The World’s Greatest Planning Tool: The Pareto Principle

Written by: David McClaskey

pareto-principle

How would you like to learn a planning tool that is both widely applicable and easy to use? Such a tool has been generally known since the 1940’s so it has stood the test of time.

Joseph Juran, one of the leading quality gurus of the 20th century, defined and popularized the Pareto principle in the 1940’s. The Pareto principle states that 20% of the items from a given system create 80% of the effect. For example 20% of the items in inventory account for 80% of the value; 20% of the students in a class create 80% of the problems; 20% of the customers a business has account for 80% of the revenue.

I’m sure you could think of countless other examples. That is the point: many things respond to this principle, therefore, it is tremendously useful due to its wide applicability. Juran described the 20% as the “vital few”; and the 80% as the “trivial many”. Therefore, the Pareto concept can be described as either the 80/20 principle or “the trivial many/vital few” principle. In later editions of the Pareto principle as described in “Juran’s Quality Handbook”, Juran changed the term “trivial many” to “useful many.” He made this change because he found that even though any one of those “trivial many” decisions didn’t have much impact by themselves, it did not imply that all those items were useless. So another way to describe the Pareto principle is the “useful many/vital few”.

Use of the Pareto principle in planning:

The purpose of strategic planning is to determine the “vital few” set of strategic objectives to work on that will have the most impact on repositioning the business for future success. In applying the Pareto principle to strategic planning, we are looking for the smallest set of strategic objectives that will yield the biggest impact in the direction that we desire to go. Related to strategic planning, in many cases, if we consider all the objectives we could select, the vital few is usually just one to five of those objectives or less than 1% of the total possible objectives. So in the case of strategic planning, the Pareto principle might be described as the vital few 1-4 of the objectives that will have the biggest impact. A common phrase that describes the Pareto concept as it applies to planning is: “get the biggest bang for your buck.” That is exactly what you’re trying to do. The Pareto principle will help you do that.

See my next blog: What is the biggest mistake usually made in strategic planning?

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