Corporate goals are founded on the fundamentals of people and resource productivity, as well as long-term growth. As a business scales and expands, it focus shifts to serving its market with maximum efficiency through process optimization. The Pareto Principle also known as the 80/20 principle, states that inputs and outputs are always skewed and not generally correlated. This means that a significant outcome can be obtained from a smaller input within a business; and it is all based on the prioritization of work and targets.
We sit in the same chair at home about 80% of the time, we converse with 20% of our friends and family or even interact with only 20% of all phone apps 80% of the time. This is typical of any other fundamental human experience, as well as many sectors within an economy; and is known as “The Pareto Principle.” Dr. Joseph Juran developed this principle in the 19th century based on the observations of Vilfredo Pareto, an Italian economist, that only 80% of the country’s land was owned by 20% of the population.
This phenomenon plays out across various sections in a business; and can be observed while evaluating performance for teams and products as well as customer satisfaction and market size. It is common to see people who appear to be busy all day but accomplish very little. This is almost always because they are preoccupied with low-value tasks while putting off the key activities that could make a significant difference to their results. According to the Pareto Principle, the most valuable tasks you can do each day are often the most difficult and complex, but the payoff and rewards for completing them can be enormous.
80/20 Rule in Business Environment
As a business manager, you may discover that 20% of the firm’s employees drive 80% of the firm’s profits or that 80% of human resource problems are caused by 20% of the employees. This is an excellent evaluation metric to determine the root cause and try to correct it through work redistribution, promotion, bonus rewards, and restructuring. The principle assists management to recognize and reward exceptional performance.
Identify the most productive employees, and charge them with the most important task. Place them in positions of leadership so they can teach others the same principles they follow.Finally, determine the distinctive characteristics, skills, and habits that contribute to their productivity; and use this knowledge to train other employees, increasing the overall productivity of your team.
80/20 rule in Sales
Businesses make money by selling their products and services, and it’s critical to identify the key drivers of overall performance by applying the Pareto Principle to understand where to focus the most energy. When performing product evaluation, management may discover that 80% of the sales volume is attributed to 20% of the products in the product line and resort to focusing on the high-earning product through increased research and development. Furthermore, a company may discover that 80% of its revenue comes from 20% of its customer base and that it has been allocating time and effort equally to both high-profit and low-profit clients. As a business strategy, it will be prudent to concentrate on high-profit clients and get to satisfy them, create a profile for them, and then target customers in the marketplace who fit that profile.
80/20 In Time Management
Most people spread their time thinly across all tasks instead of first focusing on the most important tasks. Entrepreneurs often believe that they must work excessive hours in order to generate profits. This sort of behavior creates a skewed work-life balance, which can be unhealthy, lead to burnout, and decrease productivity. To avoid this cycle, business owners ought to identify the 20% of income-generating tasks that yield the highest payoff and focus on them. Because of limited time and resources, the Pareto Principle will help executives prioritize projects and goals while delegating and dropping tasks. The time saved by applying the 80/20 principles, allows for more time for personal enrichment, relaxation, exercise, mental health, and building of meaningful relationships.
In an ideal scenario, every employee doing similar work in a company should contribute to the same number of outcomes at work. Every effort must yield an equal number of results. However, as previously noted, this is not the case, and a focus on the most important things must be prioritized and implemented. This should not render the remaining 80% useless, but they should be considered as tasks to be completed after the bottleneck has been cleared.
The Pareto Principle is not a hard and fast rule, but rather a guideline for the typical distribution of most things, including effort, reward, and output; and the number does not always have to be 80/20. The principle of the imbalance takes precedence over numbers. It is worth noting that even 15% of employees can complete 100% of all tasks in a company, or 60% of revenues could come from 40% of the customer base. This also does not imply that with only 20% effort, one can achieve an 80% result. The goal is to minimize the effort required for a given task in order to achieve the best results, hence 20% focus must always be given 100% effort.
Author: Victor Otieno