People, assets, inventories, expenses, products can all be segmented into 3 categories based on performance. Even divisions or businesses can be segmented into "keep," "eliminate" or "take a harder look at."

The Rule of Three
A great way to involve the entire team in focusing them on actions that “they” can take towards improving performance

The challenge is to segment the companies problems or opportunities in enough detail to take IMMEDIATE action. I use the traffic light analogy of green, red and yellow. It is important to use only financial accounting data for this analysis. The rule of three is a performancebased measure and as such only the accounting numbers provide the correct data.

Pareto’s Law is a good first step; however, once you have established which 20% of customers, inventory, products etc. represent 80% of your profits you need the next level of segmentation to provide detail for immediate action.

The 80% still represents a large amount of data and money. In one instance we found that 30% of products in the “yellow” category could be given an “end of life” price increase providing acceptable margins for continued manufacture. 10% of the products were simply given a price increase and moved into the “green” category. Some products had been launched and were in the growth mode, but had not yet reached their targets for volume and profits.

It is human nature to move on to the newest product or activity; however, there is a lot more money in the basics of today’s business.

Although each piece will provide good data for decision-making the analysis needs to be put together for a complete assessment. Product margins need the sales/marketing expenses by product to provide a complete picture of profitability. The various segmentations, viewed together will provide guidance for the most appropriate actions in current circumstances.