MICROLESSON ON PLANNING & ORGANISATION
The 80-20 Pareto Principle
This principle originates from an Italian economist, Vilfredo Pareto. He realised that 80% of the land in Italy belonged to 20% of the population.
This principle dictates that 80% of results or effects come from 20% of inputs or causes. This effect occurs in many phenomenons in society, work and life.
When there is a need to improve or prioritise resource allocation to some areas, finding 20% of the parts of an activity or an organisation—responsible for 80% of its results—can make a big difference.
Consider that this distribution, although widely applicable in many areas, is not always 80% to 20%. It can range from 90% to 10%, 70/75% to 30/25%, and 60/65% to 40/35%. However, 80% to 20% is the most representative of this distribution.
Real-life examples of this principle at work in the business are as follows:
- 80% of a company’s sales coming from only 20% of its customers. A company that needs to grow its sales can look at the attributes the 20% share and target prospective customers who have those attributes.
- 70% of company expenditure coming from 30% of its operational activities. An attempt to cut cost significantly will look first into 30% of these activities to see those spendings that can be eliminated or reduced for significant savings.
- 80% of the beverages, dominant in a consumer goods market provided by only 20% of the organisations being Coca-cola and Pepsi—while other players share the remaining 20% of the market share. It is an effective method to analyse an industry; to identify the major and minor players.
In project planning management—the 20% of activities that take 80% of the time is called the critical path. It can also describe supply chains; for the 20% of routes that leads to 80% of the destinations for product distribution.
The Pareto principle also has personal applications for improvement. In setting priorities, you can ask what takes 80% of my time in school, in projects or at home? Finding the answer can help you make adjustments to finding time to allocate to other activities.
The Pareto principle is a root cause analysis (RCA) framework. Other related frameworks are Mind Maps, Gantt Charts and Tree Diagrams.