langlois is 100% correct. The producers are relying on contracts to incentivize the contractors and its not working. What is required is better coordination. And that begins with systems like the People, Ideas & Objects Research & Capabilities module that details the capabilities of the producers and field staff in a manner that constructively deals with the problems of a scientific based business.

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

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

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

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

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

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

and

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

This is inherently and simply true. The key to the successful implementation of any program is the level of documentation of the capability and the level of control during the operation. The “Dynamic Capabilities Interface” combined with the Military Command & Control Metaphor provide the producer firm and Joint Operating Committee with the means for successful operations. Recall that “knowledge begets capability and capability begets action.” And contrast this to the current situation where the producers throw more money at the service industry to incentivize them to succeed.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part VI

We now soar with the eagles as we apply the overarching scope of the application of innovation to the oil and gas producer. Our discussion takes the summary of Professor Giovanni Dosi’s research and applies it to the oil and gas industry. To show the potential of what would be the effect of developing the People, Ideas & Objects ERP software.

Professor Giovanni Dosi 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. “Market structure and technological performance are endogenously generated by three underlying sets of determinants.”

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

• The structure of demand.

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

• 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 that is possible today. The industrial mechanization of the past 100 years combined with the prospective mechanization of intellectual pursuits combine to markedly appreciate the value of human life. The availability of energy will be a critical element of this advancement.

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

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

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

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part V

When we consider what a producers capabilities would look like, such as those that are listed in the “Dynamic Capabilities Interface” of the Research & Capabilities module of the Preliminary Specification. Much would depend on the type of producer that is represented. As one could imagine a large firm such as Exxon would have a vast library of capabilities, and a small start up would be limited to a small database in terms of what they were able to achieve.

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

• First, although “there appears to be roughly a log linear relation within industries between firm size and R & D expenditures,” upon closer investigation, “estimates show roughly non-decreasing return of innovative process to firm size.” This is probably attributable to the fact that very large and very small firms conduct most R & D. p. 1151
• 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 business. p. 1151
• Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size. p. 1152

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

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

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

• Statistical proxies cannot capture aspects of technical change based on informal learning. p. 1152
• Secondly, “differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms. p. 1152
• Thirdly, many firms are expending significant research dollars in keeping up with other firms innovations.  p. 1152

Or in summary, proof that money is not necessarily a determinant of innovative success and that all producers need to be represented in an innovative oil and gas industry.

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

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

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

There is a determining paradox for the ability to innovate based on imitation or on the basis of strict Research and Development. Companies can copy others innovations in industries with minimal asymmetry, (where competitors are all the same). Whereas industries that are asymmetric (like oil and gas) or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development.

This is why the focus on capabilities is critical to the success of the oil and gas concern. They are able to differentiate themselves by research and development and focusing on capabilities. Passing these capabilities on to the Joint Operating Committee through the Knowledge & Learning module allows the producer to initiate these capabilities “just in time,” where and to who they are needed. This can be done without the concern that they are exposed or risked to potential competitors through the Joint Operating Committee. It should be clear through this analysis that those that would attempt to copy others capabilities will be expending extensive resources to do so, as much or even more then it would cost to develop the capabilities on their own. However, those that chose to copy will remain static within their competitive position within the industry. Its just not that easy to copy someone else, and it's not that valuable to their firm. When markets such as oil and gas are asymmetric, Research & Development are the ways in which to differentiate capabilities and build an innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part IV

Research Into the Underlying Sciences

Our discussion of the Research & Capabilities “Research Budget Allocation Interface” offered the innovative oil and gas producer the opportunity to control the costs of the research and innovation conducted within their firm. We know from Professor Giovanni Dosi that businesses commit to innovation as a result of both the exogenous scientific factors and endogenous accumulated capabilities developed by their firms. We have discussed in fairly good detail how the capabilities are handled in the Research & Capabilities module of the Preliminary Specification. I want to continue to discuss how the research end of the module is managed.

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

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

Professor Dosi concludes that scientific input into the innovation process is evidence of the importance of factors exogenous to competitive forces among private economically motivated actors. This is subject to two 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. p. 1136

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

• The nature and interests of the bridging institutions between pure research and economic applications. (p. 1136)
• Institutional factors 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 Schumpterian entrepreneurship.

There is little doubt in my mind that we need an interface here. An interface that is similar to the “Research Budget Allocation Interface” would be appropriate. And maybe we only need to establish a second “page” within that interface. One for the internal or endogenous budget items and one for the exogenous budget items. The key here is to note that the greatest value is attained in the earlier stages.

