Disruptive Innovation lessons from The Box – containers that transformed global supply chain

There must be just a handful of cases that have impacted global politics, labor practices, and commerce as profoundly as the shipping container did. Such a seemingly boring subject is told at a suspenseful pace by Marc Levinson, the master author of the book The Box.

Container has created fundamental disruptions in the global transportation platform: trains, trucks, ships, ports, cities, workers, ship operators, and manufacturers were deeply impacted. Power has changed hands, new companies arose, existing companies and cartels are broken, the military logistics have changed. To a large extent, this chain of events occured thanks to the vision and execution of one trucker (not even a ship owner) named Malcom McLean, touted as the father of containerization.

There are multiple dimensions that deserve a deeper look in this fascinating story. Some are obvious: the disruption of incumbents and the rise of logistics as a civilian practice. Some are obscure, but can be even more valuable, especially if you are a product manager or in the field of entrepreneurship. Based on my Kindle notes, I have the following layers to highlight.

Vision

I have deep respect for people who envision things when there is nothing in that realm. Many amazing things go by unnoticed around us every single day as we are very good at assuming that we would have envisioned and built things just in the same way; everything is obvious once you know the answer. Looking at something that is standard today and appreciating the person who dreamed it when it wasn’t there, has tremendous learning value. Container is one of those things.

The protagonist of the container story is Malcom McLean, a US-based entrepreneur. In mid-1950s, he was mostly concerned with building his trucking fleet and had no business in maritime trade. Except, his trucks collected goods from manufacturers and delivered to ports, to be unloaded by port workers into ships. In the early 1950s, this process was quite labor-intensive, with dock workers, called longshoremen, unloading each box from the truck and re-storing in the ship in a days-long hurdle. McLean’s primary concern was the time his trucks spent at the docks loading and unloading, as his return-on-investment largely depended on how many contracts he could fulfill with his trucks in a given year. If his trucks spent less time in the docks and more time on the road, he would simply earn more.

After impeccably examining each part of his trucks’ journey, he envisioned a solution where manufacturers would get a container ready before his trucks arrived, so that the truck would just pick up the box and deliver to the port in one move. His outsider perspective was so foreign to the incumbents in the world of shipping that the resistance to his vision forced him to get into the business of ship ownership and execute the model himself.

Execution

Vision and execution rarely present themselves in the same individual. The book presents an amazing narrative on how McLean rode against the current and realized his vision. As a trucker, his primary business was with the domestic freight contracts in the US. His competition was not even ships, but primarily trains. When his hopes of ship owners buying into the premise of containers failed, he could have counted tens of reasons to stop pursuing this, but he didn’t.

Under heavy government regulation, freight industry was not a rule-breaker’s playground. Unions were fiercely opposed to the automation that would be brought in with containers. Governors and Mayors relied heavily on labor votes; and hence were less interested in the uncertain economic returns from the containers at the expense of angry dock workers. Ship owners enjoyed uncompetitive pricing enabled by government regulation and had little incentive to try new models – why fix it if it isn’t broken? City committees and governmental agencies were reluctant to outfit the ports with untested, experimental equipment that was prerequisite for container operations. In the light of this, some of the remarkable steps McLean took were as follows:

  • He brought in an engineering team to design the container specs from scratch.
  • He bought old ships and devised ways to retrofit them for container handling.
  • Navigating power dynamics among the government and labor leaders, he was able to secure the rights to cruise among the eastern and southern US ports with his newly-acquired ships.
  • Given the incompatibility of existing ports for container handling, he funded the development of expensive and innovative on-board cranes so that his ships could call at any port and handle container cargo.
  • He saw a major opportunity when the Vietnam war broke out. The US military was caught in a logistics mess to supply gigantic amounts of material to Vietnam and was in a bind to streamline its supply chain, almost at any cost. Playing at multiple platforms of power at once, he convinced the military and political chiefs to become the lead shipping operator for US military cargo as well as the operator of key US military ports in Vietnam.
  • Not content with his success in domestic operations, he set his sights in upsetting international shipping cartels and in capturing the US-Europe maritime trade.

