In this paper the strategic implications of innovations in the shipping industry will be analyzed. To put the innovation system and the following discussion in its context a brief introduction of the main ideas of complexity science are put forward. An interesting example of an innovation opportunity will be discussed in light of the theoretical conclusions. Finally the practical implications of these theories lead us to some suggestions useful for the strategic work in the shipping industry.
1.1
Complexity Science
The complexity science is not a fad. It is a well established scientific method aimed to complement the traditional view of science. In the old school of science the reductionism played a major role. This doctrine is based on the belief that if the components of a system where known in detail the behavior of the system as a whole could be fully explained and predicted. This philosophy is underlying much of the research in the last century where the focus has been to disintegrate the system under study into ever smaller parts, as has been done in particle physics or micro biology.
As a contrast the main thesis that is the base for all disciplines in the complexity science is that a systems behavior can not fully be explained by the included parts but is also determined by the way they interact, causing emergent properties.
One frequent model in the complexity science is the complex adaptive system . It is characterized by the ability to identify regularities in its environment and thereby make predictions to act upon. If its model of the world is close to reality the predictions will be successful and the system will gain competitiveness on rival systems. These experiences compose a kind of scheme that repeatedly is revised when the experiences show shortages. These schemes can be everything from the strategic plan of a company to the instinctive reactions of an animal. Due to irregularities in the environment a stationary state can never be reached and the mutual influence between

Chapters’ title the system and its environment will continue. This constant adaptation is the driving force for the evolution of all complex adaptive systems.
The traditional market economy is based on the following presumption (Martens,
1999);” Perfectly competitive markets are the most optimal instrument for the allocation of production factors and outputs across economic agents and produce the highest reachable point of welfare for an economy. Society should thus maximize the possibilities for competitive behavior among its citizens... “ . The role of the State and society according to these theories are mainly to create and maintain the perfect market i.e. interfere as little as possible and only to correct monopolies and to handle the problem with externalities.
According to the neo-classical theories the market strives towards an entropy maximizing equilibrium where neither buyer nor seller gains from modifying their behavior. In this state no development would occur and the system would extinct.
Now the reality shows a totally different pattern. Buyers and sellers are constantly changing their behaviors. What is missing in the neo-classical theories is the counterbalancing force of differentiation that prevents the termination in a steady state (Martens, 1999).
In macro economic theory there is a focus on growth. Most theories are built on the neo-classical Solow-model (Firth and Mellor, 2000) where economic output is function of inputted resources i.e. labor and capital. Now this straightforward relation doesn’t explain the economic growth. The model can accordingly be enlarged so that input is complemented with external technical development and labor education.
What then changes is the input to the system not the process as such.
In the late 1980s an attempt to analyze the driving forces of economical growth with a productivity approach were made. This differed from the earlier efforts mainly regarding growth as a result of increased quantities of input. These new theories were based on ideas like endogenous growth and the incorporation of technical development and education in the economic process (Firth and Mellor, 2000), making growth possible without increased external resources entering the system.
The new models pointed out innovation as a key factor in economic systems. Even if the models were based on the classical market economy the implication of the new approach was that the idea of the static equilibrium needed to be enhanced with theories able to manage complex and dynamic behaviors (Arthur, 1996).
2.1
Ideas and innovations
The basis for an equilibrium state is that the behavior of the actors is convex and converges towards a defined point. This is fulfilled if and only if the return is diminishing (Martens, 1999). When it comes to ideas and innovations this is not the case and that causes non-convexities in the economic system and equilibrium can not be reached.
The cause is that ideas are non-rival, meaning that they can be used simultaneously in more than one activity. Romer (1990) explains the connection

