NotitiesThe Secret to Achieving More With Less
Richard Koch
Het boek "The Secret to Achieving More With Less" van Richard Koch behandelt het 80/20-principe, dat stelt dat een klein aantal oorzaken verantwoordelijk is voor het merendeel van de resultaten. Het benadrukt het belang van eenvoud in bedrijfsvoering en het concentreren op de meest winstgevende klanten en producten. Het boek biedt strategieën voor het maximaliseren van efficiëntie en winstgevendheid door onnodige complexiteit te vermijden.
5: Simple Is Beautiful
minority of business activity is useful • value delivered to customers is rarely measured and always unequal • great leaps forward require measurement and comparison of the value delivered to customers and what they will pay for it. (Page 0)
The 80/20 Principle states that there always are a few high-productivity areas and many low-productivity ones (Page 0)
Because business is wasteful, and because complexity and waste feed on each other, a simple business will always be better than a complex business (Page 0)
The large and simple business is the best. (Page 0)
The way to create something great is to create something simple (Page 0)
reducing complexity (Page 0)
Progress requires simplicity, and simplicity requires ruthlessness (Page 0)
6: Hooking the Right Customers
Only train those who you are reasonably sure plan to stick around with you for several years. • Get those who are the best salespeople to train them, rewarding the sales superstars according to the subsequent performance of their trainees. (Page 0)
it is often said that we live in a postindustrial world, that firms should not be production led, that they should be marketing led and customer centered. These are, at best, half-truths. A short historical excursion is necessary to explain why (Page 0)
the small business made sure that it looked after its customers (Page 0)
The natural tendency of big business was to subordinate customer needs to the exigencies of low-cost mass production (Page 0)
Many products, from refrigerators to the Sony Walkman or the CD-Rom, could not have been commissioned as a result of market research (Page 0)
Services are now being industrialized in the same way that physical products were in the so-called industrial era (Page 0)
The mass market was dead; product and customer segmentation became the watchwords of the wise (Page 0)
It is absolutely right to be marketing led and customer centered. But it can also have dangerous and potentially lethal side effects (Page 0)
If the product range is extended into too many new areas, or if the obsession with customers leads to recruiting more and more marginal consumers, unit costs will rise and returns fall (Page 0)
The vast majority of firms’ costs lie outside the factory. These costs can be penal if the product range is too large (Page 0)
Similarly, chasing too many customers can escalate marketing and selling costs, lead to higher logistical costs, and very often, most dangerously of all, permanently lower prevailing selling prices, not just for the new customers, for the old ones too (Page 0)
concentrate only on profitable marketing and profitable customer centeredness (Page 0)
The markets and customers on which any firm should be centered must be the right ones, typically a small minority of those that the company currently owns. The conventional wisdom on being marketing led and customer centered is typically only 20 percent correct (Page 0)
Marketing, and the whole firm, should focus on providing a stunning product and service in 20 percent of the existing product line—that small part generating 80 percent of fully costed profits (Page 0)
Marketing, and the whole firm, should devote extraordinary endeavor toward delighting, keeping forever, and expanding the sales to the 20 percent of customers who provide 80 percent of the firm’s sales and/or profits. (Page 0)
There is no real conflict between production and marketing. You will only be successful in marketing if what you are marketing is different and, for your target customers, either unobtainable elsewhere, or provided by you in a product/service/price package that is much better value than is obtainable elsewhere (Page 0)
if these conditions apply in almost none of your product lines, your only hope is to innovate. At this stage, the creative marketeer must become product led (Page 0)
You cannot innovate without a new product or service (Page 0)
there are always apparently good reasons trotted out as to why you need the unprofitable 80 percent of products, in this case the fear of “losing stature” by having a smaller product line (Page 0)
The logical thing to do is to expand the area devoted to the 20 percent of most profitable and best-selling lipsticks and to delist some of the slowest-selling products (Page 0)
marginal products boosts profits while not harming customer perceptions one iota. (Page 0)
he should have concentrated on the best 20 percent of car washes. What were they doing right? (Page 0)
Important as focus on the few best products is, it is much less important than focusing on the few best customers (Page 0)
Know who the top revenue-producing customers are and make sure you meet their needs (Page 0)
Successful marketing is all about a focus on the relatively small number of customers who are the most active in consuming your product or service (Page 0)
A few customers buy a great deal while a great number buy very little. The latter can be ignored (Page 0)
Being customer centered on all of your customers is pretty nigh impossible. But cherishing the core 20 percent is both feasible and highly rewarding (Page 0)
