Research & Capabilities



Introduction

We now move on to the Research & Capabilities module of the Preliminary Specification. This is a dual specification module in that it shares attributes with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

We will discuss how the Research & Capabilities module will be used to help build value by managing the transition from the hierarchy to the aligned producer organization under the People, Ideas & Objects software. Where the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee are aligned with the hierarchies compliance and governance. Making this transition will create opportunities for people to make changes to the work that they do in order to be more efficient and effective. The “what” and “how” of this software is best described in a McKinsey article. In a four part recommendation McKinsey sets out in broad strokes what is required.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve all of these objectives. By aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the Military Command & Control Metaphor and having the financial interests of the producers drive the management of the Joint Operating Committee we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects. Marketplaces are things that people will be doing more of in terms of participation in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

4) Relying on measurements of performance rather than supervision to get the most from self directed professionals.

We have already had a quick review of the Performance Evaluation and Analytics & Statistics modules. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it. 

It is clear that it is no longer the 20th century. That to manage an enterprise requires a different approach, and the first thing that is needed to manage that enterprise is the software to enable that new approach. With real shortages in the quality human resources necessary to maintain the markets demand for energy, it will be the producer that is able to maintain a high performing organization based on the criteria we are discussing here.

It was in the Preliminary Research report (2004) that we learned the influence that Information Technology (IT) had on organizations. That IT defined and supported our organizations, and that it both enabled and constrained them. The need for the innovative and profitable oil and gas producer to remove these IT constraints requires the People, Ideas & Objects software development capabilities. Then, on an ongoing basis, as further constraints are identified they can be dealt with by developing new software to deal with new opportunities. 

We have also discussed the current producers capacity to deal with issues are constrained by the systems that are in use today. That we see a repetitive inability, or lack of capacity to deal with the existing issues of the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. There is also an inability to approach new issues that industry is faced with; such as planning for the shale based reserves development and the relationship with the service industry. I have suggested that the industry seems to be in a never ending cycle in which it is unable to exit. The systems that exist today have us operating from a day to day basis and they are unable to deal with the long term perspective.

This cycle of day to day existence is hurting the industry. The ability to deal with this issue is by adopting the Preliminary Specification and acquiring the software development capability proposed by People, Ideas & Objects. Then the innovative and profitable oil and gas producer will be able to break the cycle of systems dependence and effectively plan and execute the business of the business. Until we do this, its best to become familiar with the various elements of the scenery that we are in. And that primarily involves the losses on operations in North America. 

The Research & Capabilities module provides the exit from this endless cycle. How the firm breaks away from what it has done before and develop its capabilities to enhance its business in the long term is detailed here. There are a number of things we do in this module that make that happen here in the Research & Capabilities module. 

McKinsey, The 21st Century Organization

We went through the four points from the McKinsey article as to why we should use the Research & Capabilities module for the long term perspective of the innovative oil and gas producer. We now want to revisit these points and highlight the significance of the opportunity that is presented by separating the long term perspective into the Research & Capabilities module, and the day to day into the Knowledge & Learning and other modules. In the McKinsey article it is noted;

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key organizational construct of the innovative and profitable oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. By providing an extension of the governance structure over the partnership with the Military Command & Control Metaphor. We have isolated the Joint Operating Committee as the day to day operation of the oil and gas producer. This frees up the remaining portion of the producer to concern itself with the long term value generation of the firm.

Recall that these Joint Operating Committees are autonomous in the sense that they are focused on achieving the greatest performance. They are driven through the Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. Because they are operated by the partnership, which all the participants are motivated equally by financial gain, the producers will have faith that the “line managers will make good on a company's earnings targets.”

In addition, the producer will have the decentralized production model to rely on to ensure that “line managers will make good on company’s earnings targets.” The Preliminary Specifications decentralized production model ensures that the marginal production is shut-in so that those reserves can be saved for a time when commodity prices are higher and the reserves can be produced at a profit. So that the commodity markets are not flooded with marginal production that causes the collapse in prices we have seen time after time. And that no producer will produce a property that is marginal. This operational discipline will need to be adopted by the industry and strictly enforced. The decentralized production model is a feature of the Preliminary Specification and is contained within the Resource Marketplace module.

And in terms of the long term perspective, the Research & Capabilities module is looking at the interests the producer has in any number of Joint Operating Committees. This number may total into the thousands. To concern themselves with the operational performance of each would be a daunting and impossible task. And based on the previous discussion their involvement is limited. However, there may be systemic corporate similarities that can be applied to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the perspective of the firm, and in the long term. These are where the business value can be generated through the use of the Research & Capabilities module.

McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the Joint Operating Committee to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module.

If we reduce the business of the oil and gas producer down to the activities of the Joint Operating Committee. And concern ourselves only with the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else. This is the classic conflict that a business must satisfy, the struggle between the long and short term horizon of the business. How much should be sacrificed in the long term and how much should be sacrificed in the short term? It should be noted that the name of the module is Research & Capabilities, this discussion also focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that due to the resource constraints, particularly in the earth science and engineering disciplines, these do not permit the luxury of each producer building the full scope of these capabilities in house. The need to collaborate with partners to build the global scope of the Joint Operating Committees capabilities is how these needs will be met. Therefore a specialization in the earth science and engineering capabilities will be the result of the division of labor between the partnership represented in the Joint Operating Committee.

