The Amazing Flywheel Effect

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 it started, but once it starts to turn there are counterweights 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 people can put a great deal of effort into their business 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:

1. Customer experience is key, and all Amazon employee have this as their number one principle.
2. Excellent customer experience drives traffic to Amazon.com.
3. Sellers are attracted to put their products on Amazon.com.
4. This would create a greater selection of products for customers. At the same time the increased sales on Amazon.com allows Amazon to lower their cost structure and reduce prices. This, along with customer experience, increases the traffic on Amazon.com.

Once the sales cycle — or Flywheel — starts to take effect each element starts to increase and it takes on a life of its own. Traffic increases leading to more sales, leading to lower prices, etc. All of this results in the accelerated growth experienced by Amazon.com.

Amazon has taken the Flywheel concept and is using it in all their businesses. Amazon Web Services (AWS), for example, has used it to accelerate its business growth.

The table shows that AWS have increased 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 if 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 have an effect within a company, or group of companies, that 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 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 to AWS in other countries across the world. Looking at AWS in South Africa you can clearly see the Flywheel Effect.

In the South African example, the Flywheel is something like this:

1. AWS launches in South Africa and, based on their performance elsewhere, attracts partners.
2. These partners have employees who get AWS certified developing skills within the country.
3. Customers adopt AWS. In South Africa both Standard Bank and Vodacom have announced in the last few months that they are adopting AWS.
4. This leads to more demand for skills, which attracts more companies to become partners or existing partners to grow 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?

The million, or billion, Dollar question is how do you get the Flywheel to spin in the first place.

To me it seems that the most important thing is to identify what your counter weights are. What are on either side of the Flywheel, that will feed into each other, making the Flywheel turn. Refer back to the Jeff Bezos example at the beginning of this blog.

According to Jim Collins there are three areas to focus on consistently to get the Flywheel to start to spin:

1. Disciplined people:

• Level 5 leadership: having the right leader.
• Having the right people working for your company.

2. Disciplined thought:

• 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.

3. Disciplined action:

• Culture of discipline: Fanatical adherence to the Hedgehog Concept and refusing to do anything that is not in linewith this or pursue other opportunities that can divert the company.
• Technology accelerators: They look for new technologies that can increase their performance.

More detail on this can be found in Jim Collin’s book “Turning the Flywheel” which is available on Amazon.

Jim Collins 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 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 a company, or are currently working for one, that changes its strategy regularly, has a different focus every year, does an annual restructuring, chops and changes its sales teams and people, etc.
The above leads to what Jim Collins calls 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 also accelerate, but in this case, in a short period of time a company can accelerate towards disaster.

Conclusion

What do you think of the Flywheel Effect concept? Do you currently use this principle and have you seen results? Or is your company caught in the Doom Loop?

What is absolutely true is that the Flywheel Effect is real and can be used to accelerate your company’s effectiveness and revenue!

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.