What Is Pareto Analysis?

pIn the early 1900s, Italian economist Vilfredo Pareto, made an interesting observation. He noticed that 80% of the land in Italy was owned by just 20% of the people. But what was more interesting, is that this relationship was repeated in other countries throughout Europe.

Over time, he realised that this 80/20 relationship was not limited to land ownership, or limited to human behaviour. He discovered that even nature exhibits the existence of 80/20 relationships – illustrated by the fact that 20% of the pea pods in Pareto’s garden produced 80% of the peas he harvested …

Pareto published his findings in journals – but his observations gained little attention, and there was no practical application of his theories. However, forty years after Pareto had published his research, Joseph Juran – a business strategist – came across Pareto’s writings, and he wondered if Pareto’s theory could be practically applied to business situations. Was it possible that 80% of business problems were being caused by just 20% of the related issues? Over a series of experiments, he confirmed that Pareto analysis definitely had practical uses within the analysis of business problems.

Juran built on Pareto’s work – applying what he called the Pareto principle to quality management.

The Pareto principle has become an extraordinarily useful tool to business managers in every industry. It helps managers and analysts to focus on the most important businessissues to address – typically:

  • Complaints: 20% of customers generate 80% of the complaints.
  • Key Customers: Less than 20% of customers contribute more than 80% of the company’s profits.
  • Returned Products: 20% of the products in our range generate more than 80% of the returns.
  • Time: 20% of our time produces 80% of the results.
  • Employees: 20% of a team usually produce about 80% of the work
  • Counseling: 20% of staff take up 80% of a manager’s time.
  • Products: 20% of the products bring in 80% of the profit.
  • Reading: 20% of the book contains 80% of the content.
  • Job: 20% of our work gives us 80% of our satisfaction.
  • Speech: 20% of the presentation produces 80% of the impact.
  • Donations: 20% of the people will give 80% of the money.
  • Leadership: 20% of the people will make 80% of the decisions

The Pareto principle provides an organisation with a useful, practical strategy for improving the business: Identify the +- 20% of issues that are causing 80% of the problems, and then solve them.

Note – 80/20 is not rigid, and it also does not need to add up to 100. The key principle is disproportionate ratios between inputs and outputs. So – an observed 70/15 could be an equally valid Pareto ratio for a particular business situation.

About Jeff Walters