80/20 Case Study:
The Need for the Pareto Principle
A mid-size company in southern Wisconsin found itself dramatically underperforming in profitability despite their growth. As a result cash flow was poor and pressure from investors was mounting rapidly.
This business had far too many products, far too many customers, and as a result, was saddled with an overhead structure that guaranteed no chance of making money. They were simply going where the market was taking them. It was time to define strategic aims for the business.
Strategex came in asking tough questions. We quickly learned that the core of the business was immensely profitable. This core consisted of a narrow group that represented no more than 10% of the company’s customers and products. The tremendous complexity that constituted the other 90% of the business obscured the importance of this core segment. Hence, the business was giving it far too little attention. The growth that the business was achieving was non-strategic and unprofitable.
Surprising? Actually, not at all. Case after case after case upholds the “Pareto Principle,” also called the 80/20 principle. Every business, left alone, will soon find that 80% of its revenue comes from 20% of its products and customers. This crucial 20% always holds the key to the company's ability to generate profitable market share growth; and the remaining 80% always holds the excess cost structure and improper focus that prevents it from doing so.
Our southern Wisconsin client was soon made aware of the 20/80 nature of their business. They had a difficult time accepting the truth but the data did not lie. Data is non-judgmental, unemotional, and plays no favorites.
With this client, we suggested a number of low-risk, moderate-impact moves such as product line simplification and product/customer boxing that, within three months, got them from negative profitability to 5% in the black. With the confidence gained from the early wins and by providing constant access to Strategex expertise, they were able to implement further, more aggressive moves.
The moves they made not only continued to drive simplification in the company, they also provided more resources to the high growth areas. The result one year later? They had a more vibrant, confident organization with improved growth and 13% operating profit to fuel it. The changes made were, admittedly, not easy; nor did everyone accept the changes immediately. Grasping the concept is relatively easy, but knowing what to do about it, how to do it, and how to sell it is the trick.