But we are talking about more than just the capabilities that each Joint Operating Committee demands when we are talking about the capabilities of the producer firm and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions by trial and error and deductive tinkering.

We have detailed that the focus of the producer firm is on its asset base and its earth science and engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day of the various Joint Operating Committees. These are the core scientists of the firm.

We discovered something very interesting in our research. When we deploy teams of people in a fashion like we are with People, Ideas & Objects use of the Joint Operating Committee. The earth science and engineering capabilities of each Joint Operating Committee will atrophy. They need to be fed a constant stream of new and innovative ideas and possibilities to remain “current” with the science. This of course has to be steered by the mother ship so as to not duplicate errors or replicate blind bunny trails unnecessarily in each and every Joint Operating Committee.

Now it may seem that I have contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't mean that they would be developed “in-house.” The Research & Capabilities module should be considered to be from an industry perspective. That although each firm will have specific people defined to support each firms needed capabilities, the service industry will take on a greater role in providing much of the innovative capabilities that are developed through the mindset employed by the producer firms.

We’ve talked about the role the producer would have in determining the long term horizon of the firm. How the Research & Capabilities module would provide a window on the various Joint Operating Committees to provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I now want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

We all know this leakage of information to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the information they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding information, will deploy the right information to the right people at the right time.

According to McKinsey the solution requires...

... a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.

These tacit interactions are what are captured in the “Research” area of the Research & Capabilities module. Interaction with the larger communities to develop the knowledge and understanding around the science of oil and gas not only expands the capabilities of the producer firm but will also expand the overall science. We learned two important points regarding innovation from Professor Giovanni Dosi in the Preliminary Research Report.

    • That new science fuels new innovations, and new innovations fuel new science.
    • Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

People, Ideas & Objects research assumes that one technical trade-off in oil and gas is accurately reflected in the oil and gas commodity pricing. That these prices are providing the resources to fuel innovative and profitable oil and gas producers. Therefore the faster we iterate on the science and innovation, the more appropriate a producers strategy should be focused on a capabilities approach.

This realignment across the producer and Joint Operating Committee intuitively makes sense. From the Joint Operating Committee alignment of all the frameworks to having them focus on performance as the driving motivation, and the decentralized production model ensuring profitable operations. This also begins to make sense when we have the Joint Operating Committee pursuing the optimal short term horizon. Making the operational decisions based on the collaborative understanding of the partnership that makes up the Joint Operating Committee. And the producer firm undertaking the long term horizon of the firm by interacting with the Joint Operating Committee, the remainder of the industry and the service industry to build the needed earth science and engineering capabilities needed for the firm. However, as possibly the strongest and easiest evidence that I can provide that this is substantially correct is this quotation from Professor Richard Langlois.

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

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge to those with the decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with the knowledge.” And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little that can be done to change that. The knowledge is held within the producer firm. It is therefore necessary to create a process that sees the knowledge flow from the producer firms to the Joint Operating Committee and that is what the Research & Capabilities module does. 

Research in the Service Industry

One of the key points about the use of the Research & Capabilities module is that the oil and gas producers receive 100% of the funds from the production of oil and gas. This entitles them to be the gatekeeper on all subsequent activity with respect to how that money is expended. And that includes the “what” and “how” of service industry product and service innovations and offerings. In today’s capital markets little is tolerated for research and development that is not directly funded by customers. To expect that the service industry will divert its profits, or will raise capital to fund its research and development efforts is foolish. It is clear that there has to be a direct link between the research that is undertaken by the service industry and the customers (i.e. the producers) wallet.

At the same time producers don’t want to participate when the cash is simply thrown against the wall to see if it will stick. There has to be a clear direction and understanding given to the service industry as to the direction and need that the oil and gas industry has. For the past few years, at least in Canada, we have heard many of the independent producers calling out the service industry as greedy, lazy and taking advantage of the situation in the field. Implying that the demand for service in the field is so strong that the only means to control it is for the service companies to increase the prices they charge. I see this situation occurring as a result of a lack of investment in innovation by the service industry.

This situation in the field has led to “cost control” measures by the producers that have further constrained the communications between the service industry and the producers. To suggest that the industry should be funding service industry innovations is the last thing that producers want to hear at this time. But it is the long term solution to producer problems. Micro-managing and cost-controlling will get the job done to the satisfaction of no one. As the demands in the industry increase, the ability to increase the capacity and capabilities will be further constrained because no one is working on those capacity related problems today. When the time comes, the problems of today will be significantly larger tomorrow.

What is needed is the Research & Capabilities module of the People, Ideas & Objects application to provide the communication between the service industry, the entrepreneurs and the oil and gas producers. Communication about the needs of the producers, backed up with dollars that are willingly spent in order to develop the innovation, capacity, capabilities, services and / or products. Providing direction to the service industry certainly sounds more constructive than calling names, controlling costs or micro-managing. This functionality will be captured in the Research Budget Allocation Interface of the Research & Capabilities module. 

