Book: 80/20 Principle: The Secret of achieving more with less
Subject Area: Productivity & Effectiveness
Post number: 6

English version:


The 80/20 Principle states that there is a inbuilt imbalance between causes and effects. A Majority has a small impact and a small minority has a major and dominant impact. Out of 100% of the population, 20% of it will cause the 80% of criminal trouble. 20% of the medicines make 80% of the profit in the Pharmaceutical industry.

As a side note, another major impact of these small major events is documented by noted Researcher Nassim Nicholas Taleb in his book “The Black Swan”. He makes some interesting derivatives out of this extrapolation of thee Pareto principle on the issue of economy. Many people like to get small profits over time than a huge one time profit. And on the reverse They prefer losing money in a bulk that in small decrements.

Based on the 80/20 principle, one must learn to celebrate exceptional performance, rather than raise average efforts! Be Selective, Not exhaustive and focus your effort on the few things that you think you should excel.

The First instance of 80/20 principle applied to corporate success is in revolutionizing Data Quality. Usually 20% of the problems cause 80% of quality issues. The Reason 80/20 principle works best in business is because in effect it is possible to generate 80 percent of the profit with 20 percent of the expenditure!

The Art of 80/20 is not to control the output. But rather to watch and observe which way the wind is blowing and utilise it to our maximum benefit. It requires 80/20 Analysis (Analysing the actual facts and data) and 80/20 Thinking (Assuming the existence of the principle in any realm and acting accordingly).

Identify the product, customer, market segment and the competitive segment that the company makes the most profit. That is part of the core 20% of the company that is driving 80% of the profits. Usually competitive segment is identified by knowing the major competitor to the product! If a product has a different competitor in the market, then it belongs in its own competitive segment.

Customer profitability is the next thing. Two customers who give the same amount of business might still drive different profitability. One of them might be too demanding and exhaustive on the resources driving your profit margin low. Prioritizing and allocating resources to the customer who makes the most profit margin is essential!

The next application of the pareto law reveals that simple is beautiful and beneficial. Complex is ugly and just causes overhead. Because usually the 20% of the core business in simple, while the remaining 80% of it is unnecessarily complex, has a lot of managerial positions and is a waste of resources! Simple doesn’t NOT mean small! But unfortunately, Big tends to get ccomplex and requires conscious effort to keep it simple! In a corporation, there is always a war. The war between the trivial many and the vital few. Be Selective. Not everything has the same importance.

Marketing efforts should be focussed on the top 20% of the products. Service should be focussed on the top 20% of the customers. (Both decided based on profitability! Not on sheer volume). Always keep the core customers happy.

Lets look at the top 10 corporate uses of the Pareto principle in the next post.

Book:
80/20 Principle: The Secret of achieving more with less

Subject Area: Productivity & Effectiveness

Post number: 5

English version:

 

Principle of Least effort - The 80/20 Principle – Pareto principle – Law of the vital few: Names are different, but the principle is the same! It basically states that for a majority of the events – both corporate and personal – 80% of the results come from 20% of the effort.

The greatest myth in the world is to believe in equality. If you still do, Good luck. The universe itself is imbalanced. 99.9999% of matter is found in .00001% space. (Clusted un stars and planets.. the remaining space virtually contain no matter). 82.7% of the worlds income goes to the richest 20% (Survey 1989). 80% of a company’s profit comes from 20% of the products/customers/segment etc;

This law also applies on a personal level. 80% of your disputes with your better half come from 20% of cuaases. Why do psychologist emphasize on the first 20 years of life more while a typical human life span is around 100? Why do the early 20 years have an unequal impact and importance on the rest?

This also applies to Machines. The IC engine (Internal Combustion) wastes 80% of the fuel for combustion and uses the remaining 20% to power the actual drive! Computers are made faster by tuning it to run the most frequently run 20% of the code (e.g.: RISC).

While the ratio 80:20 is note literal (though it is in most cases), the imbalance does exist in some form. 60:40, 99.9:0.1 etc;

The initial discovery of this principle was made in wealth distribution by an Italian economist Pareto. He found that 80% of the wealth was accumulated by 20% of the population. He was surprised to validate his theory across countries across time.  He proposed the systematic and predictable lack of balance as the Pareto Principle.

So why is this law of so much importance? Because it is counter intuitive. Counter educational. We have all been taught that equal efforts should reap equal benefits. But that obviously is not the case. Not all customers are equal. Not all products are equal. Not each day we spend has the same significance. (Think of the day you spent on your public examination vs. your last Sunday when you were rolling in the bed.. Now which one had a greater impact in your life?)

The Point we miss is called feedback loop. In real life, everything is connected. Positive and negative feedback loops run amok. A day started with spilt milk leads to more and more stress. A slight initial advantage disproportionally affects the outcome.

What this means is that, Resources with major effects should be utilized more. Intermediate resources should be pressed to be more productive and weak resources are developed so that they mimic the action of stronger resources.

The Pareto theory, after all plugs-in with the Chaos theory – There is imbalance. But predictable imbalance.  Same as the Chaos theory that says certain characteristic patterns re-occur – albeit with infinite and unpredictable variety!

p.s: Please note this is just a short condensed review / my thoughts of the book and is not intended to infringe on any rights or anything like that. For a complete understanding of the subject, I strongly recommend to buy the book yourself or rent it out from a library and read it.