The 80/20 Principle: The Secret of Achieving More With Less (4 page)

The concept comes from the principles of epidemic theory. 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,”
¹⁰
because of the number of people who are infected and can therefore infect others. And since the behavior of epidemics is nonlinear and they don’t behave in the way we expect, “small changes—like bringing new infections down to thirty thousand from forty thousand—can have huge effects…It all depends when and how the changes are made.”
¹¹

First come, best served

Chaos theory advocates “sensitive dependence on initial conditions”
¹²
—what happens first, even something ostensibly trivial, can have a disproportionate effect. This resonates with, and helps to explain, the 80/20 Principle. The latter states that a minority of causes exert a majority of effects. One limitation of the 80/20 Principle, taken in isolation, is that it always represents a snapshot of what is true now (or, more precisely, in the very recent past when the snapshot was taken). This is where chaos theory’s doctrine of sensitive dependence on initial conditions is helpful. A small lead early on can turn into a larger lead or a dominant position later on, until equilibrium is disturbed and another small force then exerts a disproportionate influence.

A firm that, in the early stages of a market, provides a product that is 10 percent better than its rivals may end up with a 100 or 200 percent greater market share, even if the rivals later provide a better product. In the early days of motoring, if 51 percent of drivers or countries decide to drive on the right rather than the left side of the road, this will tend to become the norm for nearly 100 percent of road users. In the early days of using a circular clock, if 51 percent of clocks go what we now call “clockwise” rather than “counterclockwise,” this convention will become dominant, although clocks could just as logically have moved to the left. In fact, the clock over Florence cathedral moves counterclockwise and shows 24 hours.
¹³
Soon after 1442 when the cathedral was built, the authorities and clockmakers standardized on a 12-hour, “clockwise” clock, because the majority of clocks had those features. Yet if 51 percent of clocks had ever been like the clock over Florence cathedral, we would now be reading a 24-hour clock backwards.

These observations regarding sensitive dependence on initial conditions do not exactly illustrate the 80/20 Principle. 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. In the former case, we see a natural flight away from a 50/50 split of competing phenomena. A 51/49 split is inherently unstable and tends to gravitate towards a 95/5, 99/1, or even 100/0 split. Equality ends in dominance: that is one of the messages of chaos theory. 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. Eighty percent of the results come from 20 percent of the causes. A few things are important; most are not.

The 80/20 Principle sorts good movies from bad

One of the most dramatic examples of the 80/20 Principle at work is with movies. Two economists have just made a study of the revenues and lifespans of 300 movies released over an 18-month period.
¹⁴
They found that four movies—just 1.3 percent of the total—earned 80 percent of box office revenues; the other 296 movies or 98.7 percent earned only 20 percent of the gross. So movies, which are a good example of unrestricted markets at work, produce virtually an 80/1 rule, a very clear demonstration of the principle of imbalance.

Even more intriguing is why. It transpires that movie goers behave just like gas particles in random motion. As identified by chaos theory, gas particles, Ping-Pong balls, or movie goers all behave at random but produce a predictably unbalanced result. 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. Movies like
Independence Day
or
Mission Impossible
continue to play to packed houses, while other star-studded and expensive movies, like
Waterworld
or
Daylight,
very quickly play to smaller and smaller houses, and then none at all. This is the 80/20 Principle working with a vengeance.

A GUIDE TO THIS GUIDEBOOK

Chapter 2 explains how you can put the 80/20 Principle into practice and explores the distinction between 80/20 Analysis and 80/20 Thinking, both of which are useful methods derived from the 80/20 Principle. 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, comprising the mental models and habits that enable us to hypothesize what are the important causes of anything important in our lives, to identify these causes, and to make sharp improvements in our position by redeploying our resources accordingly.

Part Two: Corporate Success Needn’t be a Mystery summarizes the most powerful business uses of the 80/20 Principle. These uses have been tried and tested and found to be of immense value yet remain curiously unexploited by most of the business community. There is little in my summary that is original, but anyone seeking major profit improvement, whether for a small or large business, should find this a very useful primer and the first ever to appear in a book.

Part Three: Work Less, Earn and Enjoy More shows how the 80/20 Principle can be used to raise the level at which you are operating in both your work and personal life. This is a pioneering attempt to apply the 80/20 Principle on a novel canvas; and the attempt, although I am sure it is imperfect and incomplete in many ways, does lead to some surprising insights. For example, 80 percent of the typical person’s happiness or achievement in life occurs in a small proportion of that life. The peaks of great personal value can usually be greatly expanded. The common view is that we are short of time. My application of the 80/20 Principle suggests the reverse: that we are actually awash with time and profligate in its abuse.

Part Four: Crescendo—Progress Regained draws the themes together and positions the 80/20 Principle as the greatest secret engine of progress available to us all. It hints at the uses that could be made of the 80/20 Principle for the public good as well as for corporate wealth creation and personal advancement.

