The 90/10 Rule at Yum! BrandsRick Wartzman
KFC’s current advertising slogan is “Today Tastes So Good.” Yet what’s most impressive about the fast-food chain is the way it seems to be focused on “tomorrow’s economic performance,” to use Peter Drucker’s words.
KFC’s parent, Yum! Brands, reported on Feb. 6 that its fourth-quarter net income rose 30% as it continues to ride a wave of overseas growth. Yum, which also owns Pizza Hut and Taco Bell, expects to open about 1,500 new stores outside the U.S. this year. That follows a record expansion in 2011, when the Louisville (Ky.)-based company added 656 stores in China and 905 elsewhere abroad.
In all, more than 70% of Yum’s operating profits now flow from international markets—more than double the total of a decade ago. At the same time, Yum has taken steps to revive its flagging domestic operations, but, as Dow Jones observed: “U.S. business hasn’t been its top priority.”
That’s smart. For in this way, Yum is giving life to Drucker’s concept that “the areas of greatest potential for opportunity and results are to be given the fullest resource support—in quantity and quality—before the next promising area gets anything.”
Managing in this manner may appear to be a no-brainer. “But every analysis of actual allocation of resources and efforts in business that I have ever seen or made showed clearly that the bulk of time, work, attention, and money first goes to ‘problems’ rather than to opportunities, and, secondly, to areas where even extraordinarily successful performance will have minimal impact on results,” Drucker wrote in a 1963 Harvard Business Review essay.
One of the hardest things for a manager to remember is that of the 1,000 different situations he or she will be asked to deal with on any given day, only the smallest handful have a shot at moving the enterprise forward in a truly significant way. Management consultant J.M. Juran described this reality in the 1940s when he compared the “trivial many” with the “vital few” and codified the concept in what’s known as the Pareto Principle.
The concept (which Juran named for the Italian economist Vilfredo Pareto) is popularly called the 80/20 rule. It holds that 20% of almost anything will yield 80% of the results. Drucker pushed the formula even further. “A very small number of events—10% to 20% at most—account for 90% of all results,” he wrote, “whereas the great majority of events account for 10% or less of the results.”
This notion has few bounds. “A handful of customers out of many thousands produce the bulk of the orders; a handful of products out of hundreds of items produce the bulk of the volume; and so on,” Drucker noted. “This is true of markets, end uses, and distributive channels. It is equally true of sales efforts: a few salesmen, out of several hundred, always produce two-thirds or more of all new business. It is true in the plant: a handful of production runs account for most of the tonnage. It is true of research: a few men in the laboratory produce all the important innovations, as a rule.”
The corollary to this is just as powerful: “While 90% of the results are being produced by the first 10% of events,” Drucker explained, “90% of the costs are being increased by the remaining and result-less 90% of events.”
The job of management, then, is to make sure that financial capital, technology, and top talent are deployed where most of the results are and where most of the costs aren’t. The temptation often exists, however, to do exactly the opposite.
“The largest group of salesmen (and especially the most effective ones) are usually put on the products that are ‘hard to sell,’” as “managerial vanity” leads to endless attempts to turn losers into winners, Drucker asserted. Meanwhile, “the product that has sensational success in the market—and which, therefore, ought to be pushed all-out—tends to be slighted. ‘It is doing all right without extra effort, after all,’ is the common conclusion.”
Similarly, Drucker added, “research departments, design staffs, market development efforts, even advertising efforts have been shown to be allocated the same way in lots of companies—by transaction rather than by results, by what is difficult rather than by what is productive, by yesterday’s problems rather than by today’s and tomorrow’s opportunities.”
By being highly disciplined, Yum has evidently avoided these hazards. Last year it sold off two businesses, Long John Silver’s and A&W All-American Restaurants, because they had little appeal outside the already-saturated U.S. market. Instead, it is concentrating on those countries that are most hungry for the company’s products: China, India, Africa, Russia, and more.
“Our philosophy is really pretty simple,” the company’s chief financial officer, Rick Carucci, told analysts after the latest earnings report was released. “We reduce company ownership in highly penetrated or underperforming markets, and we increase exposure in emerging and under-penetrated markets.”
When it comes to chicken, KFC is famous for its secret blend of 11 herbs and spices. When it comes to management, the winning blend is 90/10.