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Pareto’s 80/20 Principle: Business Playing the Odds

Amazing, just amazing. No more than amazing, it was magic. That was my first reaction to the 80/20 rule when I reached into my pocket and saw that 20 % of the coins equaled 80% or more of the value. So, I read the book The 80/20 Principle, The Secret to Success by Achieving More with Less by Richard Koch.

That was a few years ago. Since then I have applied the concept of the book (and the 1906 Italian economist Vilfredo Pareto who created the principle) in many business situations. Here’s a few conclusions:

80% of your income is earned from 20% of your customers: This is a danger signal to businesses. If your income is lopsided like this, you must change the way you are marketing. For example: If you are a brick and mortaur business, you may want to hire an SEO/social networking consultant to broaden your reach on the Internet. Conversely, if you are a local business with a lot of internet, non-recurring customers, you may want to canvas the local neighborhoods. Look at your marketing plan using the 80/20 Principle.
20% of your Products bring in 80% of your Income: So, why keep the other 80% of your products if they don’t sell? This is why cost accounting is so important. You must know what your gross profit margins are per product and why they are that way. Oh, sure, you may have a 75% gross profit margin on Product A, but if you only sell 3 a month, you have to ask about the effort it takes to market it. Cut the stale products using the 80/20 principle.
20% of your Employees are Producing 80% of your Company Value: Now, before you start handing out pink slips, look at your employees with multiple dimensions. Are they underperforming because they are lazy? Unmotivated? Poorly trained? Or, maybe they have a specialty that you have not looked at which could set them apart. People are not simple and must be observed from multiple points of veiws. Test these views and make adjustments using the 80/20 prinicple.
As an owner or C-level management, are you spending 80% of your time performing tasks that others can peform, and 20% of your time bring in business? Delegate to someone’s highest level of competance. Don’t try to be a one person shop but build a company network of talented individuals that interact for a common, and ultimately great goal. Manage your time using the 80/20 Principle.

The secret to analyzing hidden business pitfalls is to not be bogged down in the minutia. As a business owner, you should manage your business and depend on others to build the wealth through their labor. Use the 80/20 Principle as a looking glass to focus on the right things in your business.

CPA Economic Depression Thinking: Buy Your House and Pay it off…Good Idea? Maybe.

As a CPA, I have categorized home-owner’s financial strategy into two categories over the last 32 years: One, the Depression Victim, and Two, the Leverage Junkie. The Depression Victim’s financial strategy is a person who has lived or heard about people living during the Great Depression of the 1930s. My mother is like that. The philosophy goes like this. You buy a house, and you pay it off, period…Sure, you can buy rental real estate, but don’t use your house as a piggy bank.

The other financial strategy extreme is the leverage junkie. Looking at them through my CPA glasses, I see that a person who holds that philosophy will buy a house, and then when it goes up in value, borrow against it to buy an other.

As you probably guessed, many people that lived by the second philosophy felt our latest economic downturn. Conversely, those that stuck by the first philosophy fared better.

But what if you take a middle road? You refinance a current mortgage? Jilian Mincer’s article, When Refinancing Doesn’t Make Sense looks at this financial strategy. CPA’s normally look at these topics from a very narrow point of view, but I act more as a financial strategist than a CPA to my clients, at times. For example, the authors state that to refinance at a low rate and accelerate your payments may be wrong, because you can earn 7% with the same money that you are saving 4.5% in mortgage payments. Really? In today’s volatile economy where States are going broke and the feds can’t control income, where are you going to find a stable 7% return with very little risk? My CPA clients that have this financial strategy mindset will not risk their money to that extent.

Now there is an exception to this point of view. I always suggest that my CPA clients save a few of months of liquid assets. It could be in savings, bonds, even precious metals, but something that you can tap into in an emergency. Why is this important? If you contact a serious illness, suffer an injury, or get laid off, you have a cushion to make a few months of rent or mortgage payments while you decide your next move.

I find that my position as a CPA gives me a very good view point at business and personal finances. The best advice I can give is to balance your thinking and prepare for economic downturns.

DeBabbitting the Business Strategy Process: Can Creative People Be Developed?

