The 80/20 Individual

The 80/20 Individual 

by Richard Koch

my Take

This book is a must read for entrepreneurs or want to be entrepreneurs. The book title may not actually reflect the link to entrepreneurship and also initially the book may be a bit slow but it definitely has some gems in it. Below are some of the points from the book which interested me.

Takeaways from the book

In 1897 Italian Economist Pareto noticed that a small minority of top earners had accounted for a large majority of the total wealth. The Pareto principle became widely known as 80/20 rule. This can be interpreted as 20% of the effort produces 80% of the result.

80/20 Individuals are those who concentrate on the 20% effort and create great value.

The Nine Essentials of 80/20 success

1.Use your most creative 20 percent

• Find the 20% of yourself that creates the 80% of your impact and happiness
• Nurture and grow the 20%
• Outsource the remaining 80% (partners or employees) 

2.Spawn and mutate great ideas

• Look for the minority of ideas that have already proven themselves to be highly successful (20%)
• Combine / Tweak the idea until it is successful for you

How to enlist and mutate great ideas

a. Circle your wagons: Define the domain where you'll use your great idea

b. Short-list the vital few ideas: 

c. Ferment a unique brew: Combine the ideas until you get a unique new business idea

d. Test, test, test

e. Confirm the economics of 80/20 enterprise

f. Discover the new 20 percent with the 20 percent

3. Find the vital few profit sources

"He that is everywhere is nowhere" - Thomas Fuller (1608-61)

• Changing the customer base - by targeting a smaller, but attractive segment of customers
• Changing the business formula - by improving the ways the new customer is served

Identify the vital 20% profit forces that give you the 80% of the profits

• People (Employees & partners)
• Customers 
• Products / Services

Vital few products and services

a. Think small : Honda bought smaller motorbikes to the US in 1960 when Harley Davidson and like dominated

b. Think big : Computers were meant for corporates when Steve Jobs wanted them to used at homes

c. Think upmarket : Ferraris , Rolex

d. Think mass market: Ford Model T, budget airlines and fast food chains

e. Provide more for less: Formule 1, a French hotel chain provides cheap small but clean hotel rooms with large, comfortable beds. The rooms are modular and mass manufactured, and you wont find lounges, room services or 24 hour reception, but the good sound insulation and low cost suits many business travellers just fine.

f. Use direct distribution channels : Dell

g. Focus on activities that have the highest ratio of value to cost: Cherry pick. Find sweet spots. Find activities that have the greatest customer appeal but require the least capital. Product design, branding, and direct selling are often sweet spots. Manufacturing, physical distribution, retailing through a fixed store network are often sour spots

4. Enlist Einstein

In 1916, Einstein argued in his general theory of relativity that time is not independent of space;rather, instead of three dimensions of space, there are four, time being the fourth.

Creating 80/20 time

Compress the delivery time to customers: For any business you are in or might enter, identify the 20% of activities that take 80% of the time and the 20% that comprise 80% of your total cost. Reduce the time taken for those activities.Check if costs are significantly lower or customer satisfaction higher. If so make the changes.

5. Hire great individuals

"If I have seen further,it is by standing on the shoulders of giants" - Sir Isaac Newton

20% of any peer group will typically achieve 80% of its results.

How to spot and hire great 80/20 Individuals

a. Understand the practical implication of the law of individual wealth creation: Hiring talent is much better deal than hiring mediocrity.

b. Exploit the theory of wealth/talent arbitrage: Talent is not difficult to spot. Grab it before your competitors do, and convert it into wealth-creating capacity as quickly and fully as possible.

Talent rarely gets paid fairly. At the very beginning of its career, talent is overpaid. But before long, if talent mutates into wealth-creating ability, it will be underpaid.

c. Appreciate the value of young talent

Hire the type of young talent that can become wealth generators quickly.

• Of these, hire the cheapest: if you look in the right places, you may be able to hire brilliant people for moderate pay.
• Favour the under confident and beware of the over confident.
• Hire to raise the bar in your department no matter how high it is already. Hire people whose potential ability to create wealth is greater than yours.

Lock in great talent by making them partners.

6. Use your current company to your advantage.

How to build your 80/20 business

a. Start a new venture

b. Finding a hybrid solution with the current employer

• Partnership
• Incubator deal

7. Exploit other firms

A new enterprise needs working capital, but should not need to invest in capital goods as there is already a glut of infrastructure and frozen capital. There are too many factories, too many machines within them, too many warehouses, too much retail spaces, even too many laboratories for research and development.

The essence of growth used to be physical-now it is intellectual.

How to exploit other firms

a. Identify the missing ingredients in missing markets: Mature companies often posses nine-tenths of the puzzle. They have brands, manufacturing assets, and access to markets, but they lack the imagination to generate growth. If you can find the small missing piece of the jigsaw, you'll be made

b. Adhere strictly to the 80/20 frugality principle: Only do the 20% of the work that produces 80% of the profit. Outsource the remaining 80% of the work.

c. Separate drones from star partners, temporary from permanent deals

d. Force birds of a different feather together: Individuals from your firm and the partners firm should work together

8. Secure capital

How to use capital

a. Use capital only when you can multiply it

b. Reduce your need for capital

c. Raise more capital than you need

d. Provide your own capital: 

Sources of capital ranked from cheapest to most expensive

• Capital made unnecessary by other firms (outsourcing)
• Suppliers and other creditors, and billing customers in advance (negative working capital)
• Own savings
• Capital from family and friends
• Bank debt
• Capital from existing employer
• Capital from alliances with other firms
• Public equity (stock market)
• Angel Equity
• Specialist industry sources of finances (e.g. insurance companies)
• Private equity
• Venture capital

e. Use the cheapest available sources of external capital

f.  Be obsessed with cash

g. Treat capital providers as valued partners

9. Make Zigzag progress

Finding the 20% of inputs that will yield 80% or more of results requires experimentation and insight.