Koch Richard BOOK 80 20 PRINCIPAL The Secret of Achieving More with Less

In his bestselling book The 80/20 Principle, Richard Koch showed readers how to put the 80/20 Principle – the idea that 80 per cent of results come from just 20 per cent of effort – into practice in their personal lives. Now he demonstrates the few things you need to do in the workplace to multiply the results you achieve. By applying the strategies outlined in The 80/20 Manager, you will: – Put in fewer hours than your colleagues yet never be short of time – Learn to focus only on the issues that really matter, and ignore those that don’t – Achieve exceptional results by working less hard – Feel successful every day.

With a simple observation that in his garden, 80 percent of the peas were borne by 20 percent of the pods, Vilfredo Pareto created a revolutionary principle. Known as the Pareto’s principle or the rule of 80-20, the core of this principle lies in the fact, that 80 percent of the results which one receives in a field of activity is a result of 20 percent of the efforts.

In case of business, merely 20 percent of the customers help in generating 80 percent of the revenue. This principle is developed and presented in a systematic way by Richard Koch. He not only explains the intricacies of the principle but also goes a step ahead by explaining the reasons that make this principle work.

It is a secret used by highly successful people, which is made known to the common man through this book.

What is the 80/20 Principle?

The 80/20 principle (aka the Pareto principle) states that 80% of the results come from 20% of the causes. A few things are important; most are not.

The Pareto principle (80/20 Principle) states that for many outcomes, roughly 80% of consequences come from 20% of the causes (the “vital few”).Other names for this principle are the 80/20 rule, the law of the vital few, or the principle of factor sparsity.

Management consultant Joseph M. Juran developed the concept in the context of quality control, and improvement, naming it after Italian economist Vilfredo Pareto, who noted the 80/20 connection while at the University of Lausanne in 1896.^[4] In his first work, Cours d’économie politique, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population. The Pareto principle is only tangentially related to Pareto efficiency.

Mathematically, the 80/20 rule is roughly described by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown to exhibit such a distribution.^[5] It is an adage of business management that “80% of sales come from 20% of clients”.

EXAMPLE  Pareto principle (80/20 Principle) In sports

It has been argued that the Pareto principle applies to sport, where leading players often take the majority of wins. For instance in baseball, the Pareto principle is reflected in Wins Above Replacement (an attempt to combine multiple statistics to determine a player’s overall importance to a team). “15% of all the players last year produced 85% of the total wins with the other 85% of the players creating 15% of the wins. The Pareto principle holds up pretty soundly when it is applied to baseball.”^[21] It has been suggested (but not tested) that the principle applies to training, with 20% of exercises and habits having 80% of the impact, suggesting trainees should reduce the variety of training exercises to focus on this effective set.

WELCOME TO THE 80/20 PRINCIPLE

For a very long time, the Pareto law [the 80/20 Principle] has lumbered the economic scene like an erratic block on the landscape; an empirical law which nobody can explain.
JOSEF STEINDL
The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organization, and by every social grouping and form of society. It can help individuals and groups achieve much
more, with much less effort. The 80/20 Principle can raise personal effectiveness and happiness. It can multiply the profitability of corporations and the effectiveness of any organization. It even holds the key to raising the quality and quantity of public services while cutting their cost. This book, the first ever on the 80/20 Principle,2 is written from a burning conviction, validated in personal and business experience, that this principle is one of the best ways of dealing with and transcending the pressures of modern life.

How to Think 80/20

Two applications of the principle — 80/20 Analysis and 80/20 Thinking– provide a practical philosophy that will help you to better understand your life and improve it.

80/20 Analysis

80/20 Analysis is generally used to change the relationship that it describes… or to make better use of it! It is useful, in particular when you want to focus your attention on the main causes of the relationship, on the 20% of input that leads to 80% (or another proportion) of output.

80/20 Thinking and why it is necessary

In order for the 80/20 Principle to become the guiding light in our everyday life, we need something less analytical and more immediately accessible than 80/20 Analysis. We need 80/20 Thinking. 80/20 Thinking is the way to use the 80/20 Principle on a daily basis for non-quantitative applications. Instead of gathering data and analysing it, we will simply estimate it. It teaches us to distinguish the essential from the accessory.

To engage in 80/20 Thinking, we have to keep asking ourselves: what is the 20% that leads to the 80%? We can then use 80/20 Thinking to change behaviour and to focus our attention on the 20% that counts.

