The 80/20 Principle: The Secret of Achieving More With Less by Richard Koch

segment was a good market to be in and on how well the company was positioned in each segment. The answers to these questions are described in the final part of this chapter.
    At this stage, a decision was made to cut the amount of management time spent on the B segments from around 60 percent to about half this level. Prices on some of the less profitable segments were also raised.

    Figure 27 Electronic Instruments Inc. 80/20 Chart of profitability by segment
     
     
    The third category, designated X priority, comprised the loss-making segments 13–15. A decision on what to do about these segments was deferred, as for the B category, until after analysis of market attractiveness and the strength of the company’s position in each market.
    Provisionally, however, it was possible to reset priorities as laid out in Figure 28.
     
----
Priority
Segments of sales
Percentage of profits
Percentage
Actions
----
A
1–6
26.3
82.9
Raise sales effort Raise management time Flexibility on price
B
7–12
57.0
48.5
Lower management time Lower sales effort Raise some prices
X
13–15
16.7
(31.4)
Review viability
Total

100.0
100.0
----
     
    Figure 28 Electronic Instruments Inc. result of 80/20 Analysis
     
    Before reaching final decisions on any segment, however, the instrumentation group’s top management examined the two other questions, besides profitability, that are key to strategy:
     
    • Is the segment an attractive market to be in?
    • How well is the firm positioned in each segment?
     
    Figure 29 shows the final strategy conclusions for Electronic Instruments Inc.
     
----
Segment
Market attractive?
Firm well positioned?
Profitability
----
1
Yes
Yes
Very high
2
Yes
Yes
Very high
3
Yes
Yes
Very high
4
Yes
Yes
Very high
5
Yes
Yes
High
6
Yes
Yes
High
7
Yes
Moderately
High
8
Yes
Moderately
Fairly high
9
Yes
No
OK
10
Not very
Yes
OK
11
Not very
Yes
OK
12
No
Moderately
Poor
13
Yes
Improving
Loss making
14
No
Moderately
Loss making
15
No
No
Loss making
----
     
    Figure 29 Electronic Instruments Inc. strategic diagnosis
     
    What actions followed this diagnosis?
     
    All of the A profit segments were also attractive markets—they were growing, had high barriers to entry for new competitors, had more demand than capacity, faced no threat from competing technologies, and had high bargaining power vis-à-vis both customers and component suppliers. As a result, nearly all the competitors in these markets made good money.
    My client was also well positioned in each segment, meaning that it had a high market share and was one of the top three suppliers. Its technology was above average and its cost position better than average (that is, lower cost) compared to its competitors.
    Since these were also the most profitable segments, the analysis confirmed the implications of the 80/20 profit comparison. Segments 1–6 therefore remained A segments and effort was concentrated on keeping all existing business and gaining market share in these segments by increasing sales to current customers and converting new ones.
    The strategy could now be refined for some of the other segments in the B category. Segment 9 was interesting. Profitability was moderate, but this was not because the market was unattractive; on the contrary, it was highly attractive, with most of the other players making very good profits. But my client had a low market share and a high-cost position in this segment, largely because they were using old technology.
    To update the technology would have taken a terrific effort and would have been very expensive. A decision was made, therefore, to “harvest” the segment, which meant cutting the effort going to protect the business and raising prices. This was expected to lead to a loss in sales but, for a time, to higher profits. In fact, cutting the effort and raising prices did raise margins, but led to very little loss of sales in the short term. It turned out that the customers were mainly locked in to the old technology