Chapters’ title between non-rivalry and non-convexity as follows; in conventional production theory a doubling of all the inputs result in a doubling of the output, but if some of the inputs are non-rival these will not have to be doubled and the return will increase more than proportionally to the inputs, or; “ The elasticity of the output with respect to input is greater than 1 and the function is not concave” In other words; innovations increase the return to scale and are hence to be promoted in the economic system.
Ideas can have a high initial cost, R&D, but can thereafter be repeatedly applied to zero marginal cost. Therefore the inventor or producer have to set a price that is higher than the marginal cost on the market to create a non-negative profit. To achieve this there is a need for restrictions in the market, otherwise the idea or innovation would be freely accessible for everybody and the inventor wouldn’t be able to cover the R&D costs. The general idea in public policy of creating the perfect market does not apply here. There need to be some sort of restrictions to make the idea excludable, otherwise profit-maximizing firms wouldn’t assign resources to produce them. Martens (1999) conclude the character of excludability as follows;
“Excludability is a property that permits the efficient exploitation of increasing returns to scale, caused by non-rivalry”. This is controlled by copyright and patent laws creating a short term monopoly for the innovator who can earn a profit exceeding market equilibrium profit. If ideas increase the efficiency in the system and can be protected so that the innovator can use them exclusively there are reasons to believe that the economic agents strive towards this kind of monopoly and that the perfect market only rarely, if ever, exists (Martens, 1999).
Technological development follows basically to main paths; either the sustaining development, with increasing performance of an existing product or technology, or by innovation of a disruptive technology, that is a technology aiming for the same market but based on a new and superior technical concept. Technologies can progress over market demand when the supplier tries to increase the profit margin. This has two consequences; first, suppliers often overshoot their market giving the customers more than they demand and are willing to pay for. Second, new technologies that at present may be underperforming can be performance-competitive in the future taking advantage of the price/value gap created (Christensen, 2000). When a firm builds on its historic R&D skills, incremental or minor projects are likely to arise, it is also found that innovation in established firms often becomes focused on the needs of existing customers (Robinson and Chiang, 2002). Management should therefore also address the potential effects and strategy challenges of innovations that are discontinuous to existing technologies (Low, 2002).
Danneels (2002) argues that product innovation drives organizational renewal by exploiting and exploring firm competences. The innovation process can be seen as linking the technology know-how about both the existing products and disruptive alternatives that may arise, with the competence to communicate and interact with both new and existing customers. The mutual interaction between the technology

Chapters’ title competence and the customer competence trigger the firm’s ability to adapt to new situations caused by changes in the environment.
In this fast changing world the focus changes from optimization to adaptation
(1996). The strategic direction can not only support exploitation of the firm’s current products, competences and customers it has to be flexible and adapting to new technology and open up new market possibilities. This have far going implications for the organization structure. Ashby (1965) illustrates this with the law of requisite variety, which requires “that the variety within a system must be at least as great as the environmental variety against which it is attempting to regulate itself” .
Mechanistic organizations which are based upon a hierarchical structure were found to be generally less competent in adapting to dynamic business environments than organic ones, which are based upon networks, since their rigid organizational structures tended to reduce the variety of their members’ collective practice, according to Moss (2001). The innovation process is often seen as the driving force of business success but as stated, ideas entail complexity into the economic system. A key success factor for businesses is to manage the complexity and gain competitiveness from the increasing returns of innovation processes.
Arthur (1996) points out several characteristics for the parts of the economy that are subject to increasing return, particularly high-technology.
Up-front Costs; High-tech products are typically heavy on know-how and light on resources. This results in R&D costs that are high relative to their unit production cost, implying that unit costs fall as sales increase.
Network Effects; Many high tech products need to be compatible with a network of users. The benefit of using the product increases with the size of the accessible network. The more a product or concept gains prevalence the more likely it is that it will emerge as a standard.
Customer Groove-In; High-tech products require often training to use correctly.
The total cost per unit sinks for the customer when the first investment in training is done.
Path dependency; One consequence of increasing returns is path dependency and lock-in. Due to random events one of several competing technologies gets ahead and as the return increases with the market share the others cannot recover and the market locks in the winning technology even if it not necessarily is superior to the alternatives. This causes a history dependency and another limitation to the model of the perfect market. It also increases the degree of uncertainty as the random events and their effects are unpredictable in advance (Arthur, 1989).
These characteristics described above all contribute to the dynamic in the system and to the effects of increasing returns. They will therefore have consequences when it comes to managing innovation in high-tech industries.
As pointed out by Arthur (1996) the traditional parts of business often exist in parallel with, and interconnected with, the new dynamic parts.