My grandfather left quite a legacy. He came from Italy as a boy to start a new life. He acted in and scripted silent movies, fought in WWI, tightrope walked between two eight story buildings (without a net) over a busy Chicago street, helped build navy ships as an electrician during WWII, and founded a successful restaurant with his wife and nine kids.

His success in the variety of endevours is grounded in one quality: creativity. Creativity is a right-brain function, natural to some and alien to others. Should all brain-storming teams have a business strategist who has this trait?

Coyne and Coyne’s article, Seven Steps to Better Brainstorming, tries to quantify this concept with a set of rules that can build business strategists within a group. Their article states that brain-storming sessions should proceed in seven steps:

Know your organization’s decision-making criteria
Ask the right questions
Choose the right people
Divide and conquer
On your mark, get set, and go!
Wrap it up
Follow up quickly

At first, I thought that maybe step 3 would meet the need for a creative strategist. But, to my disappointment, they only categorized the “right” person as one who knows answers to questions that are asked about the operations.

Still, any strategy that quantifies brainstorming raises an eyebrow. You cannot quantify creativity, and thus create a business strategist. However, the article intriged me because it referred to another article, Sparking creativity in teams: An executive guide. Ahh, I said, here is a place where the authors are referencing the important creative person, maybe the business strategist. Then I read the first sentence:

“Although creativity is often considered a trait of the privileged few, any individual or team can become more creative—better able to generate the breakthroughs that stimulate growth and performance.”

This opening sentence conjured up a new term in my head, Debabbitting. Debabbitting is any company process that aims to enhance creativity by forcing people into uncomfortable situations. But, in a business strategy session, people are most comfortable with what they know, and their usual approach to problems. In the classic Sinclair Lewis’s book Babbitt, George F. Babbitt, a mid-level company man, grew very uncomfortable when he tried to change his mundane outlook and style of life.

Now, don’t get me wrong, everyone has their special gifts. Most people are creative in certain circumstances. But, not anyone is creative in all circumstances. Take for example, a friend of mine who is a mechanical engineer. His forte is finding solutions to problems. He regularly uses creativity to find solutions to fix the problems. Yet, if you were to ask him to brainstorm outside of his element, he would struggle.

Les McKeown, author of Predictable Success, hit this point in his presentation at an Association for Strategic Planning–Los Angeles event. He spoke of his forth coming book, The Strategist–Leading Your Team to Predictable Success. At the meeting, Les described the different personalities in a business: The Operationalist (“O”), The Visionary (“V”), and the Processor (“P”). “O” is the person who solves problems, “P” does not solve problems, but will write a manual about it, and “V” is our creative person who doesn’t solve problems, and many times creates them. Though all of these roles are necessary, they conflict with each other. Therefore, Les introduced the “S”, the Synergist. The Synergist is the glue that brings all of the others together to arrive at solutions. I have find Les’s book more plausible then trying to conjeur people’s creativity. In fact, I would venture to rename the “S” as the Strategist, (the Business Strategist) because that person must strategize on how to bring all of the players together.

At first glance, you may argue that the business strategist is Les’s “visionary.” However, when you work in complimenting (and conflicting teams), you are creating a business strategist’s network, not individual. I believe Les said the roles are not cut and dry, but it seems to me that once you identify the gifts and each person’s own brand of creativity, the brainstorming session can evolve naturally.

So, how do you resist the temptation to Debabbit? First of all, you have to know your players, and their abilities. And second, you must use each person in such a way in which the process maximizes each person’s strengths. And finally, you must lead from the front by example to show the team how it can (and will) work towards a common goal.

Bad Strategic Plans: How Not to Build a Flying Carpet

When I was five years old my cousin Bill and I created a strategic plan to build a flying carpet. We wanted something that hovered over the ground about three feet (so not to be too dangerous). We also needed a steering wheel and a motor.

We had our passionate vision (I still get goosebumps), and all we needed were the materials to build it. Bill’s father was a carpenter and worked on cars. He had a garage full of parts that we chose from. So, we set out to collect the parts, or the tactics of our overall “strategy.”

We started with a piece of plywood. That was our “carpet.” Using manual saws, we cut a square out of another piece of plywood and mounted it on the larger piece with a 2×4. That was our steering wheel. Lastly, the motor. My cousin found a used automobile oil pump, it looked like a motor. We strapped it on.

We were finished and sat on it waiting for it to lift off the ground powered only by our imagination.

