The 80/20 Principle: The Secret of Achieving More With Less (7 page)

The other reason is that what matters even when considering books (as opposed to customers) is not the distribution of sales—the 20 percent of books that represent 80 percent of sales—but the distribution of profits—the 20 percent of titles that generate 80 percent of profits. Very often, these are not the so-called bestsellers, books written by well-known authors. In fact, a study in the United States revealed that “best sellers represent about 5% of total sales.”
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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. As the same U.S. research comments, “Core inventory represents those books that sell season-in and season-out. They are the ‘80’ in the 80/20 rule, often accounting for the lion’s share of sales in a particular subject.”

This illustration is salutary. It does not invalidate 80/20 Analysis at all, since the key questions should always be which customers and products generate 80 percent of profits. But it does show the danger of not thinking clearly enough about how the analysis is applied. When using the 80/20 Principle, be selective and be contrarian. 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. This is linear thinking. The most valuable insight from 80/20 Analysis will always come from examining nonlinear relationships that others are neglecting. In addition, because 80/20 Analysis is based on a freezeframe of the situation at a particular point rather than incorporating changes over time, you must be aware that if you inadvertently freeze the wrong or an incomplete picture, you will get an inaccurate view.

80/20 THINKING AND WHY IT IS NECESSARY

80/20 Analysis is extremely useful. But most people are not natural analysts, and even analysts cannot stop to investigate the data every time they have to make a decision—it would bring life to a shuddering halt. Most important decisions have never been made by analysis and never will be, however clever our computers become. Therefore, if we want the 80/20 Principle to be a guide in our daily lives, we need something less analytical and more instantly available than 80/20 Analysis. We need
80/20 Thinking.

80/20 Thinking is my phrase for the application of the 80/20 Principle to daily life, for nonquantitative applications of the principle. As with 80/20 Analysis, 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.

80/20 Thinking is too valuable to be confined to causes where data and analysis are perfect. For every ounce of insight generated quantitatively, there must be many pounds of insight arrived at intuitively and impressionistically. This is why 80/20 Thinking, although helped by data, must not be constrained by it.

To engage in 80/20 Thinking, we must constantly ask ourselves: what is the 20 percent that is leading to 80 percent? We must never assume that we automatically know what the answer is but take some time to think creatively about it. What are the vital few inputs or causes, as opposed to the trivial many? Where is the haunting melody being drowned out by the background noise?

80/20 Thinking is then used in the same way as the results from 80/20 Analysis: to change behavior and, normally, to concentrate on the most important 20 percent. You know that 80/20 Thinking is working when it multiplies effectiveness. Action resulting from 80/20 Thinking should lead us to get much more from much less.

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.

THE 80/20 PRINCIPLE TURNS CONVENTIONAL WISDOM UPSIDE DOWN

Application of the 80/20 Principle implies that we should do the following:

• 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.

There are no boundaries to the 80/20 Principle

No sphere of activity is immune from the influence of the 80/20 Principle. Like the six wise, blind Indian men who tried to discern the shape of an elephant, most users of the 80/20 Principle only know a fraction of its scope and power. 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!

Now is a good time to start. If you want to begin with applications for your organization, go straight on to Part Two, which documents most of the important business applications of the 80/20 Principle. If you are more immediately interested in using the principle to make major improvements in your life, skip to Part Three, a novel attempt to relate the 80/20 Principle to the fabric of our daily lives.

PART
TWO

CORPORATE SUCCESS NEEDN’T BE A MYSTERY

3

THE UNDERGROUND CULT

Now we see in a mirror dimly, but then we shall see face to face. Now I know in part; then I shall understand fully.

1 C
ORINTHIANS
13:12

It is difficult to gauge the extent to which the 80/20 Principle is already known in business. This is almost certainly the first book on the subject, yet in my research I was easily able to find several hundred articles referring to the use of 80/20 in all kinds of businesses, all over the world. Many successful firms and individuals swear by the use of the 80/20 Principle, and most holders of MBAs have heard of it.

Yet considering that the 80/20 Principle has affected the lives of hundreds of millions of people even though they may be unaware of it, it remains strangely uncelebrated. It is time to put this right.

