Ideas and Solutions

Market Segments

Over time, markets will tend to comprise more market segments. Within each of these segments, the 80/20 law of competition will operate. The leaders in each specialist segment may either be firms operating largely or exclusively in that segment or industry generalists, but their success will be dependent, in each segment, on obtaining the greatest revenue with the lowest expenditure of effort. In each segment, some firms will be much better than others at doing this, and will tend to accumulate segment market share as a result.

Any large firm will operate in a large number of segments, that is, in a large number of customer/product combinations where a different formula is required to maximize revenue relative to effort, and/or where different competitors are met. In some of these segments, the individual large firm will generate large surpluses, and in other segments much lower surpluses (or even deficits). It will tend to be true, therefore, that 80 per cent of surpluses or profits are generated by 20 per cent of segments, and by 20 per cent of customers and by 20 per cent of products. The most profitable segments will tend to (but will not always) be where the firm enjoys the highest market shares, and where the firm has the most loyal customers (loyalty being defined by being longstanding and least likely to defect to competitors).

Within any firm, as with all entities dependent on nature and human attempt, there is likely to be an inequality between inputs and outputs, an imbalance between effort and reward. Externally, this is reflected in the fact that some markets, products and customers are much more profitable than others. Internally, the same principle is reflected by the fact that some resources, be they people, factories, machines or permutations of these, will produce very much more value relative to their cost than will other resources. If we were able to measure it (as we can with some jobs, such as those of salespeople), we would find that some people generate a very large surplus (their attributable share of revenue is very much greater than their full cost), whereas many people generate a small surplus or a deficit. Firms that generate the largest surpluses also tend to have the highest average surplus per employee, but in all firms the true surplus generated by each employee tends to be very unequal: 80 per cent of the surplus is usually generated by 20 per cent of employees. At the lowest level of aggregation of resources within the firm, for example an individual employee, 80 per cent of the value created is likely to be generated in a small part, approximately 20 per cent, of the time when, through a combination of circumstances including personal characteristics and the exact nature of the task, the employee is operating at several times his or her normal level of effectiveness.

The principles of unequal effort and return therefore operate at all levels of business: markets, market segments, products, customers, departments and employees. It is this lack of balance, rather than a notional equilibrium, that characterizes all economic activity. Apparently small differences create large consequences. A product has only to be 10 per cent better value than that of a competing product to generate a sales difference of 50 per cent and a profit difference of 100 per cent.

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