Henry Ford: The concept of simplicity:
Henry Ford, the founding father of the Ford company once said, “Our clothing, our food, our household furnishings¾all could be much simpler than they now are and at the same time be better-looking.” These were said almost a century ago, before Ford introduced the T-model which made cars available for all. Today, I am going to revive this concept by emphasizing the importance of simplicity and downsizing in management. The basic concept that we are going to deal with is known as the 80/20 principle.
When Ford called for simplicity, he meant that production should be simple, that management should be simple and that selling should be simple. By taking simplicity as a business strategy, costs are going to drop seriously, and eventually, prices can be reduced, sales increased, customers satisfied and profits achieved. Therefore, complexity is always costly, not only in terms of overhead costs and variable costs, but also in terms of hidden costs that appear when it is too late to handle them.
An example of complexity is when a company produces hundreds of product lines, many of which are not profitable, but rather, costly and complicated, but without any real added value to the company. Today, many companies are realizing this reality and so, they are following a simple rule “If your eye offends you, pluck it out!” This means that it is useless to keep business lines that are causing loss or that are not yielding profit to the organization.
The alternative to complexity is simplicity. Simplicity as many are defining it today is known as the 80/20 principle. To illustrate, in most industries, it has been found out that 20% of all customers are responsible for 80% of the sales and profits. At the same time, 20% of the operations in a company are responsible for 80% of the value.
When researchers discovered this fact, they also found out that they had not discovered something new. This was how business was run for hundreds of years. But if we apply this principle today, it will have major impacts on business strategy and perspective. According to the customer-led approach, if a company has one thousand customers, then it has to serve one thousand kings. But according to the 80/20 principle, the company will only have to treat 200 of its customers as kings.
This completely changes the concepts of market share and business operations. The real market share is the core market share, that is, the customers who are generating the real profits for the company, not just any customer. The principle does not call for ignoring 80% of customers, but rather, it calls for giving the special treatment and the concentration of efforts on the 20% rather than on the 80%.
The 80/20 principle does not only apply to the other operations in any business. It stipulates that 20% of the people in an organization are doing 80% of the work, that 20% of the salespeople are generating 80% of the sales, that 20% of the inputs are resulting in 80% of the output, and that 20% of the products are yielding 80% of the company’s sales and profits.
In its essence, this principle is calling for simpler and better performance. It is no use to serve 1000 customers when you cannot serve them all properly. It is no use hiring 1000 people when you can achieve better results hiring 200 or 300 or 500.
The 80/20 Principle and its uses:
We have to be aware of something very important, however. The 80/20 does not mean that we have to stick to this ratio of 80% and 20%. Each company has a different ratio. In some companies, only 2% of their customers are responsible for 90% of sales and profits whereas in others, a 50-50 ratio is more realistic. The idea is that business will do better if they go simpler. Therefore, whenever we talk of the 80/20 principle, we should not think of 80% and 20% as concrete figures, but rather, as an idea, as a perspective and as a strategy.
There are several top business uses of the 80/20 principle.
- Decision making and analysis: So many decisions are made all the time, and so much analysis is carried out. For example, financial institutions that deal in stocks and bonds invest heavily in analysis although they are aware that they do not need as much as that. It would be more efficient and less costly for them to set analysis at an efficient level since no matter how much they invest in analysis, they are still achieving the same results. At the same time, expenses of consultation and decision making should only be focused on those important decisions that are vital for the organization.
- Inventory Management: Companies should stop having high inventories. Rather, they should manage their inventories such that investment will only be focused on the high selling and profitable items.
- Project Management: businesses should downsize their operations. They should get rid of those many operations which are useless or unprofitable, and instead, concentrate on the few operations and projects that yield 80% of the company’s revenues and profits.
- Negotiation: The principle is also applicable to negotiation and bargaining. For example, the negotiator should have as many points to deal with as possible, but his concentration should be focused on winning only the 20% core points which result in his victory in the end.
Other applications of the principle include other vital operations in any business such as strategy, quality, cost reduction, service improvement, marketing, selling, information technology and many others.
So what is the logic behind the principle? As it has become obvious to us, this principle aims at putting business back on the track of simplicity. The originator of this principle, Henry Ford, contributed to the revolutionizing the industrial world, and it was this principle in the first place that made business simpler and thus, products such as cars available to all. Today, businesses are realizing that this principle is indispensable for better performance, higher efficiency and more impressive service and quality. However, we can all see why this principle will face a lot of resistance, especially from managers. The principle simply says that many managers are actually not doing anything at all, and therefore, applying this principle implies that they will become jobless. This principle gives many managers one choice: either to perform better and higher, or to lose their jobs. No wonder many like it but many more don’t.