Excerpts from The 80/20 Principle by Richard Koch
▪ 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’, because of the number of people who are infected and can therefore infect others. And since the behaviour of epidemics is non-linear 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.’
▪ 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.
▪ What he was really saying was that 80 per cent of the value of a book can be found in 20 per cent or fewer of its pages, and absorbed in 20 per cent of the time most people would take to read it through
- 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 per cent of effort can lead to 80 per cent 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.
▪ To engage in 80/20 Thinking, we must constantly ask ourselves: what is the 20 per cent that is leading to 80 per cent? 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 by the background noise?
▪ 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).
▪ Business people seem to love complexity. 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. As the business becomes more complex, its returns fall dramatically. This is not just because more marginal business is being taken. It is also because the act of making a business more complex depresses returns more effectively than any other means known to humanity
▪ All the great breakthroughs from the invention of fire and the wheel onward have been triumphs of production which then created their own markets. And it is nonsense to say that we live in a post-industrial world. Services are now being industrialized in the same way that physical products were in the so-called industrial era. Retailing, agriculture, flower production, language, entertainment, teaching, cleaning, hotel provision and even the art of restauranteering--all these used to be exclusively the province of individual service providers, non- industrializable and non-exportable. Now all these areas are being rapidly industrialized and in some cases globalized.
▪ Marketing, and the whole firm, should focus on providing a stunning product and service in 20 per cent of the existing product line--that small part generating 80 per cent of fully costed profits.
Marketing, and the whole firm, should devote extraordinary endeavour towards delighting, keeping for ever and expanding the sales to the 20 per cent of customers who provide 80 per cent of the firm’s sales and/or profits.
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. These conditions are unlikely to apply in more than 20 per cent of your current product line; and you are likely to obtain more than 80 per cent of your true profits from this 20 per cent. And if these conditions apply in almost none of your product lines, your only hope is to innovate.
▪ Real measure of a healthy business lies in the strength, depth and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case. If you start to lose core customers, the business is crumbling beneath your feet, whatever you do to dress up short-term earnings. 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. Conversely, if the core customers are happy, the long-term expansion of the business is assured.
▪ Remember the main tenets of the 80/20 Principle:
The doctrine of the vital few and the trivial many: there are only a few things that ever produce important results.
Most efforts do not realize their intended results.
What you see is generally not what you get: there are subterranean forces at work.
It is usually too complicated and too wearisome to work out what is happening and it is also unnecessary: all you need to know is whether something is working or not and change the mix until it is; then keep the mix constant until it stops working.
Most good events happen because of a small minority of highly productive forces; most bad things happen because of a small minority of highly destructive forces.
Most activity, en masse and individually, is a waste of time. It will not contribute materially to desired results.
Is there something going badly astray, where we think we know why but where we might be totally wrong?
Since something important is always happening underneath the surface, without anyone noticing it, what could it be this time?
▪ Rule two affirms that the most important decisions are often those made only by default, because turning points have come and gone without being recognized. For example, your chief money makers leave because you have not been close enough to them to notice their disaffection or correct it. Or your competitors develop a new product (as competitors to IBM did with the PC) that you think is wrongly conceived and will never catch on. Or you lose a leading market-share position without realizing it, because the channels of distribution change. Or you invent a great new product and enjoy a modest success with it, but someone else comes along and makes billions out of a lookalike rolled out.
▪ When this happens, no amount of data gathering and analysis will help you realize the problem or opportunity. What you need are intuition and insight: to ask the right questions rather than getting the right answers to the wrong questions. The only way to stand a reasonable chance of noticing critical turning points is to stand above all your data and analysis for one day a month and ask questions like:
- What uncharted problems and opportunities, that could potentially have tremendous consequences, are mounting up without my noticing?
- What is working well when it shouldn’t, or at least was not intended to? What are we unintentionally providing to customers that for some
▪ 80 per cent of the value of any project will come from 20 per cent of its activities; and the other 80 per cent will arise because of needless complexity. Therefore do not start your project until you have stripped it down to one simple aim. Jettison the baggage.