Richard Rumelt’s article, The Perils of Bad Strategy reminded me of that experience, and also so many prospects who call me to prepare a business or strategic plan.

Before, you consider a business plan, or a strategic plan, let’s look at some his points that are common to bad strategic plans.

Failure to face the problem: “A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And, if you cannot assess that, you cannot reject a bad strategy or improve a good one.”

A common idea for a potential business plan which comes across my door, is the creation of a record company by some musician that wants to publish, record, and write for other bands, or artists. The problem that they never address is that the current record company business model is broken. So I ask them what are they planning to do that is different? They usually don’t hire me when I ask that question, and I never hear of them again.

Mistaking goals for strategy: “A leader may justly ask for ‘one last push,’ but the leader’s job is more than that. The job of the leader—the strategist—is also to create the conditions that will make the push effective, to have a strategy worthy of the effort called upon.”

This is why motivational speakers (or life coaches) are not strategists. They work up passions to get people to give it that one last push, but don’t have the business skills to set the condition, or roadmap for them to do so. What good would it have been if my cousin pushed me down a sand dune on the wooden carpet if he did not lay out the strategic plan of how he was going to get it to fly?

Bad strategic objectives: “Another sign of bad strategy is fuzzy strategic objectives. One form this problem can take is a scrambled mess of things to accomplish—a dog’s dinner of goals. A long list of things to do, often mislabeled as strategies or objectives, is not a strategy. It is just a list of things to do.”

When you are driving cross country, the mileage markers (Los Angeles 200 miles) are metrics that measure how far you have gone, and how far you have to go to reach your destination. A list of business metrics for the sake of metrics will not help you if they are not in line with your strategic plan.

Fluff: “A final hallmark of mediocrity and bad strategy is superficial abstraction—a flurry of fluff—designed to mask the absence of thought. Fluff is a restatement of the obvious, combined with a generous sprinkling of buzzwords that masquerade as expertise.”

If you don’t understand this, try moving to Los Angeles and prepare a business plan/strategic plan for an entertaiment company. This city if full of this vibe. I see part of my job is to cut into this and get to the core issues of the business. I have to ask the hard questions and ground whatever assumptions the client is making.

The most important ingredient in a strategic plan is honesty. Entrepeneurs have to be honest with themselves and their potential investors. If they are not, the carpet won’t fly.

Antiquing: How My Wife Convinced Me, and The Impact on Business Strategy

It started with Chumlee. I walked through the living room to my computer and stopped to watch Rick and Chumlee on Pawn Stars discuss the historical significance of something like a musket rifle. This intrigued me, but what really got me interested in their antiques was “value.” No, I don’t mean some 1920 decorative egg, I mean something that won’t break down within two years like my microwave.

Eight years ago, we purchased moderately expensive sconces. We didn’t realized that they would only last about five years. They developed an electrical short, and succumbed to the outside elements.

Inspired by the Pawn Star’s antiques, I bought four 1929 sconces at an estate sale that I will recondition. I believe these will be a better value than going to a lamp store to pay $200 per sconce. These antiques have lasted over 80 years, and are pretty cool to look at. I believe they will be a good value.

Then I came across a Strategy+Business Magazine article, Power of the Post-Recession Consumer by Gerzema and D’ Antonio. The article stated that we are part of a post recession trend of people looking for more than purchases that show status. [People are into]” a lifestyle more focused on community, connection, quality, and creativity.” In other words, when a consumer is deciding what to purchase, that consumer is considering which vendor using these four pillars. These exact points have been the foundation for some of my prior postings:

Community: Community Business Strategy: Love Your Neighbor as Yourself, and Maybe Even Turn a Profit

Connectivity: Mobile Payment Strategy: Is Your Small Business Developing One?

Creativity: Making a Living as a Musician: Do You Have the Right Frame of Mind to Break New Ground?

Quality (in tactics): Starbucks: The Moby Dick of Beans, and this article.

Of course, if this is the current reality, what are you the business owner, doing to capitalize on the trend? Are you changing your strategy to meet the consumer movement, or are you just doing business as usual? Businesses, small, medium, and large are moving at “warp speed.”

Business Strategy and Tactics: What We Can Learn From How We Raise our Kids

Our kids hate us…when we don’t give them money. Oh sure, we pay of their schooling, sports, and other school-related activities, but we are determined to require them to work for their recreation money. All three of my boys have worked for me from time to time.