Product Market Fit

The Silicon Valley and high-tech entrepreneurship crowd live by the product-market fit process. Yet, rest of the world is quite foreigner to the term. While McLean doesn’t seem to be explicitly thinking about this, the container’s journey from an obscure invention to a global reality resonate well with the getting to product-market fit process.

Shipping is a service provided to shippers, which are largely comprised of raw material suppliers, or manufacturers of intermediate or final goods. The book surprisingly reveals how powerless this customer group is with respect to freight carriers (trucks, trains, and ships). Despite being the sole revenue stream to carriers, the pre-container era is represented by shippers who accept the world of transport as is and don’t enforce any buyer power over freight carriers.

For carriers, it is business as usual: high labor cost at the ports, government regulation dictating carrier schedules and pricing, cartels called Conferences barring the new market entrants from the most profitable Transatlantic routes, a complex cargo pricing scheme that charges customers rates based on the weight and type of good carried for each leg of the trip… In short, incumbents with virtually no motivation to serve their customers better.

These dynamics in global shipping environment had deeply impacted how manufacturers organized themselves:

  • They had to be as vertically integrated as possible as to minimize the dependency on a shipping platform for its raw materials and intermediary goods.
  • Trying to minimize the cost and delays associated with shipping, manufacturers needed to be located around ports, paying premium rents in most cases. This fact alone explains big cities such as London and New York rising as the center for both manufacturing and commercial shipping in the pre-container era.
  • Manufacturers needed to accept the inevitable loss, theft and damage throughout the shipping cycle, and had to cover themselves with expensive insurance contracts.

McLean didn’t seem to be a master strategist that had insights on every single bit of customer issues listed above. Yet, he had sufficient exposure to issues on the trucking side of things to construct a critical paradigm that no one in the industry seemed had:

The shipping industry’s business is moving cargo, not sailing ships.

This short sentence, blatantly simple once you see it, had the potential to transform the shipping business fundamentally. It has a customer-centric and problem-centric perspective that incumbent shipping companies lacked at the time.

With his actions driven by this customer-centric paradigm, McLean had the opportunity to build for the customer’s needs in mind. Containers, if made viable, could standardize shipping costs, eliminate time delays in loading/unloading process, drive down the costs around theft and damage, and simplify the trade between companies so well that manufacturers could reduce vertical integration, depend on others for intermediary goods, and specialize in their core business.

This is exactly what happened to global manufacturing platform once containerships became a reality. In many aspects, the container became the TCP/IP of the global supply chain.

Disruptees: Incumbent Ports

The usual suspects of this disruption story is clear on the disruptor side: Led by McLean, outsiders (as opposed to incumbents) around the world were able to capitalize on this opportunity on the carrier side. The disruption of the incumbent carriers is somewhat inconclusive, because many of those carriers ended up surviving and benefiting from this major shift through aggressive mergers and acquisitions. Indeed, the containerization created carrier consolidation at a level never achieved before. Today’s giants, such as German Hapag-Lloyd and Denmark’s Maersk, are direct outcomes of the post-container world. On the flipside, the textbook-example of disruption has actually impacted the business of maritime ports and the cities that owned them.

Two key characteristics had existed about the world’s ports in the pre-container era:

  1. The world had a lot of small ports to serve its micro regions.
  2. There were also large ports, organized in very big cities, such as London and New York, which also housed manufacturers feeding the ports and dock workers operating the load operations.

The container reset the entire landscape of port operations. With containers, loading/unloading to the ship became much more automated, dramatically reducing the need for manual labor at the docks. Ports with commitments to dockworkers and unions had a very hard time re-organizing its operations to embrace the containers. In several instances, containers had a double-blow affect to the existing ports. Not only incumbent ports struggled to retrofit their docks for container handling equipment, their efforts against unions for labor negotiations caused prolonged strikes hurting their existing breakbulk business, accelerating the ports’ self-destruction. The following cases of disruption are told in wonderful detail in the book:

Disruptee: New York Ports (Manhattan & Brooklyn)

New York (exclude New Jersey ports for now, which were virtually non-existent in the pre-container era) commanded superb power in the US economy thanks to its ports in the Atlantic ocean and vast manufacturing plants located around its ports. Exactly for these reasons, NY ports were the first ones to get disrupted by the container business.