Innovating on the Science

I want to continue on with our discussion of the “Research Budget Allocation Interface” and the two “pages” format. Recall that one page would be for the endogenous developed capabilities and the other for the exogenous scientific findings. What I want to discuss is the process that the user of this interface will be involved in in documenting the capabilities from the research that is being conducted within the firm and the greater scientific community. By way of the football analogy that we raised earlier, I want to show how this documentation would be done.

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

As the firm continues, research from the endogenous and exogenous areas become innovations that populate the “Dynamic Capabilities Interface” which in turn populate the various Joint Operating Committees. Professor Dosi (1988) continues 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, tacitness 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) In the third paragraph of the previous section we documented that we have three processes that deal with these variables under management in the Research & Capabilities module.

Recently we also learned of the difficulty for a firm to copy another firm's ideas or capabilities provides little to no value. On the contrary the effort to copy anothers capabilities is as potentially difficult as building their own unique capabilities. We now learn that innovation is dependent on the technology that supports the firm. That is the technology both enables and / or constrains the innovations of the producer. Therefore copying capabilities, without a foundation or base of technology and capabilities to support what is being copied is useless. And if you have the base then copying would not be productive or motivating.

Professor Dosi notes “New technology paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations and ease with which they are achieved.” p. 1138. The technology that a producer has includes the ERP systems used within the organization. When the business is a science, as it is in oil and gas, it would be in the producers interest to remain open and flexible in both its scientific and business approach. This is the strategic position that a producer would be capable of maintaining with People, Ideas & Objects Preliminary Specification.

I now want to highlight the speed at which a producer firm is able to implement innovations. From the point in time of the research and discovery, to the actual implementation of the innovation there is little in terms of time or bureaucracy standing in the way of the proven innovation being implemented across the firm. When the time comes for people to use the latest approved and authorized processes in terms of what innovation they should use, there will be no ambiguity as to what is authorized in terms of the most recent approved capabilities to use.

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

The key limiting determinant in terms of time is the amount of effort necessary to take the research or study from its raw form and turn it into a usable capability. The people within the Joint Operating Committee are doing two things. Making operational decisions and executing the operations. They are not field testing experiments as lab rats. It's important that this distinction be made and the proper documentation be handed off from the research and study to those that will execute it. As once the capability is documented, it will be immediately available to be executed the next time that the operation is conducted anywhere it is pertinent within the producer firms Joint Operating Committees. We will also have more to discuss on this point in the Knowledge & Learning module.

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

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

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

The individual user(s) of the Research Budget Allocation Interface of the Research & Capabilities module will be at the forefront of the innovation that occurs within the producer firm. Having windows on the research that is developing within the firm, within the scientific community, the lessons learned in the Joint Operating Committees, and lets not forget the “Ideas Marketplace Blog” and “Supplier Collaborative Interface” are not far away either. Providing a rich understanding of the state of affairs in the service industry. Theirs will be a rich medium of information of what is happening in the innovative oil and gas industry. The concern that many will have is that this information is then codified into further capabilities which are subsequently published through to the various relevant Joint Operating Committees. There they will have these capabilities available to the members of the JOC’s who will be able to see and use the capabilities, which will include participants of other producer firms.

Professor Dosi (1988) notes a study conducted by Richard Levin et al 1984, in which they studied “the varying empirical significance of appropriability devices of (a) patents, (b) secrecy, (c) lead times, (d) costs and time required for duplication, (e) learning curve effects, (f) superior sales and service efforts.” Professor Dosi (1988) 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.” Dosi concludes. “Finally, 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)

Oil and gas producers are focused on process innovations which Dosi observed “that lead times and learning curves are relatively more effective ways of protecting them.” Which brings up a very valid point. Assume that one of the capabilities that was published through the Knowledge & Learning module was the capability to fracture shale. Just because it is published doesn't mean that it can be copied. The “team” has practiced and built the capability from previous experience and “learning curves” and that is how the capability exists. Just because a football team sees the design of other teams plays does not mean that they will be able to implement the same play. They will have to work at building the right talent and practice to implement the capabilities necessary to execute the capability before they can successfully complete it. The same would be the situation for anyone observing another producers capabilities in a Joint Operating Committee.

Professor Dosi notes that Levin states that the control of complementary technologies becomes a “rent-earning firm-specific asset.” Dosi 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 than the original innovation, and applies to both patented and non-patented innovations.” (p. 1140)

With the fast changing science and technological paradigms and steep trajectories of the industry, the need to have the capability to innovate will be needed for each producer to develop on their own. If the costs of duplication are as steep as the costs of developing the internal capabilities, the producers should then rely on their process innovations to carry their firm. What are the alternatives? Sitting on your advanced innovations and not using them, for fear that someone will copy them, in order to protect them?

