The 80/20 Principle: The Secret to Achieving More with Less

by Richard Koch

Sadly, although Pareto realized the importance and wide range of his discovery, he was very bad at explaining it. He moved on to a series of fascinating but rambling sociological theories, centering on the role of élites, which were hijacked at the end of his life by Mussolini’s fascists.

No major U.S. industrialist was interested in Juran’s theories. In 1953 he was invited to Japan to lecture, and met a receptive audience. He stayed on to work with several Japanese corporations, transforming the value and quality of their consumer goods. It was only once the Japanese threat to U.S. industry had become apparent, after 1970, that Juran was taken seriously in the West.

The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance.

Understanding the 80/20 Principle gives you great insight into what is really happening in the world around you.

The most profitable quarter of the business, segments 1–6, was classified initially as top priority A businesses,

Is the segment an attractive market to be in? • How well is the firm positioned in each segment?

Profitability analysis of the 80/20 type is a necessary but not a sufficient condition of good strategy.

A recent careful study of 39 middle-sized German companies, led by Gunter Rommel,2 found that only one characteristic differentiated the winners from the less successful firms: simplicity. The winners sold a narrower range of products to fewer customers and also had fewer suppliers.

Outsourcing is a terrific way to cut complexity and costs. The best approach is to decide which is the part of the value-adding chain (R&D/manufacturing/distribution/selling/marketing/servicing) where your company has the greatest comparative advantage—and then ruthlessly outsource everything else.

corporations can center themselves around customer needs rather than around the management hierarchy.

Simplicity raises prices as well as lowering costs.

The 50/5 Principle worked at Corning. Out of 450 products produced at Greenville, half produced 96.3 percent of revenue; the other 50 percent yielded just 3.7 percent.

Volume leads to marginal products, marginal customers, and greatly increased managerial complexity. Since complexity is both interesting and rewarding to managers, it is often tolerated or encouraged until it can no longer be afforded.

managers love complexity. Complexity is stimulating and intellectually challenging; it leavens boring routine; and it creates interesting jobs for managers.

Complexity might indicate focus on self interest rather than customer and company

All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance.

In fact the Fordist approach was plainly the right one for its time;

If the product range is extended into too many new areas, or if the obsession with customers leads to recruiting more and more marginal consumers, unit costs will rise and returns fall. With additional product range, overhead costs rise sharply, as a result of the cost of complexity.

Whenever this has been put to the test, the answer in 99 percent of cases is that delisting marginal products boosts profits while not harming customer perceptions one iota.

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.

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 reason they seem to appreciate greatly? • 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?

Simply cut them out of the product range, as Filofax did. Do not listen to anyone who tells you that the slow movers are really needed. If this was so, they’d move much faster.

Waste and idleness gravitate to where complexity and democracy meet.

We give too many resources to low-margin activities and too few to high-margin activities.

Success is undervalued, undercelebrated, and underexploited.

The predominant type of thinking in today’s world is very closely allied to immediate action and consequently is greatly impoverished. Action drives out thought. Our objective, as 80/20 thinkers, is to leave action behind, do some quiet thinking, mine a few small pieces of precious insight, and then act: selectively, on a few objectives and a narrow front, decisively and impressively, to produce terrific results with as little energy and as few resources as possible.

80/20 Thinking escapes from the linear-logic trap by appealing to experience, introspection, and imagination. If you are unhappy, do not worry about the proximate cause. Think about the times you have been happy and maneuver yourself into similar situations. If your career is going nowhere, do not tinker around at the edges seeking incremental improvements: a bigger office, a more expensive car, a grander-sounding title, fewer working hours, a more understanding boss. Think about the few, most important achievements that are yours in your whole life and seek more of the same, if necessary switching jobs or even careers. Do not look for causes, especially not for causes of failure. Imagine and then create the circumstances that will make you both happy and productive.

Few people take objectives really seriously. They put average effort into too many things, rather than superior thought and effort into a few important things. People who achieve the most are selective as well as determined.

The key question is whether there is a major imbalance between the time spent on the one hand and achievement or happiness on the other. Does the most productive fifth of your time lead to four-fifths of valuable results? Are four-fifths of your happiest times concentrated into one-fifth of your life?

The most productive time on a project is usually the last 20 percent, simply because the work has to be completed before a deadline. Productivity on most projects could be doubled simply by halving the amount of time for their completion.

It is not shortage of time that should worry us, but the tendency for the majority of time to be spent in low-quality ways.

At work, what is the one constraint that, if it were removed, would make us five, ten or twenty times as productive? For you, is it your boss, your fear of failure, your lack of qualifications, your inability to choose what you work on, your lack of the right collaborator, or something else altogether? What is the constraint, what stops you from enormous improvement? If you identify the constraint, you can then work on a campaign to remove it. • In your private life, what is the one thing that stops you making the best of your life and bringing happiness to the people you care about? There may be one overriding constraint. What is it?