The Defects of Business expansion: employing the Pareto Principle
It seems absurd when told that expanding your business is not always best for it because we are often of the idea that business growth and expansion is the goal of every startup. This is true but expansion can also cripple a business
I have witnessed the rise and fall of major businesses, the most recent was a wholesale distribution company. This company commenced business in 2015… by 2017, it became one of the major distribution companies in Nigeria and by 2018, they closed business with huge debts to settle which caused them to liquidate their assets. How is it possible for a major distribution company to rise and fall within a span of 3 years?
The following are some of the possible reasons:
1) Business gets too busy to handle its local clients, which ultimately leads to dissatisfaction and loss of clients.
2) Business cannot meet the production demands, and hence it leads to quality deterioration for meeting targets.
3) Dilution of business brand occurs when expansion is made just for the sake of expanding.
4) There is also expansion of cost due to factors such as technological up-gradation and new plants and machinery purchases, which without market demand will finally lead to losses.
5) The business ventures into various sectors that doesn’t just fail to add to revenue but also cuts from the existing operational cost
A simple “mistaken”solution to this would be to reduce the rate of business growth but that could mean your business would not reach its potential especially when you have the resources to get it there. This brings us to the concept of Pareto principle
What is The Pareto Principle?
The Pareto Principle (named after esteemed economist Vilfredo Pareto) also known as the 80-20 rule, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event.
In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority.
The original idea of the Pareto Principle was linked to the relationship between wealth and population. According to what Pareto observed, 80% of the land in Italy was owned by 20% of the population.
This principle is applied in businesses today to maximize profits with minimal resources and it is usually summarized as “Working less, Earning more”
It has to do with identifying areas of your business that adds more to your revenue and allocate more resources to those areas while reducing resources allocated to areas of your business that do not produce enough and restructuring areas that consumes more than it produces.
For instance, below is the breakdown of X law firm’s financial books having an annual revenue of 10 Million Naira
Litigation- #300,000
Corporate and commercial law-#5,000,000
Real estate- #4,700,000
Pareto principle demands that majority of X law firms resources should be allocated to the real estate and corporate section of the firm as they are more lucrative and make up for at least 80% of the law firm’s income while less resources should be allocated to the litigation section of the firm
An application of this principle to your law business could mean having more time on your hands to take care of yourself and running a successful business while doing that.
It has been a good time rubbing minds with everyone. I am open to any questions or additions.
The above article was culled from Law as Business Forum, delivered by Umeh Daniel Onochie. He is the principal partner of Daniel Umeh and Co LP, one of the founding partners of Ryse Africa and has conducted series of outreach programs.
Law as a Business is a forum/ gathering of successful lawyers deepening their knowledge of the Business of Law, convened by Charles Ajiboye, FICMC (Partner, The Penthouse Law and Former Publicity Secretary, NBA Ikeja) via a Whatsapp Chat Conversation. You may join on WhatsApp via the link below: https://chat.whatsapp.com/Kp0LdaFVxqQ8bFm54iU62B
