Many growth opportunities look like bottle rockets. They start with an impressive flash but end with an explosion. Most often, this is caused by business leaders’ tendency to chase after the biggest customer segments or the ones with the highest margins—typically the same segments that everyone else chases. Other leaders get lost in their enthusiasm for a new product or in their desire to pursue the next market fad. They fail to consider whether they are attempting to solve a customer problem, and how much the solution is worth. Such strategies may result in fireworks, but they don’t create a business of increasing momentum that provides both the stability and the energy reserve to drive sustainable growth—in other words, one with a solid flywheel.
Companies that pursue a flywheel-business model focus on building the kind of long-term capabilities that allow them to prevail against rivals and capture new opportunities for growth. This gives them the profits they need to invest more in capabilities, and the insights to do so wisely. Along the way, they target the customers or customer segments that will help them develop these capabilities. It is similar to the flywheel concept from high school physics, typically demonstrated by a heavy disc that is difficult to start up, but that spins easily with limited effort once it reaches full speed. Over time, a simple innovative idea becomes a well-oiled machine, which translates into a predictable and profitable business.
Two case studies—Johnson Controls Inc.’s Automotive Experience group and Pulte Homes—show how company leaders embraced the flywheel concept to unlock strategic growth opportunities.
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Revenues at Johnson Controls Inc. (JCI) in 2012 were US$42 billion, nearly half of which came from the largest of its three global business units, the Automotive Experience group. But this group is relatively new. For most of its 110-plus-year history, JCI developed control systems for the regulation of temperature in buildings, gradually expanding in the 1960s to centralized systems integrating control of temperature, fire alarms, lighting, and security. In the late 1970s and early ’80s, it expanded even further from its core building controls business.
The Automotive Experience group began in the early 1980s as the Automotive Seating group. At that time, the automotive industry was embracing outsourcing to eliminate the burden of United Auto Workers (UAW) wages. From 1982 to 1984, leading seat frame and foam manufacturer Hoover Universal Inc. had built six seat assembly facilities to serve nearby customer vehicle assembly plants. JCI recognized the outsourcing trend and acquired the Automotive Seating group from Hoover, along with the Ferro Manufacturing Corporation, a seat mechanisms manufacturer, and continued to add plants capable of providing full seat systems to the Detroit Three.
Realizing that wage arbitrage offered no competitive advantage—any competitor could also hire non-UAW laborers—JCI sought to build a sustainable flywheel business. Although the term lean had not yet consumed the psyche of the automotive industry, former Hoover plant manager John Daly, the newly appointed vice chairman of JCI, recognized its potential. He challenged his managers to embrace Japanese manufacturing methods and targeted the Toyota Motor Corporation as a customer that could help the company achieve its goal.
In October 1985, Daly informed his Georgetown, Ky., plant workers that a team from Toyota would be visiting in three weeks. Although the plant was viewed as JCI’s best in terms of internal housekeeping—an important consideration in Japanese manufacturing—it followed U.S. manufacturing performance standards, which did not match Japan’s. Die changes took four to eight hours, so an average production run lasted 20 days to amortize the setup cost. Inventory levels exceeded a month of supply, and equipment ran only 40 percent of the time. Despite making nascent efforts at statistical process control, the company remained focused on volume, leading to substantial rework.