January 17th, 2012 80-20 Rule


The 80-20 rule  (also known as the Pareto principle, the law of the vital few and the principle of factor sparsity) states that, for many events, 80% of the effects comes from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb in business; e.g., "80% of your sales comes from 20% of your clients."

 

It is worthy of note that some applications of the Pareto principle appeal to a pseudo-scientific "law of nature" to bolster non-quantifiable or non-verifiable assertions that are "painted with a broad brush". The fact that hedges such as the 90/10, 70/30, and 95/5 "rules" exist is sufficient evidence of the non-exactness of the Pareto principle. On the other hand, there is adequate evidence that "clumping" of factors does occur in most phenomena.

 

The Pareto principle is only tangentially related to Pareto efficiency, which was also introduced by the same economist, Vilfredo Pareto. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

 

The misnamed 80-20 rule (also known as the Pareto principle, the law of the vital few and the principle of factor sparsity) states that for many phenomena 80% of consequences stem from 20% of the causes. The idea has rule-of-thumb application in many places, but it's also commonly and unthinkingly misused.

 

The principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of property in Italy was owned by 20% of the Italian population. Since J. M. Juran adopted the idea, it might better be called "Juran's assumption". That assumption is that most of the results in any situation are determined by a small number of causes. That idea is often applied to data such as sales figures: "20% of clients are responsible for 80% of sales volume." This is testable, it's likely to be roughly right, and it is helpful in your future decision making.

 

It is important to note that many people misconstrue the principle (because of the coincidence that 20+80=100): it could just as well read that 80% of the consequences stem from 10% of the causes. Many people would reject such an "80-10" rule, but it is mathematically meaningful nevertheless.

 

Some hold that the principle is recursive, and may be applied to the top 20% of causes; thus there would be a "64-4" rule, and a "51.8-0.8" rule, and so on. This is a special case of the wider phenomenon of Pareto distributions.

 

The Pareto principle is unrelated to Pareto efficiency, which really was introduced by Vilfredo Pareto.

 

Vilfredo Pareto

Vilfredo Pareto (born July 15, 1848 in France – died August 19, 1923 in Lausanne, Switzerland) made several important contributions to economics, sociology and moral philosophy, especially in the study of income distribution and in the analysis of individuals' choices. He introduced the concept of Pareto efficiency and helped develop the field of microeconomics with ideas such as indifference curves. His theories influenced Benito Mussolini and the development of Italian fascism.

 

The Pareto family moved to Italy in 1858. In 1870, Pareto received an engineering degree from the Turin Polytechnic Institute and he took employment with the Italian state railways. In 1886, he became a lecturer on economics and management at the University of Florence. In 1893, he was appointed as a lecturer in economics at the University of Lausanne in Switzerland where he remained for the rest of his life.

 

In 1906, he made the well-known observation that 20% of the population owned 80% of the property in Italy, later generalised (by Joseph M. Juran and others) into the so-called Pareto principle (for many phenomena 80% of consequences stem from 20% of the causes), and generalised further to the concept of a Pareto distribution.

 

The Pareto index is a measure of the inequality of income distribution.

 

The Pareto chart is a special type of histogram, used to view causes of a problem in order of severity from largest to smallest. It is a statistical tool that graphically shows the 20-80 rule.

 

Pareto's social policies were put on paper in his work, Mind and Society.

 

In his Trattato di Sociologia Generale he put forward the first Social cycle theory in sociology

 

Joseph M. Juran, The Real "Father" of the 80-20 Rule

Joseph M. Juran (born December 1904 in Romania) has been called the "father" of quality. Joseph M. Juran's major contribution to the world has been in the field of quality management. Perhaps most important, he is recognized as the person who added the human dimension to quality broadening it from its statistical origins.

 

In 1937, Dr. Juran conceptualized the Pareto principle, which millions of managers rely on to help separate the "vital few" from the "useful many" in their activities. This is commonly referred to as the 20-80 principle. In 2003, the American Society for Quality is proposing renaming the Pareto Principle the "Juran Principle." Its universal application makes it one of the most useful concepts and tools of modern-day management.

 

Dr. Juran wrote the standard reference work on quality control, the Quality Control Handbook, first published in 1951 and now in its fifth edition. This handbook is the reference for most quality departments and business improvement change agents since it provides important how-to information dedicated to improving an organization's performance by improving the quality of its goods and services.

 

His classic book, Managerial Breakthrough, first published in 1964, presented a more general theory of quality management. It was the first book to describe a step-by-step sequence for breakthrough improvement. This process has evolved into Six Sigma today and is the basis for quality initiatives worldwide.

 

In 1979, Dr. Juran founded Juran Institute, an organization aimed at providing research and pragmatic solutions to enable organizations from any industry to learn the tools and techniques for managing quality.

 

The Juran Trilogy, published in 1986, identified and was accepted worldwide as the basis for quality management. After almost 50 years of research, his trilogy defined three management processes required by all organizations to improve. Quality control, quality improvement and quality planning have become synonymous with Juran and Juran Institute, Inc.

 

Juran describes quality from the customer perspective as having two aspects: higher quality means a greater number of features that meet customers' needs. The second aspect relates to "freedom from trouble": higher quality consists of fewer defects.

 

As a result of the power and clarity of Joseph Juran's thinking and the scope of his influence, business leaders, legions of managers and his fellow theorists worldwide recognize Dr. Juran as one of "the vital few" �a seminal figure in the development of management theory. Juran has contributed more to the field and over a longer period of time than any other person, and yet, feels he has barely scratched the surface of his subject. "My job of contributing to the welfare of my fellow man" writes Juran, is the great unfinished business.

 

How can the 80-20 Rule Help me in Life and Business?

The 80-20 Principle can and should be used by every intelligent person in their daily life. It can multiply the profitability of corporations and the effectiveness of any organization or individual.

 

The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. Of the things you do during your day, only 20 percent really matter. Those 20 percent produce 80 percent of your results. Identify and focus on those things. When the fire drills of the day begin to sap your time, remind yourself of the 20 percent you need to focus on. If something in the schedule has to slip, if something isn't going to get done, make sure it's not part of that 20 percent.

 

- Have a product range? Have a look at how much of your profit comes from each item. Put your effort into the 20% that give you 80% of your sales – your winners.

 

- Selling products or services? Most likely, 80% of your sales come from 20% of your customers- the ones who make the big purchases and are repeat-buyers. Cherish that 20%.

 

- Have a sales force? Have a look at how much of your profit comes from each person. Make sure you reward and retain the 20% that are your winners.

 

- Have an affiliate program? Find the top 5-20% who give you 80% of your income, and make sure you support, encourage and reward your winners.

 

- Do advertising? Have a look at where the sales come from. Then identify the few ads that really pull, and the few places where you run them that really produce. Then refine your winning ads, and run them in those few places that give you the best results.

 

- Check your web traffic logs! Which keywords are bringing you the most traffic? Which search engines? Which websites? You'll find that a small number of keywords, search engines and websites give you the lion's share of your traffic. Nurture them, and build on those strengths!

 

These are only few examples of the use you can make of the Pareto Principle.

 

References

http://en.wikipedia.org/wiki/Pareto_principle

http://www.gassner.co.il/pareto/

 

 

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