A Marketplace for Ideas

Let's review from a high level the process that is managed by the Research & Capabilities module of People, Ideas & Objects Preliminary Specification. The module has an interface that we will call the “Ideas Marketplace Blog” which is a marketplace where people, firms and service providers actively post their ideas for new products and services to help in the exploration and production of oil and gas. This marketplace provides the producer firm with the ability to explore new ideas and participate in their development with other producers. As time passes and the capabilities of the producer develops, they are able to deploy these enhanced capabilities through to their various Joint Operating Committees through interfaces in the Research & Capabilities and Knowledge & Learning modules. What we are creating in the Research & Capabilities module is a window on the marketplace of ideas.

Now what is so significant about ideas? First it's one of the few areas that computers are unable to provide any assistance in. People are the necessary ingredient in idea generation and application. The second important aspect of ideas is that we are going to need more of them. The volume of ideas that are necessary today are an order of magnitude higher than they were a generation ago. And the volume will need to be an order of magnitude higher in just a few years time. That is the nature of ideas.

If the innovative oil and gas producer is going to be iterating on the science and technology of the oil and gas industry. They will need to participate in a marketplace that is very dynamic. One that deals in every kind of idea, good, bad, brilliant, dumb or new. For if today it takes one idea to build one unit of value, tomorrow it will take two ideas to hold that value, and five ideas to build another unit of value. Such is the nature of where we are heading. If you’re not participating in the marketplace of ideas then you won't be participating in a market of value.

We are seeing the respect for ideas beginning to be reflected in the marketplace. I have been overtly critical of the manner in which the oil and gas industry has treated the service industries Intellectual Property (IP). This must change and they must begin to respect the ownership and development of IP if they are to benefit from a marketplace of ideas. There is no one who will participate in a marketplace if they see that the oil and gas producers will not respect their IP. If they risk their IP being poached by their very customers, which is the case today, then they will not participate, and therefore the marketplace for ideas will stagnate. At which time, if that stagnation were to occur, the producers could call the service industry lazy and greedy.

Seeding the promising ideas with funding will be another role the producers will have to undertake. However, since they will be respecting the IP of the owners they will only have to fund one project, not several “me too” copycats. This will allow the owner of the product or service to fully leverage the oil and gas producer marketplace for their product or service and hence, not have to rely too heavily on initial funding.

In the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification we noted that the nature of the modules would enable the users to initiate, at any time, commercial actions on the ideas and activities in these modules. This discussion deals with those actions that can be generated from those ideas and activities and the importance of this module as an ERP system module.

ERP system modules have traditionally been focused on recording transactions and reporting those transactions to the various users of the information. To do that is still required of an ERP system but if that is all that we are doing then we are missing so much of what an innovative oil and gas producer needs. In the sense of a Research & Capabilities module, the need to deal in the marketplace of ideas is where the producer needs to have a presence and understanding of what is happening in the oil and gas and service industries. Participation is mandatory for success in a world where the speed of ideas and their implementation will be weeks and months, not years or decades.

An application that fulfills the needs of a producer in this manner has to have the input and contributions of all the other producers and the service industry as well. The applications installation is multiple industry, not just within one producer. The perspective of the user in some instances will be a window on the industries that are available to them. What will be needed is the ability to have the systems that can initiate actions on those ideas and actions of interest to each of the users of the Research & Capabilities module.

We noted the ability to right click while in the Research & Capabilities and Knowledge & Learning modules any idea or action of interest. This would bring up a contextual menu of items where the user could select the ability to initiate a Work-Order, initiate an AFE with a partner in a Joint Operating Committee, etc. The point in mentioning this is from both McKinsey and Harvard Professor Carliss Baldwin. The first quote is from McKinsey.

Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need, even if it resides in their own companies and coordinating their work with others.

Once they find something of interest the user of the Research & Capabilities and Knowledge & Learning modules should have the full scope of an ERP application at their disposal. The ability to initiate any action of a commercial nature would take the idle capabilities of the producer firm or the Joint Operating Committee and put it to use. As Professor Baldwin notes.

Changing routines, competencies or capabilities based on knowledge must cause firms to have shifting knowledge boundaries. The span or scope of knowledge available to a firm will change over time as required by its changing activities. But theories based on knowledge cannot directly explain the location of transactions. First, the domain of transactions is a domain of action: goods are made; services are performed; compensation is paid and received. But actions enter the knowledge based theories only indirectly: knowledge begets capability and capability begets action. The actions themselves lie outside the scope of these theories. 

These quotes capturing the importance of embedding these two modules within the People, Ideas & Objects Preliminary Specification. Without the ability to initiate the actions within the organizations the capabilities will be trapped. In a world where the software needs to be built to identify and support the organization first, these are important considerations.

Round 1, Management vs. the Internet

We live in interesting times. The Internet has had a remarkable impact on our lives in the past fifteen years. As we look forward, that impact has only begun. When we talk about the impact that the Internet will have on the capabilities of an oil and gas producer, we need to consider some critical factors in those capabilities. This discussion deals with those critical factors and how they are implemented in the People, Ideas & Objects Research & Capabilities module of the Preliminary Specification.

The purpose of a bureaucracy in the age of the Internet not only seems wasteful, it is. The pace of everything is slowed to a cumbersome and cluttered existence that defies common sense. The Preliminary Specification considers the Internet as an inherent given. Aligns the nine frameworks of the Joint Operating Committee and producer around the Joint Operating Committee. Establishes marketplaces. Automates the work that computers do best and keeps the work that humans do, the decisions, the ideas, and the collaborations front and center in the modules. To do otherwise would be a waste of the opportunity that is afforded to us by the Internet.

