Do you want a business that accelerates and grows almost by itself? The good news is that there is something that works like that – it is called the Flywheel Effect.
What is the Flywheel Effect?
The concept of the Flywheel Effect was termed by Jim Collins in his book “Good to Great”. A flywheel is a massive metal disk, or wheel, that often weighs over 2,000 kgs. It takes a lot of effort to get started but once it starts to turn there are counter weights around the outside of the wheel that start to take effect and it starts to build momentum almost by itself. From that point the same effort can be placed on the flywheel and it will start to turn faster and faster.
Jim Collins talks in his book about how a great deal of effort can be put into businesses without much noticeable effect until one day the flywheel starts to turn. This is called the breakthrough moment and once the flywheel is in motion it will start to turn faster and faster with increasing returns for the business.
The secret of the flywheel
One of the most successful companies to use the flywheel concept is Amazon.
Below is a diagram that legend says Jeff Bezos wrote on a napkin.
Here is how it works.
Customer experience is key and every Amazon employee has this as their number one principle.
Excellent customer experience would drive traffic to Amazon.com.
Sellers would be attracted to put their products on Amazon.com.
This would create a greater selection of products for customers to choose from.At the same time the increased sales on Amazon.com would allow Amazon to lower their cost structure and reduce prices.This along with customer experience would increase the traffic on Amazon.com.
Using this model once the Flywheel starts to take effect then the varies areas of the Flywheel will start to feed each other and so start to spin faster. Traffic would increase leading to more sales leading to lower prices etc. All of this would result in the shown accelerated growth of Amazon.com.
Amazon has taken the Flywheel concept and are using it in all their businesses. Amazon Web Services (AWS) for example has used it to accelerated their business growth.
The table above shows that AWS is increasing their overall growth from 35% in 2016 to 47% in 2019. Remember this is off an increasing base and in 2018 the AWS revenue was $26.6 Billion. What happens is AWS grows even faster in the future? What will their revenue be in 2025?
A wheel within a wheel
So we have seen how a company that uses the Flywheel approach can have a breakthrough and then start to accelerate their revenue. This is just the beginning. There can be dozens of Flywheels that start to have an effect within a company, or group of companies, that start to not only accelerate themselves but also have a positive effect on other flywheels within the company or group.
I would again like to use Amazon Web Services as an example. The company operates in territories and countries across the world and also has multiple product and service offerings. I was listening to Geoff Brown, MD of AWS for Sub-Saharan Africa, being interviewed on a podcast called Cloud Over Africa. Geoff said that the growth of AWS in South Africa has followed a very similar trajectory that AWS has in other countries. Looking at AWS in South Africa you can clearly see the Flywheel Effect.
The Flywheel is something like this:
AWS start in South Africa and, based on their performance elsewhere, attracts partners.
These partners have employees who get AWS certified developing skills within the country.
Customers adopt AWS.In South Africa both Standard Bank and Vodacom have announced in the last few months that they are adopting AWS.
This leads to more demand for skills – which attracts more companies becoming partners or existing partners growing their skill base.
Not only are the different countries accelerating their Flywheels but this also gets fed into the other Amazon Flywheels. AWS provides profit for Amazon.com to lower prices further. Amazon Prime grows their subscriber base and feeds sales through to Amazon.com.
How to get the Flywheel to spin?
So the million, or billion, Dollar question is how do you get the Flywheel to spin the first place.
To me it seems the most important thing is to identify what your counter weights are. What can be on either side of the Flywheel that will feed into each other can get the Flywheel to turn. Refer back to the Jeff Bezos example at the beginning of this blog.
According to Jim Collins here are three areas to focus on consistently to get the Flywheel to start to spin:
Level 5 leadership: having the right leader.
Having the right people working for your company.
Confronting the brutal facts about a situation and rectifying it.
Implementing the Hedgehog Concept.In a nutshell this means deciding what your company does that is the best in the world (or country) and then sticking with it.
Culture of discipline: Fanatical adherence to the Hedgehog Concept and refuse to do anything that is not inline with this or pursue other opportunities that can divert the company.
Technology accelerators: They look for new technologies that can increase their performance.
These can be found in Jim Collin’s book “Turning the Flywheel” which can be found on Amazon or clicking on the link.
Jim Collins's also has a website where a toolkit can be downloaded called the “Good to Great Diagnostic Toolkit”. This toolkit has worksheets that will help you to identify your strengths and weaknesses and hopefully identify what needs to be done to get the Flywheel turning.
What stops the Flywheel
The single biggest way to stop the momentum of a Flywheel Effect is to change direction. A Flywheel can shift direction slightly but to go in a completely new direction the momentum of the Flywheel needs to either slow right down or stop entirely.
You must have heard of companies, or are currently working for a company, that changes their strategy regularly, has a different focus every year, does an annual restructuring, chop and regularly changes their sales teams and people etc.
Another term created by Jim Collins is called the Doom Loop.
The elements of the Doom Loop are self-explanatory but the scary thing is they either result in flat or disappointing results. Like the Flywheel Effect the Doom Loop can unfortunately accelerate and in a short period of time a company can accelerate towards disaster.
What do you think of the Flywheel Effect concept? Can you see it working within your company or can it be used within your company? Or your company currently caught in the Doom Loop?
The scary thing for any company is that the Flywheel Effect is real and is being used by the leading companies of the world to accelerate their growth. It seems to me that for a company today to compete they also need to be using this concept – perhaps just to keep up.
As in all my blogs your comments are always appreciated.
The views expressed within this blog are my own and not the views of the company I work for.