What is 80/20 Principle?
The 80/20 Principle asserts that there is an
inbuilt imbalance between inputs and outputs, causes and consequences, and
effort and result. It states that a minority of causes, inputs or effort
usually lead to a majority of the result, outputs or rewards. A few things
are important; most are not.
A good benchmark for this imbalance is provided
by the 80/20 relationship: a typical pattern shows that 80% of outputs
result from 20% of inputs; that 80% of consequences flow from 20% of
causes; or that 80% of results come from 20% of effort. It reflects
relationships in nature, which are an intricate mixture or order and
disorder, or regularity and irregularity.
The 80/20 Principle involves a static breakdown
of causes at any one time, as opposite to change over time. "The art of
using the 80/20 Principle is to identify which way the grain of reality is
currently running and exploit that as much as possible".
The 80/20 numbers are only a metaphor and a
useful benchmark. The real relationship may be more or less unbalanced than
80/20. The 80/20 Principle asserts, however, that in most cases the
relationship is very likely to be unbalanced and close to 80/20.
The 80/20 Principle is extremely versatile. "It
can be profitably applied to any industry and any organization, any function
within an organization and any individual job". It helps you identify all the forces beneath the surface, so that you can give
maximum power to the most productive forces and stop the negative
80/20 Thinking, applied to your daily life, can
help you change behavior and to concentrate on the most important 20%.
Action resulting from 80/20 Thinking should lead you to achieve much more
with much less. To engage in 80/20 Thinking, you must constantly ask
yourself: what is the 20% that is leading to 80%? Never assume that you
automatically know what the answer is, but take some time to
about it. "For every ounce of insight generated quantitatively, there must
be many pounds of insight arrived at intuitively and impressionistically."
2 Creativity Catalysts
Entrepreneurial Creativity: 4 Keys
Achieving Progress by Applying 80/20
80/20 Principle is inherently optimistic because
it reveals a state of affairs that is seriously below what it should be and
shows the direction towards a better state. To achieve progress and multiply
your output, you must give power to the 20% of resources that really matter
in terms of achievement, and get the remaining 80% up to a reasonable level.
"Progress takes you to a new and much higher level. But, even at this level,
there will still typically be an 80/20 distribution of outputs/inputs. So
you can progress again to a much higher level."
Simple is Beautiful
To succeed in
and transforming your business by applying the
80/20 Theory of the Firm, you need to
demonstrate that simple is beautiful and why. Unless you understand this,
you will never be willing to give up underperforming 80% of your current
business and overheads.
"The truth is that the unprofitable business is
so unprofitable because it requires the overheads and because having so many
chunks of business makes the organization horrendously complicated".
And complexity means decay. Internal complexity has huge hidden costs and
depresses returns more effectively than anything else.
"A complex business can be made more simple and
returns can soar. All it takes is understanding of the costs of complexity
(or the value of simplicity) and courage to remove at least four-fifths of
lethal managerial overhead".
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."
80/20 Principle and Innovation
Innovation is absolutely critical to future
competitive advantage. With creative use of the 80/20 Principle innovation can be
both easier and more effective if you consider the following ideas...
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".