  • NY Ports were right in the city center, with the city’s infrastructure (roads, rail yards) already built for a specific method of supply chain. When containers came, the size of the transport operations shifted enormously. NY ports didn’t have access to wide expressways for large trucks to carry loads. It wasn’t built with large-scale rail yards to deliver containers across the country. The docks were designed to handle ships of certain size. The storage zones in the docks were not adequate at all to store flights of containers, and there was no room around for the docks to expand. The city had already flourished around the port, housing dock workers’ homes and manufacturing plants. Containers required large horizontal spaces for warehousing and direct access to intermodal transport options to efficiently move cargo between land and sea.
  • Labor in NY were heavily unionized and union leaders had tremendous power in politics and local commerce. Containers meant that wages and employment would go down considerably. Decision-makers had all the incentives to rebel against containers, because dockworkers meant votes.
  • While not content with the prime real estate rates of New York City, manufacturers had no options other than being headquartered in the vicinities of the NY ports. Due to the high freight costs and unpredictability of delivery times, they had to see their goods shipped in the ports in a daily manner. This was, in fact, the only reason for manufacturing plants to stay in the expensive city center in the pre-container era.

Many politicians and various government agencies unsuccessfully attempted to retrofit NY ports for containers. Yet, a rather obscure bi-state committee, ironically named Port of NY Authority, pushed the envelope to transform the marsh on the NJ side of the Hudson River into a modern port designed for containers from scratch. The gigantic port, named Port Elizabeth, never stopped disrupting New York ports once it opened:

  • The landfilled grounds of Port Elizabeth offered vast amounts of space to store containers, install cranes, and build expressways / rail yards. With the endpoints of truck and rail freight routes right in the port, goods manufactured by any establishment in the continental US could be delivered to Port Elizabeth swiftly.
  • With no existing labor contracts and unions, Port of NY Authority didn’t need to worry about strikes and union negotiations around automation.
  • Docks were completely redesigned with a new breed of ships, dubbed containerships, with the specifications originated by a familiar figure, Malcom McLean.
  • Once the shipping costs and timelines are streamlined by the containerships, manufacturing plants located in New York City realized that they had no reason to operate in the constrained and expensive city environment. They could relocate to hinterland, consolidate their space into large campuses, and enjoy dramatically lower real estate costs. Amazingly, not only did the container hit the NY dock business hard, but also it stole the manufacturing industry away.

In the words of the book’s author, Marc Levinson: “A New York City location had long offered transport-cost advantages for factories serving foreign or distant domestic markets, as local plants could get their goods loaded on ships with much less handling than could factories inland. The container turned the economics of location on its head. Now, a company could replace its crowded multistory plant in Brooklyn or Manhattan with a modern, single-story factory in New Jersey or Pennsylvania, could enjoy lower taxes and electricity costs at its new home, and could send a container of goods to Port Elizabeth (NJ) for a fraction of the cost of a plant in Manhattan or Brooklyn.”

Disruptee: London Docks

Similar to New York, its Atlantic counterpart, London enjoyed being the prime international trade port and housing vast manufacturing facilities accordingly. This popularity was an accelerant to its demise, just like NY. Directly quoting from the book:

  • London’s docks were grouped in sheltered enclosures off the Thames that were difficult even for conventional ships to navigate; large vessels had to unload into lighters nearer the mouth of the river. Transferring huge cargo containers from oceangoing ships to lighters made no economic sense.
  • The prospect of hundreds of lorries hauling 40-foot [container] loads through the narrow streets of East London was a nightmare.
  • Similar to NY, labor issues were overwhelming. Unions were against automation brought by containers and disrupted the ongoing shipping business with prolonged strikes.

