A strange economic principle first outlined by an Italian
Professor Vilfredo Pareto (1848-1923) discovered an imbalance in the
distribution of wealth and income in nineteenth century England. Vilfredo
Pareto is widely known for his law of income distribution. In the 1860s, he
found that the majority of the wealth and income went to a minority of people.
In percentage terms 80 percent of the income and wealth went to 20 percent of
the population.
The Pareto rule is the observation that if you divide the world into causes and results, relatively few causes (roughly 20 percent) nearly always lead to most of the results (roughly 80 percent). It is the observation that a small number of events give rise to the majority effects. Most consequences come from few causes. The great majority of outputs come from a small minority of inputs. In an industrial world, Pareto’s rule was found to apply in an increasing number of situations. Pareto’s rule is a fact of life in the world of selling and sales force management: 80 percent of sales are made by 20 percent of the sales force. Project managers know that 20 percent of the work (the first 10 percent and last 10 percent) consume 80 percent of one’s time and resources. The value of the Pareto principle for a manager is that it reminds one to focus on the 20 percent that matters.
The Pareto rule is the observation that if you divide the world into causes and results, relatively few causes (roughly 20 percent) nearly always lead to most of the results (roughly 80 percent). It is the observation that a small number of events give rise to the majority effects. Most consequences come from few causes. The great majority of outputs come from a small minority of inputs. In an industrial world, Pareto’s rule was found to apply in an increasing number of situations. Pareto’s rule is a fact of life in the world of selling and sales force management: 80 percent of sales are made by 20 percent of the sales force. Project managers know that 20 percent of the work (the first 10 percent and last 10 percent) consume 80 percent of one’s time and resources. The value of the Pareto principle for a manager is that it reminds one to focus on the 20 percent that matters.
Pareto’s principle, 80/20 rule should serve as a daily
reminder to focus 80 percent of one’s time and energy on the 20 percent of
one’s work that is really important. Moreover many researchers have confirmed
that the rule applies to many other phenomena, including the distribution of
measured defects. For instance, it has been found that 80 percent of the
observed defects on a product or in a process can be attributed to 20 percent
of the possible causes. The 80/20 principle asserts that 20 percent of
products, customers or employees are really responsible for about 80 percent of
profits. Living the 80/20 way enables anyone to get extraordinary results
without extraordinary efforts. In a way this leads to the idea of achievement islands which means that the
small time periods when you are in your most productive or creative.
A small
amounts of our energy – leads to – most great things in our lives.
A small portion
of our time- leads to- most of our happiness and fulfillment
Definition
Pareto’s rule states that a small number of causes are
responsible for a large percentage of the effect, in a ratio of about 20:80.
This means that for many phenomena, 20 percent invested inputs are responsible
for 80 percent of the results obtained. In another words 80 percent
consequences originate from 20 percent of the causes. The 80/20 rule means that
a few (20 percent) are vital and many (80 percent) are trivial. Dr. Joseph M.
Juran called Pareto principle as the ‘vital few and trivial many.’ Joseph Juran
popularized the Pareto principle in the 1950s by showing that it can be applied
to a variety of situations, especially quality problems. The rule is also
called ‘the law of the vital few’ or the principle of factor sparsity.
For example IBM found that, on average, 80 percent of the
run time of a software application is due to only 20 percent of the lines of
code. This realization helped them streamline the most important lines of code
and speed up their applications by working on the lines of code that were 16
times (20 %) as important. According to factor 16, the individuals in the 20-
percent group are 16 times as important as those in the 80- percent group.
Pareto analysis
Pareto charts are one tool we can use to help us be more
effective in tracking down the sources of problems and focusing our efforts
where they will have the biggest effect. This is known as pinpointing or
localizing, a problem. Pareto charts break a big problem into its parts and
identify which parts are most important. A Pareto chart is a special kind of
bar chart where each bar represents a different category or part of a problem.
The tallest bars on the chart represent that parts that contribute the most to
the problem. By focusing our efforts on the tall bars, we can usually get the
most from limited resources and maximize our gains. That is because usually it
takes just as much effort to cut the tallest bar in half as it does to cut the
smallest bar in half.
Pareto thinking
The 80/20 rule asserts that approximately 80 percent of the
effects generated by any large system are caused by 20 percent of the variables
in that system. The 80 percent of a product’s usage involves 20 percent of its
features. In a city’s traffic control system, 80 percent of a city’s traffic is
on 20 percent of its roads. The 80 percent of your website traffic comes 20
percent of your pages. The 80 percent of a company’s revenue comes from 20
percent of its products. In a company or industry, 80 percent of innovation
comes from 20 percent of the people. The 80 percent of your success comes from
20 percent of your efforts. The 80 percent of your problems are a result
of the same 20 percent of your issues. In
machinery, 80 percent of errors are caused by 20 percent of the components. In
an organization, 80 percent of its progress comes 20 percent of the effort. Out
of 100 % of the people, 20 percent are making 80 percent of the difference. The
other 80 percent make 20 percent of the difference. Top 20s have a better way
of thinking, learning and communicating. The 80 percent of our happiness or
success is tied to the 20 percent of the inside world. The 80 percent of the
profits in an endeavour will be derived from 20 percent of the segments (or
client groups). In general 20 percent of your clients yield 80 percent of your
profits. Below 20 percent of your total number of friends
contribute the great majority of happiness and meaning to life. In summary, a
small number of events give rise to the majority of effects. Most consequences
come from few causes.
Practical applications
Personal productivity – The 80 percent of one’s time is
spent on the trivial many activities. But in order to improve your
productivity, you concentrate on the vital 20 percent. The key is to identify
those vial few activities, actions, products or programs.
Costs – to reduce costs, identify which 20 percent are using
80 percent of the resources.
Customer profitability – In most successful companies, some
customers can be more profitable than others. Many companies struggle to
measure the profitability of customers, distributors or agents. If they use
80-20 strategy, such companies can definitely profit from their customer
portfolio.
‘Critical few and trivial many’
Achieve more with less
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