This is my book summary of The 80/20 Principle: The Secret of Achieving More with Less (by Richard Koch). A classic book that introduces a simple (yet powerful) concept: that only a small fraction of everything we do is responsible for the majority of actual results. The book is available on Amazon.
Summary notes below. All emphasis mine.
If we simply reduce the difference between the vital few and the trivial many, we can multiply anything that we value!
A few things are important, most are not. The universe is not linear, nor is it balanced.
Causes, inputs and effort fall into 2 categories:
1.) The MAJORITY, that have little impact
2.) The small MINORITY, that have a major, dominant impact
“Who you work for is more important than what you do.”
In consulting, best clients are large clients and long-term clients.
“Are you working to make others rich or is it the reverse?” Founders usually take 80%+ of the profits
“Wealth from investment can dwarf wealth from working.” 80% of wealth comes from < 20% of investments
80/20 wisdom: choose a basket carefully, load all your eggs into it and watch like a hawk.
Concentrate on keeping your top 20% happy and do more business with them!
Don’t apply the analysis in a linear way. Be careful of “freezing” situation and extrapolating from it
Application of 80/20 implies that we:
– Celebrate exceptional productivity rather than raise average efforts
– Look for the shortcuts, exercise control of our lives via the least possible effort
– Be selective and strive for excellence in only a few things
– Delegate or outsource as much as possible in our daily lives
– Choose what businesses to start with extraordinary care
– Only do the thing we are best at and enjoy the most
– Make the most of those “lucky streaks” in life when we are at the creative peak and stars line up to guarantee success
– Calm down, work less and target a limited number of very valuable goals where the principle will work for us, rather than pursuing every available opportunity
Corporate Success Need Not be a Mystery
80% of life cycle costs are usually locked in after only 20% of the development time
80% of a product’s users take advantage of only 20% of its capabilities
– Generate the most money with the least expenditure of assets & effort
– Over time, 80% of the market will tend to be supplied by 20% of suppliers, who will tend to most profitable. Over time, markets will tend to comprise more market segments.
Most profitable segments will tend to be where the firm enjoys the highest market shares, and where the firm has the most loyal customers (loyalty = longstanding and least likely to defect to competitors)
Successful firms operate in markets where it is possible for them to generate the highest returns with least effort.
– A firm is truly “successful” when it exhibits high ROI and higher surplus than competitors (higher margins)
– Focus only on those market and customer segments where the largest surpluses are being generated
Look for irregular insights from the 80/20 principle
– events cannot be predicted, although predictable patterns tend to occur
– Identify lucky streaks. Scale up and make a killing
– Analyze sales by product & by customer segment
For consulting: strive to keep/expand large, long-term clients. Only pitch new ones that are promising to potentially become large clients.
Segmentation is the key to understanding and driving up profitability
– Do you face a different competitor in this part of your business compared to the rest of it?
– Do you and your competitor have the same ratio of sales/market share in the 2 areas, or different?
Best way to start making money is to stop losing money.
80% of profits made by all industries are made by 20% of industries à why don’t you go into those industries? (2009 – network/communications equipment, internet services/retailing, pharma)
– 80% of those industry profits are made by 20% of firms à why can’t you be most like them?
Network/communications equipment – Cisco / Motorola / Qualcomm / Corning
Internet services/retailing – Google / Amazon / Liberty Media / eBay / Yahoo / Expedia / IAC / Priceline
Pharma – J&J / Pfizer / Abbott Laboratories / Merck / Wyeth / Bristol Myers Squibb / Eli Lilly
– 80% of value as perceived by customers relates to 20% of what an organization does
– 80% can be provided with a product that’s 20% of the cost – is anyone offering a cheap/stripped down product/version?
– 80% of industry’s profits come from 20% of its customers à what can you do to get them?
Why do you need people?
– Every few years a new competitor, i.e. IKEA< proves there is new life in the (old) idea of self-service
– Another strategy: Discounting à offer less choice, fewer frills, less service & much cheaper prices
– Whenever possible, use machines/automate! (20% of the cost)
– Just stock the 20% of products that are responsible for 80% of sales
Simple is Beautiful – Complex is ugly!
Business people love complexity/micromanagement. But business returns abhor complexity.
Small is not beautiful
– Extra scale provides greater volume over which to spread fixed costs, especially overhead
– Market share helps to raises prices à most popular firm (with best reputation) commands a price premium over lower-share companies
Cost of complexity is high! Managers have to constantly deal and respond to new requirements
Winners sell a narrower range of products to fewer customers and have fewer suppliers.
Where a business is dominant in a given niche, it is likely to make several times ROI than in niches where it faces a dominant competitor.
