The Pareto Principle
The Pareto principle is also known as the 80/20 rule. From your own experience you may have come across it, for example 80% of our business comes from 20% of our customers. The principle itself states that 80% of the effects come from 20% of the causes. Let’s look at this in a little more detail. Cause and effect tend to be strongly related. If I throw a stone at a window (i.e. the cause) and the stone travels through the air, and hits the window then the window breaks. The broken window is the effect. There are many other examples in business such as 80% of profit comes from 20% of our products or services. From sport 80% of our goals come from 20% of our players. Try to think of some examples from your own experience.
The reason that the Pareto principle is used together with the marketing relationship, is that the bulk of your profits and long-term relationships will probably arises from 20% of your customers. Therefore you need to know as much about your customers as possible, and the customer database helps us with this. In fact technology today is ideal for retaining customers, as well as recording new information. As a marketer, you will of course put more of your efforts into your more profitable customers, whilst attempting to move the 80% towards becoming more loyal customers. We are now moving towards customer loyalty, so let’s have a look at a tool that will help us with that.
Shell Directional Policy Matrix
The Shell Directional Policy Matrix is another refinement upon the Boston Matrix. Along the horizontal axis are prospects for sector profitability, and along the vertical axis is a company's competitive capability. As with the GE Business Screen the location of a Strategic Business Unit (SBU) in any cell of the matrix implies different strategic decisions. However decisions often span options and in practice the zones are an irregular shape and do not tend to be accommodated by box shapes. Instead they blend into each other. Each of the zones is described as follows:
Leader - major resources are focused upon the SBU.
Try harder - could be vulnerable over a longer period of time, but fine for now.
Double or quit - gamble on potential major SBU's for the future.
Growth - grow the market by focusing just enough resources here.
Custodial - just like a cash cow, milk it and do not commit any more resources.
Cash Generator - Even more like a cash cow, milk here for expansion elsewhere.
Phased withdrawal - move cash to SBU's with greater potential.
Divest - liquidate or move these assets on a fast as you can.
