Technology Price Point Changes Everything

    August 27, 2015 9:32 AM by Dr. Scott M. Shemwell

    Volume 4 Number 16

    When the first IBM PC (desktop) was unveiled in 1981, its price sans options was $1,565.[i]  That is the equivalent of almost $4,100 in 2014.[ii]  Today, an average laptop is available for slightly more than $200 and one could argue that there is little similarity between the current generation and its founding ancestor.

    This is even true for durable goods such as automobiles.  The average cost of a new car in 1980 was around $7,000 and gasoline was 90 cents a gallon.[iii]  In 2014, the average cost of a vehicle is little more than $31,000.[iv]

    This is approximately $11,000 more than the inflation predicted price but today automobiles are more reliable and “have optional features that people in the 50s, 60s and 70s would have considered science fiction.”[v]

    We can surmise that the Total Cost of Ownership (TCO) throughout the automobile “asset” life cycle is lower and that its current Usability Index is high.  In other words, the Driving Experience is better than with earlier generations.

    In earlier editions, we have commented about the impact of technology is having on heavy industry resulting in lower cost structures.[vi]  We extend this position herein and posit that a unit of technology cost or its marginal cost is approaching zero.

    As previously mentioned in this series, we developed the construct of the Expected Value of Marginal Information (EVMI) in 1997.[vii]  This economic Utility Theory derived model holds true for other technologies deployed in industry.

    Therefore, we can infer that our Energy Experience can be better using the technology tools that have enabled disruptive and more effective processes.  Additionally, today’s energy firm can have features only dreamed about by previous generations.

    One of these features is better Capital Efficiency (Return on Capital Employed).  Similar to the boom in home offices, greater capital efficiency can enable smaller economic actors to undertake projects that in the past only major players could commence.  One example might be the sustained shale plays despite much lower crude oil prices.

    The current market has sidelined many major capital investments in the deepwater.[viii]  Granted, the project costs for deepwater are significantly higher; however, ROCE has been elusive more because of management costs rather than expensive deepwater technology and regulatory compliance requirements.[ix]

    ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed.  Capital Employed = Total Assets – Current Liabilities.  This key metric of the firm’s performance is driven not only by low cost operations but superior asset (reservoir) management.

    Finally, the long awaited and much discussed Big Crew Change is well underway if not drawing to a close.  The discussion has long been around how to replace the knowledge leaving the industry.

    Perhaps the knowledge is not leaving the industry but simply being repositioned in smaller firms or as contractors and other professional service providers.  If this is correct, this knowledge base will be available for the foreseeable future.

    The great Technology Enabler meeting the Big Crew Change may be changing the sector landscape.  As depicted in the following graphic which is redrawn from the Convergence of Exponentials.[x]

    With an ever decreasing technology price point powered by performance from the Convergence of Exponentials knowledgeable teams can maximize Capital Efficiency.  This disruptive force is changing the nature of this established sector.

    How will your firm Maximize its Capital Efficiency?

    About the Author

    Dr. Scott M. Shemwell has over 30 years technical and executive management experience primarily in the energy sector.  He is the author of five books and has written extensively about the field of operations management.  Shemwell is the Managing Director of The Rapid Response Institute, a firm that focuses on providing its customers with solutions enabling operations excellence and regulatory compliance management.  He has studied cultural interactions for more than 30 years--his dissertation; Cross Cultural Negotiations Between Japanese and American Businessmen: A Systems Analysis (Exploratory Study) is an early peer reviewed manuscript addressing the systemic structure of social relationships.

    End Notes

    [i]  https://www-03.ibm.com/ibm/history/exhibits/pc25/pc25_birth.html

    [ii]  http://www.davemanuel.com/inflation-calculator.php

    [iii]  http://www.thepeoplehistory.com/80scars.html

    [iv]  http://money.usnews.com/money/personal-finance/articles/2015/01/02/a-glimpse-at-your-expenses-100-years-ago

    [v]  http://jalopnik.com/5953080/how-inflation-has-jacked-up-the-prices-of-your-favorite-cars/

    [vi]  Shemwell, Scott M. (2015, March 20). Drilling Moore. Governing Energy. PennEnergy.

    [vii]  _______ (2015, February 4). Towards Zero. Governing Energy. PennEnergy.

    [viii]  http://www.ft.com/cms/s/0/dc94b628-9be7-11e4-b6cc-00144feabdc0.html#axzz3j6Xv2H9V

    [ix]  Barton, Christopher M. (2015, April 1). Best Practices Help Keep Deepwater Megaproject Capex in Check. Hart Energy.

    [x]  Shemwell, Scott M. (2015, April 23). Titans of the 1940s, Today. Governing Energy. PennEnergy.

    The New Normal?

    August 4, 2015 11:54 AM by Dr. Scott M. Shemwell

    Volume 4 Number 15

    If there was ever an overused cliché, the “New Normal” is it!  We are told that any number of societal changes result from this paradigm shift (also overused) and that we must prepare ourselves for this step-change in our lives, jobs and even culture.  Often simply a cyclical event, a New Normal does not materialize and once the danger has past, humans revert to a status quo—the Current Normal!

