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.
- 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 . . .
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