BBA360 Team 2 Project 3 "The Pareto Principle"

1. The Pareto Principle
By: Emily Espinoza
Glen Washuta
Jesse Dillon Hobby
Justin Schaffter
Kim Anderson
Omar Soto
Maribel H. Garcia

2. What we will cover
 The Pareto Principle and Small Business
 The Pareto Principle and Medium Business
 The Pareto Principle and Large Business
 Limitations and issues found with the Pareto Principle

3. Introduction
Created by Vilfredo Pareto in 1906
Vilfredo Pareto was born on July
15, 1848
Pareto was an economist, engineer,
sociologist, and political scientist.

4. The Pareto Principle
 The Pareto Principle states that 20%
of a business’s product accounts for
80% of the business’s profit, thus the
name “the 80/20 rule”.
 Analysis can provide businesses with
important information on what to
manufacture and in what quantity.

5. 80/20 Rule in Small Businesses
“In any series of elements to be controlled, a selected small fraction
in terms of number of elements almost always accounts for a large fraction
in terms of effect.”
- Vilfredo Pareto
By systematically applying the 80/20 Principle to a business, putting
more time and resources into the important facts, you can achieve any goals
you have, faster and with less waste.
 Many businesses have an easy access to dramatic improvements in
profitability by focusing on the most effective areas, eliminating, ignoring,
automating, delegating or retraining the rest; as appropriate.

6. Small Businesses Contemplate
 80% of the revenues are generated by 20% of the customers.
 80% of the profits come from 20% of customers.
 80% of the profit comes from 20% of the products.
 80% of website traffic comes from 20% of pages.
 80% of the advertising results come from 20% of a campaign.
 80% of sales time is spent on 20% of the customers.
 80% of your results come from 20% of your time spent.
 80% of the space is taken by 20% of the inventory.
 80% of the stock comes from 20% of the suppliers.

7. The Pareto Principle in Medium-Sized
Businesses
“Businesses must be aware of this principle as they approach problem
solving.”
-(Burton & Sams, 2005, p.68).
 Companies need to consider what is needed in order to solve a problem
against the outcome once the problem is solved.
If 20% of the problems are solved, they will yield 80% of the results.
“…problems with the largest potential for impact are tackled first.”
- (Burton & Sams, 2005, p.68).

8. Examples of The Pareto Principle in a
Medium-Sized Business
 80% of revenue comes from 20% of customers and products.
 A mid-sized company in Wisconsin is underperforming.
 Made aware of the Pareto Principle; made changes including product line
simplification and product/customer boxing.
 Went from a negative profit to positive profit in three months.
 Provided more resources.
 A more confident organization after using the Pareto Principle.

9. The Pareto Principle in Big Businesses
Study done using companies with multi-million dollars in sales:
62 industrial product & service managers surveyed.
71% of managers agreed that the Pareto Principle applied to their company
influenced their profits.
93% of these managers believed the 80/20 Rule can be changed to improve
a firm’s profitability.
65% of firms with an 80/20 imbalance have tried to address the imbalance.

10. 80/20 Rule in Big Businesses: Four
strategies used to address the
imbalance:
 Substitution: replacing the product, employee, or customer with a more
promising one.
 Revitalization: improving performance in an area (be it product, employee, or
customer) that has declined or reached a plateau after performing at a high level.
 Acceleration: this method is appropriate for relatively new units in an
organization where upward growth is expected. Management wants to speed up
this area.
 Incremental: This strategy adds new customers, products, or employees which
are expected to become high performers.
 An organization is likely to use a mix of these strategies to fit their needs.

11. 80/20 Rule in Big Businesses:
Addressing the imbalance of the
Pareto Principle:
 The goal is to lessen the dependence on the contribution of that 20%.
 Not through diminished performance of that 20% but by increased
performance of the other 80%.
 You want to lessen the ratio: make it closer to 70/20, 60/20, 50/20.
 This is the way you increase your profits; by maximizing the other 80%.

12. 80/20 Rule in Big Businesses: Pitfalls
of changing the 80/20 imbalance:
 If the Pareto Principle cannot be improved, management will have wasted much time,
energy, and effort for nothing.
 Costs will rise due to increased management supervision. Improved revenue must be high
enough to cover new costs.
 Moving too fast to correct the 80/20 condition may weaken your long-term viability.
 All four strategies involve substantial expenditures or investments.
 Altering the 80/20 situation may lead to discrimination among products, employees, or
customers. These groups may be alienated and become unhappy with the organization.

13. Potential problems with the
Pareto Principle
The Pareto Principle is a pattern simplification; “80% of results are generated by 20%
of causes”, that tries to help businesses visualize their operations with the goal of
capitalizing on those causes.
 Many interpret this as 20% of that which is examined is important, and the other
eighty percent trivial.
If twenty percent of your clientele generate eighty percent of your income, wouldn’t
you try to find more clients just like that first twenty percent? Some don’t and choose to
apply the Pareto principle to “focus” on those twenty to keep them safe. It sounds simple
but it can lead to two key problematic scenarios.

14. Potential problems with the
Pareto Principle
The first scenario:
 “If you lose one of the clients that make up that key 20% of your business
income, your profits will take a significant hit.” (Atherton, 2013).
 If a company is supported by only a key few clients that company is taking
a big risk of rapidly losing value by simple client loss, or being overlooked by
buyers as too great a risk if trying to sell the company.
Clients are certainly important to a company’s survival but their
cultivation isn’t the only potential failing of the Pareto Principle. Businesses
are also occasionally applying it to their personnel in the second scenario.

15. Potential problems with the
Pareto Principle
Second scenario:
“Superstar Management” which is the application of the principle that
suggests 20% of your employees produces 80% of your results. Supporters of
this line of thinking would focus their attentions, training or resources, on
those 20% creating “superstars.”
This, like the first, is merely limiting your options under the assumption
that the remaining can never be elevated because of the principle.

16. Potential problems with the
Pareto Principle
By helping your “good” salespeople become better, you are more likely to
reap greater results than by dedicating the same management effort to helping
the fewer “great” salespeople become terrific. In this case, the sheer numbers
work against you spending time only helping manage and improve the few
great workers.” (Pinnacle.com, 2013).
Common sense analysis should lead the way when it comes to business
decisions and while it’s possible to “waste time with unproductive things” care
should be taken to avoid setting aside valuable resources that may make up for
short comings with volume.

17. References
 Atherton, Daniel “Why the Pareto Principle can reduce the value of your business”
Retrieved from http://sellingyourbusiness.com/pareto-principle-reduce-business-value/
 Aa 80/20 Profit Enhancement Case Study: The Pareto Principle. (n.d.).
Retrieved from: http://www.strategex.com/profit_enhancement/pareto.php
 Burton, T. T. & Sams, J. L. (2005). Six sigma for small and mid-sized organizations.
Boca Raton, FL: Ross Publishing.
 Dubinsky, A.J., Hansen, R.W. (1982). Improving marketing productivity: The 80/20 principle
revisited.
California Management Review, 25 (1), 96-105.
 Koch, R. (2004). Living the 80/20 way: Work less, worry less, succeed more, enjoy more.
Maine, MN: Nicholas Brealey
Publishing
 Pinnacle.com “How the 80/20 Rule Helps us be more effective”
Retrieved from http://www.pinnicle.com/Articles/Pareto_Principle/pareto_principle.html
 Using the 80 20 rule in your business. (n.d.).
Retrieved from: http://www.umacs-business-solutions.com/80-20-rule.html