Chapters’ title
Kelly and Allison (1999) summaries eight points that differs the new world from the old;
From relying on bulk-material manufacturing to the design and use of technology
From processing of resources to processing of information
From delivering commodity products to delivering knowledge-based products
From the application of raw energy to the application of ideas
From emphasizing quality, low-cost production to a goal of being first (not always best) in the market with attendant high-cost R&D
From branding and emergent-price standards to market lock-ins and high margins
From a model of diminishing returns to a model of increasing returns
This applies to several parts of the industry, e.g. the suppliers of high-tech equipment and logistic interfaces such as port facilities.
This leads to the following question;
Can awareness of the complexity theories and their implications help a shipper or supplier to balance the R&D resources between sustaining and disruptive development and to manage the organization as a complex adaptive system and thereby gaining competitiveness?
4.1
Containerization in short sea shipping
Goods volumes are continuously growing, and an increasing part of the cargo is transported in containers. The containerization process started in the 1960´s as a response an increase in trade during the 1950´s (Rehnström and Olsson, 2003). The key success factor for the container as a global load unit is the standardization, allowing uniform interfaces to vehicles, handling equipment etc. The rationalization of the cargo handling has decreased turn around time in ports, labor and goods damage (Wijnolst and Wergeland, 1997).
In North European short sea shipping the most frequent goods handling principle for containers is Lo-Lo (Lift-on Lift-off) (Thalenius, 2002) where the containers or other load units are lifted onboard using cranes or trucks. The ships are often general cargo ships that are flexible with a large open space for the goods. This type of goods handling require some sort of standardized load unit to make efficient use of the handling equipment. Containers can also be loaded onto Ro-Ro (Roll-on Roll-off) ships, where the goods are rolled on and off board utilizing its own wheels or terminal handling equipment. The most common load unit used today is the oversea container, developed to secure goods in ocean freight transport. It has many advantages, it is cheap, it is standardized, and it is well know and accepted. But because it originally was developed for a different field of application it might not be optimal for short sea operations, it is heavy, it is not very well suited for truck or train transport and it requires external handling equipment to load, just to mention a few problems.
Below, the basis for development of an innovative load unit will be discussed and the extra dimensions that the complex structure of the market implies, highlighted.

Chapters’ title
Two major driving forces for developing a new cargo concept in short sea shipping can be identified;
First, a trend that the short sea shipping market changes the scope from relying only in bulk goods and low-value products to trying to attract more valuable goods from the roads can be seen. This transportation puts other demands on the load units than before. Dependent on cargo characteristics the goods has to be protected against the environment such as high temperature, vibrations, and risk of theft.
Second, the transportation companies’ responsibility goes further and further in the value chain meaning that the task extends from moving goods from terminal to terminal to provide a complete door to door transportation service from supplier to customer. This results in an increased need of cooperation between different transport modes. To utilize the full advantages of intermodality there is a need for a cargo carrier that without extra loadings and reloading can be shifted between the different types of vehicles/vessels in order to provide a simple physical interface and at the same time protect the goods. A new successful cargo concept would involve a disruptive development in the transport industry. But is the gain large enough to motivate a technology shift? And in that case; what challenges will the innovators have to face?
Design team diversity; As pointed out earlier, a dynamic and volatile environment requires a heterogeneous team. Many companies in the shipping industry have radically cut down R&D recourses and outsourced design activities. A new formation of innovation clusters can be seen as a response to the need off diversity in design teams (Rehnström and Olsson, 2003)
Technical development; Several attempts, with varying success, have been made to develop an innovative load unit suited for short sea shipping and intermodality
(Woxenius, 1993). The competing transport modes have been more successful in their harmonization and the swap body is a common intermodal unit. It has many advantages, it was originally optimized for truck transport and as this often is the most expensive part of the transport chain and the bottleneck an effective utilization is preferable. Then why not just adopt this load unit in the shipping industry as well.
From a shipping perspective the swap body has one large drawback; it is not stackable. As mentioned in the initial description of the problem the ships used for this operation is very open inside to allow a high load factor and therefore the units need to be stacked. In addition the shipping market is locked in by the ISO container and that decides all standard port handling equipment. Most developers try therefore to keep the standardized interfaces in their new inventions.
Network effects, Lock-in; This is an example of a system component that is highly dependent on other parts of the system due to many interfaces such as terminal cargo handling equipment, onboard cargo concepts, and connecting transport modes in other parts of the logistic chain. In other words there are clear network effects, the product need to be compatible with the rest of the network to be accepted or it has to be superior to the exciting technology to justify a technology shift and emerge as a new standard. This is valid for many products in logistic system, which has an obvious network structure.

