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Tantalising rules for business

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Making decisions: Pareto Principle: the 80:20 rule

This is one of those seemingly simple observational rules that can offer great insight. It goes like this:

80% of results are produced by 20% of causes

Vilfredo Federico Damaso Pareto was among other things a great economist who observed that 80% of a country’s wealth was held by 20% of its population.

The 80:20 rule can be applied to all sorts of circumstances.

Examples

• 80% of your products provide only 20% of your profit.
• 20% of your products provide 80% of your profit.
• 20% of the marketing activities provide 80% of the results
• 80% of issues are caused by 20% of products
• 20% of sales activity delivers 80% of your sales

You can apply this to almost any situation but beware that this is only a general rule of thumb and not a measurement of precision.

80:20 rule applied to a specific circumstance

Conduct an 80:20 analysis on your product range sales figures to confirm this is true. Then focus resources on the 20% of products that deliver 80% of your profit. By its definition, this maxim is self-correcting in that 20% of products will always deliver 80% of your profit. Which means that logically if profit goes up due to increased sales of the top 20% of products then the other 80% must also increase in sales.

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Executing plans: Murphy’s Law

Anything that can go wrong, will go wrong.

When you embark on a project, allow for things to go wrong and don’t be surprised when this happens. It’s not personal, it’s just the mischief of Murphy’s Law.

In fact, this is logical in that unfortunate events occur due to undetermined variables who’s existence are totally unknown until they materialise as Murphy’s Law.

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Allocating resources: Parkinson’s Law

Work will always fill the available time.

The more time you provide to a given task, the task will always soak up the allocated time. The concept comes from the ideal gas law (sometimes referred to as the General Gas Equation) where gas always expands to fill the available volume of space allocated.

So what does the concept of Parkinson’s Law mean for business?

There is no doubt that if left unchecked, bureaucracy will expand over time.

In reality, many of these enhanced or invented processes wilt on the vine due to other pressures or loose management and fading focus. But where resources are allocated or added to a business to enable these processes to survive and flourish then Parkinson’s Law can become a problem.

This is most easily seen in government where the discipline and motivation of profit is replaced with tax funding. Attempts to counter this with politically driven command economy type cut-backs is a blunt instrument and can be brutal.

In business, time and motion studies of work practices to tame Parkinson’s Law can also be counter-productive in that a demoralised staff may develop unhelpful habits like circumnavigating your revised work practices and management or likely end up leaving. This trend may leave you with a dysfunctional team or less experienced or lower quality staff; meaning your business is less competitive, even than before embarking on the process.

Knowing the balance is therefore crucial.

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Being prepared: the law of Eventuality

Given enough time, everything happens.

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Occam’s Razor

When making a decision, make the minimum number of assumptions.

In other words, the simplest explanation is usually the correct one.

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Never do a job you can’t do yourself

Don’t waste time learning a skill you will rarely use. For example: it is a bad use of time to attend night school to learn plastering so that you can plaster the ceiling in your living room; when employing a plasterer will be quicker and not particularly expensive. The plasterer will also do a much better job – given his or hers experience and practice.

Only learn skills you will use relatively frequently and is crucial to your role. This will make your time and cost much more efficient and improve your chances of success.