Protected: Pareto Principle
The Pareto Principle is broadly applicable concept that states: 80 percent of the “effects” comes from 20 percent of the “causes.” The originator of the concept was Italian economist Vilfredo Pareto, who observed that 80 percent of the wealth was controlled by 20 percent of the people. The essence of this principle can be applied to many different areas.
- Sales: 80 percent of your sales comes from 20 percent of your customers
- Relationships: 80 percent of your time is spent with 20 percent of the people you know
- Computer Science: 80 percent of the resources are used by 20 percent of the operations
- Business: 80 percent of your income is derived from 20 percent of your activities
It is the last example that forms the basis for an extremely powerful creative thinking tool. It is somewhat related to determining your ‘core competencies’ but mainly geared at identifying the activities that have the most effect on your bottom line.
1. Identify all the internal factors, processes, etc. that contribute to the bottom line.
2. Prioritize them based on the magnitude of their impact.
3. Determine the top 20 percent or so that have the greatest impact, and target the majority (80 percent) of your efforts on those.
4. The remaining 80 percent can be de-emphasized, farmed out, or eliminated.
The Pareto Principle identifies ‘dead wood’ processes no longer applicable to the current business situation. It can serve as a first step in identifying a company’s core competencies as a means of determining what non-core needs get farmed out to other businesses.
EXAMPLE: A company conducts a Pareto Principle self-assessment and determines the “Top 20 Percentile” activities as: new product generation, marketing and customer relations. It decides that these activities should require 80 percent of their overall best effort. It decides to farm out other aspects of its business, like manufacturing and human resources, and eliminate several older, outmoded functions. The result is a better-focused company with lower costs and improved effectiveness in the areas that mean the most to its bottom line.