Parts of the business that are mature & simple can be amazingly profitable
Decide which part of the value-add chain (R&D / manufacturing / distribution / selling / marketing / servicing) your company has greatest comparative advantage, then ruthlessly outsource everything else.
If a chunk of business is simple, chances are that it’s closest to the customer. Customers are listened to and feel they are important – the quest for self-importance is at least equal to quest for value.
“Contribution to overhead” à one of the lamest excuses for inaction
– least profitable segments can ALWAYS be closed (or sold) – ignore the “bean counters”
– alternatively, harvest these areas à let go of least profitable companies/products, cut off most sales/service effort, raise prices and allow sales to decline at 5-20% (while laughing to the bank!)
Go for the simplest 20%
– Identify the simplest 20% of any product range, process, marketing message, sales channel, product design, product manufacture, service delivery, customer feedback mechanism
– Standardize delivery of a simple product/service on as universal/global a basis as possible
– Make the simplest 20% as high quality & consistent as possible
– Pass up thrills, bells and whistles
– Typically, 50% of the company’s customers, products, components and suppliers will add less than 5% to revenues/profits
– Getting rid of low volume (negative value) 50% of items is the key to reducing complexity
More is worse!
– Road to hell is paved with the pursuit of volume.
– Volume leads to marginal products and marginal customers.
– Identify areas with greatest cost-reduction potential and concentrate 80% of your efforts there!
– Treasure and multiply the few productive costs à then get rid of the rest
A minority of business activity is useful.
Value delivered to customers is rarely measured and always unequal.
Great leaps forward require measurement sand comparison of the value delivered to customers and what they will pay for it.
Large and simple business is the best! (Apple)
– Progress requires simplicity, and simplicity requires ruthlessness
Hooking the Right Customers
“At a minimum, firms should identify the top 20% to get a clear picture of desirable prospects for future growth.”
The 1960s rediscovered marketing and the 1990s rediscovered customers. New rules:
1.) Marketing (and whole firm) should focus on providing a stunning product and service in 20% of the existing product line
2.) Marketing (and whole firm) should devote extraordinary endeavor towards delighting and keeping forever and expanding sales to those 20%
3.) There is no real conflict between production & marketing. You will only be successful if your product is different and, for your target customers, is either unobtainable elsewhere, or provided by you in a product/service/price package that’s better than they would find anywhere else. If these conditions apply in none of your product lines, you must innovate.
Be customer centered for the few right customers
– Direct your attention where the real threat of competition exists. Know who the top 20% revenue-generating customers are and don’t forget to meet their needs
– Every Sunday evening, go through contract management files and make note/email/reminder to call those you’ve been out of touch with
Steps to lock in your core customers:
1.) Know who they are
2.) Provide exceptional or even outrageous service to them – above & beyond industry norms
3.) Target new products/services at the core 20% of customers, developing them solely for and with this group. Innovation should be grounded in the relationship with this group.
4.) Aim to keep your core customers forever. If core customers are leaving, do something to get them back or sell the business! If core customers are happy, long-term expansion of the business is assured!
Servicing the core 20% of customers must be a company-wide obsession.
– Salesperson performance greatly varies (i.e. 99/1 super affiliates)
– Keep your top salespeople happy
– Hire more of the same type of salesperson (i.e. attitude/personality). Tell them to hire people like them!
– Get everyone to adopt the methods that have highest ratio of output to input
– Only train those who are going to stick around for several years
– Get the best salespeople to train them
Focus every salesperson’s efforts on the top 20% of your products
– Rank customers by sales & profits
– Lower costs and use telephone for less important accounts
– Revisit old customers who have provided good business in the past.
Analysis Paralysis: The 80/20 principle is analytical, but puts analysis in its place.
Ask the right questions:
1.) What uncharged problems & opportunities that would potentially have tremendous consequences, am I not noticing?
2.) What is working well when it shouldn’t, or at least was not intended to?
3.) What are we unintentionally providing to customers that for some reason, they seem to appreciate greatly?
4.) Is there something going astray, where we think we know why but could be wrong?
Change your strategy early rather than late. What works in practice is a much more reliable indicator than tons of analysis.
– When something is working well, double & redouble your bets
– When a business consistently outperforms expectations, there is at least a good chance that it can be multiplied by 10 or 100 times. In these cases, most people settle for modest growth. Those who seize the day become seriously rich!
Inventory Management: Cut down on the number of variants.
– Ideal solution is for stock never to come near your facilities (drop shipping!).
1.) Simplify the objective. Do not start your project until you have stripped it down to 1 simple aim.