You cannot target the key 20 percent until you know who they are (Page 0)
profile of the heavy and frequent consumer (Page 0)
Second, you need to provide quite exceptional or even “outrageous” service to them (Page 0)
The real key is to provide surprising service, above and beyond the call of duty and quite out of line with prevailing industry standards. This may have a short-term cost but it will have a long-term reward. (Page 0)
try above all to sell more to your existing core customers (Page 0)
much more important still is developing improvements to existing products, or developing totally new products, that are wanted by, and if possible developed in liaison with, your core customers (Page 0)
Innovation should be grounded in the relationship with this group (Page 0)
you should aim to keep your core customers forever (Page 0)
profitability is only a scorecard providing an after-the-fact measure of a business’s health (Page 0)
Customer loyalty is the basic fact that drives profitability in any case (Page 0)
If core customers are deserting, sell the business as fast as you can, or fire the management—fire yourself if you are the boss—and take whatever drastic steps are necessary to win the core customers back or at least stop the attrition (Page 0)
Only a focus on the key 20 percent of customers can make marketing a firm’s central process (Page 0)
Your organization cannot be centered on 100 percent of its customers: it can be centered on 20 percent. To be centered on these is the main job of any marketing person. But this type of marketing is also the main job of everyone in the firm (Page 0)
Sales is marketing’s close cousin: the front-line activity to communicate to and, at least as important, to listen to customers (Page 0)
stop thinking averages and start thinking 80/20 (Page 0)
One obvious but often neglected imperative is to hang on to the high performers. You shouldn’t follow the old adage: if it ain’t broke don’t fix it. If it ain’t broke, make damn sure it doesn’t break. (Page 0)
The next best thing to staying close to your customers is to stay close to the top salespeople. Keep them happy; this cannot be done solely with cash (Page 0)
Next, hire more of the same type of salesperson (Page 0)
Personality and attitude can be much more important. Put your sales superstars in a room together and work out what they have in common. Better still, ask them to help you hire more people like them (Page 0)
80 percent of sales by each of your salespeople were probably generated in 20 percent of their worktime (Page 0)
get everyone to adopt the methods that have the highest ratio of output to input (Page 0)
switch a successful team from one area with an unsuccessful team from another area. Do this as a genuine experiment (Page 0)
Invest the most training in those who perform best after the first series of training. (Page 0)
Selling is not just having good sales techniques (Page 0)
Focus every salesperson’s efforts on the 20 percent of products that generate 80 percent of sales. Make sure that the most profitable products attract four times the credit that an equivalent dollar of less profitable products does (Page 0)
The salesforce should be rewarded for selling the most profitable products, not the least profitable. (Page 0)
Insist that they spend 80 percent of their time on the best 20 percent of customers, even if they have to neglect some of the less important customers (Page 0)
Finally, get the salesforce to revisit old customers who have provided good business in the past (Page 0)
An old, satisfied customer is very likely to buy from you again (Page 0)
The impact of a better salesforce on a firm’s bottom line is immediate (Page 0)
Channel marketing and sales effort where you can offer a minority of potential customers something that is unique, better, or much better value than they can obtain elsewhere, provided that you can make higher profits in the process (Page 0)
Part One: Overture
80 percent of results or outputs flow from 20 percent of causes, and sometimes from a much smaller proportion of powerful forces (Page 2)
80/1 principle (Page 2)
99/20 relationship (Page 2)
it is very rarely true that 50 percent of causes lead to 50 percent of results (Page 2)
Few things really matter. (Page 2)
1: Welcome to the 80/20 Principle
a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards (Page 4)
there is an inbuilt imbalance between causes and results, inputs and outputs, and effort and reward (Page 4)
predictably unbalanced (Page 5)
frequency of use draws near to us things that are frequently used (Page 8)
The company immediately rewrote its operating software to make the most-used 20 percent very accessible and user friendly, thus making IBM computers more efficient and faster than competitors’ machines for the majority of applications (Page 9)
The 80/20 Principle will always reassert itself, unless conscious, consistent, and massive efforts are made and sustained to overcome it. (Page 10)
The reason that the 80/20 Principle is so valuable is that it is counterintuitive (Page 10)
We tend to expect that all causes will have roughly the same significance (Page 10)
the most likely result is that there will be a pattern of imbalance (Page 10)
this “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps (Page 10)
the two numbers in the comparison don’t have to add up to 100 (Page 11)
when we know the true relationship, we are likely to be surprised at how unbalanced it is (Page 11)
Whatever the actual level of imbalance, it is likely to exceed our prior estimate (Page 11)
