This is the third time that I have run into the 80/20 principal in the last week. In a WSJ article last week called Turning Managers into Takeover Artists, it was discussed how ITW uses the 80/20 principal in applying it to their acquisitions.
The article discussed how the ITW strategy is to "boost its bottom line by remaking the profit margins of each company it buys - focusing narrowly on its most lucrative products and customers, in an unusually strict application of a business-school concept know as 80/20."
ITW according to the article is "probably the single best company in the world at optimizing small manufacturing operations."
ITW defines the 80/20 strategy as focusing on the 20% or so of products and customers that can generate 80% of a business unit's revenue. When they acquire a company "ITW generally shrinks revenue initially but typically doubles its profit margin in three to five years. The company often reduces staff at its acquisitions by about 5 - 10 %." 80/20 creates focus and eliminates chaos.
ITW uses acquisitions of companies as a major growth strategy and is training its employees on how to look for and evaluate potential acquisition targets. They have tripled in size over the last decade to 750 business units world-wide through this strategy and have been extremely successful financially.
This is an extremely interesting business model and application of the 80/20 rule. I am going to investigate this further to see where these principals can be applied in the current opportunities that I am pursuing.