2.) Impose an impossible time scale à this way, only the critical tasks are addressed. Demand live pilot in 3 months.
3.) Plan before you act. Aim for greatest ratio of planning time: execution time. In planning phase, write down the key things you are trying to resolve (less than 7). Decide who is to do what and when. Replan after short intervals.
4.) Design before you implement.
Few points actually matter à draw up a long list of points so you can “concede” (the non-critical ones!) in the later negotiation stagfes
Don’t peak too early à impatient people don’t make good negotiators
– If you want a pay raise, do it in the last 10 minutes of the meeting
Progress means moving things from low value to high value uses.
– The scope of entrepreneurial arbitrage is always underestimated (always a long tail of waste)
Margins vary widely. Resources are always misallocated.
Success is underrated/undercelebrated/underexploited – we fail to strike when the iron is hot!
Equilibrium is illusory – personal success lies not in invention, or even in creating the marketable innovation, but in spotting the point at which innovation is about become irresistible and then riding it for all its worth.
The biggest wins all start small – fortunes are made by the very few who latch on to growth when it is small and accelerating. Even those who are experiencing the growth rarely realize its significance or potential to make a fortune.
Tips for Thinking 80/20
– Think skewness
– Expect the unexpected
– Expect everything – your time/organization/market/person/business – to have quality 20% – look for it!
– Look for the invisible 20% and subterranean 20%. Unexpected successes are a dead giveaway!
– Where are the 3%’s that last year were 1%’s?
– Develop the mental facility to block out the 80% – the easy answer, the obvious reality, the evident mass, the current incumbent, the conventional wisdom à pretend these don’t even exist. Free yourself up for the 20%.
When you spot a 20% activity, run to it, surround yourself with it, make yourself its expert/worshipper.
Use all resources (talent, money, friends, allies, credit) to seize, magnify and exploit the 20%.
Only ally yourself to 20% people and to the 20% of them that are powerful allies.
80/20 arbitrage – move resources from 80% activities to 20% activities
– Move 20% of people and money from 80% activities to 20% activities
Innovate 20% activities. Steal 20% ideas from elsewhere. Other people, other products, other intellectual spheres, other countries, other industries.
Ruthlessly prune all 80% ideas/locations/places/efforts.
Work Less, Earn More and Enjoy More
“Our objective is to do some quiet thinking, mine a few small pieces of precious insight and then cut, 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.”
It is difficult, and wasteful, to achieve something worthwhile without enjoying it.
Real wealth, knowledge, happiness and virtue can be constantly increased.
Non-linear thinking: nothing is inevitable, no undesirable state of affairs need endure
– the balance of circumstances can be shifted either way by a minor action
– choice can always be exercised
– imagine, then create the circumstances that will make you both happy and productive
Combine extreme ambition with a relaxed/confident manner
– achievement is driven by insight and selective action
– insight comes when we’re feeling relaxed and good about ourselves
Everyone can achieve something significant. The key is not effort, but finding the right thing to achieve.
– You are hugely more productive at some things than others!
You are likely to win by rigging the odds in your favor, and by winning where you have already won.
Be selective about the races you enter.
Most of our failures are in races for which others enter us. Most of our successes come from races we ourselves want to enter.
People who achieve the most are selective as well as determined.
Choice of allies: almost nothing can be achieved without allies.
– Mistake: picking the wrong SO/inner circle of friends
Happiness not spent today does not lead to happiness tomorrow
– 80/20 thinkers constantly pursue activities which make them happy
A profound imbalance exists between what is created and the time taken to create it
– 80/20 principle treats time like a friend, instead of enemy. Our use of time is the enemy
– We should act less. (Action drives out thought!)
– This is NOT “time management”!
Time is the benign link between past, present and future. We simply need to give free rein / better direction to our most 20%.
Your Time Revolution
1.) Make the mental leap of dissociating effort/reward
– Hard work leads to low returns. Insight and doing what we ourselves want leads to high returns.
– People who exemplify productive inertia: R. Reagan, W. Buffett
2.) Give up Guilt
– Do the things that you like doing. Make them your job
– It is only by fulfilling oneself that anything of extraordinary value can be achieved
– Any great artist. High quality AND high quantity!
– You will not create anything of enduring value unless you love creating it.
3.) Free yourself from obligations imposed by others
– Choose your partners and obligations very selectively and with great care
4.) Be unconventional and eccentric in your use of time
– How far could you deviate from the norm without being thrown out of your world?
5.) Identify the 20% that gives you 80%
- Your Happiness islands (what makes you happiest)
- Your Unhappiness islands (list them all and eliminate them regularly!)
