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?