Turning the Flywheel Read online

  Dedication

  To my personal band of brothers — you know who you are —

  in the spirit of loyalty, love, and enduring friendship.

  Contents

  Cover

  Title Page

  Dedication

  Turning the Flywheel

  Appendix

  Notes

  About the Author

  Copyright

  About the Publisher

  Turning the Flywheel

  “Beauty does not come from decorative effects but from structural coherence.” — Pier Luigi Nervi1

  In the autumn of 2001, just as Good to Great first hit the market, Amazon.com invited me to engage in a spirited dialogue with founder Jeff Bezos and a few members of his executive team. This was right in the middle of the dot-com bust, when some wondered how (or if) Amazon could recover and prevail as a great company. I taught them about “the flywheel effect” that we’d uncovered in our research. In creating a good-to-great transformation, there’s no single defining action, no grand program, no single killer innovation, no solitary lucky break, no miracle moment. Rather, it feels like turning a giant, heavy flywheel. Pushing with great effort, you get the flywheel to inch forward. You keep pushing, and with persistent effort, you get the flywheel to complete one entire turn. You don’t stop. You keep pushing. The flywheel moves a bit faster. Two turns . . . then four . . . then eight . . . the flywheel builds momentum . . . sixteen . . . thirty-two . . . moving faster . . . a thousand . . . ten thousand . . . a hundred thousand. Then at some point—breakthrough! The flywheel flies forward with almost unstoppable momentum.

  Once you fully grasp how to create flywheel momentum in your particular circumstance (which is the topic of this monograph) and apply that understanding with creativity and discipline, you get the power of strategic compounding. Each turn builds upon previous work as you make a series of good decisions, supremely well executed, that compound one upon another. This is how you build greatness.

  The Amazon team grabbed onto the flywheel concept and deployed it to articulate the momentum machine that drove the enterprise at its best. From its inception, Bezos had infused Amazon with an obsession to create ever more value for ever more customers. It’s a powerful animating force—perhaps even a noble purpose—but the key differentiator lay not just in “good intent” but in the way Bezos and company turned it into a repeating loop. As Brad Stone later wrote in The Everything Store, “Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.” And so, the flywheel would turn, building momentum. Push the flywheel; accelerate momentum. Then repeat. Bezos, Stone continued, considered Amazon’s application of the flywheel concept “the secret sauce.”2

  I’ve sketched my own take on the essence of the original Amazon flywheel in the nearby diagram. (Note: Throughout this monograph, I’ve included sketches of specific flywheels to illustrate the concept. To be clear, these reflect my own take on the flywheel from each case; the leaders who built these flywheels would likely draw them with more nuance than I have. Use these illustrative sketches to grasp the flywheel concept and to stimulate thinking about your own flywheel.)

  Notice the inexorable logic. Trace your way around the Amazon flywheel a few times in your mind, and you can almost get swept up in the momentum. Each component in the flywheel sets you up for the next component, indeed, almost throwing you around the loop.

  Bezos and his team could have panicked during the dot-com bust, abandoned the flywheel, and succumbed to what I described in Good to Great as the doom loop. When caught in the doom loop, companies react to disappointing results without discipline—grasping for a new savior, program, fad, event, or direction—only to experience more disappointment. Then they react without discipline yet again, leading to even more disappointment. Instead, Amazon committed fully to its flywheel and then innovated aggressively within that flywheel to build and accelerate momentum. Amazon not only survived but also became one of the most successful and enduring companies to emerge from the dot-com era. Over time, Amazon would renew and extend the flywheel far beyond a simple e-commerce website and enhance the flywheel with new technology accelerators such as artificial intelligence and machine learning. But throughout, the underlying flywheel architecture remained largely intact, creating a customer-value compounding machine that many of the largest companies in the world came to fear.

  Never underestimate the power of a great flywheel, especially when it builds compounding momentum over a very long time. Once you get your flywheel right, you want to renew and extend that flywheel for years to decades—decision upon decision, action upon action, turn by turn—each loop adding to the cumulative effect. But to best accomplish this, you need to understand how your specific flywheel turns. Your flywheel will almost certainly not be identical to Amazon’s, but it should be just as clear and its logic equally sound.

  In the years since publishing Good to Great, I’ve challenged dozens of leadership teams to do for themselves what the Amazon team did for itself. Some of those teams traveled to our management lab at the Good to Great Project in Boulder, Colorado, and I watched each team assemble its flywheel, almost like putting together a jigsaw puzzle. They’d get the pieces laid out and then fiddle with them, arguing and debating, engaged in a disciplined thought process to get their flywheel right. What are the essential components? Which component comes first? What follows? Why? How do we complete the loop? Do we have too many components? Is anything missing? What evidence do we have that this works in practice? Gradually, their specific flywheel would start to emerge. When it all clicked, it felt like the final pieces of the jigsaw puzzle had popped into place. In clarifying their flywheels, these teams experienced the sense of excitement that comes when you see—and feel—how to generate the results necessary to achieve or extend a good-to-great breakthrough.