- Achievement islands (what tasks you most enjoy doing)
- Achievement desert islands (what tasks you hate doing)
Top 10 Worst uses of time
- Things other people want you to do
- Things that have always been done this way
- Things you’re not unusually good at doing
- Things you don’t enjoy doing
- Things that are always interrupted
- Things few other people are interested in
- Things that have already taken twice as long as you originally expected
- Things where your collaborators are unreliable or low quality
- Things that have a predictable cycle
- Answering the telephone
Top 10 High Value uses of time
- Things that advance your overall purpose in life
- Things you have always wanted to do
- Things already in the 20/80 time: results table
- Innovative ways of doing things that promise to slash the time required and/or multiply quality of results
- Things other people tell you can’t be done
- Things other people have done successfully in a different area
- Anything with high quality collaborators who have already transcended the 80/20 rule of time
- Things you can get other people to do for you with relatively little effort on your part
- Things that use your own creativity
- Things for which it’s now or never
When thinking about use of time, ask:
1.) Is it unconventional?
2.) Does it multiply effectiveness?
– Both must be “YES!”
You can always get what you want.
Aim to “have it all.”
The work you want, the relationships you need, the social/mental/aesthetic stimulation that will make you happy & fulfilled, the money you require for the lifestyle that is appropriate to you, any requirement you may have for achievement/service to others.
If you don’t aim for it all, you’ll never have it all. To aim for it requires you to know what you want.
Work is a key part of life, and should be neither overdone nor underdone.
“Career is not a separate box”
Leisure industries comprise a large part of the economy – you may be able to turn your hobby into work
Enthusiasm can lead to success.
Much easier to make enthusiasm into a career than vice versa.
– Whatever you do, be clear about the optimum point you are trying to reach and view it within your life’s total context
Which type of career will make you happiest?
– Do you have a high drive for achievement/success? No.
– Would you be happiest working for an organization, self-employed or employing other people?
à Self-employed, freelancer, teacher, social worker, charity worker
Best way to get it is to do something you enjoy
– If you enjoy something, you are likely to be good at it
– If you are good at something, you can create something to satisfy others à they will pay you for it
– Think creatively à look at industries that have more or less balanced supply/demand
– i.e. Trying to break into acting vs. politics (politics has weaker competition and superior rewards)
– Aim to become self-employed as soon as possible and to start employing others.
Money is overrated.
– Once you have adjusted to a higher standard of living, it may give you little to no happiness.
– More wealth also requires more management of money!
What could you achieve that would make you proud, that no one else could with the same ease?
What could you do better than 80% in only 20% of the time?
– take photos, write/edit something, tell a story, cheer someone up/influence/inspire others, teach, resolve conflict/argument/misunderstanding
– design a layout/prototype, quick report (perform quick market research)
What achievements would fulfill both of these conditions:
1.) What would you enjoy more than 95% of your peers?
2.) What would you do better than 95 out of 100 of your peers?
Focus on what you find easy!
– Pursue those things where you are amazingly better than others and that you enjoy most.
“Most of us can trace our successes to pivotal relationships.”
Spend your time and emotional energy deepening those relationships which are most important.
– 2 most important childhood friends, 2 significant adult friends, 2 doctors
– 2 powerful sexual partners who eclipse all the others
– Fill your relationship slots with extreme care and not too early!
Professional Relationship & Alliances
History is driven by individuals who form effective alliances!
You need a few key allies, at the right time/place and with a common interest in advancing your interests. They must trust you and you must be able to trust them.
Best alliances are built on 5 attributes:
1.) Mutual enjoyment à have to enjoy their company – spend more time with contacts you enjoy!
2.) Respect à if someone is to help you professionally, they must be impressed by you!
3.) Shared experience à find people who went through similar experiences. TCKs, int’l students.
4.) Reciprocity à each party must do a great deal for the other party repeatedly, consistently, over a long period of time
5.) Trust à requires total honesty at all times. If you don’t trust someone, don’t build an alliance.
Slots to Fill
– 1-2 with mentors, people more senior than you .The best mentors are extremely able and ambitious. Reward mentors with new ideas/insights/enthusiasm/hard work.
– 2-3 with peers – pick who you believe will be the most successful
– 1-2 where you are the mentor
Intelligent and Lazy
Pick the right thing to do and only do those things that add the highest value.
There is a big gap between the top and the rest.
Winner takes all is a modern phenomenon.
– We have less respect for rank and more for markets
Find a place where your name is already there, where you can be intelligent, lazy and highly rewarded:
1.) Specialize in a very small niche; develop a core skill
– A small business that does specialize will die
– Power will be in the hands of “knowledge workers”
2.) Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
– You cannot feign or manufacture enthusiasm – don’t skip this step!