One of our top two research providers, Professor Richard Langlois wrote a book a few years ago that we reviewed as part of our research. The first chapter was entitled “Progressive Rationalization” and our quotes are from that chapter. In this first quote he notes the correlation between “new economic opportunities” such as the Internet and the “organizational structure.”

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

If we look at the first critical factor, the new economic opportunity, which in our case is the Internet. According to Langlois the “problem of organization is bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities.” The “character” of the Internet is that it enables the collaboration within the Research & Capabilities module as we have discussed to date. Recall in our recent discussion we noted from Professor Carliss Baldwin that “knowledge beget capabilities and capabilities beget action.” The facilitation of knowledge and actions are the two areas where the Research & Capabilities module enable the user to interact and engage in the community, the producer firm and the industry. This will become more apparent as you read the Research & Capabilities module specification.

The second critical factor that Langlois notes “is the existing structure of relevant capabilities.” And here the People, Ideas & Objects Preliminary Specification has a distinct advantage in that we are isolating the short and long term perspectives of the producer firm between the Joint Operating Committee and the producer firm itself. By using the Joint Operating Committee in this fashion we are building on that innovation by leveraging the innovation of the Internet.

In this last quote from Professor Langlois he reflects on centuries of historical change and the manner in which that change came about.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. 

Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

The battle lines have been drawn. As the Vanishing Hand of the marketplace replaces the Visible Hand of management. It will be the market supporting capabilities of the Internet that supports the markets. Markets are the ultimate source of the producer and Joint Operating Committees capabilities. Market coordination therefore will be a competitive differentiation that is provided through the capabilities acquired through the Internet. It is the Internet vs. the bureaucracy. I have certainly tipped my hand as to who I think will win this war.

Professor Giovanni Dosi on Innovation

Introduction

It is through Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation” that we will view the Research & Capabilities module. A couple of things that jump out at me in the module are the division of labor between computers and humans. Formulating ideas, making decisions and collaborating are the activities that are captured in this module. Leaving the mundane transaction and data management tasks to the computers. This I think an appropriate division of labor, and I wonder at times what SAP’s thinking is on this. There is also a strong division of labor and specialization in the technical resources of the producer firm. This is done to mitigate the resource shortfalls in the mid to long term. Another aspect is Professor Richard Langlois comment that we are “moving the knowledge to those with the decision rights” as being the primary process that the module captures. And lastly, that a user can right click at any time within the module and initiate any standard ERP type of action on anything in the module. This being an extension of Professor Carliss Baldwin’s research that notes “knowledge begets capabilities and capabilities beget actions.”

To the topic of innovation, Professor Giovanni Dosi’s paper discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi note:

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

We discussed that the Accounting Voucher would enable the producer to charge the various joint accounts with the costs of their technical resources with the implicit assumption that they would generate a return on the investment in the firm's capabilities. We also discussed the differences between what is acceptable practice today (with overhead allowances) and the different positions that some might take on the topic. However, I think Professor Dosi’s point here has to be taken as the key criteria as to the direction the industry takes on the issue. You are “investing to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competitions.” The ability to sustain the state of the art oil and gas capabilities on the basis of what a producer earns from oil and gas production is a direct result of those capabilities, however, shouldn’t those capabilities also earn a return on investment above and beyond what the oil and gas production provides?

It’s only reasonable that the producer firm is going to approach the operation of some technically difficult task with the appropriate capabilities. Innovation requires that the capabilities of the producer be the base on which the innovations can be leveraged. What Professor Dosi has defined in his research is the key factors that innovation requires. We will discuss these key factors and how they are integrated within the Research & Capabilities and other modules of the Preliminary Specification.

One housekeeping duty is to note that there is a “Capabilities & Commitments” interface in the Petroleum Lease Marketplace module. This documents the contractual obligations that the producer is required to meet in terms of commitments to the various Joint Operating Committees that the producer is a participant in. And to leverage the working interest partners capabilities that are likewise legally committed. This interface is placed in the Petroleum Lease Marketplace module to document the legal obligations that are contractually defined. This interface should also be populated in the Research & Capabilities module.

Innovations Three Key Factors

We will now deal with the first of the three key factors of innovation, Professor Dosi notes:

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Capabilities and stimuli generated with each firm and within the industry of which they complete.

What you are capable of is wholly dependent on what has been purposely developed within your firm. These capabilities have developed over time and are able to be deployed repeatedly. As time passes further capabilities are developed and the firm becomes more capable through a variety of different means. The ability of the firm to develop these capabilities is limited by what the oil and gas service industry is capable of providing. If they have only x number of rigs available, then only so much work will be done. And if the rigs are only able to drill shallow wells then the science of the producer will be constrained by the capabilities of the service industry. Furthermore, if the producer is a state of the art earth science and engineering wonder in a sea of producers who are barely able to successfully drill shallow wells, then the state of the art producer is reduced to the same level of the others. The marketplace of the producers in terms of their technical resources and their capabilities have an enabling and constraining limit on what the producer is capable of. Innovation is leveraged from this base.

