How to Think About Companies: "Advantage Flywheels"
From FutureBlind:
Competitive advantage can be represented visually as 1 or more
feedback loops. These create the advantage “flywheel” that maintain and
grow a moat over time. Think of a big, heavy wheel that takes some
effort to get started but then coasts off its own momentum.
Before continuing, check out Eric Jorgenson’s primer on the flywheel mental model here.
Flywheel archetypes
Here are 6 simple examples of common advantages represented as
flywheels (or “causal loops” in systems terminology). These loops are generalized — they’ll be expressed uniquely in every company that has them.
A few examples of how each advantage flywheel can vary:
- In the Economies of Scale flywheel above, the
primary driver of more volume is low prices. This fits for most consumer
businesses, but lower prices aren’t always the outcome of lower unit
costs. If prices are maintained or increase, scale will yield higher
margins → more resources to spend on growth → more sales volume.
- The Brand Habit flywheel exhibits the typical loop
for habit-reinforcing association of a brand with a specific quality or
job-to-be-done. Think “thirst quenching happiness” for Coca-Cola and
“low prices” for Wal-Mart. Another example of brand advantage is more of
a social proof effect: Product has success → the cool kids want it →
improved perception of product → …
As Eric discussed in his flywheel post, each wheel needs a push to get started.
Written in green on a few of the archetypes above are initial
advantages to get the wheels moving. Whether it’s a better user
experience, a technical breakthrough, or a bootstrapped network based
off of an existing network (college campuses for FB) or a useful utility
(Instagram).
Real world examples
The above archetypes can be combined to create more comprehensive
flywheels modeling the driving “engines” of each company’s moat:
The most successful moats have multiple flywheels that feed off of each other’s momentum.
Google’s technical advantages enable stronger brand allegiance and vice
versa. Coca-Cola’s marketing-driven brand feeds off of it’s
distributor/bottler based network effects. Facebook’s brands have at
least 3 reinforcing network effects: direct (social network), 2-sided
aggregator (advertising and developers), and brand-driven social proof....
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MUCH MORE
