Author: Richard Koch
Date Published: 2008 (Revised edition, version 3.1)
The 80/20 Principle – Author Background Facts and Tidbits
- Born: 28 July, 1950 (London, Britain)
- Name: Richard John Koch
- First Job: Initially worked as a consultant with the Boston Consulting Group
- Net Worth: Approximately $300 million as of 2021
- Famous For: is a British author, management consultant, entrepreneur, and venture capital investor. He is best known for his book “The 80/20 Principle”.
The following is a summary of the book chapters and some key words/notes extracted. These extractions are all original writings from Richard Koch but in an abbreviated form for busy readers.
Part 1 – Overture
Chapter 1 – Welcome to the 80/20 Principle
- The author introduces the reader to the 80/20 principle, which “asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards”
- As an example, “80 percent of what you achieve in your job comes from 20 percent of the time spent”
- So, through benchmarking, arises a typical pattern which will show that “80 percent of outputs result from 20 percent of inputs; that 80 percent of consequences flow from 20 percent of causes; or that 80 percent of results come from 20 percent of effort”
- The pattern underlying the 80/20 Principle was “discovered in 1897, about 100 years ago, by Italian economist Vilfredo Pareto (1848–1923). His discovery has since been called many names, including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort, and the Principle of Imbalance”
- Koch says that this principle is very important as “it is counterintuitive. We tend to expect that all causes will have roughly the same significance”.
Chapter 2 – How To Think 80/20
Chapter 2 explains how you can put the 80/20 Principle into practice and explores the distinction between 80/20 Analysis and 80/20 Thinking.
- Koch argues that “Every person I have known who has taken the 80/20 Principle seriously has emerged with useful, and in some cases life-changing, insights”
- 80/20 Analysis is Koch’s is way of describing the way that the “80/20 Principle has generally been used in a quantitative and empirical way, to measure possible relationships between inputs and outputs”
- An example application, “a firm that finds that 80 percent of its profits come from 20 percent of its customers should use this information to concentrate on keeping that 20 percent happy and increasing the business carried out with them”
- 80/20 Thinking is Koch’s phrase for the “application of the 80/20 Principle to daily life, for nonquantitative applications of the principle”
- 80/20 Thinking “enables, us to spot the few really important things that are happening and ignore the mass of unimportant things. It teaches us to see the wood for the trees
Part 2 – Corporate Success Needn’t Be a Mystery
Chapter 3 – The Underground Cult
- The 80/20 Principle was one of the key building blocks of the quality movement
- Joseph Juran applied the 80/20 Principle to statistical quality control – “the 20 percent of defects causing 80 percent of quality problems”
- The 80/20 Principle is also being increasingly applied to product design and development – “decisions made early in the development process fix the majority of life-cycle costs”
- Koch advises that “wherever one turns, effective innovations in information—in data storage, retrieval, and processing—focus heavily on the 20 percent or fewer of key needs”
- According to Koch, “the 80/20 Principle can help the chief executive, line managers, functional specialists, and any knowledge worker, down to the lowest level or the newest trainee”
- The 80/20 Principle applied to business has one key theme—to generate the most money with the least expenditure of assets and effort.
Chapter 4 – Why Your Strategy is Wrong
- Koch alleges that “is almost certainly true that you make at least 80 percent of your profits and cash in 20 percent of your activity, and in 20 percent of your revenues. The trick is to work out which 20 percent”
- “We tend to think that innovation is difficult, but with creative use of the 80/20 Principle innovation can be both easy and fun”
- Consider the Interface Corporation of Georgia, now an $800 million carpet supplier. It used to sell carpets; now it leases them, installing carpet tiles rather than whole carpets. Interface realized that 20 percent of any carpet receives 80 percent of the wear. Normally a carpet is replaced when most of it is still perfectly good.
Chapter 5 – Simple is Beautiful
- A complex business can be made more simple and returns can soar. All it takes is an understanding of the costs of complexity (or the value of simplicity) and courage to remove at least four-fifths of lethal managerial overhead
- According to Koch, “those of us who believe in the 80/20 Principle will never succeed in transforming industry until we can demonstrate that simple is beautiful and why
- Additional scale, without additional complexity, will always give lower unit costs. To deliver to one customer more of one product or service, provided that it is exactly the same, will always raise returns
- A recent careful study of 39 middle-sized German companies, led by Gunter Rommel, found that only one characteristic differentiated the winners from the less successful firms: simplicity. The winners sold a narrower range of products to fewer customers and also had fewer suppliers. The study concludes that a simple organization was best at selling complicated products
- A fifth of revenues can produce four-fifths of profits
- What is most simple and standardized is hugely more productive and cost effective than what is complex
- All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance
- 80/20 Analysis can establish why particular problems arise and focus attention on the key areas for improvement.