The question therefore becomes how do we broaden the base of not only the producer but the service and oil & gas industries? Recall how the Research & Capabilities module has an "Ideas Marketplace" blog like interface where members of both of the industries can post ideas of products and services that might be of interest to the producer firms. Producers may then act to support these ideas with funding and support to develop the idea into a product or service to augment their capabilities. Recall the "Supplier Collaborative Interface" in the Resource Marketplace module that enables the industry as a whole to benefit from the lessons learned by each producer. The "Gap Filling interface" where the producer can anonymously publish where they see gaps in the service industries offerings. Enabling the service providers to prepare new products and services based on a further defined division of labor and specialization. Or how the information within the Research & Capabilities interface is organized on the basis of geological zone, or other criteria, so that only those pertinent zones are populated to the individual Joint Operating Committees through the Knowledge & Learning module.

Recently in the Partnership Accounting module we discussed the accounting attributes of the Work Order system in forming working groups amongst industry participants. These could be informal working groups formed to study some geological or engineering situation among interested producers. The ability to strike these groups, participate in them and develop further capabilities as a result of these studies is a critical aspect of how the producers will develop their capabilities and innovativeness. Since the costs and the results are shared the industry as a whole advances. Leaving the producer open to further potential innovations. I see this as an area that will increase in terms of activity, if, the accounting logistics and bureaucratic nightmare that they create can be dealt with in the manner that the Partnership Accounting modules Work Order does.

The second key factor that Professor Giovanni Dosi defines as necessary is as follows.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

Again these only make sense in terms of being critical to enabling the capabilities and innovations of the producer firm. The question becomes is how does the Research & Capabilities module and the Preliminary Specification specifically deal with these key factors to enhance innovation?

The first key factor that I want to address is the “supply of technical capabilities, skills, engineers etc.” That raising the quantity and quality of the earth science and engineering technical resources of the industry is possibly one of the three top issues of the industry. How does the Research & Capabilities module specifically increase the supply of these resources? As we have stated here many times the need to rely on the standard economic tools of an enhanced division of labor and specialization are the keys to solving this problem.

The issue is that these technical resources are limited in their supply for the foreseeable future. Through retirement and new recruits the population of earth science and engineering resources are somewhat constrained. Add to that the volume of earth science and engineering effort in each barrel of oil is increasing as time passes. Using specialization and the division of labor we can achieve a higher throughput from the same resource base. That is the basis of the solution used in the Preliminary Specifications Research & Capabilities module.

If we look at the way the industry is structured today, with each producer building the capabilities needed to address every possible contingency within their organization. The overbuilding of earth science and engineering capabilities is the result and this internal surplus capacity is left unused and unusable. Each producer pursuing the same strategy leaves a large surplus capacity that is unused and unusable on an industry wide basis. The pooling concept that People, Ideas & Objects has developed within the Preliminary Specification. Where producers of a Joint Operating Committee are able to pool their technical resources to meet the properties demands. Eliminates the overbuilding of capacities in each of the producer firms, and enables the producers to deploy the formerly unused and unusable surplus capacity.

Each producer will also need to specialize in some area of the earth science and engineering disciplines. The need to cover off the global scope of technical requirements is an extensive undertaking today. The future will require further specialization and division of labor be undertaken in the technical disciplines. Without choosing to specialize and using the pooling concept, the producer firm will be faced with such an onerous task of attempting to cover the global scope of these technical requirements as to be unprofitable. The “pooling” approach we are taking here in the Research & Capabilities module is of necessity.

That’s the first element of the division of labor and specialization that is inherent in the Preliminary Specification. The second element deals directly with the ability to organize the technical resources in a manner that deals with how the “bread and butter” geology and engineering is done in the industry. With a dedicated software development capability such as that which is People, Ideas & Objects competitive offering, the ability to organize new service based offerings to meet the demands of the industry's bread and butter earth science and engineering demands would now be possible. The expansion of the division of labor and specialization will therefore increase the throughput of the industry from the same volume of resources, and also enhance the quality of the resources. As we have stated many times at People, Ideas & Objects, software will define and support this future division of labor and specialization.

Regarding the “facilities for the communication of knowledge” as a key factor of innovation. The Research & Capabilities and the Knowledge & Learning modules are collaborative information systems that are “industry-wide” in their implementation. A review of the many interfaces that are mentioned here showed that the development and sharing of knowledge, which are critical for the development of the individual producers capabilities and innovativeness, are systemic throughout this module.

Lastly we need to develop an interface in the Research & Capabilities module that allows the producer to interact with the academic and research areas of the earth science and engineering disciplines. 

We now want to document the last of the key factors that Professor Giovanni Dosi states are necessary to support innovation. And then begin a discussion on these key factors and how they are implemented in the Research & Capabilities module of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

It's only logical that innovation will spring from advanced markets with labor mobility, legal protection and capital markets. It's one thing to have these facilities provided, its another to have them aligned within the organization. With People, Ideas & Objects we are aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment permits the producer firm and the Joint Operating Committee to attain greater speed, innovation, accountability and profitability as a result.

What these key factors reflect is that the innovative oil and gas producer must first of all be capable. Innovation leverages the capabilities of the service industry, the producer marketplace and the greater market makeup. For the producer to attain their highest level of capabilities is the objective of the Research & Capabilities module. Each producer will be able to attain their own specific level of capabilities, and that level will be dependent on these key factors. Not all producers are built the same. The ability therefore to achieve state of the art capabilities and highly innovative practices are not something that are at risk in terms of being “copied” by other producers. Therefore a producer's willingness to participate in the collaborative environment created in the Research & Capabilities module would not risk any proprietary competitive advantage. On the contrary, based on these key factors, non-participation would limit the competitive advantage.

