Maximizing 80/20 In Your Business - And What To Watch Out For

March 9, 2018 | Scott Hagedorn

Maximizing 80/20 In Your Business

 

 

Vilfredo Pareto was an Italian economist in the late 19th century who noticed 80% of the land was owned by 20% of the people. Later this would become known as the Pareto Principle, or the 80/20 Rule.

So - What does this have to do with your business??

The most interesting aspects of 80/20 are that 1) It applies almost everywhere - not even just in business - and 2) It is infinite in its power.

80/20 is true of almost anything you can measure in a business:

  • Sources of incoming phone calls

  • Effectiveness of sales people

  • Sales to customers

  • Physical location of customers

  • Popularity of products

  • Types of product defects

  • Problem employees

  • Customer service problems

  • Sources of conflict

  • Shoplifters

  • Activity patterns in a 24-hour day, or a week or month

  • Performance of distributors, affiliates, and channel partners

  • Sources of web traffic

  • Advertising waste

  • Advertising effectiveness

  • Productivity of web pages

  • Reasons customers buy

What does 80/202 and 80/203 mean?  That is where the real power in 80/20 is.
The real power in 80/20 is that you can disregard 80 percent of the roads in your city, only look at the top 20 percent, and the 80/20 rule will still apply. 80 percent of the 80 percent of traffic is on 20 percent of the 20 percent of roads.
That means 64 percent of the travelers drive on 4 percent of the roads. That’s 80/202.
Then we do it again: 80 percent of the 80 percent of the 80 percent of the traffic, runs on 20 percent of the 20 percent of the 20 percent of the roads.
In other words 52 percent of the travelers drive on 0.8 percent of the roads. That’s 80/203

So as you can see - 80/20 in business is all about gaining leverage. It allows you to boost your results far beyond what you may have imagined.

Now think of your company and even your team... do 80% of results come from from 20% of your team members??

In all the time I’ve paid attention to this concept, I haven’t come across anyone who has answered “No” to that question.

Why It’s Important to Be Careful in Management

A more recent application or implementation of management theory that’s been making the rounds for a few years (both in books and lectures/seminars) suggests that we interpret Pareto's Principle in ways that would create a new approach, sometimes termed Superstar Management. Its supporters claim that since 20 percent of your employees likely produce 80 percent of your results, you should focus your limited time in management of only that 20 percent – the so-called superstars. However, this proposed implementation of Pareto’s Principle to management is flawed, because it overlooks the fact that 80 percent of your time should be spent doing what is really important, or most likely to deliver the greatest return. By helping your “good” salespeople become better, you are more likely to reap greater results than by dedicating the same management effort to helping the fewer “great” salespeople become terrific. In this case, the sheer numbers work against you spending time only helping manage and improve the few great workers. Thus, it’s wise to evaluate various management situations and apply the Pareto Principle appropriately – and wisely.

How are you going to recognize and respond to 80/20 in your business??