A New 80 – 20 Rule

In 1906 an Italian economist, Vilfredo Pareto called attention to the fact that 80% of the land in Italy was owned by 20% of the population, but it was Joseph Juran, the influential quality evangelist who called it a “universal principle” and named it after Pareto.  The Pareto Principle, or the 80/20 Rule, also called the law of the vital few, and the principle of factor sparsity states that, for many events, roughly 80% of the effects come from 20% of the cause.

The 80/20 rule has been widely applied to business, for example:

  • 80% of your profits come from 20% of your customers
  • 80% of your complaints come from 20% of your customers
  • 80% of your profits come from 20% of the time you spend
  • 80% of your sales come from 20% of your products
  • 80% of your sales are made by 20% of your sales staff

As such, this gives managers a ready target for performance improvement by focusing more effort on those areas with the biggest impact or payback.

A New 80/20 rule

The other day I came across a new 80/20 rule that proved  to be very enlightening and useful.  It has to do with business strategy and specifically, strategic focus.

Research by McKinsey & Co. has come up with a surprising finding about the amount of time companies spend on two key elements of strategy:  Where to Compete and How to Compete.  Conventional wisdom, and most company efforts, is that How to Compete is the critical element in strategic success and thus gets most of management’s time and attention.  But the research showed the opposite.

“In fact, 80 percent of the variance in revenue growth is explained by choices about where to compete, according to research summarized in The Granularity of Growth, leaving only 20 percent explained by choices about how to compete. Unfortunately, this is the exact opposite of the allocation of time and effort in a typical strategy-development process”.

By more clearly defining the markets you can and do play in, and segmenting them with a finer degree of granularity often gives insight into where best to compete.  And since granular market segments tend to show changes faster than aggregated markets, keeping a close eye on your market segments allows you to shift your strategy to follow the most productive segments.

Tight Lines . . .

John R Childress

E | john@johnrchildress.com      T | +44 207 584 3774      M | +44 7833 493 999

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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