Secret of Tesco’s success is reinventing the flywheel

Successful companies put effort into getting every element of their business right, which then builds up and takes on its own momentum.

Can Tesco do anything wrong? Yet another year of record profits, stonking growth, and promises of yet more to come. The juggernaut seems unstoppable. Ask different people the reasons for Tesco’s success, however, and you tend to get a wide range of answers. “Clubcard,” say some. “The right stores in the right places,” say others. Low prices, supply chain expertise, staff motivation – the list goes on.

Yet the secret doesn’t seems to lie in any one of these things alone – which is why it’s so hard to imitate. So what’s going on? Here’s a suggestion. Don’t just look at the parts. Of course each element is important. But look at how they fit together to create a virtuous spiral.

Wherever you see a company (or an industry) delivering an apparently unstoppable, spectacular performance it’s usually because it has created a win-win business system where each activity and relationship somehow reinforces the momentum created by others.

Jim Collins, author of Good to Great, calls it the flywheel effect. He describes a huge flywheel – a massive metal disk mounted horizontally on an axle, about 30ft in diameter, 2ft thick and weighing about 5,000lb. Pushing with great effort you get the flywheel to inch forward, moving imperceptibly at first. But as you keep on pushing it begins to move faster and faster until at some point “the momentum of the thing kicks in your favour. Each turn of the flywheel builds upon work done earlier, compounding your investment effort.

“Now suppose someone came along and asked: ‘What was the one big push that causes this thing to go so fast?’ You wouldn’t be able to answer; it’s a nonsensical question. Was it the first push? The fifth? No! It was all of them added together in an overall accumulation of effort applied in a consistent direction.”

Tesco, for example, led the way in building out-of-town superstores that drove a powerful win-win for itself and its customers. It had cheaper land and lower supply chain costs for itself. It provided more range, convenience and better prices for its customers. But it didn’t stop there.

When it launched Clubcard, it didn’t only use the data to get higher response rates from better targeted special offers. It used the data to give the flywheel an extra push: to understand its shoppers better, to fine tune everything it does for them. Likewise, it has adapted lean supply chain methods first invented by Toyota to eliminate waste and speed up processes. So too with staff. Following the mantra “better, simpler, cheaper”, it tries to make sure everything it does improves staff’s working lives, so that they can improve customers’ shopping experience.

Initiatives such as the move into non-food, new formats and online shopping open up opportunities to apply the same momentum-building techniques in other areas.

As Collins comments, such success stories never happen “in one fell swoop. There is no single defining action, no grand program, no one killer innovation, no solitary luck break, no wrenching revolution… [it is] a cumulative process – step by step, action by action, decision by decision, turn by turn of the flywheel that adds up to sustained and spectacular results.”

Another consultant, Chris Macrae, talks in terms of multiplier effects. Assuming better alignment means that each activity or relationship contributes just one per cent extra to the performance of the activities or relationships it comes into contact with (detailed execution is still crucial), then across the entire system and over time, the compound effects are astonishing. Do the maths yourself.

What does this tell us about marketing and branding? First, super brands aren’t necessarily the product of superb branding. When looking for the secrets of a company’s success (and therefore stuff to learn from and copy), we need to look beyond high-profile products, campaigns or initiatives to the multipliers at work in the underlying system.

Second, every marketing idea and initiative needs to be judged not only by whether it makes money or is effective in its own right. We also need to ask whether this is helping to build, or undermine, the virtuous flywheel effect.

At one point, packaged goods brands were the beneficiaries of a similar win-win business system. Packaged goods manufacturers invested in research and design and factories to produce better, cheaper products. Media advertising alerted consumers to these opportunities. Retailers made them available. And consumers rewarded them all with purchases and brand loyalty – which gave manufacturers the cash and the confidence to invest yet more resources in another spin of the flywheel.

The golden age of packaged goods brands happened not because manufacturers were particularly innovative back then, nor because advertising agencies were amazingly more creative. It was because they were riding the flywheel at full tilt.

But we should remember that every virtuous spiral has a tendency to decay. The packaged goods system had many friction points within it. Conflicts between media owners and advertisers over advertising costs. Conflicts with retailers over margins. Conflicts with consumers over irritating ads, inflated product claims and so on. As long as the flywheel’s momentum was increasing, it could brush these conflicts aside: they were a price worth paying for access to the system’s benefits.

But as markets matured, product parity and advertising overload set in, and as consumers got bored with grocery shopping, the flywheel’s momentum began to slow. At that point, the opportunity to organise a new set of win-wins emerged in another part of the system – and power shifted from manufacturers to retailers. Trust and growth shifted with it. Thus, according to strategy consultants Roland Berger, the top 25 retailers across the world doubled their revenues from $500bn (&£280bn) to $1,000bn (&£560bn) over the five years from 1997 to 2002. In the same period, Gillette, Heinz, Sara Lee and Unilever achieved negative compound sales growth, while Coca-Cola, Colgate-Palmolive and Kraft achieved just one per cent.

So will the win-win retailers’ reign also come to an end? Not any time soon, though there are plenty of conflicts – and limits – bedevilling the flywheels. Conflicts with suppliers, local market saturation, supply chain ethics, regulatory difficulties, to name but a few.

Other virtuous spirals are also becoming apparent. Amazon, Dell and Ebay are examples of companies that have invented new types of win-win which created stardom. Waiting in the wings, potentially powerful win-wins could be constructed around personal information services – gathering information from and about individuals and using this and other information to help them access better value from markets and to achieve personal goals. As well as helping individuals achieve more, at less cost, such services could also dramatically reduce sellers’ marketing costs, while improving their understand of customers and markets. Who knows, such personal information services might even put a spoke in today’s retailers’ flywheels.

Either way, it’s worth asking: where are your brand’s multipliers and what’s driving your flywheel?

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