Red and Yellow Strategies
How To Spin the Flywheel: Three Steps to Skyrocket Your Business
The Flywheel Effect Can Make Or Break Your Company
Thor, the Scandinavian god of war, hurled his heavy hammer to crash his enemies’ skulls.
Modern athletes throw hammers in the peaceful Olympic Games.
How can a woman throw a 4-kilogram (8.8 lb.) weight and a man a 7.26-kilogram (16.0 lb.) weight more than 80 meters (280 feet)? Yet these are the world records in this sport.
In 1986, a soviet athlete, Yuriy Sedykh, threw his hammer 86.74 m (284 ft 6 in), and this record hasn’t yet been broken. Anita Włodarczyk, the Polish athlete, set the world record for women in 2016–82.98 m (272 ft 2 in).
When an athlete is about to throw the hammer, for a few moments, both the athlete and the hammer become parts of a flywheel, accelerating each other. However, any mistake can be costly for the athlete.
In business, the so-called Flywheel Effect can make your company proliferate — or kill it fast and painfully.
Example 1
In 2016, I joined the board of directors of a large insulating materials manufacturer as a non-executive director.
Its strategy was cost leadership. It was the most cost-efficient company in the market. Lean production was its corporate religion.
It could offer its customers almost any discount and still remain profitable. No wonder customers loved the organization.
And so did suppliers. The cost leadership strategy allowed the company to develop into the biggest fish in the pond. Every supplier or subcontractor dreamed of having it on their client list.
The enterprise enjoyed deep discounts and special terms from banks, raw material suppliers, logistics subcontractors, and software vendors.
It turned those financial preferences into discounts for clients.
· The better prices the company received from suppliers, the lower prices it offered to customers.
· The lower prices it offered to customers, the more customers it gained.
· The more customers the company had, the better terms it received from suppliers.
It was the Flywheel Effect in its purest form.
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Example 2
YouTube is the platform that offers you to spend your time watching videos. Then, it sells this time to advertisers.
The more time you spend on the platform, the more ads you’ll see.
So, YouTube develops a recommendation algorithm to keep you on the platform.
The more ads you see, the higher the ad price for advertisers.
The more the platform earns, the more it invests in the recommendation algorithm.
The better the algorithm is, the more time users spend on the platform.
So, if you feel you need to make an effort to close YouTube, TikTok or Instagram apps, know that this strategy works.
Flywheel and Value Exchange
Every business is a set of processes, or Value Waves, that deliver value for six stakeholder groups: customers (above all), employees, business partners, shareholders, society, and regulators.
The flywheel effect happens when the value you create for one stakeholder group allows you to deliver significantly more value for one or several other groups.
For instance:
· A company sells products to customers at a low price and thus creates value for them. Low prices attract more customers. The company gets bigger, which in turn attracts suppliers, banks, and subcontractors.
· McKinsey is a well-established employer brand. It allows the company to hire the best young employees. And this, in turn, improves the quality of services it provides for clients.
· Amazon is the go-to online store for millions of customers. It helps the company to receive the best conditions from its suppliers.
The flywheel effect development system is three-tiered:
1. You create value for one group of stakeholders.
2. As a result, you build a valuable asset, such as a customer base.
3. You then leverage this asset to generate additional value for another group of stakeholders and capture more value from it. You use this value to create even more value for the first group.
The dark side of the strategic flywheel
This idea has only one dark side. Some companies get so caught up in building value for other stakeholders, like suppliers, to create the flywheel that they forget about their customers.
The biggest retail chain in the country where I worked ten years ago lost its leadership because its leaders played too much with the economy of scale. They managed to increase the company’s purchasing power significantly.
But while they were doing it, their competitors stole their shoppers by offering them a better in-store experience.
Don’t forget that customers are the only stakeholders that bring money into your business.
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Pro Tips
To build a flywheel for your business, you’ll need:
1. The list of key stakeholders
2. The list of their needs
3. The list of assets you may develop by delivering exceptional value for one of the stakeholder groups
If one of the assets is something that other stakeholders dream about, it may be a sweet spot that will become your company’s flywheel.
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Read also: Strategic Roots: Why Goal Trees Fall Short and Processes Matter
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