Tuesday, 28 October 2014

Paretize Your Business

For the next few weeks we shall be looking at some principles and ratios needed to optimize your business operations as well as some to check if the business is on track.

Today, we will look at the Pareto principle or the 80/20 rule and review its applications for your business. The Pareto principle is a rule of thumb underpinned by a cumbersome Mathematical law (power law). But you needn't understand the law to understand the principle; a cursory look at your surrounding is enough to prove its merits. The principle links cause and effect and is used in determining how to optimally allocate your ‘scarce’ resources. In layman’s terms, Pareto principle states that if 100 factors can cause 100 effects, about 20 of the factors will likely cause 80 of the effects. If I've succeeded in confusing you, let me un-confuse you with the following illustrations.

If you are a kindergarten teacher unlucky to have a perpetually noisy class, 80% of the noise is the handiwork of 20% of your pupils. If you are like my friend, who collects shoes like bees do pollen grains, you’ll wear 20% of the shoes on 80% of your outings. If you are a salary earner, always complaining that your take home cannot take you home, 80% of your monthly income is consumed by 20% of your expenses. And on and on it goes. Actually, the man credited with the principle postulated it when he noticed that 80% of the land in his country was owned by 20% of the population. Can you give other examples of similar phenomena in your surroundings?