First, I must start by extending an apology for the delayed post for last week. Nevertheless, here we are.
Secondly, we move right into the Pareto Principle. I know that many entrepreneurs already understand this principle, and probably use it in their day-to-day decision considerations. For those who don’t we will simply say that this principle, also commonly referred to as the 80/20 rule, states that 80% of the output in any given situation or system is determined by 20% of the input. The principle is named after economist Vilfredo Pareto who first brought this principle into focus. Of course the 80/20 rule sounds like mathematics, isn’t it? There’s nothing to worry about, as we shall keep it simple and avoid the math.
So, how does this principle come into entrepreneurship anyway? What is an entrepreneur going to do with this principle? Is it really something worth spending time on or it’s just one of those ‘endless’ principles that people just keep dreaming and talking about? I think that this principle is very useful for an entrepreneur, and I guess you will be on my side by the time we are through with this article! I’m just going to dwell on examples where you can apply this principle and use it to steer your enterprise to greater heights. Don’t you like progress Mr. Entrepreneur?
- Your personal efforts and productivity. The word ‘busy’ is oftentimes used in normal communication, and of course I know that 90+ percent of entrepreneurs are busy people. I’m not going to talk about your business but I just want you to know that 80% of your achievements and results are coming from only 20% of your time and effort. You might fight back and tell me that you make very good or even excellent use of every minute of your day. I can hear you – but I have a question for you? Do you actually know the critical issues that require only 20% of your time to generate for you 80% of the results you need? I think this is the gist of the matter.
- Revenue and profit generation. As an entrepreneur, you can market – and market, until you actually start dreaming about marketing! Even if you deploy a huge sales and marketing force, they could run around vast territories and only come back with peanuts. You need to realise that 80% of your revenues come from 20% of your clients or customers. Again, 20% of your sales force generates for your enterprise 80% of the sales. Additionally, 20% of your products (I’m talking about those with numerous products on offer), generate for you 80% of the sales and revenue. Indeed, even 80% of your profits result from 20% of your products and marketing efforts. Isn’t this very pleasant news really? Never run around and lose sleep following every small business. Focus on the big fishes and you will most certainly succeed.
- Cost control. Yes – I mentioned in one of my recent posts that if you cannot control costs in your enterprise, you could generate zillions of revenue and end up with nothing at the close of the financial year. The Pareto principle also applies in cost control. You will realise that 20% of your activities generate 80% of the costs. These 80% of your costs require just 20% of your efforts to address them, and you would be smiling all the way to the bank. Don’t you agree with me? Just take a closer look at your costs and you will agree with me! Focus on those critical activities and cost drivers and you will be glad soon.
- Your manpower. Many of us know this issue of human capital. You put in mediocre human capital you certainly get mediocre results. It is quite a consistent and real thing you know. I’m not stopping you from recruiting freshers and developing them over the years strategically. However, you could use this principle to guide other staff retention and motivational plans you have in your enterprise. 20% of your staffs give you 80% of the action and results you need to succeed. Likewise, another 20% of your staffs give you 80% of the human capital headaches you have! This is not pleasant but sometimes we have to say unpleasant things like this – of course with some little love. It therefore implies that 80% of your staff motivation and retention plans should rotate around 20% of your staffs. Isn’t it? Get me right here – I’m not saying you go ahead and abuse the 80%. They are still an important part of your enterprise and you need to carry them along.
- Your investments and resource utilisation. What about your investments and resource utilization Mr. Entrepreneur? Do you know that 20% of your investments and resources generate for you 80% of the results? Now, you need to identify this 20% and laser focus on them. Of course you might not throw out the other 80% but you need to be wise! Also, 80% of your activities require 20% of your resources and vice-versa.
- Strategic and tactical planning and execution. 80% of the critical aspects of your strategic and tactical issues are determined by 20% of the challenge. 80% of your efforts in strategy and tactics should rotate around 20% of the top issues. As an entrepreneur, you could actually delegate 80% of the strategic and tactical work to 20% of your staffs and get the results you need. Work smart instead of working hard!
- Overall enterprise leadership. Now, I’m not going to spend time differentiating between management and leadership here. But candidly, many entrepreneurs tend to get stuck in the management bit and ignore leading the enterprise. To be an effective leader you need to work by the Pareto principle. The most vital issues of leading an organization rotates around only 20% of the issues while you leave your managers to handle the remaining 80% of the issues. Do you understand me? You can choose to be deeply involved in the whole 100% if you like – but don’t complain and develop health complications and blame everybody including the doctor who is treating you. Alright? It’s a no-brainer here! If you want to work 23 hours per day and lose sleep over everything in the business, I cannot stop you. It’s your choice, isn’t it?
I think we need to stop here for today. Don’t you think so? Just a word of wisdom and caution – don’t simply go ahead reading a riot act because of your intentions to abide by the 80/20 rule from this day forward. You might need to look deeper, consult a bit more, communicate and prepare people for change, and also get their buy-in to the implementation of this principle. If you move blindly and cause chaos in your enterprise due to your overzealous approach, you have only yourself to blame. Don’t say no one cautioned you, OK?
Until then – cheers and best wishes!
The Wise Entrepreneur