    In previous editions of this blog we have expressed the position that the crude oil commodity price point may have indeed entered into a new normal trading range.[i]  Moreover, technology continues to be one of the differentiators between profitable firms and those that struggle when oil is below $50.[ii]

    While cost cutting is important and a traditional approach to cyclical downturns, this time some firms are tweaking and even revamping their fracing (technology based) solutions.[iii]  One analyst even calls this, “a step-change in well performance.”

    The oil industry has long been known as a cyclical sector and market observers often express comments such as, “Margins Depend On Oil Prices.”[iv]  But what if this is no longer a truism?

    Driven by technology and the good business practices of those nimble, rapid responsive organizations, margins may now depend more on the “Structural Dynamics” cost structure and less on the (short-term) price point.[v]  The evidence is mounting that the industry may in fact have transformed to this new “structural” normal.[vi]

    However, can shale oil replace (by volume) the production of the Middle East and Deepwater offshore?  This pundit suggests that this is To Be Determined.  While this may be an unknown, the industry appears to be reacting as if shale is a major disruptive event.

    If this structural transformation is the case, how does the industry respond?  History suggests that the basic response may be tepid in that management will believe in the ultimate rebound until such time as “the die is cast.”

    Farfetched?  The changes, albeit turnover in Fortune 500 companies is high; however, its focus is more on the changes in fortunes of individual firms than the economy in general.  According to one source, “It reflects a kaleidoscopic process of sectoral change and greater efficiencies at the level of individual firms, as well as some less sanguine economic developments.”[vii]

    This begs the question, are we seeing Schumpeter’s Creative Destruction at work in the fossil fuel industry today?[viii]  If we are, history also suggests that incumbents will not see the Structural Dynamics underfoot.[ix]

    So perhaps we are entering a New Normal and “It is Different this Time.”[x]  Those that cling to historical market models may do so at their peril.

     

    How is Your Firm Structuring for a Possible “New (permanent) Normal?”

     

    About the Author

    Dr. Scott M. Shemwell has over 30 years technical and executive management experience primarily in the energy sector.  He is the author of five books and has written extensively about the field of operations management.  Shemwell is the Managing Director of The Rapid Response Institute, a firm that focuses on providing its customers with solutions enabling operations excellence and regulatory compliance management.  He has studied cultural interactions for more than 30 years--his dissertation; Cross Cultural Negotiations Between Japanese and American Businessmen: A Systems Analysis (Exploratory Study) is an early peer reviewed manuscript addressing the systemic structure of social relationships.

    End Notes

    [i]  Shemwell, Scott M. (2014, December 18). 2008—Redux. PennEnergy Governing Energy. Vol 3. No. 24.
    [ii]  ___________ (2015, January 22). Is it Different This Time?. PennEnergy Governing Energy. Vol 4. No. 2.
    [iii]  http://uk.reuters.com/article/2015/07/29/usa-oil-technology-idUKL1N1042J020150729
    [iv]  http://www.valueline.com/Stocks/Industries/Industry_Analysis__Petroleum_(Integrated).aspx#.VbvTJtJ0yM8
    [v]  Shemwell, Scott M. (2015). Structural Dynamics: Foundation of Next Generation Management Science. Houston: RRI Publications. http://www.amazon.com/Structural-Dynamics-Foundation-Generation-Management-ebook/dp/B00U0JKMT0
    [vi]  http://www.reuters.com/article/2014/10/23/idUSL3N0SH5N220141023
    [vii]  http://www.wired.com/2012/06/fortune-500-turnover-and-its-meaning/
    [viii]  Shemwell, Scott M. (2014, July 18). Institutional Imprint. PennEnergy Governing Energy. Vol 3. No. 14.
    [ix]  ___________ (2015).
    [x]  ___________ (2015, January 22).

     

     

    Cultural Simulation

    July 20, 2015 8:49 AM by Dr. Scott M. Shemwell

    Volume 4 Number 14

    This pundit has long advocated the use of games and process simulations not just as learning tools but as useful methods for exploring the results of complex scenarios in a comparative analysis.[i]  Which scenario has the highest return with the lowest risk profile?

    Moreover, as when the invading aliens on the video game win, no one is seriously injured when the “Failure is not an Option” problem generates disappointment!  Perhaps embarrassed or “put in one’s place”, hitting the reset button and trying again costs nothing other than the Human Marginal Cost of Mortification (HMCM).

    As with any learning experience, failure is often the best teacher.  This is all fine and good unless the stakes are high.

    [ii]

    Almost a decade ago, we released the first version of Project Management Scenario Simulations.  This was later codified into a formal methodology including a software suite.[iii]  This enabled organizations to test various risk based scenarios before, “cutting steel.”

    In a recent survey, only 21% of the companies “self-reported” that their organization had attained the top level of Culture of Safety Maturity.[iv]  Attainment for the Five Levels of COS Maturity:

    • Level 5                  21%
    • Level 4                  36%
    • Level 3                  26%
    • Level 2                  11 %
    • Level 1                  06 %

    Moreover, when those top level organizations contract with partners or suppliers whose maturity is lower, by default the maturity level of that project can only be as high as the highest maturity level of lowest organizational maturity.

    Additionally, each organization has its unique culture which is often the source of competitive advantage; certainly organizational pride.  By type, a large operator has a different culture than a large service company or manufacturer and so forth for all large medium and smaller firms in the sector.[v]

    Effectively, th