Chapter 6 – Hooking the Right Customers
- The 80/20 Principle is essential for doing the right kind of selling and marketing and for relating this to any organization’s overall strategy
- Marketing, and the whole firm, should focus on providing a stunning product and service in 20 percent of the existing product line—that small part generating 80 percent of fully costed profits
- Marketing, and the whole firm, should devote extraordinary endeavor toward delighting, keeping forever, and expanding the sales to the 20 percent of customers who provide 80 percent of the firm’s sales and/or profits
- Products accounting for 20 percent of your revenues are likely to comprise 80 percent of your profits
- Keep in closest contact with the 20 percent of your clients who give you 80 percent of your business
- Being customer centered on all of your customers is pretty nigh impossible. But cherishing the core 20 percent is both feasible and highly rewarding.
Chapter 7 – The Top 10 Business Uses of the 80/20 Principle
- The versatility of the 80/20 Principle is legion: it can be used in almost any area of function to direct strategic and financial improvement.
- According to Koch, the top 10 business applications of the 80/20 Principle include the following:
- Cost reduction and service improvement
- Information technology
- Decision making and analysis
- Inventory Management
- Project Management.
Chapter 8 – The Vital Few Give Success to You
- The 80/20 Principle comprises radar and autopilot. The radar gives us insight: it helps us spot opportunities and dangers. The autopilot allows us to stroll around our business arena and talk to customers and anyone else who might matter
- The best people—meaning the people best fitted to what they are doing and doing the things that make the most money—generate enormous surpluses, usually far beyond what they are allowed to take out
- We need massive reeducation to stop thinking 50/50 and start thinking 80/20
- Expect everything—your time, your organization, your market, and every person or business entity you come across—to have quality 20 percent: its essence, its power, its value, a small part with substantially all the goodness hidden away by the mass of mediocrity. Look for the powerful 20 percent
- Think 80/20 and act 80/20. Those who ignore the 80/20 Principle are doomed to average returns. Those who use it must bear the burden of exceptional achievement.
Part 3 – Work Less, Earn and Enjoy More
Chapter 9 – Being Free
- The 80/20 Principle, like the truth, can make you free. You can work less. At the same time, you can earn and enjoy more
- The common attributes of 80/20 Thinking are that it is reflective, unconventional, hedonistic, strategic, and nonlinear; and that it combines extreme ambition (in the sense of wanting to change things for the better) with a relaxed and confident manner
- The objective of 80/20 Thinking is to generate action which will make sharp improvements in your life and that of others
- According to Koch, the “objective, as 80/20 thinkers, is to leave action behind, do some quiet thinking, mine a few small pieces of precious insight, and then act: selectively, on a few objectives and a narrow front, decisively and impressively, to produce terrific results with as little energy and as few resources as possible”
- 80/20 Thinking escapes from the linear-logic trap by appealing to experience, introspection, and imagination.
Chapter 10 – Time Revolution
- According to Koch, “80 percent of achievement is attained in 20 percent of the time taken; conversely, 80 percent of time spent leads to only 20 percent of output value” and “80 percent of happiness is experienced in 20 percent of life; and 80 percent of time contributes only 20 percent of happiness”
- You don’t need to organize yourself better or alter your time allocation at the margins; you need to transform how you spend your time
- There is no shortage of time. In fact, we are positively awash with it. We only make good use of 20 percent of our time. And for the most talented individuals, it is often tiny amounts of time that make all the difference
- The 80/20 Principle says that if we doubled our time on the top 20 percent of activities, we could work a two-day week and achieve 60 percent more than now. This is light years away from the frenetic world of time management
- The 80/20 Principle treats time as a friend, not an enemy. Time gone is not time lost. Time will always come round again
- Koch says that “It is our use of time, and not time itself, that is the enemy”
- The 80/20 Principle shows time and time again that the 20 percent who achieve the most either work for themselves or behave as if they do
- About a fifth of your time is likely to give you four-fifths of your achievement or results and four-fifths of your happiness
- For the 80 percent of activities that give you only 20 percent of results, the ideal is to eliminate them.
Chapter 11 – You Can Always Get What You Want
- Twenty percent of what we do leads to 80 percent of the results; but 80 percent of what we do leads to only 20 percent. We are wasting 80 percent of our effort on low value outcomes. Twenty percent of our time leads to 80 percent of what we value
- Eighty percent of the value in any organization or profession comes from 20 percent of the professionals. The workers who are above average will tend to be paid more than those who are below average, but nowhere near enough to reflect the differential in performance
- The 80/20 Principle is clear. Pursue those few things where you are amazingly better than others and that you enjoy most.