▪ Time management often advises people to categorize their list of ‘to do’ activities into A, B, C or D priorities. In practice, most people end up classifying 6070 per cent of their activities as A or B priorities. They conclude that what they are really short of is time. This is why they were interested in time management to start with. So they end up with better planning, longer working hours, greater earnestness and usually greater frustration too. They become addicted to time management, but it doesn’t fundamentally change what they do, or significantly lower their level of guilt that they are not doing enough.
▪ What we must do is to plant firmly in our minds that hard work, especially for somebody else, is not an efficient way to achieve what we want. Hard work leads to low returns. Insight and doing what we ourselves want lead to high returns.
▪ Whenever I am tempted to do too much, I remember Ronald Reagan and Warren Buffett. You should think of your own examples, of people you know personally or those in the public eye, who exemplify productive inertia. Think about them often.
▪ Giving up guilt is clearly related to the dangers of excessively hard work. But it is also related to doing the things you enjoy. There is nothing wrong with that. There is no value in doing things you don’t enjoy. Do the things that you like doing. Make them your job. Make your job them. Nearly everyone who has become rich has had the added bonus of becoming rich doing things they enjoy. This might be taken as yet another example of the universe’s 80/20 perversity
▪ You may not have quite the same drives, but you will not create anything of enduring value unless you love creating it. This applies as much to purely personal as to business matters.
▪ It is important to focus on what you find easy. This is where most motivational writers go wrong. They assume you should try things that are difficult for you; on the same grounds, one suspects, that grandparents used to urge the consumption of cod liver oil before capsules were invented. The inspirationalists quote such worthies as T J Watson, who said that ‘success lies on the far side of failure’. My view is that normally failure lies on the far side of failure. Also, success lies on the near side of failure. You are already very successful at some things and it matters not a whit if those things are very few in number.
▪ The anthropologists say that if you have too much experience, too early, you exhaust your capacity for further deep relationships. This may explain the superficiality often observed in those whose profession or circumstances force them to have a great number of relationships, such as salespeople, prostitutes or those who move house very frequently.
There are only four types of officer First, there are the lazy, stupid ones. Leave them alone, they do no harm. . . Second, there are the hard-working intelligent ones. They make excellent staff officers, ensuring that every detail is properly considered. Third, there are the hard-working, stupid ones. These people are a menace and must be fired at once. They create irrelevant work for everybody. Finally, there are the intelligent lazy ones. They are suited for the highest office. --- General Von Manstein on the German Officer Corps
▪ Be willing to pay a high price to work for the best. Find any excuse to spend time with them. Work out what their characteristic ways of operating are. You will find that they see things differently, spend time differently and interact with other people differently. Unless you can do what they do, or something even more different from the average modus vivendi in the profession, you will never rise to the top.
▪ To quote John Cacioppo, an Ohio State University psychologist: It’s the most important relationships in your life, the people you see day in and day out, that seem to be crucial for your health. And the more significant the relationship is in your life, the more it matters for your health. Think about the people you see every day. Do they make you happier or less happy? Could you change the amount of time you spend with them accordingly?
▪ Seven daily happiness habits
- Mental stimulation
- Spiritual/artistic stimulation/meditation
- Doing a good turn
- Taking a pleasure break with a friend
- Giving yourself a treat
- Congratulating yourself
▪ Seven short cuts to a happy life
- Maximize your control
- Set attainable goals
- Be flexible
- Have a close relationship with your partner
- Have a few happy friends
- Have a few close professional alliances
- Evolve your ideal lifestyle
▪ The really important factors were parental control, the clarity of the school’s mission, leadership, the school’s autonomy, and the freedom and respect enjoyed and earned by the teachers
▪ Business people, like everyone else, are generally reluctant to make such radical and simplifying changes. Radical simplification disturbs vested interests (not least, those of the managers in charge themselves), creates disruptive change and requires everyone to be both accountable and useful. Most people prefer life to be quiet, stable and unaccountable ▪ In the case of healthcare, as in most areas, prevention is better and a great deal cheaper than cure; stopping disease in the early stages is better and cheaper than stopping it later; and creating habits of healthy living among the young, habits that are likely to endure through a long lifetime, will do more good than almost any other form of social expenditure.