So, when I came across Barbara Haislip’s article, How to Raise en Entrepreneur, it rang true with lessons with business strategy and tactics:

Encourage your kid to start a home spun business: For those of us that are fed up working for some else, why not think about starting a new business? Go through the steps and take a calculated risk. You may never be happy if you don’t try. Develop your business strategy, and then the tactics that you will need to achieve your goals. See https://www.ricknorriscpa.com/blog/business-finances/buiness-plans-and-strategy-living-on-a-hope-and-a-dream/
Don’t let kids get too comfortable: As a business person, if you are not growing, you are dying. Without a business strategy, you are going nowhere real fast. Likewise, without business tactics, you may know where you want to go, but may be “doing donuts” instead of getting there.
Help kid’s recognize the world is full of buisness opportunities: In your business, think creatively about your industry. Opportunities show themselves at some of the mots unusual places. The most basic business strategy has a SWOT analysis. Opportunities is the “O.”
Teach your kids in their sports to be a leader and team player: As an business leader, you must learn how to lead and encourage without intimidation. Good to Great by Jim Collins shows us that a screaming ego maniac CEO may create a successful company, but it does not usually survives the CEO’s departure because underlings are abused into acting. In your business strategy, you must share the vision. In your business tactics, you must adjust your course and measure your success in acheiving you objectives.

My message is obvious, your business strategy and tactics tools are things you may have learned since you were a kid. Tap into them and allow your creativity to

Cat Woman Beats IRS on her Charitable Tax Deduction, look out Batman

At the time you are reading this article, the IRS is still shaking the kitty litter from their feet. Earlier this month, Jan Van Dusen made them cough up a fur ball. The IRS painted her as a wacky cat lady trying to cheat the government out of its hard-earned taxes. As a Fix Our Feral’s volunteer, whose mission was to trap stray cats, Ms. Van Dusen would trap feral cats, neuter them, and care for them until they can be adopted by owners or released…70 cats to be exact. Ms. Dusen then deducted all expenses relating to the cats as a charitable tax deduction under section 170.

A few months ago, I wrote about this type of charitable tax deduction in Serving as a Vounteer? You Don’t Have To Wait for Heaven to Collect Your Reward. In order to take the deduction, you must have support for some unreimbured expense that you used to support a charitable organization. In addition, you need a letter from the organization acknowledging your expenditure as a gift.

This doesn’t mean that you can go out and plant 200 trees and get a charitable tax deduction unless some organization acknowledges that this is a gift to the organization and in furtherance of their charitable purpose.

In the previous article, I spoke of how my wife and me use our horses for such a purpose. We use them over 90% of the time to patrol for the National and State Park Services. Not only do the Services provide a letter to us, but they train us in CPR, first aid, and we log in with a radio when we patrol. We are in effect, the eyes and ears of the rangers. The program is very precise and requires 12 hours of horse training per year. We deduct 90% of our horse expenses as a charitable tax deduction because we use our horses almost exclusively as the mounted volunteer patrol.

The time to think about your charitable tax deduction is today. Don’t wait until April 14th. If you volunteer for an organization, determine what they need to further their charitable purpose and deduct whatever expenses you require to further it. Your burden is to substantiate it with receipts and a letter acknowledging it as a gift. Alway use a tax professional when making these kinds of decisions.

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Business Plans and Strategy: Living on a Hope and a Dream

I once knew a guy who spent every last dime trying to get auto companies to buy his “hubcap” locks for expensive spoked wheels. They repeatedly turned him down. He took his idea to the insurance companies and…”poof!” He struck it big.

David Ronick’s article, 10 Steps from Idea to Business tries to lay out a path to success in 10 steps. I applaud David in trying to help all those who want to be entrepenuers, but the steps can lead one in a direction that may not bear fruit.

1. Come up with an idea-David basically says to brainstorm for a good idea. The problem with this is “what is a good idea?”

2. Think through all angles- David has the right idea, but most people are not equipped to do this. Take for example, Jim Collins in Good to Great. He preaches his three concentric circles. Or, Kim and Mauborgne’s The Blue Ocean Strategy, where they lay out the idea of a product that renders competition virtually irrelevant. A “rough business plan” will not substitute for a well thoughtout strategic plan. Most people can’t do that, and have to hire a strategist to help them with it.