Whether you realize it or not, the principle applies to your life, to your social world, and to the place where you work (Page 11)
it is possible to obtain much more that is of value and avoid what has negative value, with much less input of effort, expense, or investment (Page 11)
At the heart of this progress is a process of substitution. Resources that have weak effects in any particular use are not used, or are used sparingly. Resources that have powerful effects are used as much as possible (Page 11)
the entrepreneur shifts economic resources out of an area of lower productivity into an area of higher productivity and yield (Page 12)
What J-B Say called the work of entrepreneurs, modern financiers call arbitrage (Page 12)
business organizations and individuals are generally very poor at this sort of entrepreneurship or arbitrage, at shifting resources from where they have weak results to where they have powerful results (Page 12)
If we did realize the difference between the vital few and the trivial many in all aspects of our lives and if we did something about it, we could multiply anything that we valued (Page 12)
Tags: green
chaos theory, which has great parallels with the 80/20 Principle (Page 13)
The snag with linear thinking is that it doesn’t always work, it is an oversimplification of reality (Page 13)
view the world as an evolving organism where the whole system is more than the sum of its parts, and where relationships between the parts are nonlinear (Page 13)
The universe is wonky (Page 14)
Tags: green
there is a self-organizing logic lurking behind the disorder, a predictable nonlinearity—something which economist Paul Krugman has called “spooky,” “eerie,” and “terrifyingly exact (Page 14)
cause and effect are rarely linked in an equal way. (Page 14)
Chaos theory helps to explain why and how this imbalance happens by tracing a number of developments over time. (Page 14)
If they are forces for good, we should multiply them. If they are forces we don’t like, we need to think very carefully about how to neutralize them (Page 14)
there are always a few forces that have an influence way beyond their numbers. These are the forces that must be identified and watched (Page 14)
small initial influences can become greatly multiplied and produce highly unexpected results, which nevertheless can be explained in retrospect (Page 15)
It is only because of positive and negative feedback loops that causes do not have equal results (Page 15)
the rich get richer, not just (or mainly) because of superior abilities, but because riches beget riches (Page 15)
It all depends when and how the changes are made.”11 (Page 16)
The tipping point is “the point at which an ordinary and stable phenomenon—a low-level flu outbreak—can turn into a public-health crisis (Page 16)
what happens first, even something ostensibly trivial, can have a disproportionate effect (Page 16)
The examples given involve change over time, whereas the 80/20 Principle involves a static breakdown of causes at any one time. Yet there is an important link between the two. Both phenomena help to show how the universe abhors balance. (Page 17)
A 51/49 split is inherently unstable and tends to gravitate towards a 95/5, 99/1, or even 100/0 split (Page 17)
Equality ends in dominance: that is one of the messages of chaos theory (Page 17)
The 80/20 Principle’s message is different yet complementary. It tells us that, at any one point, a majority of any phenomenon will be explained or caused by a minority of the actors participating in the phenomenon (Page 17)
Word of mouth, from reviews and the first audiences, determines whether the second set of audiences will be large or small, which determines the next set and so on (Page 18)
80/20 Analysis is a systematic, quantitative method of comparing causes and effects. 80/20 Thinking is a broader, less precise, and more intuitive procedure (Page 18)
we are actually awash with time and profligate in its abuse (Page 19)
The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man (Page 19)
The implication of the 80/20 Principle is that output can be not just increased but multiplied, if we can make the low-productivity inputs nearly as productive as the high-productivity inputs (Page 19)
reallocate the resources from unproductive to productive uses (Page 20)
find ways to make the unproductive resources more effective, even in their existing applications (Page 20)
The few things that work fantastically well should be identified, cultivated, nurtured, and multiplied. (Page 20)
The 80/20 numbers are only a benchmark, and the real relationship may be more or less unbalanced than 80/20. The 80/20 Principle asserts, however, that in most cases the relationship is much more likely to be closer to 80/20 than to 50/50 (Page 23)
It is perhaps unfortunate that the numbers 80 and 20 add up to 100. This makes the result look elegant (as, indeed, would a result of 50/50, 70/30, 99/1, (Page 24)
To apply the 80/20 Principle you have to have two sets of data, both adding up to 100 percent, and one measuring a variable quantity owned, exhibited, or caused by the people or things making up the other 100 percent. (Page 24)
never read a book from cover to cover, except for pleasure (Page 25)
Read the conclusion, then the introduction, then the conclusion again, then dip lightly into any interesting bits. (Page 25)
2: How to Think 80/20
