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The Key to Profits

"Concentration is the key to profits. Greater profits
require that you concentrate your efforts on the
smallest number of activities that will produce the
largest amount of revenue."
Peter Drucker

When focusing on business and profit improvement, I always have the Pareto Principle on my mind, working in the background, helping me filter out all the noise. "The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many phenomena, 80% of the consequences stem from 20% of the causes." In other words, 80% of the problems can be attributed to 20% of the causes.

We can also flip it around and say that 20% of what we do accounts for 80% of all we bring in. If we improve the 20% and do it better, faster, and cheaper, we'll account for 80% of the results. It's time to focus on that 20% and see what opportunities are available to us. This leads us to a discussion on core competencies.

Core Competencies

The term was popularized by Hamel and Prahalad, back in 1990 in the Harvard Business Review. Drucker was one of the first to mention it in 1964 when he focused on 'strength analysis'. Simply put, they said that a core competency is something that the firm does really well. It provides customers with major benefits. It's not easy for competitors to copy or adopt. It is a set of skills and abiliites that can be leveraged to other products and markets.

A core competency can include:

  • An excellent, reliable process
  • Synergy with customers & suppliers
  • Specific technical intelligence - "know-how"
  • Corporate culture
  • Unique product development
  • Branding, Marketing etc.

Let me give you an example that Hamel & Prahalad gave in the HBR: HONDA.

Honda is known as a leader in engines. They leverage their core competency to create excellent products in a variety of markets all built on their excellence in engines. Honda produce small snow-blower engines, lawn-mower engines, car engines, truck engines, race car engines - I think you get the point.

A lot of small to medium sized businesses try to do everything they do as best they can. They tend to realize where their profits come from and feel that everything else is just the cost of doing business and they need to handle it internally, which may cost them a majority of their profits. They say "there is no other way". They also want full control and they feel they can do it cheaper in-house.

Companies should put more focus on the customer and improve their abilities to add value. Does the customer care if you handle every single back-office operation? No, as long as they get more benefits out of dealing with you than the competition.

Again, take a look at the 20% of what you do that creates the 80%. Focus on making it better. Leverage it to grow your company. Then outsource as much of the rest as possible to vendors & suppliers that have complementary core competencies.


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