THE PARETO PRINCIPLE (CROWN AS KING)
Use to identify where you need to concentrate your efforts to maximise results.
The Pareto Principle is possibly the single most useful theory that a manager can know about. Why? Because it can be used to reduce significantly a manager’s workload and is applicable in a huge range of circumstances.
The principle was devised by the Italian economist Vilfredo Pareto. He first used it to demonstrate that 80% of the wealth in Italy was owned by 20% of the population. Joseph Juran, the quality guru (see Theory 78), stumbled across his work and helped to popularise its use.
It was quickly found that the 80/20 split could be applied to a vast array of social and business situations. For example, 80% of an organisation’s sales are made to 20% of its customers and 80% of the labour problems in an organisation are caused by 20% of the workers.
This theory of ‘the vital few and the trivial many’ does not pretend to be a precise measure of any phenomenon. The split may be 70/30 or 90/10. It’s a rule of thumb that can be applied to a wide range of questions relating to staff, products, resources, customers and suppliers, but the precise split will differ from instance to instance.
HOW TO USE IT
The following are just a few examples of how you might use the Pareto Principle.
- 20% of your staff will cause 80% of your staffing problems. Sort out the 20% and leave the others alone.
- 20% of your staff contribute 80% of your productivity/profits/sales etc. Reward them!
- 20% of your customers generate 80% of your sales. Make sure you look after your golden egg-laying customers.
- 20% of your debtors owe 80% of debts outstanding. Concentrate collection efforts on these people.
- 80% of complaints originate with 20% of customers. Identify why there is a problem with these particular customers and tackle it (see Section 10). Usually you will be able to resolve the problem and although customers are usually right, some are just not worth the hassle.
- 80% of expenses incurred by the organisation will be in 20% of the budget headings. It is these big cost centres that you need to keep under close observation and where you should look for savings.
- 80% of your income will be earned from 20% of your products. You need to guard against over-reliance on a small number of products. Your future survival depends on it.
QUESTION TO ASK
- Which three areas can I use this theory on immediately?
- Which 20% of the jobs I do add most value?