Long-term clients tend not to be price sensitive. In most consulting firms, the real excitement comes from winning new clients. In my new firm, the real heroes were those who worked on the largest existing clients for the longest possible time. They did this by cultivating the top bosses of those client corporations (Page 26)
Who you work for is more important than what you do (Page 26)
talent had very little to do with it (Page 26)
they realized that for most firms, 80 percent of profits come from 20 percent of clients. In the consulting industry that means two things: large clients and long-term clients (Page 26)
we kept plugging away at the most important issues until we had bludgeoned the client into successful action (Page 27)
It was better to be in the right place than to be smart and work hard (Page 27)
be cunning and focus on results rather than inputs (Page 27)
Acting on a few key insights produced the goods. Being intelligent and hard working did not (Page 27)
Even those who follow the 80/20 Principle need a bit of luck, and I have always enjoyed far more than my share (Page 28)
Wealth from investment can dwarf wealth from working (Page 28)
It is crucial to pick this 20 percent well and then concentrate as much investment as possible into it. (Page 28)
80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk. (Page 28)
A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking (Page 29)
This requires deep thought about any issue that is important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area. You can then act on the insight (Page 29)
80/20 Analysis examines the relationship between two sets of comparable data. One set of data is always a universe of people or objects, usually a large number of 100 or more, that can be turned into a percentage. The other set of data relates to some interesting characteristic of the people or objects that can be measured and also turned into a percentage (Page 30)
What makes 80/20 Analysis unique is that the measurement ranks the second set of data in descending order of importance and makes comparisons between percentages in the two sets of data. (Page 30)
It is the convention of 80/20 that it is the top 20 percent of causes that is cited, not the bottom (Page 30)
The emphasis is nearly always on the heavy users or causes (Page 32)
80/20 Analysis may result in any set of findings. Clearly, individual findings are more interesting and potentially more useful where there is an imbalance (Page 33)
An 80/20 Analysis is best displayed pictorially, by looking at two bars (Page 33)
concentrate on the key causes of the relationship, the 20 percent of inputs that lead to 80 percent (or whatever the precise number is) of the outputs (Page 35)
80/20 Analysis, applied inappropriately and in a linear way, can also lead the innocent astray—you need constantly to be vigilant against false logic. (Page 36)
The key consideration is not the distribution of books sold, but what customers want (Page 36)
customers who account for 80 percent of their profits and find out what those 20 percent of customers want (Page 37)
a study in the United States revealed that “best sellers represent about 5% of total sales (Page 37)
The true bestsellers are often those books that never make it into the charts but sell a reliable quantity year in and year out, often at high margins (Page 37)
the key questions should always be which customers and products generate 80 percent of profits (Page 37)
When using the 80/20 Principle, be selective and be contrarian (Page 37)
Don’t be seduced into thinking that the variable that everyone else is looking at—in this case, the books on the latest bestseller list—is what really matters (Page 37)
The most valuable insight from 80/20 Analysis will always come from examining nonlinear relationships that others are neglecting (Page 37)
Most important decisions have never been made by analysis and never will be (Page 38)
we start with a hypothesis about a possible imbalance between inputs and outputs, but, instead of collecting data and analyzing them, we estimate them. 80/20 Thinking requires, and with practice enables, us to spot the few really important things that are happening and ignore the mass of unimportant things. It teaches us to see the wood for the trees. (Page 38)
80/20 Thinking, although helped by data, must not be constrained by it. (Page 38)
we must constantly ask ourselves: what is the 20 percent that is leading to 80 percent? (Page 38)
You know that 80/20 Thinking is working when it multiplies effectiveness (Page 38)
When we are using the 80/20 Principle we do not assume that its results are good or bad or that the powerful forces we observe are necessarily good. We decide whether they are good (from our own perspective) and either determine to give the minority of powerful forces a further shove in the right direction or work out how to frustrate their operation (Page 38)
celebrate exceptional productivity, rather than raise average efforts • look for the short cut, rather than run the full course • exercise control over our lives with the least possible effort • be selective, not exhaustive • strive for excellence in few things, rather than good performance in many • delegate or outsource as much as possible in our daily lives and be encouraged rather than penalized by tax systems to do this (use gardeners, car mechanics, decorators, and other specialists to the maximum, instead of doing the work ourselves) • choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves • only do the thing we are best at doing and enjoy most • look beneath the normal texture of life to uncover ironies and oddities • in every important sphere, work out where 20 percent of effort can lead to 80 percent of returns • calm down, work less and target a limited number of very valuable goals where the 80/20 Principle will work for us, rather than pursuing every available opportunity. • make the most of those few “lucky streaks” in our life where we are at our creative peak and the stars line up to guarantee success (Page 39)
