Simple Is

Beautiful
My effort is in the direction of simplicity. People in general have so little
and it costs so much to buy even the barest necessities (let alone the
luxuries to which I think everyone is entitled) because nearly everything
we make is much more complex than it needs to be. Our clothing, our
food, our household furnishings—all could be much simpler than they now
are and at the same time be betterlooking.
Henry Ford1
We saw in the previous chapter that nearly all businesses have within them
chunks of business with widely varying profitability. The 80/20 Principle
suggests something quite outrageous as a working hypothesis: that onefifth
of a typical company’s revenues account for four-fifths of its profits
and cash. Conversely, four-fifths of the average company’s revenues
account for only one-fifth of profits and cash. This is a bizarre hypothesis.
If we assume that one such business has sales of £100 million and total
profits of £5 million, for the 80/20 Principle to be correct £20 million
of sales has to produce £4 million of profits— a return on sales of 20 per

5
CORPORATE SUCCESS NEEDN’T BE A MYSTERY
90
cent; while £80 million of sales has to produce just £1 million of profits, a
return on sales of just 1.25 per cent. This means that the top fifth of business
is sixteen times more profitable than the rest of the business.
What is extraordinary is that when it is tested, the hypothesis generally
turns out to be correct, or not very far wide of the mark.
How can this be true? It is intuitively obvious that some business chunks
may be considerably more profitable than others. But 16 times better? It
almost beggars belief. And, routinely, executives who commission productline
profitability exercises often do refuse to believe the results when first
presented with them. Even when they have checked the assumptions and
verified them, they still end up baffled.
The next stage is often for managers to refuse to get rid of the 80 per cent
of business that is unprofitable, on the apparently reasonable grounds that
the 80 per cent makes a very large contribution to overheads. Removing the
80 per cent, they say, would clearly decrease profits, because you simply
couldn’t remove 80 per cent of your overhead in any sensible time frame.
When faced with these objections, corporate analysts or consultants
generally give way to the managers. Only the most horribly unprofitable
business is removed. And only minor efforts are made to increase the
extremely profitable business.
Yet all this is a dreadful compromise, based on a misunderstanding. Few
people stop to ask why the unprofitable business is so bad. Even fewer stop
to think whether you could in practice, as well as in theory, have a business
solely composed of the most profitable chunks and get rid of 80 per cent of
the overhead.
The truth is that the unprofitable business is so unprofitable because it
requires the overheads and because having so many different chunks of
business makes the organization horrendously complicated. It is equally
true that the very profitable business does not require the overheads, or only
a very small portion of them. You could have a business solely composed of
the profitable business and it could make the same absolute returns,
provided that you organized things differently.
And why is this so? The reason is the same. It is that simple is beautiful.