3. Get feedback–This is always good advice, but from who? If you are new to the market, you will most likely not be able to get to the right people. And what about them stealing your idea? This step is hard, so you will have to do your own research. The internet is a good place to start.

4. Respond to feedback–Again, I can’t see this step, or the other steps working because you would not get past step three. This is where so many businesses fail because they live off a dream and don’t do their basic research.

5. Build a basic product–Will you have an inventory? Read Chris Anderson’s The Long Tail. You might have second thoughts about your dream.

6. Open shop–As a newbee, can you manage your shop? Read Les McKeown’s Predictable Success. The book may paint an unflattering picture of where your company is in its life cycle.

7. Test what you’ve created–Have you developed a disruptive technology in your market? The Innovator’s Dilemma by Clayton Christensen explains what this means and how companies used it to become great.

8. Make adjustments

9. Get ready to grow–Collins and Porras’s book, Built to Last can open you eyes as to what makes a susainable business.

10. Stomp on the startup accelerator

My response is not meant to kill any good idea that you may have. Instead, I have listed major strategy books written by authors who have studied hundreds of successful and unsuccessful businesses. Read them, and others before entering step two, above. The more you know about a successful business, the more you will be able to leverage their experiences to make your dream a reality.

Social Marketing Cloud Computing: Ground Control to Major Tom

“Ground Control to Major Tom
Commencing countdown, engines on
Check ignition and may God’s love be with you”

When David Bowie sang these lyrics, the astonauts’s image touched us. We wondered what the astronaut was thinking, and why did he suffer a demise.

Cloud comuting is going private. Dan Rowinski came out with an article, The Personal Cloud will be a $12 Billion industry business by 2016. He claims that this will be the next horizon. In addition, an article by Jim Blasingame Social Media Builds Customer Communities touches on this new frontier combining cloud computing and social networking.

As business management strategists, we try to see the trends affecting each client. For example, a client who is considering the purchase of a large comuter server, may be betters served in a cloud computing environment.

Now, this may solve a lot of problems like data mangement, accessiblity, and such, but how does it integrate with the company’s social networking, search engine optomization, or other media platforms?

The social media community builder article touches on this. As business management strategists, we encourage clients to not just look at the immediate future, but the long-term in order to set their strategy.

I hear the “technology” changes every six months. You must strategize considering the possible technology changes. So, what do we as business management strategists recommend?

Pesonal computing will take a hit. Blasingame states that cloud and personal computing will come together. For example, you will log into a site in order to pay your bills, or do a business transation. The data stays offsite, not on your personal computer or business server.

If the experts are saying this is the next horizon, what are you doing about it. As business management strategists, we strongly reco

Mobile Payment Strategy: Is Your Small Business Developing One?

I remember around 1970 asking for a “stingray” type bicycle with a five speed stick shift and a slick tire. I was definitely leap-frogging my friends’ stingrays who lacked multiple gears. I nailed them on the hills. My bike was the early precursor of the multi-gear mountain bikes that cost up to $5,000 today. I was ahead of the pack, for a while anyway.

Last December, I wrote about the mobile payment strategy in Is Your Viral Strategy Becoming Obsolete? I asked the question of whether your strategy and tactics are being adjusted to accommodate the next horizon? If you were, you were ahead of the pack.

Well, I thought that the mobile payment strategy lead was getting smaller with Laurie Kulikowski’s article, Small Businesses Assess Mobile Payments. But then I read, “Intuit offers small businesses its GoPayment system, basically a credit card reader that attaches to a smartphone. The transaction can be downloaded into Intuit’s QuickBooks financial software for businesses.”

That was when I realized that she was speaking of old technology. She wasn’t offering the five speed bike, but the stingray with streamers. The new mobile payment strategy will not be the “clip on” payment device on your phone.

It will be your phone.

The new frontier will be the app that works instead of a credit card, not in addition to. Are you looking to be in the business front where a customer punches numbers on his/her phone to buy your item? In that case, mobile payment strategy takes on a whole new name.

Design a research strategy to keep a head of the pack. A mobile payment strategy may be that little tactic that pushes your business in the lead, for a while anyway.