You’re not an employee anymore. Nobody tells you what to do.
Yet what you do determines the fate of your business and, in turn, your own.
That’s the reality of being an entrepreneur and business owner.
Learning to direct your energy, time, and money, and that of your company, is essential.
The 80-20 rule is broken
The 80-20 rule advises us to focus on the 20% of inputs—the products, marketing channels, and people—that produce 80% of results, and eliminate the other 80% of inputs that produce only 20% of results.
We focus on the “vital few” and ignore the “trivial many”.
The problem with this is that the 20% that produces 80% of results today is unlikely to be the same driver of our success in the future.
In 2006, iPod sales produces 40% of Apple’s revenue; today, iPod sales account for 0% of Apple’s revenue.
Introducing: The Core-More-Explore Framework
We must protect the core of our business, the 20% today that drives 80% of results, as the Pareto Principle advises.
We must also invest resources in exploring what might later become the core of our business.
We can’t do one or the other.
You can categorize the inputs in a business into three categories:
- Core: The products, channels, and people that produce the majority of revenue and profits today.
- More: The promising growth areas with some traction that, if we invest more in them, offer the easiest growth opportunities, assuming we’ve fully invested in our Core.
- Explore: The completely new, unproven bets, like the iPhone for Apple in 2007, that could later become the Core of our business. (The iPhone today produces over 50% of Apple’s revenue. Yet, I guarantee you that won’t be the case 20 years from now.)
We must protect the Core, optimize the More, and invest in Explore.
All businesses die
No business lasts forever. With a long enough time horizon, every business dies.
However, your goal as an owner and entrepreneur is to build a company that lasts for a long time and grows to a sizable enterprise so you achieve all your financial goals while making the impact you want to make in the world.
How long your business lasts and how large it grows are determined by how well you invest its resources.
For your business to prosper, you must protect what’s working and continually devote a portion of resources toward what might 10X your business in the future.
70-25-5
In most businesses, it’s advisable to invest 70% of resources in Core, 25% in More, and 5% in Explore.
However, if the Core is in permanent decline, such as a business selling an outdated product, the owner should invest more into other areas. As they say, if you find yourself on a leaky ship, it’s sometimes better to find a new ship than to continually patch holes.
The 70-25-5 ratio as related to the Core-More-Explore model implies two important concepts: 1) invest the majority of your resources in the Core of your business and 2) make sure to invest something, but not too much, in exploratory bets.
Turning around a nearly dead business
When my bad decisions nearly killed Amazing, one of my companies, in 2016, I didn’t think we could bring it back to life. We’d “tried everything”, I thought.
The problem was that we lost sight of the business’s core. We launched lots of unrelated, general business courses and threw them into a big, confusing membership.
It was only once we re-focused on what we did best at the time, helping people build Amazon-focused ecommerce businesses, did we turn the business around (and it happened shockingly fast).
“Capitalism is brutal.”
A common quote among investors is “capitalism is brutal”. By that, they mean that competitors are always out to copy, clone, steal, or pummel any business producing good profits.
We must stay ahead by protecting what’s working and continually investing in what could reinvent our business’s future.
In the next newsletter coming out Tuesday of next week, I’ll break down how to put the Core-More-Explore Framework into action.
Talk soon,
—Matt