WHY THE 80/20 PRINCIPLE BRINGS GOOD NEWS

I want to end this introduction on a personal rather than a procedural note. I believe that the 80/20 Principle is enormously hopeful. Certainly, the principle brings home what may be evident anyway: that there is a tragic amount of waste everywhere, in the way that nature operates, in business, in society, and in our own lives. If the typical pattern is for 80 percent of results to come from 20 percent of inputs, it is necessarily typical too that 80 percent, the great majority, of inputs are having only a marginal—20 percent—impact.

The paradox is that such waste can be wonderful news, if we can use the 80/20 Principle creatively, not just to identify and castigate low productivity but to do something positive about it. There is enormous scope for improvement, by rearranging and redirecting both nature and our own lives. Improving on nature, refusing to accept the status quo, is the route of all progress: evolutionary, scientific, social, and personal. George Bernard Shaw put it well: “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.”
¹⁵

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. Successful experiments with the 80/20 Principle in the business arena suggest that, with creativity and determination, this leap in value can usually be made.

There are two routes to achieving this. One is to reallocate the resources from unproductive to productive uses, the secret of all entrepreneurs down the ages. Find a round hole for a round peg, a square hole for a square peg, and a perfect fit for any shape in between. Experience suggests that every resource has its ideal arena, where the resource can be tens or hundreds of times more effective than in most other arenas.

The other route to progress—the method of scientists, doctors, preachers, computer systems designers, educationalists, and trainers—is to find ways to make the unproductive resources more effective, even in their existing applications; to make the weak resources behave as though they were their more productive cousins; to mimic, if necessary by intricate rote-learning procedures, the highly productive resources.

The few things that work fantastically well should be identified, cultivated, nurtured, and multiplied. At the same time, the waste—the majority of things that will always prove to be of low value to man and beast—should be abandoned or severely cut back.

As I have been writing this book and observed thousands of examples of the 80/20 Principle, I have had my faith reinforced: faith in progress, in great leaps forward, and in mankind’s ability, individually and collectively, to improve the hand that nature has dealt. Joseph Ford comments: “God plays dice with the universe. But they’re loaded dice. And the main objective is to find out by what rules they were loaded and how we can use them for our own ends.”
¹⁶

The 80/20 Principle can help us achieve precisely that.

2

HOW TO THINK 80/20

Chapter 1 explained the concept behind the 80/20 Principle; this chapter will discuss how the 80/20 Principle works in practice and what it can do for you. Two applications of the principle, 80/20 Analysis and 80/20 Thinking, provide a practical philosophy which will help you understand and improve your life.

DEFINITION OF THE 80/20 PRINCIPLE

The 80/20 Principle states that there is an inbuilt imbalance between causes and results, inputs and outputs, and effort and reward. Typically, causes, inputs, or effort divide into two categories:

• the majority, that have little impact

• a small minority, that have a major, dominant impact.

Typically also, results, outputs, or rewards are derived from a small proportion of the causes, inputs, or effort aimed at producing the results, outputs, or rewards.

The relationship between causes, inputs, or efforts on the one hand, and results, outputs, or rewards on the other, is therefore typically unbalanced.

When this imbalance can be measured arithmetically, a good benchmark for the imbalance is the 80/20 relationship—80 percent of results, outputs, or rewards are derived from only 20 percent of the causes, inputs, or effort. About 80 percent of the world’s energy is consumed by 15 percent of the world’s population, for example.
¹
Eighty percent of the world’s wealth is possessed by 25 percent of the world’s people.
²
In health care, “20 percent of your population base and/or 20 percent of its disease elements will consume 80 percent of your resources.”
³

Figures 2 and 3 show this 80/20 pattern. Let us imagine that a company has 100 products and has found out that the most profitable 20 products account for 80 percent of all profits. In Figure 2, the bar on the left comprises the 100 products, each occupying an equal hundredth of the space.

Figure 2 Shows a 20/1 pattern

In the bar on the right are the total profits of the company from the 100 products. Imagine that the profits from the one most profitable product are filled in from the top of the right-hand bar downwards. Let us say that the most profitable product makes 20 percent of total profits. Figure 2 therefore shows that one product, or 1 percent of the products, occupying one hundredth of the space on the left, makes 20 percent of the profits. The shaded areas represent this relationship.

If we continue counting the next most profitable product and so on down the bar, until we have the profits from the top 20 products, we can then shade in the right-hand bar according to how much of the total profit these top 20 products make. We show this in Figure 3, where we see (in our fictitious example) that these 20 products, 20 percent of the number of products, comprise 80 percent of the total profits (in the shaded area). Conversely, in the white area, we can see the flip side of this relationship: 80 percent of the products only make, in total, 20 percent of the profits.