Flywheel Effect: Why Positive Feedback Loops are a Meta-Competitive Advantage

Eric Jorgenson
Aug 7, 2017 · 12 min read

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I admit, I was not completely sure what I was talking about when I chose “Flywheel Effects” as a topic. But that’s part of the fun.

This turned into a fascinating adventure through Competitive Advantages, Mental Models, and practical lessons for operators. Also lots of fun pictures and diagrams in this one!

Here’s the “Table of Contents”:

  • What is the Flywheel Effect?
  • Applications of Flywheel Effect (and Meta-Competitive Advantages)
  • The Best Examples of Flywheels
  • How to Push the Flywheel

I think we ended up in a good place, but as always I’d love to hear if you think I’m wrong on any of this so I don’t stay quite as ignorant as I am now.

What is the Flywheel Effect?

Definition…?

Visualization

Picture a huge, heavy flywheel — a massive metal disk mounted horizontally on an axle, about 30 feet in diameter, 2 feet thick, and weighing about 5,000 pounds. Now imagine your task is to get the flywheel rotating on the axle as fast and long as possible.

Pushing with great effort, you get the flywheel to inch forward, moving almost imperceptibly at first. You keep pushing and, after two or three hours of persistent effort, you get the flywheel to complete one entire turn.

Dissection

Momentum — An object at rest tends to stay at rest, and object in motion tends to continue in motion. Newton’s first law, applied to business. Flywheels (being massive heavy objects) are hard to get moving. If they get moving, they are likely to continue.

Feedback Loops — The faster the wheel is spinning, the easier it is to add incremental speed. The faster it moves, the more energy it generates. And the more excited everyone is about how great this Flywheel is!

Compounding Return on Effort —No “one push” makes it happen. Continuous small inputs add up into an impressive output, eventually.

Direction — Sustained effort must be focused in one direction in order to maintain momentum and compounding returns. Misplaced effort is either wasted or counterproductive.

You can see each of these concepts in this one paragraph from Good To Great explaining the effect:

The momentum of the thing kicks in your favor, hurling the flywheel forward, turn after turn … whoosh! … its own heavy weight working for you. You’re pushing no harder than during the first rotation, but the flywheel goes faster and faster. Each turn of the flywheel builds upon work done earlier, compounding your investment of effort. A thousand times faster, then ten thousand, then a hundred thousand. The huge heavy disk flies forward, with almost unstoppable momentum.

Definition, again

Flywheel Effect: Positive feedback loops that build momentum, increasing the payoff of incremental effort.

Or, Flywheel Effect in Normal English: When good things you do lead to more good things “just happening”.

Applications of The Flywheel Effect

My current thinking is The Flywheel Effect, as we’ve defined it, is a kind of meta-competitive advantage.

It can accelerate the growth of a business and the widening of a moat, but it is not itself a source of competitive advantage. It is a force-multiplier of existing competitive advantages.

Let’s see how the Flywheel Effect interacts with Competitive Advantages:

Supply-Side Economies of Scale

The bigger these companies got, the cheaper they could sell their goods for, the more leverage over suppliers, and the bigger the brand became.

Another example, from Ben Gilbert’s talk (more later) is Disney. As their empire of entertainment grew, the positive feedback loops between their various businesses became stronger:

Brand

Every time they have a player drafted or win a championship, it becomes a more desirable school for the next round of players, and on it goes. Each win makes the next win slightly easier.

Another example, Munger’s explanation of the powers of scale for Coca-cola.

Another advantage of scale comes from psychology. The psychologists use the term social proof. We are all influenced — subconsciously and to some extent consciously — by what we see others do and approve. Therefore, if everybody’s buying something, we think it’s better. We don’t like to be the one guy who’s out of step.

The social proof phenomenon which comes right out of psychology gives huge advantages to scale — for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it’s available almost everywhere in the world.

Network Effects (Demand-side Economies of Scale)

Network effects almost always lead to or create a Flywheel Effect, but the Flywheel Effect can occur where network effects do not, as we’ve seen in the previous examples.

Network Effects are the most powerful source of the Flywheel Effect.

This is because Network Effects (past a certain tipping point, especially when combined with virality), can be auto-catalytic.

