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The Pareto Principle | The 80-20 Rule

The Pareto Principle | The 80-20 Rule

The Pareto Principle | The 80-20 RuleThe Pareto Principle – also known as the ’80-20 Rule’ – is one of those ideas that crops up in many places. It is ubiquitous because it is an expression of a general principle of nature. It is an example of a power law. Extremely long rivers are rare. Small ones are very common. A small number of words appear frequently within a language, whilst there are very many words that we hardly use at all.

But what makes the Pareto Principle a valuable version of this phenomenon is that it is easy to articulate and understand. And it is therefore easy for managers to apply, to get better results. Consequently, since Joseph Juran rediscovered and named the idea in the 1930s, it has become an indispensable snippet of knowledge, for anyone in management.

The Origin of the Pareto Principle

Vilfredo Pareto was born in 1848 (died 1923) in Italy. He was a polymath whose main contributions were in the field of economics. One of his interests was income distribution, which he found follows a power law. More particularly, he discovered that 20% of Italy’s population owned 80% of its wealth: hence, the 80-20 rule.

That degree of unfairness remains common. Global income distributions offer similar figures today. It also means that the most wealthy 5% of the population own over half of the world’s wealth.

What is the Pareto Principle?

American quality guru, Joseph Juran, was introduced to the principle by an executive at General Motors, who was studying executive salaries. Their pay inequality followed the same mathematical pattern that Pareto had found over thirty years earlier. And it got Juran thinking…

‘What if the same pattern applied to other things?’

It turned out it did. And, to Juran’s delight, he found that he could attribute around 80 per cent of faults to about 20 per cent of causes. For reasons we can only guess at, American industry took little or no interest in Juran’s findings. But Japanese industry lapped them up. In the 1950s, Juran’s ideas (and those of W Edwards Deming) were instrumental in the transformation of Japanese manufacturing. And that story is one we have visited many times. [see our articles about Eiji Toyoda and Taiichi Ohno]

Definition of the Pareto Principle

The Pareto Principle is simply this:

’80 per cent of what you get comes from 20 per cent of what you do’

That is, a small number of causes tend to account for most of the outcomes we see. Consequently, we also call it ‘the law of the vital few’. This principle applies in many domains, like:

  • Geography: a few rivers deliver most of the fresh water
  • Business: a few businesses make most of the profits
  • Demographics: a few cities account for most of a (developed) country’s population
  • Healthcare: a few patients account for most of the care costs
  • Criminology: a few criminals commit most of the crimes
  • Sales: a few customers or clients account for most of a (B2B) business’s revenues

What is surprising is that, in most of these cases, the numbers match the 80-20 rule. That is, the few are 20% and most is around 80%. The Pareto Principle really only tells us that a small number of causes tend to account for most of the outcomes, so the numbers can be 15-30% of causes account for 60-90% of results.

How to Apply the Pareto Principle

In a word: ‘prioritisation’.

  • Find your vital few problems and address them.
  • Find your vital few customers and serve them.
  • And find your vital few activities, and spend more time optimising them.

What is Your experience of the Pareto Principle?

We’d love to hear your experiences, ideas, and questions. Please leave them in the comments below.

 

 

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