The 80/20 Principle: The Secret of Achieving More With Less by Richard Koch
Book: The 80/20 Principle: The Secret of Achieving More With Less by Richard Koch
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Authors: Richard Koch
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perennial transformation strategy. Offer less choice, fewer frills, less service, and much cheaper prices. Eighty percent of sales are concentrated in 20 percent of products—just stock these. Another place I used to work, a wine merchant, stocked 30 different types of claret. Who needed that amount of choice? The firm was taken over by a discount chain and now a wine warehouse has opened up down the road.
Who would have thought 50 years ago that people would have wanted fast-food outlets? And today, who realizes that accessible mega-restaurants, the sort that offer a limited and predictable menu in glitzy surroundings at reasonable prices but insist that you give back the table after 90 minutes, constitute a death warrant for traditional owner-run restaurants?
Why do we insist on using people to do things that machines can do much more cheaply? When will airlines start to use robots to serve you? Most people prefer humans, but machines are more reliable and much cheaper. Machines may give 80 percent of the benefit at 20 percent of the cost. In some cases, as with cash machines (automatic teller machines, also known as holes in the wall), they provide a much better service, much faster, and at a fraction of the cost. In the next century only old fogies like me will prefer to deal with humans and even I will have my doubts.
Are carpets obsolete?
I want to leave you to your own imagination. Just one final example, where use of the 80/20 Principle has transformed a company’s fortunes and could conceivably change a whole industry.
Consider the Interface Corporation of Georgia, now an $800 million carpet supplier. It used to sell carpets; now it leases them, installing carpet tiles rather than whole carpets. Interface realized that 20 percent of any carpet receives 80 percent of the wear. Normally a carpet is replaced when most of it is still perfectly good. Under Interface’s leasing scheme, carpets are regularly inspected and any worn or damaged carpet tile is replaced. This lowers costs for both Interface and the customer. A trivial 80/20 observation has transformed one company and could lead to widespread future changes in the industry.
CONCLUSION
The 80/20 Principle suggests that your strategy is wrong. If you make most of your money out of a small part of your activity, you should turn your company upside down and concentrate your efforts on multiplying this small part. Yet this is only part of the answer. Behind the need for focus lurks an even more powerful truth about business, and it is to this theme that we turn next.
5
SIMPLE IS BEAUTIFUL
My effort is in the direction of simplicity. People in general have so little and it costs so much to buy even the barest necessities (let alone the luxuries to which I think everyone is entitled) because nearly everything we make is much more complex than it needs to be. Our clothing, our food, our household furnishings—all could be much simpler than they now are and at the same time be better-looking.
H ENRY F ORD 1
We saw in the previous chapter that nearly all businesses have within them chunks of business with widely varying profitability. The 80/20 Principle suggests something quite outrageous as a working hypothesis: that one-fifth of a typical company’s revenues account for four-fifths of its profits and cash. Conversely, four-fifths of the average company’s revenues account for only one-fifth of profits and cash. This is a bizarre hypothesis. If we assume that one such business has sales of $100 million and total profits of $5 million, for the 80/20 Principle to be correct $20 million of sales has to produce $4 million of profits—a return on sales of 20 percent; while $80 million of sales has to produce just $2 million of profits, a return on sales of just 1.25 percent. This means that the top fifth of business is sixteen times more profitable than the rest of the business.
What is extraordinary is that when it is tested, the
Who would have thought 50 years ago that people would have wanted fast-food outlets? And today, who realizes that accessible mega-restaurants, the sort that offer a limited and predictable menu in glitzy surroundings at reasonable prices but insist that you give back the table after 90 minutes, constitute a death warrant for traditional owner-run restaurants?
Why do we insist on using people to do things that machines can do much more cheaply? When will airlines start to use robots to serve you? Most people prefer humans, but machines are more reliable and much cheaper. Machines may give 80 percent of the benefit at 20 percent of the cost. In some cases, as with cash machines (automatic teller machines, also known as holes in the wall), they provide a much better service, much faster, and at a fraction of the cost. In the next century only old fogies like me will prefer to deal with humans and even I will have my doubts.
Are carpets obsolete?
I want to leave you to your own imagination. Just one final example, where use of the 80/20 Principle has transformed a company’s fortunes and could conceivably change a whole industry.
Consider the Interface Corporation of Georgia, now an $800 million carpet supplier. It used to sell carpets; now it leases them, installing carpet tiles rather than whole carpets. Interface realized that 20 percent of any carpet receives 80 percent of the wear. Normally a carpet is replaced when most of it is still perfectly good. Under Interface’s leasing scheme, carpets are regularly inspected and any worn or damaged carpet tile is replaced. This lowers costs for both Interface and the customer. A trivial 80/20 observation has transformed one company and could lead to widespread future changes in the industry.
CONCLUSION
The 80/20 Principle suggests that your strategy is wrong. If you make most of your money out of a small part of your activity, you should turn your company upside down and concentrate your efforts on multiplying this small part. Yet this is only part of the answer. Behind the need for focus lurks an even more powerful truth about business, and it is to this theme that we turn next.
5
SIMPLE IS BEAUTIFUL
My effort is in the direction of simplicity. People in general have so little and it costs so much to buy even the barest necessities (let alone the luxuries to which I think everyone is entitled) because nearly everything we make is much more complex than it needs to be. Our clothing, our food, our household furnishings—all could be much simpler than they now are and at the same time be better-looking.
H ENRY F ORD 1
We saw in the previous chapter that nearly all businesses have within them chunks of business with widely varying profitability. The 80/20 Principle suggests something quite outrageous as a working hypothesis: that one-fifth of a typical company’s revenues account for four-fifths of its profits and cash. Conversely, four-fifths of the average company’s revenues account for only one-fifth of profits and cash. This is a bizarre hypothesis. If we assume that one such business has sales of $100 million and total profits of $5 million, for the 80/20 Principle to be correct $20 million of sales has to produce $4 million of profits—a return on sales of 20 percent; while $80 million of sales has to produce just $2 million of profits, a return on sales of just 1.25 percent. This means that the top fifth of business is sixteen times more profitable than the rest of the business.
What is extraordinary is that when it is tested, the
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