2005 Winter/Spring Volume No. 5
Want to be a growth company
Practice being an 80/20 company
There are individual companies who are changing the industries they are in. They are considered by some as revolutionaries filled with people and small teams who use the 80/20 principle to build businesses and future success. You may already be an 80/20 individual and/or company without knowing it, but if you are not, you have everything to gain by becoming one.
The 80/20 Principle answers two questions:
How can we raise the profits of our corporation?
How can we use the 80/20 principle to be more effective in our daily work?
A Brief History of the 80/20 Principle
In 1897, Italian economist Vilfredo Pareto noticed a regular pattern in distributions of wealth and income, no matter the country or time period concerned. He found that the distribution was extremely toward the top end—a small minority of the top earners always accounted for a large majority of the total wealth. The pattern was so reliable that Pareto was eventually able to predict the distribution of income accurately before looking at the data. For centuries Pareto’s research was unknown to the world, hidden obscurely within his work.
It wasn’t until Joseph Moses Juran, one of the gurus of the quality improvement movement in the twentieth century, renamed it the “Rule of the Vital Few” that the world became aware of this powerful principle. In his 1951 book The Quality Control Handbook, which became hugely influential in Japan and later in the West, Juran separated the “vital few” from the “trivial many”, showing how problems in quality could be largely eliminated, cheaply and quickly, by focusing on the vital
few causes of these problems. Juran, who moved to Japan in 1954, taught executives there to improve quality and product design while incorporating American business practices into their own companies. Thanks to this new attention to quality control between 1957 and 1989, Japan grew faster than any other industrial economy. Since then the Pareto principle has become widely known as the “80/20 rule” or “80/20 principle”. American and European engineers and computer experts began to use the principle routinely.
The 80/20 Impact
The 80/20 principle is an empirical “law” that has been verified in economics, business, and interdisciplinary science. It states that 80 percent of results flow from 20 percent of causes. In other words, most of what exists in the universe—our actions, and all other forces, resources, and ideas—have little value and yield little result. On the other hand, a few things work fantastically well and have tremendous impact. There is no magic in the 80 and the 20 which are merely approximations. The point is that the world is not 50/50; effort and reward are not linearly related.
Examples to Consider
Let’s take a look at a few examples within your own corporation:
Evaluate your current client base from 2004. Break down your clients by revenue pro-vided. Now take a look at your top twenty percent based upon revenue. Next, review the top 20% of your clients by income contribution. What does it tell you? What would happen if you lost 10 - 15% of this base? What impact would it have? It is presumed, based upon the 80/20 principle, that the impact would be very significant.
List recurring service problems experienced in 2004, now evaluate the top 20% of these service problems. Based upon the 80/20 principle, you can surmise that these problems cause roughly 80 percent of the reasons your customers are unhappy, dissatisfied, and/or will not come back to you for services in the future.
Finally, take a look at your company’s efforts—the whole picture, administration, accounting, service, scheduling, etc... List all the activities that you do in order to service a client. This is often called a continuum of value delivery and it starts from the time a customer inquires about your service until the service is rendered, billed and paid for. List these and rank and order them from greatest to least in terms of negative consequence if not performed right. Now look at the top 20%. Juran and Pareto understood that these twenty percent, if not performed correctly, would have the largest impact on the customer. As a matter of fact, they would state approximately 80% of the problems in the service process could be eliminated if these were fixed.
Value Comes from
Growth - 80/20 provides a Compass
The most interesting and most valuable part of business is not the maintenance of existing operations—doing efficiently what we did yesterday. If every corporation maintained the status quo, revenue and the economy would never grow.
Arguably, growth for companies is the most important—growth in revenue, income, and value to the customer. Growth means creating something new and valuable. Growth is ultimately driven by people and self-directed teams who use the 80/20 principle to focus on priorities and effect positive change. With the 80/20 principle, people and corporations can leverage the most powerful forces around them—tangible, but especially intangible ones—to dazzle their market place and provide customers with much more of what they want for less than what they wish to conserve (be it money, resources, time, space, energy).
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