The 80/20 rule was made by the Italian economist Vilfredo Pareto to describe the unequal wealth distribution in his country. One of the main use of this principle is in the study of business productivity. The principle has its basis from the imbalance of land ownership in Italy, which states that nothing is equal, and the minority always owns the majority. Since it is only an aphorism, one can’t take it as a hard and fast rule or the law.
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Brief Understanding of Pareto’s Principle
Vilfredo observed the 80/20 rule in wealth and population. As per his observation, the conclusion that came out stated that 20% of the population owned 80% of land in Italy. His 80/20 rule was a clear view of the bitter truth of life – things in life are not always distributed evenly. Then on, the Pareto’s principle became applicable to distinct areas such as manufacturing, management, and HR. Also, many client-service based and customer relationship management software programs adopted the 80/20 law as well. Let’s know what exactly is in exact terms.
What is the 80/20 Rule by Pareto?
The 80/20 rule defines how 80% of outcomes result from 20% of all causes. It isn’t a hard and fast mathematical law, but rather just a precept.
Advantages of 80/20 Rule
The simple advantage of the 80/20 rule is that it helps determine the part to reward and the part to fix. That is, whatever the business or an individual deals with, the ratio 80:20 will always help them focus on allocating resources efficiently. For example, let’s assume that if we take up a business, 20% of the customers are driving 80% of the sales. Then, our prime focus will remain on the customers and reward them their loyalties instead of grieving over 20% who bounced back.
Disadvantages of 80/20 Rule
Since Pareto’s principle is merely an observation and not a law, it isn’t right for all terms. That is, the rate of work of 20% of the workforce won’t always be 80%. Maybe, 10% of them are good for nothing; then, the management gets disturbed. So, there the rule bit fails.
Core Principle of the 80/20 Rule
- Identifying the best assets and using them to create maximum value
E.g.:- While studying for the exam, the student must know 80% of the syllabus to focus and other 20% of the syllabus to exempt
How the 80/20 Rule Applies in the Management?
The project managers have a knowledge of the 80/20 rule by Pareto in a way that it reflects on all major components of management, including:-
The Upright Rule
- 80% revenue generation by 20% of the customers
- 80% of the complaints come from 20% of the customers
The Opposite Rule
- 20% of work consumes 80% of the time
- 20% of investors provide 80% of the funding
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