The 80/20 Principle using 80/20 Analysis and Thinking allows us to:

• Celebrate exceptional productivity
• Take short cuts
• Exercise control using the least possible effort
• Be selective
• Strive for excellence
• Delegate as much as possible
• Choose our career and our colleagues
• Only do the things we do best
• Slow down, work less
• Make the most of “lucky streaks”

HOW TO USE THE 80/20 PRINCIPLE

There are two ways to use the 80/20 Principle, Traditionally, the 80/20 Principle has required 80/20 Analysis, a quantitative method to establish the precise relationship between causes/input/effort and results/outputs/rewards. This method uses the possible existence of the 80/20 relationship as a hypothesis and then gathers the facts so that the true relationship is revealed. This is an empirical procedure which may lead to any result ranging from 50/50 to 99.9/0.1. If the result does demonstrate a marked imbalance between inputs and outputs (say a 65/35 relationship or an even more unbalanced one), then normally action is taken as a result (see below).
A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking. This requires deep thought about any issue that is
important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area. You can then act on the insight. 80/20 Thinking does not require you to collect data or actually test the hypothesis. Consequently, 80/20 Thinking may on occasion mislead you —it is dangerous to assume, for example, that you already know what the 20 percent is if you identify a relationship—but I will argue that 80/20 Thinking is much less likely to mislead you than is conventional thinking. 80/20 Thinking is much more accessible and faster than 80/20 Analysis, although the latter may be preferred when the issue is extremely important and you find it difficult to be confident about an estimate.

 The Underground Cult

It is difficult to gauge how well the 80/20 Principle is known in the world of business. Many successful companies and individuals swear by the 80/20 Principle. And yet, the 80/20 Principle, which has touched the life of millions of individuals, perhaps without them even noticing, remains strangely almost unheard of.

How a company can turn to the 80/20 Principle to increase its profits

Any company has a lot to gain from applying the 80/20 Principle. We begin the following chapter with the most important use of the 80/20 Principle in any company: target the areas where you make genuine profits and, equally essential, the places where you genuinely lose money.

Why Your Strategy is Wrong

If you have not used the 80/20 Principle to redirect your strategy, you can be quite sure that it is deeply flawed. You are almost certainly doing too many things for too many people. To settle on a useful strategy, you must closely examine the various parts of your company, especially from the point of view of their profitability.

Where do you make the most money?

To identify this, carry out an 80/20 Analysis of the profits by:

• product
• customer
• business
• segment of competition

Don’t draw simplistic conclusions from the 80/20 Analysis

The 80/20 type analysis of profitability is a necessary but insufficient condition for good strategy. On the other hand, incontestably, the best way to begin to make money is to stop losing it. This does not mean that the strategic analysis ends with the 80/20 Analysis, but that it should begin with it.

Simple is Beautiful

Simple is beautiful — complex is ugly

Those among us who believe in the 80/20 Principle will never succeed in transforming industry until we can prove that simple is beautiful and explain why. Too many people do not understand this and they will never be willing to give up 80% of their current business (thereby eliminating 80% of their overhead costs).

Simple is beautiful explains the 80/20 Principle

A study conducted by Gunter Rommel with 39 German average-sized companies revealed that one single characteristic makes flourishing companies stand out from the others: simplicity. Prosperous companies sell a narrower range of products to a lower number of customers and order stocks from a smaller number of suppliers.

Go for the simplest 20%

What is most simple and standardised is infinitely more productive and cost-effective than what is complex. The simplest messages are the most appealing and universal for colleagues, customers and suppliers. The simplest structures and process flows are both the most attractive and the most economical. Try to identify the simplest 20%, always and everywhere. Cultivate this 20%. Refine it to make it even simpler. Standardise. Improve. Every time something starts to become complex, simplify it. If you cannot, eliminate it.

The Vital Few Give Success to You

The underlying logic of the 80/20 Principle requires us to understand and internalise some very simple rules; once we have done this, we can easily “think 80/20” and “act 80/20” in everything we do.

Stop thinking 50/50

The best way to start thinking 80/20 is to start acting 80/20, just as the best way to act 80/20 is to think 80/20.

Move money from 80% type activities towards 20% type activities. You cannot spend the mental energy that you waste on 80% type activities on the 20% of 20% type projects. All resources are limited and should be deployed where they reap the most rewards.