Becoming an 80/20 thinker requires active participation and creativity on your part. If you want to benefit from 80/20 Thinking, you have to do it (Page 40)
3: The Underground Cult
The 80/20 Principle was one of the key building blocks of the quality movement (Page 44)
Once the “vital few” sources of off-quality product have been identified, effort is focused on dealing with these issues, rather than trying to tackle all the problems at once. (Page 45)
software, where 80 percent of a product’s uses take advantage of only 20 percent of its capabilities (Page 48)
That means that most of us pay for what we don’t want or need (Page 48)
For what a business needs the most for its decisions—especially its strategic ones—are data about what goes on outside of it. It is only outside the business where there are results, opportunities, and threats.13 (Page 50)
A database, no matter how copious, is not information. It is information’s ore (Page 50)
The information a business most depends on is available, if at all, only in a primitive and disorganized form (Page 50)
The 80/20 Principle applied to business has one key theme—to generate the most money with the least expenditure of assets (Page 51)
and effort (Page 51)
some suppliers will be much better than others at satisfying customer needs. These suppliers will obtain the highest price realizations and also the highest market shares. (Page 51)
some suppliers will be much better than others at minimizing expenditure relative to revenues. In other words, these suppliers will cost less than other suppliers for equivalent output and revenue or, alternatively, be able to generate equivalent output with lower expenditure. (Page 51)
The concept of surplus implies the level of funds available for profits or reinvestment, over and above what is needed normally to keep the wheels turning (Page 51)
Higher surpluses will result in one or more of the following: (1) greater reinvestment in product and service, to produce greater superiority and appeal to customers; (2) investment in gaining market share through greater sales and marketing effort, and/or takeovers of other firms; (3) higher returns to employees, which will tend to have the effect of retaining and attracting the best people in the market; and/or (4) higher returns to shareholders, which will tend to raise share prices and lower the cost of capital, facilitating investment and/or takeovers (Page 52)
Tags: green
Over time, 80 percent of the market will tend to be supplied by 20 percent or fewer of the suppliers, who will normally also be more profitable (Page 52)
In the 80/20 equilibrium, a few suppliers, the largest, will offer customers better value for money and have higher profits than smaller rivals. This is frequently observed in real life, despite being impossible according to the theory of perfect competition (Page 52)
But the real world does not generally rest long in a tranquil equilibrium. Sooner or later (usually sooner), there are always changes to market structure caused by competitors’ innovations (Page 52)
Over time, markets will tend to comprise more market segments (Page 52)
Any large firm will operate in a large number of segments, that is, in a large number of customer/product combinations where a different formula is required to maximize revenue relative to effort and/or where different competitors are met (Page 53)
80 percent of surpluses or profits are generated by 20 percent of segments and by 20 percent of customers and by 20 percent of products (Page 53)
there is likely to be an inequality between inputs and outputs, an imbalance between effort and reward (Page 53)
some people generate a very large surplus (their attributable share of revenue is very much greater than their full cost), whereas many people generate a small surplus or a deficit (Page 53)
80 percent of the surplus is usually generated by 20 percent of employees (Page 53)
A product has to be only 10 percent better value than that of a competing product to generate a sales difference of 50 percent and a profit difference of 100 percent. (Page 54)
One implication of the 80/20 theory of firms is that successful firms operate in markets where it is possible for that firm to generate the highest revenues with the least effort. This will be true both absolutely, that is, relative to monetary profits, and relatively, that is, in relation to competition. A firm cannot be judged successful unless it has a high absolute surplus (in traditional terms, a high return on investment) and also a higher surplus than its competitors (higher margins). (Page 54)
Firms rarely reach the highest level of surplus that they could attain, or anywhere near it, both because managers are often not aware of the potential for surplus and because they often prefer to run large firms rather than exceptionally profitable ones. (Page 54)
The principles work because they are a reflection of relationships in nature, which are an intricate mixture of order and disorder, of regularity and irregularity. (Page 55)
Creative systems operate away from equilibrium (Page 55)
Cause and effect, input and output, operate in a nonlinear way (Page 55)
Events cannot be predicted, although predictable patterns tend to recur. (Page 55)
