Pareto Concept and Management Tool

Concept

Pareto introduced the 80:20 management tool. He first observed the '80/20' principle when researching and analyzing wealth and income distribution trends in nineteenth-century England. This discovery, its implications, and his wider findings appeared in the book: Cours d'conomie Politique (1896/97) (Pareto's 80:20 Rule Theory, 2018). Pareto noted that generally 20 percent of the people owned 80 percent of the wealth as such, this 'predictable imbalance' or the principle of  varying ratios of disproportionate distribution' could be found or applied in other situations. He went on to test his 80-20 principle in other countries, and other distribution scenarios and was able to confirm that the 80:20 Principle.

The Pareto Principle is descriptive in nature as it tends to analyzes, justifies draws conclusions that 80 percent of a product or phenomenon's output often comes from only 20 percent of the available input. For example, a business may receive 80 percent of its income from the sale of only 20 percent of the products available in their inventory (Smith, 2017).

The Pareto Principle suggests that where two related data sets or groups exist (typically cause and effect, or input and output), for example: "80 percent of output is produced by 20 percent of input" "80 percent of outcomes are from 20 percent of causes" "80 percent of contribution comes from 20 percent of the potential contribution available" In 2002, Microsoft announced that 80 percent of errors that occur in their system are caused by 20 percent of all bugs found in their system.

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The American distribution of wealth holds closely to the 80/20 rule. In 2012, 20 percent of Americans held 89 percent of all wealth in America "20 percent of clothes in a wardrobe are worn 80 percent of the time" "20 percent of the tools in a toolbox are used in 80 percent of tasks" "20 percent of the energy use in a household will offer 80 percent of the potential energy savings"

View of the Environment

Pareto theory applies logic to increase effectiveness/efficiency for any situation where there is too much of anything - in business, organizations, work, personal life and anything else.

Often in such situations nothing changes - the situation is allowed to persist due to inertia and because the apparent size of the task is daunting, so people don't know where or how to begin. Pareto theory offers a quick easy way to see clearly what must be retained, and what is unnecessary.

Strategy Evolution

Prioritization and Increasing Productivity: Pareto's principle continues to help people by showing best ways to prioritize resources. Noticing unequal patterns of distribution and acting on this knowledge is a great way to improve businesses and personal productivity. Those who observe this principle are able to prioritize in ways that lead to increased quality, productivity, and profit. Pareto's principle helps people notice patterns and act on them to improve the ways they go about work and production. It helps people decide how to best use resources to make a profit.

Capability Evolution

When confronted with any situation requiring rationalization, streamlining, greater focus, etc., use these steps: Identify the 20 percent that is vital (and which probably enables at least 80 percent of productivity, performance, effectiveness, etc). This is your starting point. Retain this 20 percents, and nothing else, unless it serves a crucial purpose. Test effectiveness and implications of the reduced range/holding.Note that 20 percent is a guide. The actual percentage which represents optimal effectiveness/necessity depends on the situation, and on other considerations, which must be factored into the thinking.

And additionally in organizational Pareto-based change: Ensure proper consultation happens. Communicate and explain clearly to all affected. Devise/agree a transitionary stage to enable a safe change, for example consider forms of storage or archiving of the 'unnecessary' items to be discarded or discontinued, etc., just in case they are needed for emergencies. Ensure adequate warning and leeway is offered so that people affected by the change can make alternative arrangements.

Offer and explain alternatives for options no longer available

For example, in some businesses, 20 percent of employees complete 80 percent of the work. Employers may notice workers who are high producers and consider providing a raise or promotion. Contrarily, they might notice low producers and seek to determine what is leading to low levels of output.In some businesses, 80 percent of sales come from a mere 20% of products. Some products are much more popular than others. Businesses may take notice of what qualities these popular products hold and seek to produce similar products that appeal in the same way.

Organizational Efficiency

A Pareto analysis requires that individuals list changes that are needed or organizational problems. Once the changes or problems are listed, they are ranked in order from the biggest to the least severe. The problems ranked highest in severity should become the main focus for problem resolution or improvement. Focusing on problems, causes and problem resolution contributes to organizational efficiency. Companies operate efficiently when employees identify the root causes of problems and spend time resolving the biggest problems to yield the greatest organizational benefit (Diamond, 2017).

Enhanced Problem-Solving Skills

You can improve your problem-solving skills when you conduct a Pareto analysis, because it enables you to organize work-related problems into cohesive facts. Once you've clearly outlined these facts, you can begin the planning necessary to solve the problems. Members of a group can conduct a Pareto analysis together. Arriving at a group consensus about the issues that require change fosters organizational learning and increases group cohesiveness (Diamond, 2017).

Improved Decision Making

Individuals who conduct a Pareto analysis can measure and compare the impact of changes that take place in an organization. With a focus on resolving problems, the procedures and processes required to make the changes should be documented during a Pareto analysis. This documentation will enable better preparation and improvements in decision making for future changes (Diamond, 2017)

Critique

The theory sounds too simple to adopt in many business situations and may bring potential risks to business. If a business would be left to focus and maintain 20 percent of its customers who generate 80 percent of revenue, the bargaining power of its customers would be too high to imminent losses.

Development of Strategic Management Paradigm

In the 1940s, Dr. Joseph Juran was studying Pareto's work and realized that this 80/20 rule could also be applied to the area of quality control. When looking at defects in products, he observed that most of these defects were being caused by a small number of problems in the production process. He called this principle Pareto's Rule in honor of its founder (Smith, 2017). Reducing errors and increasing efficiencies is the cornerstone of production models such as six sigma.