In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. Pareto was an Italian economist who studied income distribution and found that there is always an elite (even in communist countries) that controls a disproportionate percentage of the wealth.[3]
Pareto’s Principle states that roughly 20% of actions produce 80% of results, or 80% of effects come from 20% of causes. It is a simple and effective economic principal that has been used for decades by business professionals to streamline business operations and produce higher results. It is fundamental to business efficiency and success, and by understanding the rule, it can also be used to streamline our personal lives.
Italian Economist and Sociologist Vilfredo Pareto (1848-1923) observed that 80% of the land in Italy was owned by 20% of the population. While investigating other countries he found the same unequal distribution of income and wealth in each.
Pareto published his observations and mathematical formulas that described his findings. After publication, researchers in other areas of science and business began to find the same unequal distribution in their fields.
The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:
1. 80% of profits come from 20% of customers
2. 80% of complaints come from 20% of customers
3. 80% of profits come from 20% of the spend time
4. 80% of sales come from 20% of products
5. 80% of sales are made by 20% of sales staff
Seven steps to identifying the important causes using Pareto Analysis: [1]
1. Form a table listing the causes and their frequency as a percentage.
2. Arrange the rows in the decreasing order of importance of the causes, i.e. the most important cause first.
3. Add a cumulative percentage column to the table.
4. Plot with causes on x-axis and cumulative percentage on y-axis.
5. Join the above points to form a curve.
6. Plot (on the same graph) a bar graph with causes on x-axis and percent frequency on y-axis.
7. Draw a line at 80% on y-axis parallel to x-axis. Then drop the line at the point of intersection with the curve on x-axis. This point on the x-axis separates the important causes on the left and less important causes on the right.
Figure 1. Simple Example of A Pareto Diagram Using Sample Data [4]
This is a simple example of a Pareto diagram using sample data showing the relative frequency of causes for errors on websites. It enables to see what 20% of cases are causing 80% of the problems and where efforts should be focussed to achieve the greatest improvement.
The value of the Pareto Principle for a project manager is that it reminds to focus on the 20% of things that matter. Of the things we do during our project, only 20% are really important. Those 20% produce 80% of your results. Identify and focus on those things first, but don't totally ignore the remaining 80% of causes.
2. The 80-20 Principle in My Life
Pareto’s Principle states that roughly 20% of actions produce 80% of results, or 80% of effects come from 20% of causes. It is a simple and effective economic principal that has been used for decades by business professionals to streamline business operations and produce higher results. It is fundamental to business efficiency and success, and by understanding the rule, it can also be used to streamline our personal lives.
Italian Economist and Sociologist Vilfredo Pareto (1848-1923) observed that 80% of the land in Italy was owned by 20% of the population. While investigating other countries he found the same unequal distribution of income and wealth in each.
Pareto published his observations and mathematical formulas that described his findings. After publication, researchers in other areas of science and business began to find the same unequal distribution in their fields.
Regulation 80-20 provides a fruitful framework for the effective and efficient use of time and other resources. By focusing on the 20 percent of the area was really productive, I was able to make a significant improvement.
Effectiveness and efficiency can also be achieved by an innovation that makes 20 percent of the effort is done to produce 80% of the total performance. Revolution starts in the productivity of creative thinking. Management needs to be fished many ideas to earn 20% a brilliant idea that will bring amazing results.
This is done by giving priority to the most important tasks and delegate the rest. Good personal management can be done by managing myself optimally. Making use of time and other resources to the productive. I am not waste time doing things that are not useful. Concentrate on myself to do the things that are most valuable and meaningful large.
Base on Pareto’s Principle I can:
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Accomplish More in Less Time. By focusing on activities that produce the most results and eliminating or outsourcing trivial activities, I can free more of my time while accomplishing more. Reason: 20% of activities produce 80% of results.
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Improve My Finances. Everyone’s budget is different, but most major expenses are from debt (credit cards, mortgage, student loans). By attacking prior debts and not acquiring new debt, I can improve my finances dramatically. Reason: 20% of financial decisions result in 80% financial results.
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Make more Money. With increased production resulting from more time spent on vital activities, I will have more time to focus on providing more value. The more value I produce, the more money I make. Reason: 80% of income is derived from 20% of sources.
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Eliminate Stress. Find the small portion of activities that produce the most stress and eliminate them. Reason: 20% of stressful activities produce 80% of the stress.
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Purge the Clutter. Try to donate or sell the possessions that I hardly use. They are contributing to 80% of the dust. :). Reason: 80% of the space on shelves hold clutter.
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Loose Weight. If I cut out the small percentage of foods that contributes the most to weight gain, (fatty foods, fried foods, sweets). And exercise regularly, not only will I loose weight, I willl have more energy and feel much better. Reason: 20% of foods contribute to 80% of weight gain.
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Improve Relationships. Focus on nurturing the small percentage of relationships that provide the most value (spouse, family, close friends). Moments spent and memories made improve the quality of my relationships. Reason: 20% of relationships provide 80% of value.
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Travel Lighter. Most luggage is not necessary, By traveling light, I eliminate most of the hassles of carrying extra baggage. I personally travel with extremely minimal luggage, (one carry on bag). If I think I might need it, leave it. If I can’t live without it, bring it. Reason: 80% of luggage is excess 20% is essential.
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Eliminate Information Overload. Constant bombardment from news, emails, advertisements, and articles :) are taking up time and head space. Cut down on the information consumption to the small percentage that is necessary. Reason: 80% of information useless is 20% is crucial. [2]
3. Summaries
Success by using rule 80/20 means to deepen the focus by creating priorities based on the magnitude of activity. Success will be achieved by focusing on the implementation of some of the most important activities. So, the key is; identify the 20 percent that produces 80 percent of the principle and practice is 80% of 20%.
4. References
1. Wikipedia, Pareto Analysis.
Rahmad Kurniawan
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