Control is therefore impossible (Page 56)
you back the right number at the right table, you can make a fortune (Page 56)
If you can identify where your firm is getting back more than it is putting in, you can up the stakes and make a killing (Page 56)
The game is to spot the few places where you are making great surpluses and to maximize them and to identify the places where you are losing and get out (Page 56)
The real world comprises a mass of influences, where cause and effect are blurred, and where complex feedback loops distort inputs; where equilibrium is fleeting and often illusory; where there are patterns of repeated but irregular performance; where firms never compete head to head and prosper by differentiation; and where a few favored souls are able to corner the market for high returns (Page 56)
The 80/20 Principle is rampant but largely unobserved (Page 57)
What we are generally allowed to see in business is the net effect of what happens, which is by no means the whole picture (Page 57)
The 80/20 Principle is most useful when we can identify all the forces beneath the surface so that we can stop the negative influences and give maximum power to the most productive forces (Page 57)
isolate where you are really making the profits and, just as important, where you are really losing money (Page 57)
Unless you have used the 80/20 Principle to redirect your strategy, you can be pretty sure that the strategy is badly flawed (Page 58)
Business strategy should not be a grand and sweeping overview. It should be more like an underview, a peek beneath the covers to look in great detail at what is going on (Page 58)
4: Why Your Strategy Is Wrong
80/20 Analysis of profits by different categories of business: • by product or product group/type • by customer or customer group/type • by any other split which appears to be relevant for your business for which you have data; for example, by geographical area or distribution channel • by competitive segment. (Page 59)
Identify which parts of the business are making very high returns, which are just about washing their faces, and which are disasters (Page 59)
Start with products (Page 59)
allocate all the overhead costs to each product group on some reasonable basis (Page 59)
Take each category of overhead cost and allocate it to each product group. Do this for all the costs, then look at the results. (Page 59)
Typically some products, representing a minority of turnover, are very profitable; most products are modestly or marginally profitable; and some are really making large losses once you allocate all the costs (Page 59)
Tags: green
After products, go on to look at customers. Repeat the analysis, but look at total purchases by each customer or customer group (Page 61)
Some customers pay high prices but have a high cost to serve: these are often smaller customers. The very big customers may be easy to deal with and take large volumes of the same product, but screw you down on price (Page 61)
Tags: green
The analysis led to a successful campaign to find more A and B customers: the small direct customers and the distributors (Page 64)
Tags: green
The message here was to strive above all to keep and expand long-serving clients, who were the least price sensitive and who could be served most cheaply (Page 66)
Tags: green
pitches were only made where it was believed the company concerned would turn into a long-term client (Page 66)
SEGMENTATION IS THE KEY TO UNDERSTANDING AND DRIVING UP PROFITABILITY (Page 68)
the greatest insights come from a combination of customers and products into “dollops” of business defined with reference to your most important competitors (Page 68)
A competitive segment is a part of your business where you face a different competitor or different competitive dynamics (Page 69)
Do you face a different main competitor in this part of your business compared to the rest of it? (Page 69)
If you are up against a specialist competitor, your profitability will depend on the interaction of your product and service against theirs (Page 69)
Do you and your competitor have the same ratio of sales or market share in the two areas, or are they relatively stronger in one area and you relatively stronger in another? (Page 69)
There will be real reasons for this (Page 69)
At this stage you don’t need to know the reasons. All you need to do is observe that, although you face the same competitor, the balance of advantage is different in the two areas (Page 70)
Thinking about competitors puts you straight on to the key business splits (Page 70)
thinking about competitive segments lobs you straight at the most important way to split and think about your business (Page 70)
Dividing the business into competitive segments demolished these arguments (Page 70)
if you don’t face different competitors, or different relative competitive positions, it’s not a separate segment (Page 70)
Each segment had a different competitor or different competitive positions (Page 71)
Is the segment an attractive market to be in? • How well is the firm positioned in each segment? (Page 74)
my client had a low market share and a high-cost position in this segment, largely because they were using old technology. (Page 76)
decision was made, therefore, to “harvest” the segment, which meant cutting the effort going to protect the business and raising prices. This was expected to lead to a loss in sales but, for a time, to higher profits (Page 76)
