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An 80/20 Profit Enhancement Study:
Applying “The Holy Grail of Business” to Increase Profitability
In late 1999, a $3 billion company was acquired, a company that brought superb brand names and excellent potential for overall performance improvement. These were the factors that made this company such an attractive acquisition.
Their biggest issue at the time of acquisition was profitability. Despite the ability to add revenue seemingly at will, the overall profit-margin percentage had been languishing in the mid-single digits for years. The commitment by the parent to Wall Street was simple — to double the profit margin to 16%, minimum, in five years.
To perform the formidable task of doubling the profit margin, the parent dedicated a total of five individuals to the integration effort. The rest of the company’s management team was largely left intact. The charter for the “gang of five” was to teach the process, drive the process, and oversee the process…but not to single-handedly DO the process.
Strategex experts had a very robust role, eventually having responsibility — at one time or another — for all the brands/pieces of the business. Each of these units underwent the full battery of 80/20 processes, following the “four steps” used again and again. Data mining, product line simplification, USa (Understand, Simplify, Automate), and quad-based segmentation were the key elements.
Profitability improvement with no significant revenue loss was seen across all former units. Key measurables that contributed to this improvement were as follows:
- 70% reduction in SKU combinations
- Up to 50% reduction in sales/manufacturing/R&D cycle times for critical product/customer combinations
- Significant re-channeling of small orders to distribution vs. direct, resulting in complexity reduction without loss of end-user purchases
The profitability actually more than doubled in the five-year period, from approximately 8% to 17%. Today, the units continue to grow, the profitability continues to improve, and nearly all of the old managers are still managing their businesses, though all of the cultures have changed wholesale to “80/20.”
This was the biggest challenge: getting the group to understand that 80/20 could not be implemented piecemeal. The principle is not simply a tool — it’s a way of doing business and, once you accept the premise, a way of life. Once accepted, it was not particularly difficult to make the improvements desired, because the entire organization from top to bottom was invested in the solution.
Interestingly, of the “gang of five” only one is still involved with the group of businesses. Their task was to teach, drive, and oversee the process. Once complete, the redirected management team was more than capable of not only running their business, but also of buying others and of teaching, driving, and overseeing on their own.
The best referral on the experience comes from the former CEO who served until the margin doubling was complete. He calls 80/20 “the holy grail of business.” He never thought it would work but now is quick to spread the gospel: it works everywhere. His takeaways:
- A few experts teaching 80/20 can have a huge impact.
- The process is robust. The same techniques work no matter how big the target is.
- Existing management can be taught to use — and love — the process almost universally
- 80/20 is not a simple tool that can be selectively applied. It is a culture-changing device.