This environment is the polar opposite of the manner in which the industry operates today. Certainly there are high levels of joint ventures in operation, however, those are designed to mitigate financial risk more than anything else. And I am not suggesting a different posture be taken in terms of the risk profile of the industry. Only that a more open collaborative earth science and engineering level of discussion and participation is necessary for the industry to move to the next level of performance. One that enables the key factors to interact with the highly aligned and innovative oil and gas producer. And to begin the move to that next level of performance which requires that we build the software that defines and supports the innovative and profitable oil and gas producer, the People, Ideas & Objects Preliminary Specification.

Innovations Key Factors, A Scenario

I want to take a look at Professor Giovanni Dosi’s “key factors” of innovation in the context of the scenario that we used recently during our review of the Partnership Accounting module. Recall that we had a number of producers who were joining together through the Work Order system to participate in an engineering study. This Work Order system was discussed in the Partnership Accounting module to highlight the manner in which it eliminated the logistical accounting difficulties that impede the development of these working groups. I now want to discuss how the efforts of working groups are added to the capabilities of the producer and are managed in the Research & Capabilities module of the Preliminary Specification.

Upon completion of the working group the producer firm will have a unit of knowledge that has been developed from the efforts of the group. Professor Carliss Baldwin provides us with some clarity here with her “knowledge begets capabilities, and capabilities beget action” comment. What is needed is for the producer to have a central repository for all of the knowledge of the producer that is accumulated through the various working groups and other “key factors” in which they acquire knowledge. This will be called the “Dynamic Capabilities Interface” in the Research & Capabilities module and will detail the source of the knowledge, the key factor, how it was acquired, and what it involves. This will be captured within a wiki style interface. This interface is also sorted by geological zone and other technical criteria, and will be populated to the Knowledge & Learning module for deployment to the appropriate Joint Operating Committees when required. Organizing a firms and Joint Operating Committees capabilities is the beginning of developing, deploying and effectively managing them.

Within any module of the People, Ideas & Objects application the user will be able to right click their mouse and select from a contextual menu of actions. These actions will include the ability to begin a Work Order, raise an AFE, prepare a Joint Venture Agreement etc. If the user can take action on the capabilities listed within the “Dynamic Capabilities Interface” then we have achieved the process that Professor Baldwin states is necessary. Having this information centralized for the producer, and the specific information for the Joint Operating Committee helps to concentrate the knowledge within one location within the firm. There will be little confusion as to where to find the answer to a specific question. When the user finds what they are looking for, the detail of the knowledge or capability should be specific enough as to define a process as to how it is successful implemented. Understanding that knowledge is never static, the ability to update the information with lessons learned would be part of the users responsibility. Recall updates from the Lessons Learned Interface is also done for the Joint Operating Committee in the Knowledge & Learning module.

The ability to annotate and reference the material within the “Dynamic Capabilities Interface” would make this more usable. In addition, with the tools that are available today, such as search, makes the information more valuable. What is truly valuable is the types of tools that will be available tomorrow. We are beginning to see some of these tools enter the consumer space with the iPhone’s SIRI virtual assistant. The first step however will be to acquire the knowledge and make it actionable through the ERP system of People, Ideas & Objects. Then we will be able to add these tools as they become available in the future.

If all that we were to do with the capabilities aspect of the Research & Capabilities module of the Preliminary Specification. Was to document the capabilities in the “Dynamic Capabilities Interface” then we would be wasting a lot of people’s time. The purpose in documenting the capabilities is so that we can deploy them, and that brings in the “Planning & Deployment Interface” which is the topic of discussion here.

Ideally I see the ability of a firm to deploy their capabilities as a key competitive advantage. The organization of that competitive advantage will be the focus of the management of the firm. It should also be noted that there is a similar “Planning & Deployment Interface” in the Knowledge & Learning module for the Joint Operating Committee. The analogy that I would like to use and have developed in the Preliminary Specification is directly applicable to the game of American football. Where the coach can call in a play and the team is able to execute that play based on their known capabilities, roll and skills on the team. I want to draw a direct analogy for the person who plans and calls on the capabilities of the firm or Joint Operating Committee in the “Planning & Deployment Interface.”

First we need to bring in the Military Command & Control Metaphor and understand that the role of the individual, as designated in that structure becomes a critical part of the planning and deployment of the firm or JOC’s capabilities. There can be only one Quarter Back and you need many Down Lineman. Filling the various roles in order to take the actions that are needed is as important as the capabilities themselves. The Military Command & Control Module (MCCM) imposes a chain of command across the multiple producers represented in the JOC, or firm and enables them to operate the pooled resources of these firms.

The “Planning & Deployment Interface” will take the three critical aspects of the firm / JOC and arrange them within a web like interface for the user to develop the actions they desire. The three critical aspects are the people represented in the MCCM, the capabilities and the time frame. Having selected the personnel that you want to execute the action that you have in mind, their available time becomes known to the interface from each individual's calendar. Selecting the capabilities from the Research & Capabilities, or Knowledge & Learning, module is then drawn into the interface. From there the user is able to “process” the information and based on the variables given determine when the work would be able to be completed. Then they may select additional resources to fill deficiencies in areas where the capabilities suggest they need more resources, conduct more studies to determine certain unknowns or proceed with the project.