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

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

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

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

With that it sounds like it's time for another interface. And we’ll call this the “Experiments Interface” which will list the number of experiments and document the type and expected results of any and all experiments being conducted by the firm. This will be a comprehensive interface, much like the “Research Budget Allocation Interface” in that it will also have many similarities to a project management interface. This will provide the users with the ability to manage the project from start to finish in a manner that the capabilities are able to be developed as expected by the firm. These two interfaces will enable the users to control and manage the firm's development at the speed of the market and the science.

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

Therefore being in tune with the market and the science is the only safe place for the innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Professor Giovanni Dosi on Innovation Part III

Where and How Innovation is Implemented

In this section we want to reinforce the point that innovation will develop from the interactions and collaborations in the “Planning & Deployment Interface.” We noted that the people assigned to the project would discuss the project and raise any issues that they may have and innovation would stem from these interactions. This process that is captured in the “Planning & Deployment Interface” is how the Preliminary Specification reduces innovation to a defined and replicable process.

Professor Dosi notes that innovation is developed through the interactions between the “capabilities and stimuli” and “broader causes external to the individual industries such as the state of science.” These are captured in the “Planning & Deployment Interface” (capabilities and stimuli) and the Work Order system (state of science) of the Research & Capabilities module of the Preliminary Specification. As time passes the producer augments their capabilities with the findings from their research undertaken in the various Work Orders that are issued. Capabilities are then implemented in the day to day activities that the Joint Operating Committee is involved in. It is the interaction within the producer firm and JOC, and the broader causes that create the innovations.

We take the concept of a trajectory, define it, and apply it to oil and gas. 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 the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil and gas is accurately reflected in the commodity pricing. Higher commodity prices finance enhanced innovation. These “trade-offs” are very much an engineering approach and therefore I want to reiterate the point that they are “defined as the compromise, and the technical capabilities.”

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, People, Ideas & Objects would assert 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.

Therefore the ability to collaborate in the “Planning & Deployment Interface,” and elsewhere, of the Research & Capabilities module is critical to the innovativeness of the producer firm. And by extension, this would also apply to the Joint Operating Committee through the “Planning & Deployment Interface” in the Knowledge & Learning module. Innovation is as much an engineering discipline as it is anything else. That is how we can reduce it to a defined and replicable process.

Every organization has to deal with the two distinct and differing types of work that need to be done. Simply the two types of work are the need to execute and the need to develop the firm's capabilities for the future. These two roles have been separated in the Preliminary Specification with the Knowledge & Learning module, or Joint Operating Committee, concerning itself with execution. And the Research & Capabilities module, or producer firm concerned with developing its capabilities. This division of labor and specialization regarding these two types of work is the topic of this discussion.

We have noted that innovation was in many ways an engineering approach to problem identification and resolution. We however want to focus these innovation efforts in one area of the firm. Making sure that they are concentrated where they are most useful and the least harmful. And that is in the “Dynamic & Capabilities Interface” of the Research & Capabilities module. It is at that location that the focus can be on innovation without the impact affecting the day to day operations of the Joint Operating Committees. Only when an innovation is proven to be worthwhile should it be written up as a new capability in the Dynamic Capabilities Interface, and therefore available to be populated into the Knowledge & Learning module for use in the day to day of the Joint Operating Committees. Professor Giovanni Dosi notes;

Organizational routines and higher level procedures to alter them in response to environmental changes and / or to failures in performance embody a continuous tension between efforts to improve the capabilities of doing existing things, monitor existing contracts, allocate given resources, on the one hand, and the development of capabilities for doing new things or old things in new ways. This tension is complicated by the intrinsically uncertain nature of innovative activities, notwithstanding their increasing institutionalization within business firms. p. 1133

These support the “how to do things” (the JOC) and “how to improve them” (the producer firm). 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 to test the theory, the failure may ultimately lead to and may be one of the keys to discovery.

By containing the innovation within the producer firm in the manner that the Research & Capabilities “Planning & Deployment Interface” does. Limits the contamination that might occur if innovation were attempted in the areas where execution is expected. This division of labor is necessary between the oil and gas firm and the Joint Operating Committee. As well, we know there are two types of people, those who are able to function best in either of these two environments. Any time these people are asked to operate in the environment that they are not oriented to, they feel uncomfortable and perform poorly.

