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Gaining Greater Value with the 80/20 Principle
by Glen Ludwig

I’m assuming that improving the use of time, money, and effort at your agribusinesses is a priority objective. I’m pretty safe there, aren’t I?

It’s also a safe assumption that you’re familiar with the “80/20 Principle,” which asserts that a minority of causes, input, or effort usually lead to a majority of the results, output or rewards. In other words, about 80% of what is achieved in your agribusiness results from about 20% of the time and effort invested.

Interesting yes, but until recently when I viewed this concept with the stark knowledge that 80% of my efforts were largely irrelevant, I hadn’t realized I’ve been missing the true impact of the principle. I suddenly began to think that if I could successful determine what 20% of my time actually resulted in 80% of the value I create as a consultant; I could just work one day out of five. The same could apply to you. Just the glimmer of that possibility should provide the needed motivation to further explore the 80/20 Principle.

This simple but grossly under-utilized concept was discovered by Italian economist Vilfredo Pareto 100 years ago. My recent realization of the potential of 80/20 thinking occurred while listening to the audio book version of author Richard Koch’s book, The 80/20 Principle - The Secret to Success by Achieving More With Less as I drove across Iowa. It stimulated my interest to the point I bought and read Koch’s book. As a result of not fully understanding or quickly applying the 80/20 concept, I read the full 262 pages, rather than just the 55 to 60 pages that, according to the 80/20 Principle, included the majority of the real value.

Prior to my recent awakening to the 80/20 Principle, I had understood its casual application to sales and marketing activities. Most agribusiness managers understand they can generally expect that 80% of their business will come from about 20% of their customers. That’s about as far as many of us get in applying the 80/20 concept. What I now recognize is that the 80/20 idea has been well researched by several noted academics over the last 100 years and applies broadly over both business and life.

The reason that the 80/20 Principle is so valuable is that it’s counter-intuitive. We tend to expect that all investments of time or money will produce roughly the same results. We tend to think that all customers are equally valuable…that any particular $5000 of business or 1000 bushels of grain is just as important and valuable as the last or the next...that all friends are essentially equally important to us…that all issues in our business equally deserve similar levels of attention and work to resolve them…I could go on and make this list much longer. The point is that an understanding of the 80/20 Principle blows a gaping hole in the foundation of such thinking.

Applying the principle

How might 80/20 thinking be applied in your business? First, understand that the 80/20 process starts with a search for business relationships that are naturally out of balance. The goal is not to fix the imbalance, but instead to understand the nature of the imbalance and use this information to better allocate your resources. Don’t get hung up in seeking only 80/20 relationships; “80/20” is only a handy handle for the concept. As businesses apply the principle, they find relationships that may be 95/5, 83/17, 74/26 or maybe even an 82/12. There is no requirement that the two components of the ratio add to 100%.

Let’s explore an example: As noted above, most agribusiness leaders recognize the imbalance between number of customers and sales volume. Thus it’s easy to buy in to the notion that 20% of your customers will represent about 80% of your business. So how is that information used? You might begin by looking at your allocation of resources for serving, maintaining, and growing the market share of the 20% who already represent 80% of your business. But be cautious—don’t proceed with a quick response based on only one aspect of 80/20 thinking.

Business volume is important, but margins and service income pay the expenses. Prior to reallocation of resources, you need to explore other out-of- balance relationships. Drill down into your business and discover several sets of relationships before executing significant change. The process will result in deeper understanding of your business as you identify business segments within your company or division.

From an allocation-of-marketing-resources viewpoint you need to at least explore gross and service income generation by customer and determine the 80/20 relationship imbalance. Your eventual goal is to determine the ratios of net income to effort for each customer. Unfortunately, many accounting systems utilized in agribusiness fall short of providing that level of management information, but as consolidation of agriculture continues the best and most successful firms are likely to use this type of information to their competitive advantage.

If you do only superficial 80/20 thinking, you risk making some resource allocation errors. For example, only looking at the business volume per customer relationship and going no further could result in misallocating resources to some large customers who are not really profitable. To make the best possible decisions, seek relationship imbalances as near to the net income line as possible.

If done well, management decisions based on 80/20 analysis can allow your business to get much more from much less. Using our customer analysis example, a company could increase net income by allocating more resources to lavishly serve--and nurture deeper and bigger business relationships with--the most profitable customer segment. Some of those extra resources would come from reducing attention to the customer segment that is only moderately profitable.

Eliminating “dry well” customers

Additionally, a company typically will find a customer segment that generates no profit. There are several ways to handle this group:

1. Slashing resource commitments.

2. Increasing your margins to improve returns while also moving service-providing resources away to higher profit segments. What if you lose a few of these customers in the process? Celebrate! Their departure has just improved your earnings.

3. Sell their business to a competitor who is operating under the myth that volume is king and all business has equal value.

These are just a few of the ways you might improve the performance of your business with 80/20 thinking, and it isn’t possible to deliver a full understanding in a brief article. Author Koch cautions, “It is important to grasp the fluidity and force driving 80/20 relationships. Unless you appreciate this, you will interpret the 80/20 Principle too rigidly and fail to exploit its full potential.”

My take on current trends in the intensely competitive agribusiness environment is that there are many firms who could be more successful if they were embracing 80/20 thinking. Yes, fully implementing an 80/20 approach will require some major adjustments in long term business culture. But change is inevitable in every successful business. The 80/20 can be a great tool to improve the odds for making the best and most productive changes. Consider spending your limited “change currency” in the best possible manner by using an 80/20 approach.

Those executives or management teams who are already effectively using the 80/20 didn’t become effective instantaneously. Neither will you. I suggest interested readers invest $15.95 in Koch’s book to learn more. If you wish to explore the 80/20 with this author call 815-844-3512 or email me at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Based on the 80/20 Principle I only expect to hear from a few of the best.

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