Auto-catalysis — A “runaway feedback loop” describes a situation in which the output of a reaction becomes its own catalyst. (Thanks Farnam Street)

The compounding return on effort is massive, and accelerates as it grows. These combined factors are maybe best exemplified in Facebook, and explain more about how insanely fast it became globally-dominant.

This takes the Flywheel Effect to a whole new level. It becomes like a magical physics-defying Flywheel that uses it’s own momentum to speed itself up even faster without additional input. “Flywheel” so inadequately describes a run-away Network Effect that we really need a whole new way to explain it. (And Magic Flywheel probably won’t stick.)

Examples of the Flywheel Effect

Amazon

I stole this screenshot from Ben Gilbert’s talk about Network Effects, which I highly recommend. He highlights these complex overlapping Flywheel effects very well. He also has a great example from Airbnb:

(Which will make much more sense if you hear his voice-over.)

Uber

If this napkin drawing isn’t self-explanatory, Bill Gurley’s post about Uber’s Valuation (mainly assessing Total Addressable Market and Market Share limit) is a very thorough look at each of these effects.

Pick-up times. As Uber expands in a market, and as demand and supply both grow, pickup times fall. Residents of San Francisco have seen this play out over many years. Shorter pickup times mean more reliability and more potential use cases. The more people that use Uber, the shorter the pick up times in each region.

Coverage Density. As Uber grows in a city, the outer geographic range of supplier liquidity increases and increases. Once again, Uber started in San Francisco proper. Today there is coverage from South San Jose all the way up to Napa. The more people that use Uber, the greater the coverage.

Utilization. As Uber grows in any given city, utilization increases. Basically, the time that a driver has a paying ride per hour is constantly rising. This is simply a math problem — more demand and more supply make the economical traveling-salesman type problem easier to solve. Uber then uses the increased utilization to lower rates — which results in lower prices which once again leads to more use cases. The more people that use Uber, the lower the overall price will be for the consumer.

(Homework Option)

Atlassian

Atlassian has been quietly dominating…

And Tom Tunguz has written a great short post about how they’re doing it. He calls it The Flywheel Saas Company.

The Flywheel Model differs from the Traditional Model in one fundamental regard. The enterprise sales team is exclusively inbound. They are explicitly denied the option of seeking business outside the customer base, and must gin up business from only existing customers. The enterprise sales team is an up-sell and cross-sell team. In fact, so is the mid-market sales team. Only the SMB marketing team is permitted to acquire new leads.

The company famously touts that it has grown without sales reps, precisely because its mid-market and enterprise teams farm exclusively within the pool created by the company’s marketing engine.

Flywheel models have a simple beauty about them. The entire company is focused on the same thing: building the momentum in one main customer acquisition mechanism.

I like this example because it doesn’t rely on Network Effects or Economies of Scale. This was a bootstrapped company with fantastic growth because they ignored conventional wisdom and found a way to focus more effort on one specific goal of the business.

How to Push the Flywheel

Pick the right direction as early as possible

Focus Efforts

Make Progress Visible

We learned that under the right conditions, the problems of commitment, alignment, motivation, and change just melt away. They largely take care of themselves.[…]

What do the right people want more than almost anything else? They want to be part of a winning team. They want to contribute to producing visible, tangible results. They want to feel excitement of being involved in something that just flat-out works. […]

When they begin to see tangible results, when they can feel the flywheel beginning to build speed — that’s when the bulk of people line up to throw their shoulders agains the wheel and push.

Reading this, the visible results piece becomes incredibly important. Show the team you’re starting a winning streak, and they’ll be motivated to get onboard.

Look for additional positive Feedback Loops

There are probably ways to add positive Feedback Loops to your business if you think hard about it. For inspiration, this is the full version of Walt Disney’s original sketch of the feedback loops of his business.

Find Every Incremental Gain

This means you should look for ways to eke out every improvement possible. This HBR article contributed by Kathryn O’Day about Gold Medal Cyclers will help you get in the mindset and break down the goals.

Keep Pushing

Stay focused and keep pushing.

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Eric Jorgenson

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Read and write. Listen and speak. Think and unthink. Fixing the biggest broken market in the world at Zaarly. Twitter: @EricJorgenson Site: EJorgenson.com

Evergreen Business Fortnightly

Timeless Wisdom on Business Topics, created from the best resources suggested by our readers. Each week there’s a new topic and a new Edition of Evergreen Business Weekly. Become a member at Evergreen.instapage.com