  Bill McNabb, then CEO of the mutual fund giant Vanguard, brought his senior team to Boulder in 2009, and they worked for two days to crystallize their flywheel. They did an impressive job of capturing the essence of the Vanguard momentum machine, which I’ve sketched in a simplified flywheel diagram below.

  Notice how each component in the Vanguard flywheel isn’t merely a “next action step on a list” but almost an inevitable consequence of the step that came before. If you offer lower-cost mutual funds, you almost can’t help but deliver superior long-term returns to investors (relative to higher-cost funds that invest in the same assets). And if you deliver superior returns to investors, you almost can’t help but build client loyalty. And if you build strong client loyalty, you almost can’t help but grow assets under management. And if you grow assets under management, you almost can’t help but generate economies of scale. And if you increase economies of scale, you almost can’t help but have lower costs that you can pass along to clients. Vanguard had been turning some form of this flywheel for decades, built upon the insights and principles of its visionary founder Jack Bogle, who championed the world’s first index mutual funds. But pausing to crystallize the underlying flywheel architecture gave the leadership team the clarity it needed to keep building momentum with fanatic intensity, especially coming out of the 2008–2009 financial crisis. From 2009 to 2017, Vanguard’s flywheel continued to build momentum, more than doubling its assets under management to excee
d $4 trillion.3

  The Vanguard case exemplifies a key aspect of how the best flywheels work. If you nail one component, you’re propelled into the next component, and the next, and the next, and the next—almost like a chain reaction. In thinking about your own flywheel, it’s absolutely vital that it not be conceived as merely a list of static objectives that you’ve simply drawn as a circle. It must capture the sequence that ignites and accelerates momentum.

  The intellectual discipline required to get the sequence right can produce profound strategic insight. As Stanford Graduate School of Business strategy professor Robert Burgelman once observed to a classroom full of students in 1982 (of which I was one), the greatest danger in business and life lies not in outright failure but in achieving success without understanding why you were successful in the first place. Burgelman’s insight kept pinging in my brain throughout my twenty-five years of research into the question of what makes great companies tick, especially in explaining why some companies fall from grace. When you deeply understand the underlying causal factors that give your flywheel its momentum, you can avoid Burgelman’s trap.

  THE DURABILITY OF A GREAT FLYWHEEL

  One of the biggest, and most common, strategic mistakes lies in failing to aggressively and persistently make the most of victories. One reason why some leaders make this mistake is that they become seduced by an endless search for the Next Big Thing. And sometimes they do find the Next Big Thing. Yet our research across multiple studies shows that if you conceive of your flywheel in the right way—and if you continually renew and extend the flywheel—it can be remarkably durable, perhaps even capable of carrying your organization through a major strategic inflection point or turbulent disruption. But to do so requires understanding the underlying architecture of the flywheel as distinct from a single line of business or arena of activity.

  Let me use a classic historical case to illustrate, Intel’s “dramatic” shift from memory chips to microprocessors. From its earliest days, Intel built a flywheel harnessing Moore’s Law (the empirical observation that the number of components on an integrated circuit achieved at an affordable cost doubles roughly every eighteen months). From this insight, Intel’s founding team created a strategic compounding machine: Design new chips that customers crave; price high before competition catches up; drive down unit costs as volume increases (due to economies of scale); harvest high profits even as competition drives down prices; and reinvest those profits into R&D to design the next generation of chips. This flywheel powered Intel’s rise from start-up to great company in the memory-chip business.4

  Then in the mid-1980s, the memory-chip business careened into a brutal international price war. Intel’s sales declined and profits evaporated. CEO Gordon Moore and President Andy Grove faced a stark reality: Intel’s memory-chip business had become economically untenable and would remain so. In his must-read book Only the Paranoid Survive, Grove described an epiphany when he asked Moore, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore gave an unequivocal answer, “He would get us out of memories.” So, Grove mused, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”5 I carry an image in my mind of Grove and Moore pointing at each other and saying, “You’re fired.” Then walking out in the hall, pointing at each other and saying, “You’re hired.” Then walking back into the office as “new” leadership and saying, “That’s it, we’re getting out of memories!”

  Now, consider the following question. In making this bold move, did Intel jettison its flywheel? No! Intel had been building up a side business in microprocessor chips for more than a decade, and the underlying flywheel architecture could apply just as soundly to microprocessor chips as memory chips. Different chips, to be sure, but very much the same underlying flywheel.

  In 2002, I had a conversation with Grove about this very question in preparation for an on-stage conversation we were going to do together on the topic of building great companies. As we got to talking about the decision to get out of memories, Grove commented that, through the lens of the flywheel construct, Intel’s bold memories-to-microprocessors shift wasn’t quite as discontinuous as it appeared on the surface. It was really more of a transfer of momentum from memories to microprocessors, not a jagged break to create an entirely new flywheel. If Intel had tossed out its underlying flywheel architecture when it exited memories, it wouldn’t have become the dominant chip maker that powered the personal computer revolution.