Segments 10 and 11 were ones where the instrumentation group had leading market shares, but they were structurally unattractive markets. Market size was declining; there was overcapacity, and the customers held all the cards and could negotiate very keen prices. Despite the fact that it was a market leader, my client decided to deemphasize these segments and all new investment was canceled. (Page 77)
But (Page 77)
operate at the minimum size necessary to be profitable) as soon as possible. (Page 77)
DON’T TAKE 80/20 ANALYSIS TO SIMPLISTIC CONCLUSIONS (Page 78)
the best way to start making money is to stop losing money (Page 78)
start with 80/20 profit analyses (Page 79)
But we have still not by any means exhausted the use of the 80/20 Principle in strategy. The principle is also of enormous value in identifying the next leaps forward for your business. (Page 79)
We tend to assume that our organizations, and our industries, are doing pretty much the best they can (Page 79)
Tags: green
It would be far better to start from the proposition that your industry is all screwed up and could be structured much more effectively to provide what customers want (Page 79)
80 percent of value perceived by customers relates to 20 percent of what an organization does (Page 80)
Where might less be better (Page 80)
80 percent of the benefit from any product or service can be provided at 20 percent of the cost. (Page 80)
Many consumers would buy a stripped-down, very cheap product (Page 80)
80 percent of any industry’s profits come from 20 percent of its customers. Do you have a disproportionate share of these (Page 80)
Eighty percent of sales are concentrated in 20 percent of products—just stock these (Page 81)
The 80/20 Principle suggests that your strategy is wrong (Page 82)
If you make most of your money out of a small part of your activity, you should turn your company upside down and concentrate your efforts on multiplying this small part (Page 82)
Behind the need for focus lurks an even more powerful truth about business (Page 82)
nearly everything we make is much more complex than it needs to be (Page 83)
The next stage is often for managers to refuse to get rid of the 80 percent of business that is unprofitable, on the apparently reasonable grounds that the 80 percent makes a very large contribution to overheads. Removing the 80 percent, they say, would clearly decrease profits, because you simply couldn’t remove 80 percent of your overhead in any sensible time frame (Page 84)
Tags: green
Few people stop to ask why the unprofitable business is so bad. Even fewer stop to think whether you could in practice, as well as in theory, have a business solely composed of the most profitable chunks and get rid of 80 percent of the overhead. (Page 84)
The truth is that the unprofitable business is so unprofitable because it requires the overheads and because having so many different chunks of business makes the organization horrendously complicated (Page 84)
You could have a business solely composed of the profitable business and it could make the same absolute returns, provided that you organized things differently (Page 84)
simple is beautiful (Page 85)
Business people seem to love complexity (Page 85)
No sooner is a simple business successful than its managers pour vast amounts of energy into making it very much more complicated. But business returns abhor complexity. (Page 85)
Tags: green
the act of making a business more complex depresses returns more effectively than any other means known to humanity. (Page 85)
the process can be reversed (Page 85)
A complex business can be made more simple and returns can soar (Page 85)
remove at least four-fifths of lethal managerial overhead (Page 85)
Those of us who believe in the 80/20 Principle will never succeed in transforming industry until we can demonstrate that simple is beautiful and why. Unless people understand this, they will never be willing to give up 80 percent of their current business and overheads. (Page 85)
we must get involved in a current controversy over whether size in business is a help or a hindrance (Page 85)
Why is it that firms often see their sales mushroom yet their returns on sales and capital actually fall, rather than rise as the theory would predict? (Page 87)
The most important answer is the cost of complexity. The problem is not extra scale, but extra complexity. (Page 87)
additional scale is rarely just more of the same. Even if the customer is the same, the extra volume usually comes from adapting an existing product, providing a new product, and/or adding more service. This requires expensive overhead costs that are usually hidden, but always real (Page 87)
And if new customers are involved it is far worse (Page 87)
When new business is different from existing business, even if it is only slightly different, costs tend to go up, not just pro rata with the volume increase but well ahead of it. (Page 87)
This is because complexity slows down simple systems and requires the intervention of managers to deal with the new requirements (Page 87)
when partially completed work is set down to await someone else’s intervention and later picked up and passed on into another gap—all these costs are horrendous and all the more insidious because they are largely invisible (Page 87)
B’s extra volume has been bought at the cost of higher complexity (Page 87)
Big is only ugly and expensive because it is complex. Big can be beautiful. But it is simple that is always beautiful (Page 88)
Understanding the cost of complexity allows us to take a major leap forward in the debate about corporate size (Page 88)
