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:
In Business
·
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
In Society
·
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 remarry and redivorce)
·
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:
a) Entrepreneurial
skills - to identify and seek out opportunities
b) Management skills - to manage the business
c) Technical skills - to do the work that the business does
b) Management skills - to manage the business
c) Technical skills - to do the work that the business does
I will cover these concepts more in a later blog post.
However, 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.
It's exactly for this reason that we run seminars and
workshops for business owners - to provide them with the skills and tools to
improve their ability identify the things they need to do to "work on
their business", not just in it.
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 ain't going to happen.
Here is a challenge for you in the new 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.
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