Diagnostic and Audit Systems

How To Diagnose Your Business Problems

Why you should read this section

• You will learn about 1 very powerful tool that will simplify and speed up your problem diagnosis

• You must have a Strategic Core Competency to survive. Find out what it is and how to identify it

“Things which matter most must never be at the mercy of things that matter least.”
--- Goethe---

Pareto's Principle

What did Vilfredo Pareto discover that could save your business?

Vilfredo Pareto was an Italian economist who, in 1897, discovered something fascinating about wealth distribution. He found there was a consistent mathematical relationship between the proportion of people and the amount of income or wealth that this group enjoyed. Basically, he found that roughly 20% of the population held 80% of the wealth.

Pareto further discovered that he could reliably predict that 10% would have perhaps 65% of the wealth and 5% would have 50%. The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced.

By the way, Richard Koch has written an excellent book on this topic called the "80/20 Principle-The Secret To Success By Achieving More With Less".

So Pareto's Law came to be known as the 80/20 Principle. This principle asserts that a minority of causes or inputs usually lead to a majority of the results or outputs.

Why the 80/20 Principle can save your business

The power of this law or principle lies in its simplicity and reliability in predicting where success and failure can be found. For example, what if you knew (based on this principle) that only 20% of your products accounted for 80% of your sales or profit to your business? And conversely, that 80% of your products only accounted for 20%. If your business needed turning around, then this would be one place to start that process. You would begin to pare down the number of products that you offered and reorganize the organizational chart and overhead to match this smaller offering.

In using Pareto's Law to diagnose business problems remember this.  Usually the percentages are not exactly equal to 80/20. That is not the point. What is important is to locate the disproportionate relationship between different variables.

Examples of Pareto's Law in a business:

• 20% of customers account for 80% of your revenue

• 20% of customers also account for 80% of your accounts receivable.

• When you age your accounts receivable, you will most likely find that only 20% of the past due accounts will be responsible for 80% of the balance.

The point of all this is to quickly allow you to narrow your analysis scope and focus on the most significant problems and opportunities.

Most turnarounds need to downsize

In most turnaround situations, you will need to scale back and downsize your business. One way to do this is by focusing on the 20% of the products or services that account for the majority of the sales & profit. What if you eliminated all or some of the products not included in the top 20%? Alternatively, what if you started raising prices on those products rather then eliminating them? Very quickly, you could have a major positive impact on your business.

We will get into employee lay-offs in another section of this website, but for now remember that this principle applies to staffing as well. You will most likely find that only about 20% of your employees account for 80% of the productivity or work. Most businesses have picked up a lot of "dead wood" employees and of course this is a major expense area.

Strategic Core Competencies

The next diagnostic tools we will explore is the concept of Strategic Core Competencies. What you must locate in your business are the few products, profit centers, or business units, which will support a profitable and reorganized business. These areas will most likely contain your organization's Strategic Core Competencies.

Robert Bradford & J. Peter Duncan have done some great work on the subject of Strategic Core Competencies. I recommend their book "Simplified Strategic Planning-A No Nonsense Guide For Business People Who Want Results Fast".

 Strategic Core Competencies (SCC) 

Imagine that you are holding a box that contains something of great value to your customers and no one else has it or can even copy it without great difficulty.  Do you think you could make any money with it? Of course you could!  That's the "holy grail" in business- to have something that is both valuable and unique, something that customers really want and that makes you different from other competitors.  Such things are called Strategic Core Competencies and you should find yours.

However, SCCs are not like many other things in business.  You cannot go anywhere and buy a SCC, the way you can purchase a machine, acquire a patent, or even hire an employee. That is because true SCCs are different.  They are intellectual assets, not physical assets, and they are the hidden drivers behind most successful modern companies. 

SCC Mix is important and is usually a combination of 3 things:

• Skills: a skill is any manual or mental activity that arise from talent, training, or practice

• Process: a process is any manual or mental systematic series of actions that are directed toward some end.  Include any significant "know-how" resident in your company

• Knowledge:Knowledge includes any information, data, or understanding of facts or principles resident in your company

Significant value to customers & unique to competitors 

What makes it a strategic competency is that the particular combination is also of significant value to your customers and rather unique among competing companies. A SCC becomes a weapon that companies can use to win the battle for competitive advantage. It can be used over a long period of time.  In addition, it's usually knowledge- based. 

SCC must pass 4 specific tests

1. Is it a combination of skills, processes, and knowledge?

2. Does it differentiate the company from the competition?

3. Does it create strong value for the customers?

4. Is it difficult to copy?

Deep diagnostic dive

Finally, if you are still at a loss in locating the big problem areas or the key areas to rebuild your business around, then you will need to move into a more detailed analysis.

By going into a more extensive diagnostic assessment, you will be looking for answers to the following questions:

• How serious is the situation? Is your company critically ill?

• How rapid is the downturn? How rapidly and forcefully must you start the turnaround?

• What caused the downturn? Do the problems continue?

• Does your company mostly need a strategic turnaround (profit improvement) or financial restructuring (debt reduction)? If you need both, which should you tackle first?

• What are the major weaknesses and strengths? Can the business survive a turnaround? What weaknesses jeopardize it?

In order to answer those questions, you may need to go into a much finer level of detailed analysis. I have compiled a free multiple page Diagnostic and audit form which will assist you in "drilling down" into very detailed problem analysis. To get a copy e-mailed to you, click in the box below:

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