only one characteristic differentiated the winners from the less successful firms: simplicity (Page 89)
The winners sold a narrower range of products to fewer customers and also had fewer suppliers (Page 89)
Tags: green
Where a business is dominant in its narrowly defined niche, it is likely to make several times the returns earned in niches where one faces a dominant competitor (the mirror image (Page 89)
Parts of the business that are mature and simple can be amazingly profitable (Page 89)
you can have the luxury of just focusing on the most profitable activities and customers, but partly also because the costs of complexity—in the form of overheads and management—can be slashed. (Page 89)
Outsourcing is a terrific way to cut complexity and costs (Page 89)
where your company has the greatest comparative advantage—and then ruthlessly outsource everything else (Page 90)
If you are just in one line of business, you don’t need a head office, regional head offices, or functional offices (Page 90)
The key problem with head offices is not their cost; it is the way they take away real responsibility and initiative from those who do the work and add the value to customers (Page 90)
The most profitable products and services are usually those that are left to get on with their own life without any “help” from the center (Page 90)
Finally, where a chunk of business is simple, the chances are that it is closer to the customer (Page 90)
Customers can be listened to and feel that they are important. People are willing to pay a lot more for this. For customers, the quest for self-importance is at least as important as the quest for value. Simplicity raises prices as well as lowering costs (Page 90)
If you focus on the most profitable (Page 91)
surprisingly fast (Page 91)
The less profitable segments can sometimes be sold, with or without their overheads, and always be closed (Page 91)
harvest these segments, deliberately losing market share. You let go of the less profitable customers and products, cut off most support and sales effort, raise prices, and allow sales to decline at 5–20 percent while you laugh all the way to the bank (Page 91)
What is most simple and standardized is hugely more productive and cost effective than what is complex (Page 91)
Letting the customer access your business system—as with all forms of self-service—creates choice, economy, speed, and spend (Page 92)
Always try to identify the simplest 20 percent of any product range, process, marketing message, sales channel, product design, product manufacture, service delivery, or customer feedback mechanism (Page 92)
Refine it until it is as simple as you can make it (Page 92)
Whenever something has become complex, simplify it; if you cannot, eliminate it. (Page 92)
As in almost every firm around the world, the Corning executives had used a standard cost approach to decide what to produce (Page 92)
standard cost systems make it impossible to know true product profitability, largely because they do not differentiate between high- and low-volume products (Page 92)
By eliminating low-volume, unprofitable products, which contributed little to revenues and negative amounts of profit, engineering capacity was reduced by 25 percent (Page 93)
The 50/5 Principle asserts that, typically, 50 percent of a company’s customers, products, components, and suppliers will add less than 5 percent to revenues and profits (Page 93)
Getting rid of the low-volume (and negative value) 50 percent of items is the key to reducing complexity (Page 93)
More is worse (Page 93)
The solution was to cut the number of products by more than half (Page 93)
At the heart of the market meltdown, Corning turned away business. This might seem perverse, but it worked. A simpler, smaller operation rapidly restored profits. Less was more (Page 94)
why do supposedly profit-maximizing organizations become complex, when this plainly destroys value (Page 94)
One important answer, alas, is that managers love complexity (Page 94)
Complexity is stimulating and intellectually challenging; it leavens boring routine; and it creates interesting jobs for managers (Page 94)
complexity is also sponsored by managers, just as it sponsors them (Page 94)
There is thus a natural tendency for business, like life in general, to become overcomplex (Page 94)
They do not focus on what they should be doing (Page 94)
They should be adding value to their customers and potential customers (Page 94)
Every person and every organization is the product of a coalition and the forces within the coalition are always at war (Page 94)
The war is between the trivial many and the vital few (Page 94)
All we can discern is the overall result; we miss both the garbage and the gems (Page 95)
any organization always has great potential for cost reduction and for delivering better value to customers: by simplifying what it does and by eliminating (Page 95)
a small portion of activity will always be terrifically effective and valued by customers; it is probably not what you think it is (Page 95)
poor performance is always endemic, hiding behind and succored by a smaller amount of excellent performance (Page 95)
major improvements are always possible, by doing things differently and by doing less (Page 95)
Do not tackle everything with equal effort. Cost reduction is an expensive business (Page 96)
80 percent of what is important is supported by 20 percent of the costs (Page 96)
equal cost does not lead to equal customer satisfaction (Page 96)
Identify, treasure, and multiply the few productive costs, and get rid of the rest (Page 96)