THE FIRST 80/20 WAVE:
THE QUALITY REVOLUTION

The quality revolution which took place between 1950 and 1990 transformed the quality and value of branded consumer goods and other manufactures. The quality movement has been a crusade to obtain consistently higher quality at lower cost, by the application of statistical and behavioral techniques. The objective, now almost reached with many products, is to obtain a zero rate of product defects. It is possible to argue that the quality movement has been the most significant driver of higher living standards throughout the world since 1950.

The movement has an intriguing history. Its two great messiahs, Joseph Juran (born 1904) and W. Edwards Deming (born 1900), were both Americans (although Juran was born in Romania). Respectively an electrical engineer and a statistician, they developed their ideas in parallel after the Second World War but found it impossible to interest any major U.S. corporation in the quest for extraordinary quality. Juran published the first edition of his
Quality Control Handbook,
the bible of the quality movement, in 1951, but it received a very flat reception. The only serious interest came from Japan and both Juran and Deming moved there in the early 1950s. Their pioneering work took an economy known at the time for shoddy imitations and transformed it into a powerhouse of high quality and productivity.

It was only when Japanese goods, such as motorcycles and photocopiers, began to invade the U.S. market that most American (and other Western) corporations began to take the quality movement seriously. From 1970, and especially after 1980, Juran, Deming, and their disciples undertook an equally successful transformation of Western quality standards, leading to huge improvements in the level and consistency of quality, dramatic reductions in fault rates, and large falls in manufacturing costs.

The 80/20 Principle was one of the key building blocks of the quality movement. Joseph Juran was the most enthusiastic messiah of the principle, although he called it “the Pareto Principle” or “the Rule of the Vital Few.” In the first edition of the
Quality Control Handbook,
Juran commented that “losses” (that is, manufactured goods that have to be rejected because of poor quality) do not arise from a large number of causes:

Rather, the losses are always maldistributed in such a way that a small percentage of the quality characteristics always contributes a high percentage of the quality loss.

The footnote to the text commented that

the economist Pareto found that wealth was non-uniformly distributed in the same way. Many other instances can be found—the distribution of crime amongst criminals, the distribution of accidents among hazardous processes, etc. Pareto’s principle of unequal distribution applied to distribution of wealth and to distribution of quality losses.
¹

Juran applied the 80/20 Principle to statistical quality control. The approach is to identify the problems causing lack of quality and to rank them from the most important—the 20 percent of defects causing 80 percent of quality problems—to the least important. Both Juran and Deming came to use the phrase 80/20 increasingly, encouraging diagnosis of the few defects causing most of the problems.

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.

As the quality movement has progressed from an emphasis on quality “control” through to the view that quality must be built into products in the first place, by all operators, and to total quality management and increasingly sophisticated use of software, the emphasis on 80/20 techniques has grown, so that today almost all quality practitioners are familiar with 80/20. Some recent references illustrate the ways in which the 80/20 Principle is now being used.

In a recent article in the
National Productivity Review,
Ronald J. Recardo asks:

Which gaps adversely affect your most strategic consumers? As with many other quality problems, Pareto’s Law prevails here too: if you remedy the most critical 20 percent of your quality gaps, you will realize 80 percent of the benefits. This first 80 percent typically includes your breakthrough improvements.
²

Another writer, focusing on corporate turnarounds, comments:

For every step in your business process, ask yourself if it adds value or provides essential support. If it does neither, it’s waste. Cut it. [This is] the 80/20 rule, revisited: You can eliminate 80 percent of the waste by spending only 20 percent of what it would cost you to get rid of 100 percent of the waste. Go for the quick gain now.
³

The 80/20 Principle was also used by Ford Electronics Manufacturing Corporation in a quality program that won the Shingo prize:

Just-in-time programs have been applied using the 80/20 rule (80 percent of the value is spread over 20 percent of the volume) and top-dollar usages are analyzed constantly. Labor and overhead performance were replaced by Manufacturing Cycle Time analysis by product line, reducing product cycle time by 95 percent.
⁴

New software incorporating the 80/20 Principle is being used to raise quality:

[With the ABC DataAnalyzer] the data is entered or imported into the spreadsheet area, where you highlight it and click on your choice of six graph types: histograms, control charts, run charts, scatter diagrams, pie charts and Pareto charts.

The Pareto chart incorporates the 80 to 20 rule, which might show, for instance, that out of 1,000 customer complaints roughly 800 can be eliminated by correcting only 20 per cent of the causes.
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