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The Law Of The Vital Few & Entrepreneurship: Importance Of 80/20 Rule In Productivity

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[This is 11th chapter in the #ProductivityHacks series currently running on Trak.in]

“Concentrate all your thoughts upon the work in hand. The Sun’s rays do not burn until brought to a focus” ? Alexander Graham Bell

In the year 1905, Italian economist Vilfredo Pareto observed a very interesting phenomenon happening in his country and the environment. He observed that 80% of the land in his country is being owned by 20% of the population and 20% of the pea pods in his garden contained 80% of the peas!

Later on, Management Consultant Joseph M Juran studied Pareto’s work and came with a famous management rule in his book The Quality Control Handbook called as “The Law of Vital Few”, also known as the “Pareto’s Principle”.

He studied that Pareto’s principle about 80/20 rule is being applied all over the business and infact entire human life. If you observe closely, you will find that our society is divided in these two extreme classes: 80% of the wealth is being accumulated by 20% of the elite.

Productivity Hacks Entrepreneurs-009

Ask any businessman and entrepreneur, and he will readily reveal that 80% of his sales come from 20% of its main customers. If we research further, we will observe that:

  • 80% of profit comes from 20% of its customers
  • 80% of complaints come from 20% of customers
  • 80% of the income generated by a company comes from 20% of the time spend by employees
  • 80% of profits come from 20% of its products

Hence, if we apply this principle in our Productivity Hacks, then it implies that if you have 10 written goals right now, 2 of them would yield maximum outcome, and your whole focus should be to identify those 2 first and execute them at the earliest.

What Entrepreneurs Can Learn From 80/20 Rule?

Entrepreneurship is all about finding simple solutions to complex problems, and scaling it up. Now, to achieve this, you will need to experiment a lot which will take time. Using Pareto’s Principle of 80/20 rule, we can train our minds to identify the 20% of the main experiments, which will give us 80% of the solutions, which can be scaled up for more profits.

This identification of the 20% main tasks is all about practice and focus, and no book can teach you that. But yes, we can learn from the application of 80/20 rule by other famous entrepreneurs and investors to have a better view of the whole theory.

Steve Jobs and 80/20 Rule

You must be aware of the famous story wherein Steve Jobs ‘made’ his way back into Apple after being thrown out of the company by its board members. After coming back into Apple, Steve observed that the company is focused on too many products, and none of them were selling.

Now, just imagine for a second that Steve Jobs becomes greedy at that particular time when he re-enters Apple as he was literally bankrupt, and tries to sell each and every product which Apple manufactured at that time. He owned majority stake in Apple, and he could have done that.

But he chose to apply the 80/20 rule and did something which was totally unheard off.

He immediately stopped production of all products, and focused on just 4 main product lines. Apple employees were stunned and shocked as Mac Desktop alone had around 12 versions running in the market!

This decision of Steve Jobs was absolutely correct, as we can see today that Apple has dwarfed every major electronics company, including the legendary Sony and Samsung. He realized that focus is very important, and then identified the top 20% of the products which was bringing in 80% of the profits to the company. Instead of diluting their focus on the 80% of the non-profit products, he put 100% of his efforts on those 20% of products, which clicked.

Few would be aware that even before iPhone was launched, Apple had already started working on iPads. But due to Steve’s relentless pursuit of perfection and focus, they stopped their work on iPad and solely focused on iPhone, to make it better, sleeker and more attractive. Once they had made iPhone market ready, they started their focus on iPad and made it better.

Here is a video where Steve shares the story of iPad:

In an interview, Steve Jobs said, “People think focus means saying ‘yes’ to the thing you’ve got to focus on. But that’s not what it means at all. It means saying ‘no’ to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things we have done.” (Source )

Warren Buffett and 80/20 Rule

Warren Buffett is considered the greatest investor of 20th century. In the year 2008, he was world’s wealthiest person and in the year 2011, world’s third wealthiest person. He is often known as the “Wizard of Omaha” ; “Oracle of Omaha” and so on. With $60 billion in his bank account, he is world’s 4th biggest billionaire as per the recent ranking of Forbes.

Did you know that 90% of his wealth has been generated from his 10 major investments.

In the book The Tao of Warren Buffett, he is being quoted, “You only have to do a few things right in your life, so long as you don’t do too many things wrong.”

A small excerpt from this book: “Warren decided early in his career it would be impossible for him to make hundreds of right investment decisions, so he decided that he would invest only in the business that he was absolutely sure of, and then bet heavily on them. He owes 90% of his wealth to just ten investments. Sometimes what you don’t do is just as important as what you do..”

I hope you have now a fair idea about the importance and relevance of 80/20 rule in productivity, business and life in general. In the next part of the series, we will discuss top 10 ways using which we can practically apply 80/20 rule in our life to increase our productivity.

Previous Chapters in “#ProductivityHacks For An Entrepreneur” Series

  1. Understanding Importance of Time
  2. The Morning Activities
  3. The Four Step Plan
  4. Creating; Managing & Optimizing Lists
  5. Mastering Art of Collecting Information
  6. The Science of Creating a Process Out of Chaos
  7. How To Complete A Project Successfully
  8. The 6 Stage Model of Reviewing Your Productivity
  9. How To Fool Our Mind To Boost Productivity
  10. Four Ways To Relax Your Mind To Boost Productivity
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