General Business Principles

Control is therefore impossible. But it is possible to influence events and, perhaps even more important, it is possible to detect irregularities and benefit from them. The art of using the 80/20 Principle is to identify which way the grain of reality is currently running and to exploit that as much as possible. If you can identify where your firm is getting back more than it is putting in, you can up the stakes and make a killing. Similarly, if you can work out where your firm is getting back much less than it is investing, you can cut your losses.

In this context, the ‘where’ can be anything. It can be a product, a market, a customer or type of customer, a technology, a channel of distribution, a department or division, a country, a type of transaction or an employee, type of employee or team. The game is to spot the few places where you are making great surpluses and to maximize them; and to identify the places where you are losing and get out. We have been trained to think in terms of cause and effect, of regular relationships, of average levels of return, of perfect competition and of predictable outcomes. This is not the real world. The real world comprises a mass of influences, where cause and effect are blurred, and where complex feedback loops distort inputs; where equilibrium is fleeting and often illusory; where there are patterns of repeated but irregular performance; where firms never compete head to head and prosper by differentiation; and where a few favored souls are able to corner the market for high returns.

Viewed in this light, large firms are incredibly complex and constantly changing coalitions of forces, some of which are going with the grain of nature and making a fortune, while others are going against the grain and stacking up huge losses. All this is obscured by our inability to disentangle reality and by the calming, averaging and highly distorting effects of accounting systems. The 80/20 Principle is rampant but largely unobserved. What we are generally allowed to see in business is the net effect of what happens, which is by no means the whole picture. Beneath the surface there are warring positive and negative inputs that combine to produce the effect we can observe above the surface. The 80/20 Principle is most useful when we can identify all the forces beneath the surface, so that we can stop the negative influences and give maximum power to the most productive forces.