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 / Summer 2013 / Issue 71(originally published by Booz & Company)


Building a Flywheel Business

Second, both companies identified key capabilities that would enable them to compete successfully, and targeted a customer or customer segment that could help them further develop those capabilities. Importantly, they targeted neither the largest customer segment nor the customer that could pay the most per unit. Rather, they sought out an underserved market that would help them learn and refine their alternative business model. In some cases, they added capabilities and market access through M&A: Both companies realized that a well-functioning flywheel is not only an engine for organic growth, but can also provide the strategic logic for acquisitions.

Third, JCI and Pulte both had a “big-picture vision” for their company’s growth, and simultaneously understood the need to work with a customer to learn the myriad small details that no amount of planning or conceptual thinking could uncover. Toyota helped teach JCI how to implement lean manufacturing, and Concord Green provided the opportunity for Pulte to interact with hundreds of customers to build the design tools needed to change the customization–cost paradigm.

Finally, for both companies, the entire picture might not have been clear from the beginning. But each had a line of sight to the next flywheel revolution—that sense that this could be bigger than a single-customer initiative. They leveraged their growth to fund further investment ahead of the competition. JCI used its scale to invest in consumer research and expand its interior portfolio, whereas Pulte used its consumer knowledge to capture purchasing scale and enhance its design tools. Each nurtured specific competitive advantages to add momentum to its flywheel.

These four characteristics—step change in value, clear target segment, scale in new capabilities, and line of sight to the next revolution—are also found in other familiar flywheel businesses. Consider Walmart, which spent its early years targeting towns that then dominant Kmart had concluded were too small. The company recognized the possibility of a step change in value in towns where the existing alternatives were high-priced local stores with limited merchandise or a suburban mall a dozen miles away. By growing for more than a decade under the radar screen, Walmart achieved the scale to develop the IT systems and logistics network for which the company is now famous. Did Sam Walton foresee Walmart’s becoming the largest company in the world (by revenue)? Probably not, but he certainly did sense that his “everyday low price” model and the efficient supply chain behind it offered innovations to better serve millions of people in the type of middle American towns that he understood so well.

There is great power in linking customers and capabilities this way to create a flywheel effect. But it is important to remember that flywheels can be deceptive, leading to false confidence and hubris. We’re reminded of an article in a rural newspaper of our youth featuring the supposed inventor of a perpetual motion machine. Made of an intricate collection of hand cranks, gears, and chains connected within a menagerie of dozens of old oil drums, the device clearly powered a massive flywheel that would continue to spin the cranks for a long time once the operator had used the gearing to gradually build it up to top speed. Inevitably, the machine stopped as gravity and friction took their inescapable toll. But the inventor was undeterred, closing the interview with conviction: “I think I just need a couple more barrels.”

Flywheel business models do not achieve perpetual motion, but instead require continued tending to maintain the momentum. Times change, and flywheels are by definition hard to adapt and difficult to control—leaving a business vulnerable to the entry of a disruptive technology. In times like these, it can be tempting to revert to old habits, pursuing bottle rockets. Our advice: Don’t even try to course correct. Even companies with well-oiled machines should continually look for the next flywheel business, always seeking step-function changes by linking a new set of capabilities and customers. The original flywheel inevitably winds down, but companies that have planned ahead will have a new one up and running to take its place. 

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