The government’s transportation body retained McKinsey & Co. to chart a course for the British docks. McKinsey’s study predicted that container shipping would quickly consolidate around a few companies using gigantic ships carrying standardized containers. Ports, it said, would need to be very large to gain economies of scale in transferring containers between ships, trains, and trucks at high speed. Containerization could cut Britain’s ocean freight bill in half, McKinsey found—but only if a single huge port were to handle all cargo to and from North America and then use unit trains to link the port to other parts of the United Kingdom.

In just 4 years between 1967 and 1971, of the 144 wharves that had operated in London, 70 shut down. While the popularity of London port was going down the drain, a once-lonely port in the North Sea shore of England, named Felixstowe, made all the right moves to become that single huge port that McKinsey consultants predicted.

Disruptor: Felixstowe Port

Felixstowe started from nothing and became Britain’s largest container terminal in 10 years. Its characteristics, which made it a loser in the pre-container era, helped it acquire the lead role as Britain welcomed the container trade and emerged as the two-way Transatlantic trade center between America and continental Europe. Key aspects of Felixstowe were:

  • It used to be a tiny private port on the Eastern coast of the UK, facing Europe.
  • No major breakbulk (general cargo) traffic meant that Felixstowe had no sunk costs for the legacy port operations.
  • Its tiny pre-container era volume helped it bypass the labor unions and the opposition to container-enabled automation.
  • Being a privately-owned port, its operations didn’t have to satisfy political complexities.
  • Located in an undeveloped region, it had no barriers to expand for intermodal transport connections and expansive warehousing operations.
  • Its docks were destroyed in the storms of 1953, allowing the owners to grasp the full spectrum of opportunities while rebuilding the port.

In 1966, while the British government was trying to convince international container ship lines to call at Tilbury (a new gov’t project from scratch to replace London docks), Felixstowe’s owners had had the foresight to strike a private deal with Sea-Land Service (McLean’s company). They spent £3.5 million pounds ($10 million), a fraction of the government’s outlay at Tilbury, to reinforce a wharf and install a container crane. Sea-Land opened service in July 1967 with a small ship shuttling containers back and forth to Rotterdam, and soon added ships directly from the United States. In 1968, with Tilbury closed by the strike, the once-obscure Port of Felixstowe became Britain’s largest container terminal. As Felixstowe flourished, so did Rotterdam.

Disruptor: Port of Rotterdam

Rotterdam had ports operating in its shores since 1400s, but not at levels of international significance. During 1940s, it had the unfortunate fate of being bombed and completely destroyed by Germany. Before the destruction, the port had limited capability due to the shallow waters, and the forced reset of its infrastructure gave Dutch officials a clean slate to rebuild.

During two and a half years of union-induced delay in Britain, Rotterdam spent $60 million to build the European Container Terminus, with ten berths and room for more. Traffic that had once fed through London to other British ports was now transshipped at Rotterdam, which was on its way to becoming the largest container center in the world. Dutch planners’ agility in the wake of Rotterdam port’s destruction, and the city’s existing connections to Germany via road, rail and barges made Rotterdam a magnet for the booming containership business in the Atlantic.

Reflections

In less than 20 years, containers have transformed the way supply chains are built and operated on a global scale. Some of the things we consider as given today in the global commerce were emerging as big shifts during the containerization era:

  • New major ports were created from scratch to serve as regional distribution hubs. Some notable ones are Singapore, Felixstowe, Rotterdam, and New Jersey.
  • Many incumbent ports vanished. NY, London to name a few.
  • For the first time, it made sense for Australia to join the global economy with its two-way trade, thanks to dramatically shrinking shipping costs.
  • World of shipping insurance changed dramatically.
    • Insurance claims on Europe – Australia route went down 85%.
    • Cargo theft dropped sharply, and damage claims in transit fell by up to 95%.
    • After insurers were persuaded that container shipping in fact had fewer property losses, premiums fell by up to 30%.
  • Larger, more professional ship operators became the only viable reality:
    • Hapag-Lloyd merger, among two big German companies failing to stay abreast of this major change, happened because of containerization.
    • The Danish AP Moller’s Maersk came very late to the game (in 1973, some 16 years after McLean started operating the first containership), but used an aggressive M&A strategy at a global scale to become the largest containership in the world. In doing so, Maersk led the demise of several shipping cartels (i.e. Conferences).
  • Asia-Pacific ports became the world’s workshop for manufacturing with great ports and intermodal access to countless regional ports.
  • As of today, despite its very attractive labor costs, African countries are still having issues attracting investment in manufacturing supply chains, largely because their inefficient ports and constrained containership service are creating prohibitively high transport-cost disadvantages.

In hindsight, it is quite surprising for a low-tech steel box to change the dynamics of global trade and politics at such extreme levels, but it did; in ways unimaginable to the key players of that era.

Bill Gates has also written about this book in his blog, particularly highlighting the tricky business of predicting which innovations will flourish and which will vanish. Find his book review here.

Everything is obvious once you know the answer.

Quote

Everything is obvious once you know the answer.

The world is largely a structured place. Almost everything we do, think about, and experience has an order. We use many things around us thinking that it is created in the only obvious way available.

It is a whole new dimension of awareness when you think about the first person who envisioned something had to perform in a certain way, and hence to be designed accordingly. Once you become aware of how hard it is to build something when there is nothing, make sense out of noise, you start appreciating the rare attributes; vision and execution.

Making things takes time, and once you have started, you have to keep going until it’s right.

Quote

Making things takes time, and once you have started, you have to keep going until it’s right.

Esther Freud is an author who collected many pieces of the puzzle from his father as he painted and she watched over many years.

People often want to finish whatever it is they are building, reading, watching so that they can get on to something else. But, great results can only come from patiently building things, brick by brick.

Vanity Fair’s piece shows how newspapers fall prey to the innovator’s dilemma

Michael Kinsley had a piece titled “The Front Page 2.0″ in Vanity Fair’s May 2014 issue.

While it is a nice read overall, what struck me was the part about how NY Times chief wanted to position the newspaper in an era of blogs and digital publishing proliferation. Here is the section that is extremely relevant for the disruptive innovation thinking:

In a couple of recent speeches, the C.E.O. of the New York Times Company, Mark Thompson, has suggested that the high quality of the Times’s content—the very quality that alarmists claim is becoming unaffordable as a result of bloggers and other cheap competition—will be the paper’s salvation, because people will pay real money for it. (He cautions that the Times is sui generis and that this high-quality strategy won’t work for ordinary, run-of-the-mill papers such as . . . any paper other than the Times.) With admirable, or possibly insane, frankness, he says the Times’s intention is to reduce reliance on advertising and to squeeze its most loyal readers as much as possible to pay for the content they consume.

See what is coming? Disruptive innovators enter a market from the low end. The incumbents respond by securing the highest-end of their customer base. Christensen lets us imagine how incumbents communicate internally when they discuss the innovator’s threat. Let’s satisfy better our most profitable customers. Let the innovator capture the lowest end. Those customers are not bringing that much profit anyway.

It is clear how the story goes on from here. Innovator captures the lowest end of users, and improves its offering to allure the next tier. And the next. Then the next. Eventually, the most demanding, most profitable one…

NYTimes CEO’s remarks are right on spot to become a disruptive innovation case study in business schools.

Minimally-viable vs. Fully-finished products

There are essentialists and there are perfectionists.

Essentialists essentially start with a minimal set of features to put a product in front of a customer. They validate whether there is anything useful in the new offering, and advance iteratively. When you behave like this, you are building a “minimum-viable product”.

Perfectionists carefully construct the entire package, mentally first and actually after. They put every piece, every feature in perfect order before the customer first sees it. They choose to stay in dark (i.e. with no feedback from the customer) for a long time and they are ok with it. When they launch, customer experiences a fully-finished, polished product.

