80/20, An Evolution of an Existing Business Model
Strategex was approached by the CEO of a $2B multi-divisional, multi-national public company who wanted to implement the 80/20 Profit & Growth methodology. The company had endured years of decreasing operating profit; they lost three percentage points in five years despite revenue gains. They were consistently performing in the bottom third of their peer group. He sought to eliminate complexity from his business and to reallocate resources to more profitable areas with better growth potential.
The company had been using a business model based heavily on the Danaher Business System (DBS), and many of its managers knew no other system. The challenge was not only to teach 80/20 and generate the results that the CEO wanted but to do so while shifting a culture with deep roots in a different method of management (DBS). Our goal was not to replace the existing operating model but to enhance it with 80/20 as a key component. At the same time, Strategex needed to ensure that as excitement for the 80/20 methodology began to grow, we would prevent, as the CEO noted, “running with scissors."
The Process
Year 1: Three Pilots
We selected three “pilot” divisions for a deep dive and appointed three corporate managers as “subject matter experts” (SMEs). Strategex worked extensively with the SMEs to educate and coach in 80/20. By the end of year one, we implemented 80/20 fully to a third of the business, with the SMEs taking on a gradually increasing role.
Year 2: Gaining Momentum
In year two, Strategex advisors and the SMEs switched roles—the SMEs would lead, while the Strategex advisors would observe and support. Meanwhile, the second third of the company began its 80/20 transformation. In the back half of year two, the final third was launched.
Year 3: Pivot to Growth
In year three, the business was ready to pivot to growth. Strategex experts trained individual business units and SMEs on the 80/20 Profit & Growth methodology—an entirely different skillset. Once trained, Strategex would gradually retreat to a virtual role of support. By the end of year three, the transformation process was complete.
The Results
In the end, the process was followed to the letter, and the culture was transformed completely. Excellent financial results provided the credibility necessary to gain momentum. Operating income for the entire business increased over 500 basis points with 67% revenue growth, despite the dramatic downturn in one of its core end markets.
80/20 Profit & Growth is now entrenched fully as the core component of its operating model, a model that still draws heavily upon the Danaher Business System foundation. This integrated model is now one that many peer companies are working to replicate.
80/20 showed us how to serve our customers better, innovate better, and get rid of the noise.
80/20 eliminated nonvalue-added complexity and enabled the company to focus on mission-critical activities.
Ultimately, we taught the team how to drive profitability. Beyond operating income improvement, 80/20 had a positive impact on other aspects of financial performance.
TOPLINE GROWTH
Sales went up 67% from $1.5B to $2.5B.
HIGHER VALUE
Earnings per share increased 272% from $1.99 to $5.41.
IMPROVED PERFORMANCE
TSR grew more than 450% and over the 80th percentile compared to benchmarks.