  For a truly great company, the Big Thing is never any specific line of business or product or idea or invention. The Big Thing is your underlying flywheel architecture, properly conceived. If you get your flywheel right, it can guide and drive momentum (with renewal and extensions) for at least a decade, and likely much longer. Amazon, Vanguard, and Intel didn’t destroy their flywheels in response to a turbulent world; they disrupted the world around them by turning their flywheels.

  This doesn’t mean mindlessly repeating what you’ve done before. It means evolving, expanding, extending. It doesn’t mean just offering Jack Bogle’s revolutionary S&P 500 index fund; it means creating a plethora of low-cost funds in a wide range of asset categories that fit within the Vanguard flywheel. It doesn’t mean just selling books online; it means expanding and evolving the Amazon flywheel into the biggest, most comprehensive e-commerce-store system in the world, and later extending that flywheel into selling its own devices (such as the Kindle and Alexa) and moving into physical retail (Amazon bought Whole Foods in 2017). It doesn’t mean sticking doggedly with memory chips; it means redeploying the Intel flywheel to entirely new chip categories.

  To be clear, my point is not that a flywheel will necessarily last forever. But just look at these three cases—Amazon, Vanguard, and Intel—each operating in a highly turbulent industry. In each company, the underlying flywheel propelled growth for decades. Intel did eventually evolve substantially beyond the chip business, but that doesn’t change the fact that its initial flywheel architecture powered Intel’s rise to a great company for more than thirty years. The logic underlying Vanguard’s flywheel architecture remained essentially intact even as it approached the half-century mark. And at the time of this writing in 2018, the original Amazon flywheel has remained robust and relevant—thanks to renewal and extension—nearly two decades after it was first articulated.

  Later in this text, I’ll address how great companies renew and extend their flywheels. If you wake up one day to realize that your underlying flywheel no longer works, or that it’s going to be disrupted into oblivion, then accept the fact that it must be recreated or replaced. But before you decide to toss out your flywheel, first make sure you understand its underlying architecture. Don’t abandon a great flywheel when it would be a superior strategy to sustain, renew, and extend.

  STEPS TO CAPTURING YOUR FLYWHEEL

  So, then, how might you go about capturing your own flywheel? At our management lab, we’ve developed a basic process, refined during Socratic-dialogue sessions with a wide range of organizations. Here are the essential steps:

  Create a list of significant replicable successes your enterprise has achieved. This should include new initiatives and offerings that have far exceeded expectations.

  Compile a list of failures and disappointments. This should include new initiatives and offerings by your enterprise that have failed outright or fell far below expectations.

  Compare the successes to the disappointments and ask, “What do these successes and disappointments tell us about the possible components of our flywheel?”

  Using the components you’ve identified (keeping it to four to six), sketch the flywheel. Where does the flywheel start—what’s the top of the loop? What follows next? And next after that? You should be able to explain why each component follows from the prior component. Outline the path back to the top of the loop. You should be able to explain how this loop cycles back upon itself to accelerate momentum.

  If
you have more than six components, you’re making it too complicated; consolidate and simplify to capture the essence of the flywheel.

  Test the flywheel against your list of successes and disappointments. Does your empirical experience validate it? Tweak the diagram until you can explain your biggest replicable successes as outcomes arising directly from the flywheel, and your biggest disappointments as failures to execute or adhere to the flywheel.

  Test the flywheel against the three circles of your Hedgehog Concept. A Hedgehog Concept is a simple, crystalline concept that flows from deeply understanding the intersection of the following three circles: (1) what you’re deeply passionate about, (2) what you can be the best in the world at, and (3) what drives your economic or resource engine. Does the flywheel fit with what you’re deeply passionate about—especially the guiding core purpose and enduring core values of the enterprise? Does the flywheel build upon what you can be the best in the world at? Does the flywheel help fuel your economic or resource engine? (In the appendix to this monograph, I’ve created a short summary of the framework of concepts that have come from our research—concepts such as the Hedgehog Concept—along with a brief definition of each concept. This appendix also shows where the flywheel fits in the overall conceptual map for the journey from good to great. The first time I mention any of these concepts in the main text, I will put them in bold.)

  Organizations without the components of a flywheel already in place—such as early-stage entrepreneurial companies—can sometimes jump-start the process by importing insights from flywheels that others have built. Jim Gentes founded Giro Sport Design on a new bicycle-helmet design that would be lighter and more aerodynamic than other helmets. Wearing a Giro helmet, the cyclist could ride faster, cooler, and safer. It would also be stylish and colorful, whereas other boxy helmets made the rider look like a geek monster from outer space in a B-grade 1950s horror film. After carrying a prototype to the Long Beach bike show, Gentes returned to his one-bedroom apartment with $80,000 of orders and began manufacturing batches of helmets in his garage.6