Upon proceeding with the project the people who were selected by the user in the “Planning & Deployment Interface” are given the job to do. They are provided with an understanding of what and how and who will be involved in completing the project. Not that it should be a simple matter of execution, but they should at this time have everything provided within the “package” they receive from the “Planning & Deployment Interface.” That package should be comprehensive and detailed such that it is all that they need to be able to focus on the successful completion of the task. 

The quality of the documentation of the capabilities will be the determining factor in how successful the project will be. If the detail contained in the “Dynamic Capabilities Interface” is of rich media, detailed and provides the user with a good understanding of what is required then the communication from what is expected and what is understood is not at variance. The people will be able to see clearly what it is that the project is about and how they are expected to complete the task.

The innovative and capable oil and gas producer is in need of the ability to document and deploy their capabilities in an efficient and effective manner. Here is a way in which the deployment is planned and executed with an understanding or “meeting of the minds” based on the quality of the documentation in the “Dynamic Capabilities Interface.” It being not just a repository of data that might be used someday by someone. But a living source of quality capabilities in which the producer or JOC depends on to make sure that the execution of their projects are successful.

Who ever it is that implements the project through the “Planning & Deployment Interface” will be selecting the various capabilities documents from the “Dynamic Capabilities Interface.” When they do this they will be able to ensure that the capabilities they select reflect the “final” status necessary for the project. If there is further documentation that needs to take place or more work is needed to advance the state of the capabilities that are selected, these attributes can be added. This would have the effect of keeping the documentation up to the state of the capability within the firm or the Joint Operating Committee. Recipients of the information, once the “Planning & Deployment Interface” was processed, would be able to compare the capabilities information they received with the previous version they viewed, and determine quickly how the capability has changed from that previous version. This could be done by way of differing colored text or some other means. Then they could assess what impact and consideration that change would have on their portion of the task and if they were to have any issues as a result.

Just as with the selection of the various capabilities the resource selection would have any updated information regarding the capabilities of each individual. If the completion of a course or program, the successful implementation of other capabilities etc would be available to the user who initiates the “Planning & Deployment Interface.” This information could be incredibly detailed and include the contributions that the individual made to the “Lessons Learned Interface” in both the Knowledge & Learning, and Research & Capabilities modules. Their performance reviews from previous tasks and any comments about the role they undertook in previous assignments. This information should be available for in-house staff, resources that are pooled through the various Joint Operating Committees that a firm participates with, any suppliers and vendors or contractors that the firm or JOC may have hired to work on the task.

The timing of the project and its completion are somewhat flexible based on the number of resources that are put on the project. This makes for a bit of a paradox, as if the team gets too large you lose the cohesiveness that the team needs to rely upon. Understanding that the people that are resourced into these tasks are probably assigned to multiple projects, and their participation is somewhat constrained by these limits, the time line may reach beyond what is initially the target.

Lastly the “Planning & Deployment Interface” has been about the known knowns to this point. There are a variety of known unknowns and unknown unknowns. To document these, if possible, is the role of the team members once the project interface has been processed and assigned. Recall that Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” A section of the interface should be set aside where the team can collaborate on these points and provide some innovative solutions for the producer or JOC.

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? I think the development of the “Planning & Deployment Interface” as described here would provide the producer and Joint Operating Committee with these sought after abilities.

Focusing on the Producers Earth Science and Engineering Capabilities

People, Ideas & Objects software application modules enable the producer firms and Joint Operating Committees to focus on their core competitive advantages. These being the land & asset base, and the earth science and engineering capabilities of the innovative and profitable oil and gas producer. The Research & Capabilities module of the Preliminary Specification is the key module for the innovative producer to focus on their earth science and engineering competitive advantages. We have been discussing the “Planning & Deployment Interface” of the module and now we want to discuss 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 modules review we defined the time horizons for the Research & Capabilities module, and the Knowledge & Learning module, as the long term and short term respectively. The Research & Capabilities is about the acquisition of capabilities and their documentation, and the 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 in which the producer firm needs to implement the capabilities that it has for experimentation and its sole benefit.

This separation of the time horizon for the Research & Capabilities to take the long term perspective, provides the appropriate mindset for the producer firm to focus on the overall development of the earth science and engineering disciplines. The ability of the producer to match the pace of change in the underlying sciences and mapping the necessary changes within the “Dynamic Capabilities Interface” will communicate the changes from the organization to the various Joint Operating Committees that need that information on those capabilities. These changes and the communication of the changes to the appropriate people in a timely fashion will provide a means of increased performance for the producer and JOC. Providing a foundation for the producer to further build and implement their competitive advantages of earth science and engineering capabilities.

Restating for clarity purposes. That is how the Research & Capabilities module enables the producers to develop, implement and integrate advanced capabilities within their organization. The research undertaken by the firm should not interrupt the day to day of the operation. However, when the research augments the firms capabilities the “Dynamic Capabilities Interface” is updated with that knowledge. These capabilities as they are listed in the“Dynamic Capabilities Interface” will be available to be selected on related criteria in the “Planning & Deployment Interface” of the Knowledge & Learning module. 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 and therefore remain open in a Work Order for completion or resolution.

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.

