Smaller business operators are constantly making decisions – large and small. The 80/20 Rule suggests some tools that might help with faster, better, smarter decisions.
We can apply 80/20 to decision making within your company. Refer back to the introduction to the Skills Module: SM2.0 80/20 Sales Growth; Double Sales, Triple Profits
We can immediately recognise that comparatively few of the decisions that we make are very important so that gives us a starting point.
It’s a basic rule of time management, for example, that we should work on the vital few decisions that are the best use of your personal time. The same thing applies in your business.
We can rank all of the various decisions that need some attention by the impact that they will have on the business and then knock them off from the highest impact to the lowest impact in that order. In fact, we probably never bother to get to the low impact decisions because we recognise they have only a marginal effect on the business.
We should take all of the candidate decisions to be made periodically (say quarterly) and re-sort the list so that the highest priority ones keep coming back to the top. If less important decisions do need to be made, they can be delegated down the chain of command to a point where they become a “big” decision for that individual or team whereas they are a small one for you.
Very often we arrive at a course of action by default. We fail to make a conscious decision on some issue.
As a result of the decision making vacuum, people begin implementing some band-aid solution which eventually becomes the “norm” and is now implemented as a matter of course. Once something becomes a habit like this, it tends to become invisible, and/or indispensable, and people rarely give thought to changing the habit even if they realise that they have that habit.
Therefore, it’s very important that you take the opportunity to stand outside of your company and work on it, rather than in it, so that you can spot habits that have formed that are not necessarily optimal. Well known small business writer Michael Gerber is famous for the quote “work on your business, not in it”.
Develop a set of metrics that measure important characteristics of your business so that you can see if the business is declining in some dimension because a habit that is less than optimal has set in
Go to the article: Importance of Performance Analytics for Profit
We also know from the 80/20 rule that waiting until you have 100% of the data to make a decision is an ineffective use of your time.
The cost of obtaining data and of making a decision gets more and more expensive as you move towards the 100% end and that last 20% of information that you require is likely to cost 80% of the total cost in time and money of finding the data that you need and making the decision using it.
Therefore, it is much more efficient to suspend data collection once you have somewhere around 80% of the necessary data, make a decision, and implement it as though you are 100% confident that it is going to work.
Extending this approach, if something is not working very well, there is no point in having it run for a long time to become 100% confident that it is not going to work.
As soon as there are early indicators that the decision is not working as expected, you should “pivot” on that decision and either reverse it or change it into some other direction and re-experiment.
This approach is widely recommended, in the case of Start-up Businesses, in the whole body of knowledge referred to as “Lean Start-ups” (see
Go to the article: How to Do Profitable Start-ups
It is far better to fail quickly than to prolong the agony and the cost by postponing the inevitable.
In fact, when making decisions that take you into new territory, it may be best to make and implement the decision with a 50:50 probability of success first. Then you will fail fast if that is going to happen rather than waiting for several “safer” decisions to work only to fail when you finally get to the ‘deal breaker” decision.
When you are fortunate to make a decision that has very good outcomes, 80/20 would say that you should focus as much of your human and financial resources as possible on that decision in order to maximise it.
The shape of the 80/20 exponential curve indicates that very high profitability can be gained from a comparatively small proportion of your clients and products. You should double down on a decision that turns out to be good because there may be plenty more opportunity left in it, which you can take to its maximum possible extent. Try different permutations like price, volume, complexity, basic or luxury versions for example.