We all know the 80/20 or Pareto Principle – that a small number of inputs and activity account for the majority of outputs and results, and that, in all likelihood, 80% of your profits result from just 20% of your sales and customers.
However, while most managers understand the principle intellectually, few turn this understanding into sustained and focused action. Like an overweight person who knows that a better diet and exercise regime will make them healthier and happier, but is still content to sit in front of the TV every night with a pizza and beer, many managers cling to the comfort of their current ways of working. It is only when a heart attack has happened that action takes place.
So how do you put on your ‘pareto tracksuit’ more regularly and get down to the ’80/20 gym’? Here are 6 ways to get the 80/20 habit into your business.
- Use it on new investment decisions. You may not initially have the energy or desire to reverse your previous investment decisions, but you can ensure future decisions are in line with the 80/20 approach. By starving investment for your 80% and focusing future resource allocation on your 20% you will, over time, create a more focused, energised and successful business.
- Focus effort on what’s really important. In a previous retail role, I sought to use the Pareto Principle in reducing product range in some stores. This had some marginal cost benefit. A better opportunity for profit growth, however, would have come from focusing on the retailers’ top 20% of customers, and better meeting their needs (I am always amazed how little I knew just a matter of weeks ago!).
- Ignore the marginal contribution argument. Many decisions not to reduce product range or compete in certain market segments are based on the fact that, whilst not profitable, they make a positive contribution to overheads. This is the tail wagging the dog, and will not create a Crufts Champion! If there is a will to reduce overhead, a way can usually be found.
- Focus growth on developing new opportunities within the 20%. Rather than reducing the opportunity for growth, a focused business can have greater creativity and innovation. For example, Chris Zook in the Harvard Business Review tells how Vopak, the world leader in the storage of bulk chemicals, significantly reduced the size of its business following a profit decline. In fact it shed over 80% of its business activities! Yet five years later its share price was higher than before the initial profit decline. Chairman John Paul Broeders said, “Without shrinking first, we would never have created the resources, the management focus, and a stable platform to grow again as we have.”
- Be boring! Having a more focused business strategy makes life simple, and possibly even a little boring for your managers. You must resist the temptation to stimulate them by letting them develop new business opportunities that will add little to your bottom line and a lot to your complexity and costs. Stuart Rose has commented that one of the big problems when we took over at M&S was that it “began to spread itself thinner in an effort to ‘invest’ in its future.”
- Understand that the customer is not always right. Budget airline, Ryanair, is built on doing the 20% of things that meet 80% of customers’ needs, and ignoring the final 20%. Some customers may want a free meal, an executive lounge and a specific seat, but this adds complexity and cost, and is not something that they will fully pay for.
The bottom line
Using an 80/20 approach to management creates focus, energy and growth. Where and how could you use it today to improve the results of your organisation?
To find out more contact Stuart by clicking here or call +44-(0)1636-526111.