Some 20 years ago I went to a seminar on business development and strategies for business growth. At that seminar I picked up one really critical principle – the principle known as the Pareto Principle or the 80/20 rule.
I subsequently purchased a book written by Richard Koch called “The 80/20 Principle” which provided a wonderful insight into this principle.
Simply put, the 80/20 rule asserts that the minority causes, inputs or effort usually lead to majority of your results, outputs or rewards. To put it another way, 80% of what you achieve comes from 20% of your effort – for all practical purposes, the dominant part of your effort is relatively irrelevant. This is totally contrary to what people normally expect.
So what does imbalance between effort and result mean? Essentially:
- 80% of outputs come from 20% of your inputs
- 80% of consequences flow from 20% of causes
- 80% of results come from 20% of effort
What in general does this mean:
- 20% of products usually account for 80% of dollar sales value
- 20% of customers usually account for 80% of dollar sales value
- 20% of customers or products account for 80% of an organisations profits
- 20% of your expenses will account for 80% of the dollar value of your expenditure
- 20% of criminals account for 80% of the value of all crime
- 20% of motorists cause 80% of accidents
- 20% of those who marry account for 80% of the divorce statistic (sadly distorted by those who consistently re marry and re divorce)
- 20% of children attain 80% of the educational qualifications available
In the Home
- 20% of your carpets are likely to get 80% of the wear
- 20% of your clothes will be worn 80% of the time
- 80% of intruder false alarms are set off by 20% of the possible causes
Have a good look at your life and business – I’m sure you will find that the principle will be well and truly alive. Being aware of this can enable you to reprioritise the things in your life and business to produce maximum results for minimum input!
Now the purpose of my introducing this principle to you is in support of a statement that I’m going to make – it’s a hunch, but a pretty informed one at that!
80% of businesses are at best making basic wages for their owners. There you are, I’ve said it. In fact, I’ll go one step further and say that 80% of those business owners are earning less than their best paid employee. That’s a big statement I know, but a sad fact.
Now many will say that times are tough – and yes, there is no doubt that they are! However, my answer to that is that even in good times, they still were making wages at best. And that’s not good enough for the capital invested in a business.
Now, I have one more controversial statement to make – of the 20% of businesses that were making a profit greater than a basic wage for their owners, in 80% of cases that was from luck, not any good planning or business strategy. So, let’s now look at what we are left with – 20% of 20% of businesses or 4% of businesses out there are making profits greater than basic wages for their owners from good strategic planning and execution. And I would put forward one further conclusion – and it is a variation from the 80/20 principle – that is I would suggest that these 4% of businesses would account for 80% of business profits in the business community!
Now I see that is a disgrace in that most businesses erode economic value, not create it! How could that be? In the book “E Myth” by Michael Gerber (a must read book for anyone planning to go into business or already in business), Gerber suggests that for a business to be successful, the business owner must have (or buy in) three major skills as follows:
- Entrepreneurial skills – to identify and seek out opportunities
- Management skills – to manage the business
- Technical skills – to do the work that the business does
The majority of businesses owners go into a business where they are good at the technical work – however, their entrepreneurial and management skills are poor. So even though they are good at what they do, they work hard at the wrong things and their business fails. And by failure, I don’t necessarily mean that they go broke – it just doesn’t meet their expectations and ultimately decide that working for someone else wasn’t really that bad in the first place.
Given the very poor profitability of the majority of businesses out there, we are astounded by the indifference shown by business owners to embracing the opportunity to improve their business and their lives are you happy working harder and earning less than your employees? Sorry, to me this is madness and the sooner you get out of your business and let someone else take over with the right attitude, the better you and the community in general will be. Oh, and when you get out, don’t expect a purchaser to pay the price you think your business is worth – sorry, it just isn’t going to happen!
Here is a challenge for you in the new financial year – it’s time to change. Make the time and effort to attend seminars/webinars and workshops aimed at improving your business management skills. Ask your accountant or contact your local chamber of commerce or industry group – they are sure to be running something that will be of value to you. We know that they can make a significant difference to your outlook and business performance.