Identification and building of capabilities for knowledge intensive, highly risky and uncertain activities: a study in the oil and gas sector

Abstract

Upstream petroleum firms acquire blocks to explore oil and gas, These decisions are strategic choices for the firm exercised under conditions of high uncertainty and risk. Firms, therefore, continuously strive to improve their decision making processes. In this study, we focus on how upstream petroleum firms develop decision making capabilities to enhance their chances of acquiring blocks and hit pools of hydrocarbon reserves in these blocks. A study of this nature requires integration of literature on capabilities, strategic decision making and uncertainty, and bidding. Capability focused studies have devoted sparse attention to the generic issue of development of capabilities. In fact researchers, have started asking this question only recently (Montileagre, 2002; Helfat and Petraf, 2003; Keil, 2004). Strategic decision making researchers (Rajgopalan, 1993, Elbana and child, 2007) Have called for capability oriented studies that explicitly link context with organizational processes and capture unfolding of relationship between context, process, and decision effectiveness. Uncertainty literature has offered little remedy for highly uncertain and risky decisions (Embelmswag and kjolswad, 2006) & the focus of studies in bidding have been predominantly quantitative ignoring the process aspect of decision making. From the review of extant literature, we observe that there is a need to understand that there is a need to understand uncertainties that influence decision making, decision making process in this context, and processes that firms use to copy with uncertainties Accordingly, we formulate identification and development of capacities required for effective decision making as the research objective of this study. For this study, we relied on a multiple case – based approach (Eisenhardt, 1989). Four firms from upstream petroleum sector comprised the data set. Primary data was supported with additional secondary data to document cases on four firms. Thematic analysis of data focused on categorizing different types of uncertainties decision makers keep in mind while formulating the response to the task at hand. Inductive logic was then used to identify the capabilities by coupling organizational processes with type of uncertainty. Longitudinal data analysis of the firms was used to build framework of capability building. From the analysis, we point out three types of uncertainties: focus, stance, and solution that organizations face. To overcome these uncertainties, firms develop capabilities to identify target area, position themselves with respect to competitors, and establish routines to exercise choice. These capabilities are built by partnering, learning by doing, structuring, resource integration, establishing logic for processes, associating, and investing in core knowledge infrastructure. The process of capability building is a three-staged stepped up process where in firms try to achieve technological and evolutionary fit in each stage. This research contributes in a number of ways to the existing body of knowledge on uncertainty, capabilities, and decision making. First, it identifies three board classes of uncertainties in decision making and the processes (capabilities) that are appropriate to handle each class of uncertainty. Second, it provides a framework of capability building for decision making under conditions of high uncertainty and risk. The practical value of the findings lies in providing an alternate perspective of decision making activities in oil and gas bidding along dimensions of value identification, positioning, and harnessing. Finally, the findings peripherally provide explanation for oil multinationals not succeeding in winning exploration bids in India and suggest need for a better auction design.