Recent polls this week indicate that Americans look with empathy on small business owners that are forced to close their doors due to impacts of this economy. While there seems to be no shame in the cry for mercy, there is a significant feather for the cap of those who have uncovered the secrets for survival. I observed a sales training specialist this week exclaiming that the answer to our dipping sales efforts is to essentially attempt to break the 80/20 principal by focusing only on those 20% tasks that make 80% of the profits. If Pareto’s Law is truly a law of nature, is that breaking possible?
It all begins with Vilfredo Pareto, an Italian economist and political sociologist who lived from 1848 to 1923. He devised the law of the ‘trivial many and the critical few’, better known as Pareto’s Law, or the 80:20 rule. This rule says that, in many business activities, 80% of the potential value can be achieved from just 20% of the effort, and that one can spend the remaining 80% of effort for relatively little return.
Old Vilfredo might have lived a century ago, but he was spot on. Those who have been in business a long time will confirm the almost universal truth of the 80:20 rule, in many forms.
The wholesale distributor that I work with has over 6000 SKU’s, of those about 300 make up 80% of the business written. While the company struggles in this market, the critical task is to clearly define those 300 items and focus their efforts there. As a result, there will be more productivity, however of the 300 items, 20% will still bring in 80% profit. So where is the benefit?
A friend of mine is a Sales Manager for a Realty office. She has 20 sales staff working under her. About 85% of the business was written by the four top staff. Does that mean that she should lay off the other 16 folks? That is probably not an option. Now we’re closing in on the appropriate solutions.
Let’s look at public education. The standard sized classroom in our local public school districts is 27-35 students. Of those students about 20% are producers and will compete for the highest marks which we all know translates into scholarships and budding futures. Our local districts also offer alternative education to students who have experienced failure. Class sizes were reduced to 10-14. It is important to emphasize that these are classrooms of 10-14 students that have been at the bottom of their previous classes in the traditional setting. I had the privilege of working as an educator and administrator in that environment. The principle plays out there as well, 20% compete for the top grades.
Here is where I can make the benefits of the Pareto principle most visible. Those statistics translate this way: Traditional classrooms saw 8/32 top achievers while Alternative saw 4/12 (12/32) top achievers in classes with reduced size. That not only increases the rate of top achievers by 12.5%, it ultimately decreases the failure rate. Unfortunately we rarely see state boards allocating priority of funds to significantly reduce class size in an effort to improve education. We also see more attorney’s on state education boards than we do sociologists and economists. I wonder if there is a correlation there.
The Pareto Law exists virtually everywhere that any form of production exists. If it can’t be broken, how can we exploit it? Let’s look at the goals we each have for ourselves and our businesses; sales revenue, employee management, personal growth and development. As we collectively look at the applications of Pareto’s Law; do you see any personal and professional applications that have the potential to decrease focus on non profitable energies and move you a step closer? Keep in mind that even as you focus your energies, the law remains and 20% of what you keep doing will still produce 80% of the profits. How does this affect motivation? Can you use the education model to create a solution in your own world? Does a simple reduction really lead to more precision? Please share your observations with us.