The Pareto principle was developed by the Italian sociologist and economist Vilfredo Pareto who stipulated that a small number of causes is responsible for a large percentage of the effect. The ratio he established as standard is 20:80. Hence, 20% of the people will do 80% of the work; at the same time, 20% of machines will accomplish 80% of the work. Inversely, 20% of customers or people will cause 80% of the problems at work, and so on.
The first advantage of the Pareto principle is that it is very applicable in a large number of domains, particularly project management. This enables machinery supervisors and project managers to relocate their resources in a more efficient way to achieve the maximal or optimal level of production. The second advantage is that this principle enables those managers who apply it to set their priorities using a new convincing logic.
The disadvantage of this principle is that it is not always applicable, and that when trying to apply it in a quantitative manner, it is very likely that one will be encountering serious problems. For example, if you 1000 customers, the 20:80 ratio may not apply to them at a given point in time.
The Pareto Principle has been applied in a number of areas in the business field. Michael Porter’s applies this principle by changing its market structure and its suppliers, that is, by setting priorities according to the 20:80 principle. The company is emphasizing most of its efforts on 20% of its suppliers, and at the same time, it is allocating its resources to focus on 20% of the market that is responsible for 80% of its sales and income.
“A theoretical application of Pareto Principle to Michael Porter’s Competitive Forces.” http:/www.informs.org/Conf/NO95/TALKS/TC34.2.html
“Decision Process Guidebook.”