OCI Research & Capabilities, Part V
Earth Science and Engineering Capabilities of Producers
People, Ideas & Objects software application modules enable producer firms and Joint Operating Committees to focus on their core competitive advantages. The innovative and profitable oil & gas producer's land & asset base, as well as its earth science and engineering capabilities. The Research & Capabilities module of the Preliminary Specification is the key module for producers focusing on their earth science and engineering expertise. We have discussed the “Planning & Deployment Interface” of the module. Now we begin the discussion on how the producer maintains the pace of change in the underlying sciences and technologies.
The simple answer to this question is that the producer and particularly the Joint Operating Committee will not have the distraction of the long term acquisition of scientific and engineering research and capabilities development affect the day to day implementation of the knowledge of the firm or Joint Operating Committee. Recall at the beginning of this module's review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. Research & Capabilities is about the acquisition of capabilities, their documentation, and Knowledge & Learning is about their deployment, implementation and execution. The fact that there is a “Planning & Deployment Interface” in the Research & Capabilities module may lead to some confusion, however, it is there as there are times when the producer firm needs to implement its capabilities for experimentation and its sole benefit.
This separation of the long term horizon for Research & Capabilities. Provides the appropriate mindset for the producer firm to focus on the coordination of the market and overall development of earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and map the necessary changes within the “Dynamic Capabilities Interface” to communicate these changes from their organization to their various Joint Operating Committees that need that information. These changes and communicating the changes to the appropriate people in a timely fashion will increase performance for the producer and Joint Operating Committee. Establishing a foundation for the producer to further build and implement their competitive advantages in earth science and engineering capabilities.
Restating for clarity. That is how the Research & Capabilities module enables producers to develop, implement and integrate advanced capabilities within their organization. Research undertaken by the firm should not interrupt the day-to-day operations. However, when research augments the firm's capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. As documented in the "Dynamic Capabilities Interface," the Knowledge & Learning module will allow selection of capabilities based on the appropriate and related criteria. If the research conducted by the firm is unresolved or undetermined in its conclusion then it would not belong in the “Dynamic Capabilities Interface.” If it remained unresolved or undetermined then it would indicate that further work was required to prove, troubleshoot and implement the capability. Therefore, they remain open within a Work Order until they are resolved, completed or terminated.
How and Where 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 they may have where capabilities and innovation would stem from these interactions. This process 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 issued. Capabilities are then populated to the Joint Operating Committee's day to day activities. It is the interaction between the producer firm and Joint Operating Committee, and the broader causes that create the innovations.
We take the concept of a trajectory, describe it, and apply it to oil & gas. A technological trajectory is defined as 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 & gas is accurately reflected in commodity prices. Higher commodity prices will 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 industries' innovation on changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & gas, People, Ideas & Objects 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 that 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. And this is how we can reduce it to a defined and replicable process.
Every organization has to deal with two distinct and differing types of work that needs to be done. Essentially, 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, concerned with execution. And the Research & Capabilities module, or producer firm concerned with developing its capabilities through market coordination. This division of labor and specialization regarding these two types of work is the topic of this discussion.
We have noted that innovation was an engineering approach to problem identification and resolution. We however want to focus these innovation efforts on one area of the firm. Making sure they are concentrated where they are most useful and 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 affecting the Joint Operating Committees' day to day operations. Only when an innovation is proven worthwhile and its implementation procedures defined should it be written up as an additional capability in the Dynamic Capabilities Interface. This capability is therefore available to be populated into the Knowledge & Learning module. It is available for use in the day to day operations 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
It supports both the "how to do things" (the Joint Operating Committee) and the "how to improve them" (the producer firm). The dichotomy reflects the challenges of improving processes and products through trial and error. The ability to accurately predict the success or failure of an idea contains inherent high risks and hence high rewards. This is one of the constraining factors in innovative thinking, in that no one wants to be proven wrong. While, even if the idea fails to test the theory, the failure may ultimately lead to and 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." Limits contamination if innovation was attempted in areas where execution is expected. Eliminates the high cost of innovation when repeated trial and error is conducted again and again in different areas of the same organization and over repeated timeframes. This division of labor is necessary between oil & gas firms and their Joint Operating Committees. We know there are two types of people, those who function best in either of these two environments. Any time either of these people are asked to operate in an environment they’re not oriented to, they feel uncomfortable and perform poorly.
