Free The 80/20 Principle: The Secret of Achieving More With Less by Richard Koch

time in twenty, at another table it only comes up one time in fifty. If you back the right number at the right table, you can make a fortune. If you stubbornly keep backing number five at a table where it comes up one time in fifty, your money will all disappear, regardless of how high your starting bank.
    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.
    HOW COMPANIES CAN USE THE 80/20 PRINCIPLE TO RAISE PROFITS
     
    Enough of history, philosophy, and theory! We now switch gears to the intensely practical. Any individual business can gain immensely through practical application of the 80/20 Principle. It is time to show you how.
    Chapters 4 to 7 cover the most important ways to raise profits via the 80/20 Principle. Chapter 8 closes Part Two with hints on how to embed 80/20 Thinking into your business life so that you can gain an unfair advantage over colleagues and competitors alike.
    We start in the next chapter with the most important use of the 80/20 Principle in any firm: to isolate where you are really making the profits and, just as important, where you are really losing money. Every business person thinks they know this already, and nearly all are wrong. If they had the right picture, their whole business would be transformed.

 
    4
     
    WHY YOUR STRATEGY IS WRONG
     
    Unless you have used the 80/20 Principle to redirect your strategy, you can be pretty sure that the strategy is badly flawed. Almost certainly, you don’t have an accurate picture of where you make, and lose, the most money. It is almost inevitable that you are doing too many things for too many people.
    Business strategy should not be a grand and sweeping overview. It should be more like an underview, a peek beneath the covers to look in great detail at what is going on. To arrive at a useful business strategy, you need to look carefully at the different chunks of your business, particularly at their