October 10, 2020

Understanding 80-20 Rule: In Pursuit Of It’s Background Principle & Application

What Is the 80-20 Rule? The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. Although the 80-20 axiom is frequently used in business and economics, you can apply the concept to any field—such as wealth distribution, personal finance, spending habits, and even infidelity in personal relationships.
Key Takeaways:
(1) The 80-20 rule maintains that 80% of outcomes (outputs) come from 20% of causes (inputs).
(2) In the 80-20 rule, you prioritize the 20% of factors that will produce the best results.
(3) A principle of the 80-20 rule is to identify an entity’s best assets and use them efficiently to create maximum value.
(4) This “rule” is a precept, not a hard-and-fast mathematical law.
Understanding the 80-20 Rule: You may think of the 80-20 rule as simple cause and effect: 80% of outcomes (outputs) come from 20% of causes (inputs). The rule is often used to point out that 80% of a company’s revenue is generated by 20% of its customers. Viewed in this way, then it might be advantageous for a company to focus on the 20% of clients that are responsible for 80% of revenues and market specifically to them—to help retain those clients, and acquire new clients with similar characteristics . This rule is actually based on efficiency. We can also understand this principle like this; you get 80% of your studying done in 20% of your time actually spent on studying. Think to when you’re studying for 5 hour’s you spend a lot of time being distracted, re-reading, thinking about other things, daydreaming about your future, or you leave to go grab a coffee. 20% of 5 hours is 1 hour, so in theory you only need 1 hour of studying to achieve 5 hours of “studying”. The rest of the time will be spent on your phone, checking Facebook or another website, or simply zoning out in moments of lost focus.
Background of 80-20 Rule: The 80-20 rule—also known as the Pareto principle and applied in Pareto analysis—was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century. It was introduced in 1906 by Italian economist Vilfredo Pareto, best known for the concepts of Pareto efficiency. Pareto noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto expanded this principle to macroeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population.
Inputs and outputs simply represent different units, so the percentage of inputs and outputs does not need to equal 100%.
Benefits of 80-20 Rule: The 80/20 rule can help you identify where the majority of your time, money or energy is best spent. Using the 80/20 rule, you can determine achievable goals and outline specific tasks to reach them and stay focused on what makes the most impact. Here are just a few benefits the 80/20 rule provides:
(1) Improved time management: By identifying tasks that yield the most results, you can organize your day to focus on tasks that have the most significant impact on your work.
(2) More effective leadership: If you want to improve your leadership skills, you can use the 80/20 rule to make time for socializing with your team, serving as a mentor and seeking other opportunities to build trust and team unity.
(3) Better use of company resources: The 80/20 rule can help you better utilize your company’s time and efforts to research competitors or industry trends, streamline hiring procedures and improve company culture.
Examples of 80-20 Rule:
(1)20% of seeds planted result in 80% of the flowers
(2)20% of the world has 80% of the wealth
(3) 20% of occupational safety hazards lead to 80% of the injuries.
(4) You wear 20% of your clothes 80% of the time.
(5) In the environment, 80% of the world’s pollution comes from 20% of the factories.
How to apply 80-20 Rule : Steps to apply the 80/20 Rule
(1) Identify all your daily/weekly tasks.
(2) Identify key tasks.
(3) What are the tasks that give you more return?
(4) Brainstorm how you can reduce or transfer the tasks that give you less return.
(5) Create a plan to do more that brings you more value.
(6) Use 80/20 to prioritize any project you’re working on.
(7) Set a plan to focus on activities that produce the most results.
How to set goals based on the 80/20 Rule
(1) Identify your key tasks based on your goals. What’s blocking you? Make a list of your constraints. What’s standing in the way of your priorities? Together with your team, come up with a plan to unblock. Take this opportunity to clarify the goals and visions with your cross-functional team. This is also an opportunity to collect feedback.
(2) Clarify and unblock. More clarity will help you and your team have a better vision of your goals and what you need to do in order to achieve those goals. Removing impediments opens the door to more focus, keep in mind that we want to maximize the value of focusing on tasks that will give you more return.
(3) Use the 80/20 framework. After you have evaluated your goals and tasks using the 80/20 framework, it’s so much easier to focus on the right things. Since you’ll be focusing on what will bring you more value, you’ll start to see the results faster. This can also be another incentive to continue to focus on what matters the most.
(4) Work smarter. This should be a constant basis in our daily lives: evaluate, prioritize, focus, and continuously work. Don’t be discouraged, work smarter, and help your team to work towards their goals.
Often Misinterpreted: The 80-20 rule is a precept, not a hard-and-fast mathematical law. In the rule, it is a coincidence that 80% and 20% equal 100%. Inputs and outputs simply represent different units, so the percentage of inputs and outputs does not need to equal 100%.
(The author is civil engineer by profession. Views are his own)

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