The Silicon Valley culture cheers MVP approach, and they are not wrong; it helps a ton to pivot without incurring monumental costs. Yet, this doesn’t mean it is the only way. I want to celebrate three perfectionist projects from the media world in an era of MVPism.

Game of Thrones – every single detail, from the cast, to the costumes, to the screenplay are detailed, planned, perfected in advance.

House of Cards – almost everything that can be said about Game of Thrones, repeated.

The Porter magazine – a new fashion magazine by Net-a-porter group. 3 years planning. Perfect content, branding, distribution plan, digital footprint, advertisers, strategy connecting the core e-commerce business.

This is just another piece of the puzzle. MVP is not a rule. It is a choice.

Published on LinkedIn: Want real learning? Test yourself

I published my first post on LinkedIn earlier this week. My main focus was emphasizing the importance of testing in our learning process. After discussions with the commenters, I think the highlight reel for the piece would be this:

Practically, you are testing yourself whenever you force yourself to produce an answer, before you see the answer. Testing is the due diligence on our learning performance.

I am already looking forward to publishing my next post on LinkedIn. Hope you are too.

Want real learning? Test yourself

Stronger or smarter

Since I took my first biology classes many years ago, I have been constantly intrigued by the mystery about the human brain and why it evolved the way it did. John Medina provides snippets of answers in his book titled Brain Rules. I will probably post more, but this one sheds enough light on an important divergence.

There are two ways to beat the cruelty of the environment: You can become stronger or you can become smarter. We chose the latter. It seems most improbable that such a physically weak species could take over the planet not by adding muscles to our skeletons but by adding neurons to our brains.

This explains so much of what we are trying to do as humanity today; along with what we were able to achieve (space programs, nuclear weapons) and where we continuously fail (obesity, psychological disorders).

Disruptive Innovation at a glance

Not every innovation is disruptive. In fact, most of the innovation happening today should be classified as sustaining. Yet, many companies, especially startups, define their mission around disrupting incumbents and industries.

Clayton Christensen is the key figure when it comes to understanding disruptive innovation. I will use some quotes from him and his books to underline what makes an innovation disruptive.

Disruptive innovations don’t attempt to bring better products to established customers in existing markets. Rather, they disrupt and redefine that trajectory by introducing products and services that are not as good as currently available products. But disruptive technologies offer other benefits-typically, they are simpler, more convenient, and less expensive products that appeal to new or less-demanding customers.

In most cases, innovations lead to better-performing products, and established companies pour disproportionate amount of resources on extracting more revenue from their existing customers by offering them more sophisticated products. Disruptive players focus on the overshot section of the market: low-end, less-demanding customers, and even non-users of a category.

They [incumbents] are always motivated to go up-market, and almost never motivated to defend the new or low-end markets that the disruptors find attractive. We call this phenomenon asymmetric motivation.

If a disruptive innovator is trying to steal the low-end, least-profitable customer segment of an incumbent, it is highly likely that the incumbent will focus its efforts to protect its more profitable customer segments.

Then what: Cloud storage

Cloud storage wars are getting intense on the storage size front. A WSJ story on Box’s new offering describes what is to come and predicts marginal cost of storage reaching zero. When that happens, competitiveness will likely move towards the abilities of viewing and processing various file types.

Google currently has 2x high ground with:

  • Gmail. Users can perform “View in Google Drive” for email attachments.
  • Google Drive. Users can view and edit docs, spreadsheets, presentations on the web and on mobile. Collaboratively.

Dropbox has 1x high ground: Mailbox. Users will perform “View in Dropbox” for email attachments.

Box is at a disadvantage with no horse in mail apps. But, they partially mitigate that with a strong footprint in enterprise market.

Then what? Competition will go shopping to expand and enhance their file viewing and editing abilities. The shopping lists will likely contain Aviary, Goodreader, LiveLoop.