Golf, the pareto principle, and your businessAug 24, 2023
On Sunday, PGA Tour player and Oklahoma State alum (hey-o — my alma-mater) Viktor Hovland shot a 28 or -7 on the back 9 of a PGA Tour event to walk away with a win. In case you don’t know, that’s really good. It was one of the best rounds by a player in that spot and he broke the course record by shooting a 61 (-9) on the round.
When asked about his performance in the post-round interview, he attributed it to focusing on the best decision he could make in that moment.
He said, “ok, what’s the right decision, right here and now, and commit to it.” That strategy worked pretty well, I’d say.
Throughout the year, Hovland has had multiple opportunities to win tournaments in 2023 and only walked away with one win. In some of those failures to win, he’d performed poorly in the final round and thrown away a chance to win.
So what made the difference? My opinion:
- Improved chipping
- Refined mindset
While chipping is important, I’d argue the mindset shift was the main catalyst.
Barely one shot separates PGA Tour players from Korn Ferry Tour players. For those that don’t know golf, that’s less than a 1% difference.
The only way to make it to the top level is the have control of your mindset.
This is a great example of the Pareto Principle, also known as the 80/20 rule.
This principle states that 80% of results or effects come from 20% of the effort or cause.
When you start seeing this principle, you see it everywhere you go.
With Viktor Hovland or Korn Ferry vs PGA Tour players, the mental edge represents the 20% effort turning into 80% of results.
One level up with mindset moves you from Korn Ferry to PGA Tour. Another step up from player to winner’s circle.
In much the same way, the Pareto Principle is highly evident in business.
So, what are some 80/20 principles to focus on and look for in your business?
Cost of Goods Sold
When tough times come, everyone turns to cutting costs. But the focus tends to go towards non-impactful one-time cuts.
But the biggest impact cuts typically come from your biggest line items. Why cut ten things when one cut accomplishes the same?
Let’s dig into an example.
Say you have $100,000 in revenue and COGS is 60% of Revenue. That means you have 40,000 left for Overhead expense after Cost of Goods Sold.
Reducing COGS by 10% or $6,000 increases profit by $6,000.
To get that same $6,000 savings from Overhead, you have to make a 15% reduction.
10%, while still painful, is less so than 15%.
Micro adjustments to big lines have a disproportionate impact to the bottom line.
Cash Flow Management
Profit isn’t cash. I will keep hamming this home until you’re exhausted from hearing it. The reality is that cash flow management is overlooked by too many businesses something that can make or break a growing or shrinking business.
Understanding the Cash Conversion Cycle is key to understanding cash flow. If you want to go deeper on it, I’ve talked about it here and here.
By optimizing cash flow, you build long-term resilience into your business which allows you to sustain in hard times and the ability to pounce when others see hard times.
Keeping your highest performers engaged and happy will have a dispropriate impact on results.
Not only will they perform better, but they’ll bring up the performance of those around us.
It’s human tendency to look at the lowest performers and focus on improving them.
But, when you invert this to focus on the highest performers, you increase productivity and are more likely to truly drive the business forward.
It’s a common situation in business that 20% of customers equal 80% of revenue. Even if that’s not your business, key customers can drive results.
By focusing on delivering the best service to key customers, you provide your business with a stable base.
That base engrains you even deeper with those customers, which can result in 2 things:
- More business from those customers
- Strong referrals from them
While we’re always concerned about customer and industry concentrations, sometimes those concentrations can work to your favor.