This article is Part 1 in a 3-Part Series.
The 80/20 principle describes how the world works and shows us how to do more with less. It is one of the most universal principles and seems to apply to almost anything. It is built into the fabric of the universe.
The secret is to identify the forces with more than their fair share of impact. If they are forces that can help us we should try to maximize and ride them. If they are harmful forces, we must remove or avoid them.
The best way to start to get more from less is to stop all activities that subtract more value than they add. The other aspect is to find 20% of activities that adds 80% of value , and increase it.
The 80/20 principle also applies to individuals , and to their effectiveness in their careers and private lives alike.
Using Pareto principle in Business
The business should do less but more profitably. Whichever way we see cut it, the firm should concentrate on its most productive and profitable elements and activities , and forget or hive off the rest.
- The firm should own less
- The firm should acquire less , and divest more
- The firm should participate in fewer stages of the value chain.
- The firm should have fewer products
- The firm should have fewer customers
- The firm should have fewer suppliers
- The firm should have fewer employees.
The return on Management employee (ROME)
The most important concept of 20th century was Return of capital employed (ROCE). The defining concept of the 21st century could prove to be ROME, return on management employed.
The scarcest resource is focused, insightful, value adding executives, not capital. Ideas, brains, knowledge, technical skills, and the sheer ability to get sensible things done - these have more value and rarity than cash.
Only business with high ROCE and high ROME should be retained as part of the core.
Achieve more with less.
Make this your key resolution every year, month, week and day.
One reason we can achieve more with less is that we can decide not to do things that actually have negative value. The easiest and often the best way to add up personal or organizational effectiveness is simply to stop doing things that subtract net value.
Start by applying 50/5 principle
Identify the least important or profitable half of the number of activities, products, customers and suppliers that contribute only 5% of sales. Cut them.
Move on to the 80/20 principle
Identify the 80% of products, customers, suppliers, and employees that contribute only 20% of value. Make them much more profitable or productive, if this possible , or , if isn’t , remove them over time.
Focus all your energies on increasing the 20% of business
Whether defined by customers, products, or any other measure - that contributes 80% of the value. Try to sell more of the same or similar products, to the relevant customers or others who share similar characteristics.
Be Extremely Selective
Be extremely selective in what you own , the acquisitions you make, the capital you use, and the number of stages of value added in which you participate and what you try to control. Over time, make your company more virtual and more focused on the minority of activity that delivers most of the value.
Identify the most valuable resources
French Mathematician Pierre de Fermat discovered that a ray of light traveling between two points will go that takes least time, not shortest route. In going the quickest way, light is minimizing its scarcest resource : time.
This is the principle of “least time” that led to laws of reflection and reflection .
We can apply the same principle in business by thinking about the scarcest resource. Identify the scarcest, most valuable resources in your organization , and arrange everything else to make the best of this scarce resource.
Think about and measure value subtracted as well as value added
Trichotomy law states from mathematics states that every number is either zero, positive or negative. This may look trivial but it is super useful in the context of value creation!
In organizations and life generally, we tend to focus on the value that is created, ignoring the value that is subtracted. Every activity, unit, person that adds value may also subtract value as well. For every plus, there might be a minus as well. What matters is the net result.
Identify whatever activities or links subtracts more value than they add, add cut them. Stop any activity that you or others engage in, if the value subtracted is nearly as great as, or is greater than value added.