Actually understanding the Pareto Principle
The Pareto Principle, also known as the 80/20 rule, is a management theory developed by Joseph M. Juran that states that a majority of the effects come from a minority of the causes. It takes its name from the underlying math by . The common example uses states that 80% of the effects are produced by 20 percent of the causes, however this is widely misinterpreted as the rule. Unlike the example the rule specifically points out that the ratios are not likely 80/20 and this is a generalization.
This analysis is used to identify the most important factors in a system, process or organization and to prioritize efforts to improve it. According to Juran, by focusing on the "vital few" causes of problems in quality control, improvements can be made cheaply and quickly. The Pareto Analysis is widely used in project management, quality control, and business decision-making to help identify the most impactful areas to focus on, rather than spreading efforts evenly across all areas.
We highly suggest learning the actual Pareto Principle from the following (with examples) along with its included video:
How does this analysis really work & why is 80/20 misleading?
Many people assume 80% of business is done by 20% of clients or accounts, and the reverse, 20% of business is done by 80% of clients or accounts.
This isn’t really true, as 80% and 20% is just a commonly used example from an outdated eyeball assumption from ‘s work, which is true only under limited circumstances. The term 80/20 is shorthand for the general principle at work. who popularized the idea of the principle in management frequently recognized that the actual distribution between the “the vital few and the useful many” could be 90/10 or 75/25 etc.
Consequently it is highly unlikely that your distribution will be 80/20.
Dealing with the Misconception
To make this easier for you when people don’t understand this wrinkle, we provide a sheet on the assumptions of 80% and 20% for the Vital Few and the Useful Many, as a comparison.
Note: They are the technically wrong answers, but they are the frequently asked answer.
We also provide the right answers.
The Awkward Zone and distinguishing the categories.
As the above article and video states, Juran suggested it is best to separate this into the following categories:
Most people get the distinction between the categories wrong, because they eyeball it.
We fix this in this analysis by determining “breakpoints”, or points that distinguish (based on your tolerances) when the line is flattening and actually doing the math.
This is especially useful when you have a gradual slope where some of your vital few blends into the awkward zone or where the awkward zone blends into the useful many.
Put bluntly, it’s a curve, and we can measure it and provide a range of tolerances so that you can determine a zone where the curve is flattening.