This maybe shows a contradiction in the People, Ideas & Objects software. We assert that the software aligns the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. This claim that the innovation framework is part of the Joint Operating Committee is consistent with the fact that once the producer has proven the innovation is valid, then the Joint Operating Committee is the means in which it is implemented and executed throughout the producer firm through the “Planning & Deployment Interface” in the Knowledge & Learning module.

Uncertainty and Risk in Innovation

Continuing on with our innovation review of the Research & Capabilities module of the Preliminary Specification. We note that the “Dynamic Capabilities Interface” enabled the innovative oil and gas producer to isolate the innovation activities within one area in their firm. This enabled the various Joint Operating Committees to focus on execution of what was known, which of course included what was proven new and innovative. We now want to talk about the uncertainty and risk associated with innovative search. Something that I think that most producers are familiar with, however, something that will become more commonplace as the demand for innovation by the producer increases.

What is clear to me is the role that software will play in the enabling of innovation within the oil and gas firm. Throughout this discussion in the Preliminary Specification it is evident that software plays a critical role in the future oil and gas firm. Software is able to define and support the quantifiable and replicable processes of innovation. For the oil and gas industry to conduct any level of innovation without having the software, as defined here by People, Ideas & Objects, will be leaving the innovations outcome to chance. Such is the nature of software in the 21st century.

Whether it is geological or engineering in nature, the pursuit of these sciences bring to the oil and gas business certain elements of risk and uncertainty. Add to this the commercial nature of the oil and gas business and you have an atmosphere where innovation is for those who can take the heat. Professor Dosi suggest this is the appropriate environment for innovation.

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134

Let's be clear, the uncertainty resides in both the scientific and business realms. I am not of the opinion that the two can be separated, as is done in other systems such as SAP. This is maybe why the industry has been poorly served, in my opinion, by the business systems that operate today. They don’t recognize the innovative and scientific basis of the business and therefore are unable to support an innovative oil and gas industry. If the commodity prices are allocating the financial resources to fuel innovation. The industry will need to have the systems and procedures installed in order to manage the innovation. Systems such as what are described in the Preliminary Specification. With the low costs of knowledge and collaboration being the two commodities that affect the technological trajectories, having interfaces such as the “Planning & Deployment Interface” of the Research & Capabilities module will be a necessity.

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base  and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge. p. 1135

We now turn to the research area of the Research & Capabilities module in the Preliminary Specification. What we are particularly interested in, is to take control of the financial costs of the innovative activities that are being conducted within the producer firm. A firm of any size would have a variety of projects being conducted. With the volume becoming unmanageable quite quickly if there was no control over the amount spent and the type of activity. There are cost controls that are set in place in the People, Ideas & Objects Preliminary Specification such as AFE’s and Work Orders, and these will control the research undertaken in the firm. The interface that we are talking about does not replace those, it only centralizes the information for a clearer understanding of the activity and its funding.

Your firm may become involved in many projects that seek to find new knowledge and capabilities regarding the oil and gas business. Some of these activities may be rather large and will certainly be the focus of the firm and will have no difficulty in attracting the attention of the firm. Some however may be small and will be important from the perspective that the capability is just as pertinent to the firm, but don’t attract the attention. Nonetheless, these capabilities needs to be included in the day to day of each and every operation of your firm, and as such needs to be documented in the “Dynamic Capabilities Interface.” How does the firm manage the various projects within a firm to ensure that the money spent and all of the projects are documented within the capabilities of the firm?

Within the Research & Capabilities module we will have the “Research Budget Allocation Interface” that will assist in dealing with the costs of innovation and the volumes of projects the firm is involved in. If an AFE is raised with some element of the costs including the partnership doing some joint research or innovative activity, this activity should be populated in the “Research Budget Allocation Interface.” Or, if a Work Order is raised to conduct some study, that too will be populated into the “Research Budget Allocation Interface.” The purpose of this interface is to ensure that there is no duplication of the research undertaken, if there is then the costs could be saved. It is also to document the ongoing status of the project. And ensure that the results of the project are documented within the “Dynamic Capabilities Interface” of the Research & Capabilities module.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Although this may appear like a simple interface, in the proper hands it would be a very powerful tool. It would provide a global view of the firms activities in the area of innovation and show the overall progress that the firm was making. It would also show where unrelated innovations might occur. Lastly it might show where some opportunities lay. Professor 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) Professor 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 innovate inputs.

The “Research Budget Allocation Interface” would provide a window on both the “different incentive structures and different opportunities within the producer firm. Making for a powerful tool in terms of guiding the innovative oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.