How to build a successful business
If you are looking for a successful business, consider management books. Since he began his column, Bartleby has been buried alive with examples of the genre. Get it right, and there’s a lot of money to be made. “Good to Great” by Jim Collins was one of the most successful; all told he has sold over 10m books. His latest is a monograph, “Turning the Flywheel”, which builds on a concept from his most famous work.
The idea is a virtuous circle, where success in one time leads to success in another, in a self-sustaining way. Mr. Collins starts with Amazon, where low prices attract customer visits, which attract third-party sellers, allowing the company to expand, growing its future in faster than their costs, and allowing prices to fall further. Something similar is happening at Vanguard, the asset management group, which offers tracking funds with low fees, attracting customers, and allowing costs to be further cut.
The two examples above are really cases of using economies of scale. But other models are available. In Intel’s case, the flywheel started with high-performance chips that customers were willing to pay high prices for. These high profits were invested in research and development, allowing Intel to produce the next generation of chips before its competitors.
Mr Collins argues that this approach can work outside the corporate sector, citing a school that employed exceptional teachers, thereby improving outcomes and creating a reputation as a good place to teach, enabling the recruitment of more high level teachers. Something similar happened at a hospital he studied.
The secret, he insists, is constant vigilance. “To keep the flywheel spinning, you must constantly innovate, and improve with each part,” he writes.
All this is very convincing and Mr. Collins avoids the sin of many rule books, because they are not incomprehensible or uncertain. However, many businesses may feel that the difficulty lies in setting up the flywheel in the first place. If you are a small business with low volumes, your cost ratio will be very high, so it is difficult to deliver low prices. Amazon got away with it because they had patient and intelligent businesses that believed this was a business model that was impacting the world. Such suffering is very rare. And if you take over a school or hospital that is struggling, you might want to hire the best teachers and doctors, but usually they don’t want to come, and you don’t have the budget to hire them.
As the Rod Stewart hit “The First Cut is the Deepest”, the first push of the flywheel is the hardest.