Adapted from The 80/20 Principle and 80/20 Revolution, Richard Koch

 

80/20 Principle

 

80/20 Analysis of Profits

To achieve sustainable growth through effective reallocation of resources, conduct continuously an 80/20 Analysis of profits by its different categories:

  • by product or product group/type

  • by customer or customer group/type

  • by competitive segment

  • by any other split, e.g. by geographical area or distribution channel

Warning!

Don't apply 80/20 analysis and strategies in a linear way.

"Like any simple and effective tool, 80/20 Analysis can be misunderstood, misapplied and, instead of being the means to an unusual insight, serve as the justification for conventional thuggery. 80/20 Analysis, applied inappropriately and in linear way, can also lead to the innocent astray you need constantly to be vigilant against false logic".

 

80/20 Analysis examines the relationships between two sets of comparable data and can be used to change the relationships it describes. One its use is to discover the key causes of the relationship, the 20% of inputs that lead to 80% of outputs, and put your resources behind the best-performing efforts. The second main use of 80/20 Analysis is to improve the effectiveness of the underperfroming 80% of inputs that contribute only 20% of the output.

80/20 Analysis should be applied carefully, in a systemic way, as opposite to linear thinking that may lead to misunderstanding of the 80/20 Principle and its potential abuses. "Don't be seduced into thinking that the variable that everyone else is looking at... is what really matters. This is linear thinking. The most valuable insight from 80/20 Analysis will always come from examining non-linear relationships that others are neglecting."

>>  Analytic Thinking vs. Holistic Thinking

 

 

 

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