3.) Realize that knowledge is power
– Know more about an area than anybody else does, then figure out a way to monetize it à create a market and a set of loyal customers
– Do not expect to become a leader unless you really are more knowledgeable than anybody else!
4.) Identify your market and your core customers and serve them best
– Definite how the knowledge you have will be sold.
– Are you going to set up a business to market services to individuals or companies?
– Are you going to supply raw knowledge, to process it for particular situations or use the knowledge to create a product?
– Are you going to invent the product, add value to someone’s semi-finished product or be a retailer of finished products?
Serving customers is key, but they must be the right customers for you – those whom with relatively little effort you can make extremely happy.
5.) Identify where 20% of effort gives 80% of returns
– Could you invent an even more clever and efficient way to do something?
– Who are the minority? Could you do what they do?
– Is there a good fit between yourself and your customers?
– Where could you impress your customers with very little effort?
– Do you enjoy what you do and are you enthusiastic about it?
– Where do corporations make obscene profits? The answer will be with industry heretics, the professional mavericks and eccentric individuals
6.) Learn from the best
– Disciple sitting at the feet of the master, learning a trade from a craftsman
– The student assisting professor with research, artist serving time with an accomplished artist
– Find a way to spend time with them. Unless you can do what they do, you will never rise to the top.
– Observe, learn and practice. Take notes. Assist and imitate.
7.) Become self-employed early in your career
– Period of super learning lasts for a few months only, or a year at the most
– Don’t worry about your security after this point à firms can’t offer security anymore
8.) Employ as many net creators as possible
– Who’s value comfortably exceeds their cost
9.) Use outside contractors for everything but your core skill
– Keep your own firm as simple as possible and purely focused on those areas where it is several times better than the competition
10.) Exploit capital leverage.
– i.e. Automation whenever possible. à software distribution, adding locations to McDonald’s
Winners take all. Aim for being the top in your field.
Choose the niche made for you. You will not excel unless you enjoy what you’re doing.
– What delivers the greatest customer satisfaction with the least use of resources?
– First learn all there is to be learned à for the best firms and individuals within them (best = defined for your own narrow niche)
“Put it in the right place and leave it there.”
– Majority of wealth comes from investment rather than from income
– There’s a premium on accumulating money early on to fund investment
1.) Make your investment philosophy reflect your personality
– try to be rational about why you buy certain stocks
– specialize in an area where you know a great deal and follow successful investors with a track record
2.) Be proactive and unbalanced
– you should have few investments and you should minimize “advisors”/”money managers”
3.) Invest mainly in the stock market
4.) Invest for the long term
5.) Invest most when the stock market is low à “value investing” by Benjamin Graham
6.) If you can’t beat the market, track it
7.) Consider the merits of emerging markets à places with highest/fastest GNP growth
8.) Cull your loss makers. If it falls by 15%, sell it! Run your gains.
The Habits of Happiness
Best way to be happy is to stop being unhappy
– In what circumstances were you at your most positive and most negative?
– Who were you with? Where? What were you doing? Weather?
– Skew the odds in your favor!
Change the way you think about events.
– Optimism is a key ingredient to both success and happiness.
Change the way you think about yourself:
– Make the choice that you want to be happy. You have a positive duty to be happy.
– Give up guilt, focus on your strengths, forget about your weaknesses
– Remember all the good things you’ve done, the positive feedback you’ve received
– We tell stories about ourselves all the time – might as well make them positive stories!
– Construct the right stories about yourself, and believe them!
– Change the people you see most often à the more significant the relationship is for your life, the more it matters for your health. Do the people you see every day make you more happy or less happy?
Write down your pressure points! Avoid them!
– sitting at home w/out exercise, blizzards, claustrophobic public transport, rigid work schedules/bureaucracy and small talk, racism/bigotry and dangerous locations/violence
Things that typically make people happy:
2.) Mental stimulation
3.) Spiritual/artistic stimulation, meditation
4.) Doing something for another person/people
5.) Something with a friend (coffee, drink, meal, walk)
6.) Give yourself a treat/congratulate yourself
1.) Maximize control over your life
2.) Set attainable goals
3.) Be Flexible
4.) Have a close relationship with your partner
5.) Have a few happy friends
6.) Have a few close professional alliances
7.) Evolve your lifestyle
Growing social inequality is the real issue à we must provide a way for individuals to get a quick start
– provide startup capital/education
– value is unequally created in capitalism, so social inequality is a serious topic to be discussed
Read other reviews and notes on the book’s Amazon page.