Unless you have used the 80/20 Principle to create your strategy I am fairly confident that strategy is badly flawed.
For sure you most certainly have an incomplete and inaccurate view of where you make and lose the most money.
It is almost certain that you are wasting far too much time, effort and resources on the wrong people, products, and/or services and not enough on the right people, products and/or services.
You are focusing on the broad part of the pyramid instead of the narrow one.
To create a highly effective business strategy, you need to take a close look at the different pieces of your business that generate your profits and cash flow.
Unless you are a very small business, you make at least 80% of your profits and cash flow from 20% of your customers, 20% of your employees and 20% of your products and/or services.
The real trick is to identify which 20%.
Where are you making the most money and where are you losing the most?
In order to clearly identify which parts of your business are making very high returns, which are just getting by and which are complete catastrophes, an 80/20 Analysis has to be performed of your people and profit-centers for each of these different categories:
- by product/service or product/service group
- by customer or customer group
- by employee or employee group
- and possibly by any other category of your business that appears to be relevant that you have pertinent data for; things like competitive market segment, department, geographic area, etc.
80/20 Analysis is a task for a “smart” human. It can’t be outsourced simply to a computer.
Numbers always tell a story, but because every business is unique, the story is many times different for each business.
Just knowing the 20% that generates 80% of your results by product/services, customers and employees, gives you a tremendous advantage over your competitors because we now know what, who and where to focus all of our marketing and selling time, energies and resources.
The real low-hanging strength of 80/20 is showing you where you are losing money.
We tend to think that our business is doing the best it can and that the competitiveness of the market has reached its equilibrium and now we need to win market share by sheer force.
Nothing could be further from the truth or more destructive in thought.
By changing our thinking to 80/20 we begin to transform the way we do business at every entry-point, every segment, category and every level.
We begin to eliminate waste. Our inventory costs go down, which improves cash flow.
We need fewer employees because the employee we now have generate more and better results with far less management on our part and you can afford to reward them better thus creating a culture where people actually look at their jobs as a career.
We watch our customer loyalty increase, the frequency of purchases increases and because we are catering to the 20%, when they do purchase, the ticket sale is much higher thus the profit and cash flow increases.
80/20 is Your Guide to Developing Your Business into an Innovative Animal.
The 80/20 Principle is of enormous value in identifying the next big innovative leaps forward for your business.
80/20 is all about simplifying your life. Getting more and better results with less – less time, less effort, less customers, less inventory, etc. etc.
The 80/20 Principle suggests you turn your business upside down and concentrate all of your time, effort and resources on multiplying the small but Wildly Important Parts [WIP’s] to your strategy.