Chapter 12 – With a little help from our Friends
- Eighty percent of the value of our relationships comes from 20 percent of the relationships
- Eighty percent of the value of our relationships comes from the 20 percent of close relationships that we form first in our lives
- A small number of relationships will account for a large proportion of emotional value
- A surprising number of people spend a lot of time with people they don’t like. This is a complete and utter waste of time. It’s not enjoyable, it’s tiring, it’s often expensive, it prevents you doing better things, and it will get you absolutely nowhere. Stop doing it! Spend more time with the contacts you enjoy, particularly if they can also be useful to you
- For both personal and professional relationships, fewer and deeper is better than more and less deep.
Chapter 13 – Intelligent and Lazy
- Talent has probably always followed an 80/20 pattern
- Koch puts forward the 10 golden rules for career success:
- Specialize in a very small niche; develop a core skill
- Choose a niche that you enjoy
- Realize that knowledge is power
- Identify your market and your core customers and serve best
- Identify where 20 percent of effort gives 80 percent of returns
- Learn from the best
- Become self-employed early in your career
- Employ as many net value creators as possible
- Use outside contractors for everything but your core skill
- Exploit capital leverage.
Chapter 14 – Money, Money, Money
- You are more likely to become wealthy, or to obtain the greatest increase in wealth, from investment income rather than from employment income
- Because of the compounding effects of investment, you can become rich either by starting to invest early in life, or by living a long time, or both. Starting early is the most controllable strategy
- As early as possible, develop a consistent, long-term investment strategy, based on principles that have worked well in the past
- Koch’s 10 commandments of investment include the following:
- Make your investment philosophy reflect your personality
- Be proactive and unbalanced
- Invest mainly in the stock market
- Invest for the long term
- Invest most when the market is low
- If you can’t beat the market, track it
- Build your investments on your expertise
- Consider the merits of emerging markets
- Cull your loss makers
- Run your gains.
Chapter 15 – The Seven Habits Of Happiness
- It appears to be true for most people that the majority of perceived happiness occurs in a minority of the time
- Identify the times when you are happiest and expand them as much as possible
- Identify the times when you are least happy and reduce them as much as possible
- Koch suggest that “when unhappiness strikes, we can recognize what is happening to us and refuse to accept it. We are free to change the way in which we think and act”
- Identify personal levers that can magnify positive thoughts and cut off negative ones
- Make the choice that you want to be happy. You owe it to yourself and you owe it to other people too
- A further route to superior happiness is to change the events you encounter in order to increase your happiness
- Koch’s Seven daily happiness habits include the following:
- Mental stimulation
- Spiritual/artistic stimulation/meditation
- Doing a good turn
- Taking a pleasure break with a friend
- Giving yourself a treat
- Congratulating yourself
- Happiness is a duty. We should choose to be happy. We should work at happiness. And in doing so, we should help those closest to us, and even those who just stumble across us, to share our happiness.
Part 4 – Fresh Insights: The Principle Revisited
Chapter 16 – The Two Dimensions Of The Principle
- Put away your skepticism and your pessimism
- The greatest thing about the 80/20 Principle is that you do not need to wait for everyone else. You can start to practice it in your professional and personal life.
See Richard Koch Greatest Hits 10 YouTube Video
After reading this book and carefully digesting its contents and key messages, I list below my key takeaways:
- You can apply the 80/20 Principle to all aspects of your life including: work, business, exercise, happiness, time, happiness, wealth creation
- Don’t get too hung up on the 80/20 split but rather, just use the principle in general and apply the analysis to all key aspects of your life. Look to eliminate those things which are meaningless, inefficient, bad for our health and happiness
- Carefully think through your use of “time”. We do not necessarily need to be servants of time management as such but rather review overall our use of time in all aspects of our lives. I liked Koch’s view that, there is no shortage of time and in fact, “we are awash with it”.
- Where we have our own operations/businesses/activities that have complexity including lots of input and outputs and many clients, it makes much sense to do a detailed analysis to determine where we have key reliance on the 20% and where are the majority of our profits or successful outcomes (80%) coming from. This could be very useful as an annual review so that we maximise our operations and focus on those things which give us our best outcomes.
This book was a very interesting and informative read. This principle is one that I have come across before, but Richard Koch opens your eyes to the enormous variety of circumstances within our lives where this principle can be applied. It may not always be a panacea to our problems, but it provides us with another tool to apply toward the many life challenges we face on a daily basis.
As summed up nicely in the wise words of Richard Koch, the “few things that work fantastically well should be identified, cultivated, nurtured, and multiplied”.
If you enjoyed this book review, you will enjoy my review of the book, “Elements of Investing“.
Read, learn, enjoy, be persistent and most importantly, take action!