95/5 Rule – Replacing the 80/20 Principle
I can still see his dark beady eyes darting left and right with excitement as he gestured with his arms and hands to make his points. He was the literal young ITW Management ‘Shooting Star’. He was – showing and telling – me ‘Why’. He was explaining the Secret to Success Theory by Richard Koch of Achieving More with Less: The 80/20 Principle. The year was 2002, the month September, and the time, about 2:30 in the afternoon MST. The tone of his speech could only be likened to that of a religious zealot on the podium. Yes, this 80/20 Principle (or Rule – as it is also known) was truly one of the great secrets of highly effective people and organizations. His belief and faith was so firm in conviction – that it actually motivated me to look deeper into this phenomenon of managerial brilliance for myself.
Numbers never lie and the clock on your iPhone Clock never stops. Time only moves in one direction and how you manage it has a direct correlation on your Bottom Line at the end of 4Qs. Real time reminders and gauges of your personal and corporate success – no matter what the function. These two – factual foundational baselines – in Business Thinking – are the crux of the 80/20 Model. Or, simply put: 80% of your profits comes from 20% of your customers or clients. Conversely, the top 20% of your customers/clients – provide you with 80% of your profits. It’s important to look at each angle distinctly because Interpersonal Relationships in Business have a real time intangible effect on logical decision making. This highly touted theory is Common Sense Thinking that even the dimmest bulb among us intellectually can grasp, appreciate, articulate and then initiate – positive course changing actions from.
In my business, everything leads back to Resin Pellets. “All roads lead to Rome” would be a good statement of comparison. All Roads inside the Flexible Packaging World – lead back to Resin – which is processed to make Film sheeting. The value of which is measured in pounds sold. So, no matter which way you convert it, or use it in the marketplace – you always have the same nominal measure that gives you an accurate costing tool to be used as a base number for measuring your profitability.
So, taking the above aforementioned into account, it has come to my attention over the past 12 to 18 months in North American Flexible Packaging – that the Chaos Theoryhas begun to take hold. Digital Printing & Flexible Packaging Innovations have mathematically begun to compile – tangible proof – that “sensitive dependence on initial conditions” can (and will) have a disproportionate effect on both income and market share growth. For example, a firm that in the early stages of a market, provides a product that is 10 percent better than its rivals may end up with 100 or 200 percent greater market share, even if the rivals later provide a better product. A small advantage exploited early on can turn into a larger lead or dominant position later on, until equilibrium is disturbed and another small force then exerts a disproportionate influence. Thus, a 51/49 market share split is inherently unstable and tends to gravitate towards a 95/5, 99/1 or even 100/0 split. Equality ends in dominance: that is one of the messages of this currently evolving Chaos Theory. (Note: The above was taken from James Gleik, 1987, Chaos: Making a New Science, New York: Little, Brown.)
So what’s my point here? Who cares about 15 percentage points anyway? 80/20 is easy to explain, understand, initiate and teach. 95/5 is not. 95/5 is a reflection of ‘a disturbance or disruptive force’ currently driving market share dominance within Flexible Packaging / North America and Globally. The Digital Age of Acceleration is upon us and human brain capacity is still physiologically the same. Thus, 80/20 is no longer good enough – to move to the front of the pack. The new focus must be centered on and around building up the ‘Workhorses’ or known ‘Sweet Spots’ that currently exist in Production. Sharing this data, on a continuous basis and collaborating across departments to keep it ‘alive’ will insure the march and shift to market dominance.
In summation, 95/5 Rule is Bold – Disruptive – Strategic Thinking. It forces everyone within the organization to – work smarter – and faster – to capture position amongst the pack of competition. To this point, Sales & Marketing must communicate and correlate all NBD through this narrow window focused on capacity, innovation, and production strengths. Marrying the internal sweet spots in product mix to the top 5 percent of your customer base – will turn the largest profit margins in the shortest time. Relationship focused and nurtured – every day – cross departments. Utilize the advantages in technology and share these openly with the smartest people you do business with. Challenge their intelligence to Disrupt their norm. Challenge their pride to be the best in what they do. 95/5 Rule application is simply focusing your Growth in Revenue to the people who have given you the most financially. Many will argue the logic and risk involved … but to them I say simply that Continuous Collaboration and Sharing – cross departments – in the mode most mutually friendly – technologically – (IE: Whats App) -will eliminate the inherent processing risks substantially. Disrupt the norm – capture the lead and keep it.