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.

Who Does the Innovation

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 Outlook for Innovation

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. 

Professor Richard Langlois on Capabilities

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.

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. 

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. 

A Critique of the Bureaucracy

As I stated earlier, the culture of the industry also has an influence on the design of these modules. These cultural conditions reference the boundary of the firms and markets and determine the future changes that will be needed. Since we are dealing with the service industry, and all but the smallest number of producers practice sourcing their field operations from the market. We are consistent with the culture of the industry. Nonetheless Professor Langlois notes three factors are important. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices that were made.
  • The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360
  • The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360
  • The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360
The service industry is robust and dynamic. What is needed is for the oil and gas producers to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings. 

The question that we have to ask ourselves is why should we focus on capabilities in the oil and gas industry? I think it is because we have lost the ability to respond to market signals and initiate new and innovative thinking. These next two points will ask the difficult questions that should be asked in terms of “what” and “how” the industry has been operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil and gas producer, and particularly the Joint Operating Committee, to act in their best interests. 

In the Preliminary Research Report I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a high level of stagnation present in the industry. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. Its as in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion. 

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.” 

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

This is the one culture of the industry that we are moving against. It is also the most powerful. The bureaucracies control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, and there are none. They all get financed on relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy are too conflicted to do the right thing in this regard. The decision to proceed will need to be taken out of the bureaucracies hands and handed to the investors and the C class executives to fund People, Ideas & Objects. After all they have some concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil and gas industry to a scope and scale that is impressive and productive. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means in which to approach the future demands of society's needs for energy. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We have far to fall. Bureaucracies have failed before, and when they do fail, they leave it for the bond holders and investors to clean up the mess, while they look for greener fields elsewhere. 

Economic Growth Through Organizational Change

There is no question how economic growth will occur. That is from organizational change. But I think that it is intended to be as a result of constructive action not as a result of atrophy and inaction. 

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Young 1928; Richardson 1975). p. 3

With the selection of ERP systems like SAP the bureaucracy have secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with. 

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm is able to exercise their opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they are able to populate these capabilities to the various Joint Operating Committees that they have an interest in. Reducing the costly experimentation of innovation yet opening up the assets of the firm to innovations. 

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

This previous quote captures so much of what we should be concerning ourselves with. I think it also shows that by using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil and gas producer requires that you focus on their competitive advantages of their land and asset base, and earth science and engineering capabilities. The Research & Capabilities module focuses on the producers earth science and engineering capabilities and provides the means in which to document them, expand them, deploy them, and most importantly innovate off of them. Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

As we have learned “knowledge beget capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil and gas industry. Systems that provide the computers with the work that they do best and with work that people do best, ideas. So that capabilities should be comprised of knowledge, skills, experience and ideas. The Research & Capabilities module enables the producers capabilities to be captured and deployed in innovative ways. 

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27

and

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. 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. 27

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects is bringing to the oil and gas industry. However, the conclusion I think is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason that Research was grouped together within a module with Capabilities, they have a strong interaction with one another. 

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

As we move to the Knowledge & Learning module we’ll deal with the deployment of these capabilities in the Joint Operating Committee.

Two Primary Processes of Innovation

We have been discussing the coordination of operations and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is one of the things that is carried out in the module, innovation another. To refresh our memory, the primary process in which innovation is carried out in the Preliminary Specification is as follows. 

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and limit the cost of the innovation by reducing the unnecessary repeated experimentation. As I stated this is the primary process of innovation. 

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description. 

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

To preclude the opportunities to act upon these types of discoveries would leave the spontaneity out of the oil and gas industry. When faced with the knowledge that is provided to the user from the “Dynamic Capabilities Interface” some things may become obvious. Serendipity is a word that is used in economics. We should adopt it here to ensure that a dynamic and innovative nature of the industry is the result. 

But there is more that we are doing in this secondary process. We are building on the already well established earth science and engineering capabilities of the producer firms of the Joint Operating Committees. This broadening of the scope of users occurs at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes. 

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2

and

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

What is therefore needed is a means to capture innovations that arise from this secondary process. Whether they are in the domain of the service industry or in the earth science and engineering fields. A means to turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee were to field test their own innovations based on the ideas they may have heard elsewhere.

Conclusion

The Research & Capabilities module documents the earth science and engineering “capabilities” of the innovative and profitable producer firm. Capabilities have been defined as those “knowledge, skills and experience” of the firm. People, Ideas & Objects have added “ideas” to that list. Capabilities have also been defined as “knowledge begets capabilities, and capabilities beget action.” These are the cornerstone of an innovative and profitable oil and gas producer in the 21st century. These capabilities are developed here in the Research & Capabilities module for publication in the pertinent Joint Operating Committees through the Knowledge & Learning modules. 

The Research & Capabilities module enables the producer firm to structure a division of labor between those that will develop the research and innovations within the producer firm, and those that will deploy the innovations within the Joint Operating Committees. This is one of the major processes that is carried out in the module. Another major process is that it provides the innovative oil and gas producer with the ability to move the knowledge and capabilities to where the decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil and gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires. 

Lastly bringing new knowledge and capabilities into the organization are what provide economic growth. Deployment of that new knowledge to the right people at the right time is the challenge that the producer faces and the role that the Research & Capabilities module undertakes in the producer firm. 


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