This reflects 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. However, we also have innovation as an Organizational Construct. In contrast to the Joint Operating Committee, the producer develops innovations through its capabilities. Organizational Constructs, including the Joint Operating Committee, seek to establish, support and define a culture within North American oil & gas producers and the greater oil & gas economy. Creating an alternative to today's bureaucratic and non-performing culture.
Uncertainty and Risk in Innovation
Continuing our innovation review of the Research & Capabilities module of the Preliminary Specification. We note that the “Dynamic Capabilities Interface” enabled the innovative oil & gas producer to isolate innovation activities within one area of their firm. This enabled the various Joint Operating Committees to focus on the execution of what was known, which included proven innovations. We now want to discuss the uncertainty and risk associated with innovative search. Something that I think most producers are familiar with, however, something that will become more commonplace as the demand for innovation increases.
What is clear is the role software will play in enabling innovation within the oil & gas firm. Throughout this discussion in the Preliminary Specification it is evident that software plays a critical role in the future oil & gas firm. Software defines and supports quantifiable and replicable innovation processes. The lack of this software constrains the industry. For the oil & gas industry to conduct any level of innovation without software, as defined here by People, Ideas & Objects, will leave the innovation 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 brings to the oil & gas business certain elements of risk and uncertainty. Add to this the commercial nature of the oil & gas business and you have an atmosphere where innovation is for those who can take the heat. Professor Dosi suggests 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
Uncertainty exists in both scientific and business realms. I am not convinced that the two can be separated. This is perhaps why the industry has been poorly served, in my opinion, by business systems today. They don’t recognize the innovative and scientific basis of the business and cannot support an innovative oil & gas industry. If commodity prices allocate financial resources to fuel innovation, the industry will need systems and procedures installed to manage innovation. Systems such as those 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 (Mansfield et al. 1977). p. 1134
We now turn to the research area of the Research & Capabilities module in the Preliminary Specification. What we are particularly interested in, is taking control of the financial costs of innovative activities conducted within the producer firm. A firm of any size has many projects underway. With the volume becoming unmanageable quickly if there was no control over the amount spent and the type of activity. There are cost controls in the People, Ideas & Objects Preliminary Specification such as AFE’s and Work Orders. These will control research costs. The interface that we're discussing does not replace those, it only centralizes the information for a clearer understanding of the activity and its funding.
A producer firm may become involved in many projects that seek new knowledge and capabilities regarding the oil & gas business. Some of these activities may be rather large and will certainly be the focus of the firm. They will have no difficulty attracting the firm's attention. Some however may be small and important from the perspective that the capability is just as pertinent to the firm, but don’t attract the attention. Nonetheless, these capabilities need to be included in the day to day of each and every operation of your firm, and as such need 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". This will help deal with innovation costs and the volume 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 will 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 also documents the project's ongoing status. And ensure that the project results 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 right hands it would be a very powerful tool. It would provide a global view of the firm's activities in innovation and demonstrate the overall progress that the firm was making. It would also show where unrelated innovations might occur. Lastly it might show where some opportunities exist. Professor Dosi (1988) states
Clearly, the commitment of resources by profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives. Are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both? Jacob Schmookler in his classic work, argued that the serendipity and universality of modern science provide a wide and intersectoral indifferent pool of opportunities that are exploited to different degrees in each economic activity according to differential economic incentives, and in particular, to different patterns of demand growth (Schmookler 1966).
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 for the innovative oil & gas producers.