Key Learning Outcomes

  • Learn about this well-known business principle, the Pareto principle, which originated in the 1800s and still has valuable applications in business today.
  • Investigate why, for example, 20% of your wardrobe gets 80% of the wear or 80% of your productivity will come from 20% of your activities.
  • Recognise that the key is to focus on the vital 20%.
  • Use the Pareto principle in time management, client nurture and problem-solving.

Article

This business principle has its origins in the nineteenth century when Italian sociologist and economist, Vilfredo Pareto, observed when studying the distribution of land ownership in Italy, that 80% of the land was owned by 20% of the population. With further study and investigation he found that this principle held in many areas of life right down to his garden where 20% of the pea pods produced 80% of the peas.

Engineer, Dr Joseph Juran, named the principle in the mid-1900s when he discovered that in quality control, 20% of defects caused 80% of the problems. Dr Juran is widely recognised for transforming Japan’s manufacturing industry from sub-standard to world-renowned by using this rule, also referred to as the ‘rule of the vital few’.

If you look at the principle you will find that:

There are a couple of things to keep in mind before we look at how this rule can help in the day-to-day running of the business. The first is that the principle illustrates that there is often an uneven distribution in the results gained from the work put in, but the numbers are not always exactly 80:20 – they could be 90:10 or 70:30. The second thing is that just because 80% of the results might come from 20% of your efforts, you cannot stop at the 80% as often it is that last 20% that makes the difference. Likewise if you own a retail store you might find that 80% of your sales are coming from 20% of your stock; however, you still need the variety and selection to entice customers into your store.

So how can the Pareto principle work for us? The key is to focus on the important 20%. Here are a few examples of how we can make Pareto’s rule work for us in business.[wlm_ismember]

Time management

Make sure that you are using your time to focus on the tasks that are going to yield the most returns. Prioritise your top 20% of tasks each day and watch your productivity improve. Use the tools in the development section of the website to help finetune your skills in this area.

Staff

The principle tells you that 20% of your team will produce 80% of the results. You want to focus on the 20% in terms of recognition and reward. However, you should spend 80% of your time on what is important; therefore, focus on training and working with the other 80% of the team to get them to improve.

Customers

Eighty per cent of your revenue will come from 20% of your customers. The key is to identify the top 20% and ensure you are working closely with them. Our client nurture section will be helpful here. Likewise, you will find that there may be a few customers that cause most of your problems or take up most of your time. It is important to identify these and in some cases it may be a wise business decision to let the client go, allowing you to focus on securing new and more profitable business.

Problem solving

Eighty per cent of the problems in your business will come from 20% of the causes. Once we understand this, the next step becomes easier. Start to monitor what those causes are and then focus on solutions for each one.

Once we start thinking about the 80:20 rule we can see it at work through all aspects of our life. If you do not believe us, take a quick look at your wardrobe – we guarantee that you will find that 20% of what you own gets 80% of the wear. The important thing with the principle is not to use it too rigidly, and use it wisely. The key is to be aware that not every input will have the same degree of output, and we need to ensure that we are working on the important things to ensure that we gain the maximum level of return.[/wlm_ismember]

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