Chapters’ title
Up-front costs, Joint venture; If the innovation aims to totally change the logistic system i.e., changing the interfaces to other system components, the cost for development and market introduction could be an element of risk. One way to share the costs and at the same time get input from other stakeholder to the system is to perform the development in a joint venture together with, for example, cargo handling equipment supplier, port facilities, and the connecting land transport modes.
A concept design of an innovative load unit has been developed in cooperation between Chalmers University, dept. of Naval Architecture, TTS, a supplier of cargo handling equipment and an EU sponsored research project, INTERMODESHIP. It is based on the ISO container but extended in length to better suit truck transport and made lighter by using a sandwich material (Thiedel and Weisspfennig, 2002). This concept is interesting as it addresses some of the problems with the standard container, but still the question remains whether the product have advantages that motivate the market to switch. A further development including preparations for automatic loading and unloading, well-designed track and trace possibilities and other features might help to outperform the old technology, if this can be done without being to costly.
The question whether to protect the innovation to obtain a monopoly or to increase the applications of the product in order to create a standard and market lock-in is tricky. Dependent on which part of the industry the innovator is representing the strategy differs. A shipper would probably see the advantages of having access to as large network as possible were all are using the same standard unit. Otherwise he will have to deal with a costly and resource demanding return management and limited number of ports supporting the new load unit. A supplier of cargo handling equipment, on the other hand, could probably consider a time limited monopoly as a way to cover R&D costs but even he is dependent upon the total market success of the innovation. One possible strategy could be to first have an open attitude to lock in the market and then develop patented applications to profit on. This strategy require a high liquidity or a joint venture as the process can be time demanding.
To put to much effort into a market introduction of an innovative product is always associated with risk, especially in a dynamic unpredictable business. To succeed, an introduction as to come with the right timing to benefit from the price value gap created between the exciting product and market demand. This gap has to be identified along with the true demands of the market which requires a responsive market sense and an ability to transform these signals to a description that can serve as a R&D specification. This connects to the conception of the firm as a complex adaptive system which constantly registers its environment and tries to work out suitable strategies to maximize its profit. Therefore it is also risky not to invent. As
Christensen (2000) points out a to focused customer orientation can hinder the firm to identify new markets and disruptive technologies until it is to late to change direction

Chapters’ title
From the above discussion, a few recommendations can be drawn;
Create a diverse design team
Design the products to fit in the existing network and have potential to be locked in by other applications
Consider a Joint Venture to share up-front costs and to broaden the market acceptance
Design customer follow-up and education well especially when introducing high tech solutions
Balance the resources between incremental and disruptive development
The shipping industry is rapidly turning into a knowledge based sector and is therefore becoming subject to other economic rules then traditionally, such as increasing returns. This is especially noticeable for the subsystem developers due to the high share of know-how and high-tech in the products compared to the material costs. The network structure of the industry is also affecting the strategic direction.
In innovation and in new market entries there is always an element of risk. The risks of incorrect timing, immature technology, and misleading market prognosis have to be considered and assessed to the risk of losing market share to a competitor with new and superior technology.
Arthur, W. B. (1989) Economic Journal, 116-131.
Arthur, W. B. (1996) Harvard Business Review .
Ashby, R. W. (1965) An Introduction to Cybernetics, Methuen & Co Ltd, London.
Christensen, C. M. (2000) The Innovator's Dilemma, HarperBusiness, New York.
Danneels, E. (2002) Strategic Management Journal, 1095-1121.
Firth, L. and Mellor, D. (2000) Research Policy, 29, 1157-1163.
Kelly, S. and Allison, M. A. (1999) The complexity advantage : how the science of complexity can help your business achieve peak performance, McGraw-Hill, New York.
Low, D. W. C. N. F. P. G. S. (2002) European Business Review, 14, 257-267.
Martens, B. (1999) In The evolution of complexity : the violet book of 'Einstein meets Magritte' ,
Vol. 8 (Ed, Heylighen, F.) Kluwer Academic, Dordrecht ; London ;.
Moss, M. (2001) Knowledge and Process Management, 8, 217–232.
Rehnström, K. and Olsson, L. (2003) In VINNOVA Analys VA 2003:4 Vinnova, Stockholm.
Robinson, W. T. and Chiang, J. (2002) Strategic Management Journal, 23, 855–866.
Romer, P. M. (1990) AEA papers and proceedings, 80 .
Thalenius, J. (2002) SAI, Göteborg, pp. 103.
Thiedel, M. and Weisspfennig, M. (2002) Chalmers University of Technology, Department of
Naval Architecture and Ocean Engineering, Gothenburg.
Wijnolst, N. and Wergeland, T. (1997) Shipping, Delft Univ. Press,.
Woxenius, J. (1993) Department of Transportation and Logistics, School of Technology and
Economics, Göteborg, pp. 95.