Applying the Pareto Principle

In 1941 Joseph M Juran discovered the work of Italian Economist Vilfredo Pareto that would have a profound affect on the course of his life. Pareto had a great interest in studying the social impact of economic systems and policies and undertook a large study of wealth distribution in Italy. The outcome of his study was that 80 percent of Italy’s wealth was controlled by just 20 percent of its population. This 80 / 20 ratio seemed also the same when he broke down incomes in sub regions of Italy.

Pareto became fascinated by the reoccurrence of the 80 / 20 ratio and expanded his research to other European nations. Surprisingly he found a similar ratio in every nation (with the exception of the UK where the ratio was 30 / 70). The so called 80 / 20 rule can still be seen today with a 1992 United Nations report showing that 20 percent of the worlds population control 82.7 percent of the worlds wealth.

When Juran discovered Pareto’s work he was involved in quality control consultancy and began to notice the issues he was encountering were in the Pareto proportions. Eighty percent of the problems with products were as a result of twenty percent of the reported faults. By perusing the twenty percent of the faults that cause the most breakdowns a more efficient method of quality control was achieved.

Juran wrote extensively about applications of the Pareto principle in the field of quality control and inspired many to look for examples of the Pareto principle in other disciplines. The basic 80 / 20 ratio has been reported in many other instances. Many businesses report that eighty percent of their income comes from 20 percent of their customers, that 20 percent of sales staff generate 80 percent of sales and that twenty percent of working time by sales staff generates eighty percent of their sales.

The key to applying the Pareto principle to your particular business is to correctly identify where the ratio exists and to find the correct method to exploit it. In the example of a sales force where 80 percent of sales are generated by 20 percent of the sales force the first stage is to examine the twenty percent of high performers. What do these members of staff have that the other eighty percent don’t have. They could have more experience in the sales field, in which case the method of applying the Pareto principle is to improve their skills with training. You may find that those in the particular sales field who have been there longer and have more contacts, are the twenty percent who perform better. The solution is therefore to concentrate on getting the 80 percent of the staff who have less contacts to do more networking.

In terms of customer care, where the Pareto principle applies, businesses should be identifying the twenty percent of customers that make up the eighty percent of sales and concentrating their efforts on retaining those clients.

Although the Pareto principle is a vague concept dealing with approximate ratios there is a more solid foundation of business thinking underneath. If you encounter a situation where a small percentage of cause has a high percentage of effect and can find factors in that cause that account for it then a relatively small amount of effort can have a much larger effect.

Article Source: http://www.rightbiz.com

Katie is a freelance writer with an interest in graduate recruitment at Pareto

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