In 1906 Vilfredo Pareto derived a mathematical formula that described how the wealth in his country was distributed, observing that 20 percent of the people owned 80 percent of the money.
This simple observation, or Pareto principle has had far reaching implications for managers. It suggests that the majority of results (80%) are caused by a few key activities (20%). Hence the principle is also known as the 80:20 rule.
How to Use it
You should look for the few activities that bring you have most impact or move you closer to your goals. By focusing on these few activities, the greatest return for effort can be achieved.
Identify what area of activity you want to improve.
Identify what measures you have access to.
Present the information so that it increases across the chart/page
Find the 20% (as so) activities that make most impact.
Focus you effort here.
Consider a small business with eleven product lines.
Some of these lines sell better than others.
Present the sales/profit lines across a scale as shown below.
The point where the Cumulative Value passes 80% demonstrates which sales lines produce the majority of the value to the business.
Therefore, as a manager, you should ensure that line 1,2 and 3 are your focus.
The 80:20 values are only rough estimates and it is a guiding process for managers and should not be used in a prescriptive fashion.
For further information try Richard Koch’s book The 80/20 Principle: The Secret to Success by Achieving More with Less.