What is the 80/20 Principle?​ Process and application for operations management

The 80/20 Principle plays an important role in optimizing and improving business performance. In the article below, let's join 1C Vietnam to learn in detail about the concept and process of applying the 80/20 principle in businesses today!

1. What is the 80/20 Principle?​

The 80/20 principle was born based on the original name Pareto principle - an idea formed by Italian economist and sociologist Vilfredo Federico Pareto. Initially, this principle referred to the test result that 80% of Italy's assets were owned by 20% of the population.

Later, the 80/20 principle was considered an implicit rule meaning that everything in life is not equally distributed and does not bring the same output value. Of these, about 80% of the results are caused by 20% of the causes.

In general, the 80/20 principle plays an important role, helping individuals and businesses have more motivation to focus on the 20% important factors that make a difference for the business, instead of spending too much effort. effort, time, effort... give 80% without reaping much results.

At the same time, the 80/20 principle will help administrators allocate time, manage work in the most optimal way, solve problems and work effectively.

2. The meaning of the 80/20 principle for businesses

Applying the 80/20 principle can help businesses optimize performance and focus on important factors to achieve high results. Here are some meanings that the 80/20 principle brings:

• Helps businesses identify and prioritize important work, projects or resources to optimize performance and control progress.
• Applying the 80/20 principle helps businesses manage time effectively and plan long-term strategies.
• Clearly identify the 20% of customers or products that generate 80% of sales revenue, helping businesses focus on loyal customer files and product development.

3. Process of applying the Pareto 80/20 principle in businesses

To apply the Pareto 80/20 principle most correctly, administrators need to follow the following specific processes:

• Identify important factors
• Make a list of causes that need to be done
• Based on the level of negative impact, score the causes with numbers, high or low.
• Put the causes into a group
• Implement a plan to address each cause from high to low level

4. Applying Pareto to enterprise performance management

In theory, applying the Pareto principle in practice is not complicated, businesses can do it easily. For example:

• In business, managers should know that 80% of revenue depends on 20% of customer contributions. Therefore, businesses will make specific calculations, divide 20% of customers into one group and focus on them instead of applying service policies to all customers.
• Businesses providing work management support software need to focus on developing 20% ​​of important features but hold 80% of the value of the software product. This is the group that will focus resources, develop and promote to potential customers.
• For individuals who wish to seek capital, this 80/20 principle can also be applied. About 20% of investors will be able to hold 80% of the capital. So let's talk and cooperate with 20% of large investors, instead of spending a lot of time looking for small investors.

5. Note when applying the 80/20 Pareto principle

The 80/20 principle helps a lot in choosing and arranging work appropriately to produce the best results. To apply this principle effectively, 1C Vietnam would like to send businesses a few important notes:

• Cases where the 80/20 principle should not be applied: When there are not too many differences in groups of people, objects or services, the 80/20 principle will not be truly effective.
• Mistakes when applying the 80/20 principle to business: There are also some cases where errors are encountered when applying this principle to business. One situation is if 80% of the total output will be produced by 20% of the workers. So if the 80/20 principle is applied, the factory will have to reduce the number of workers. This is not appropriate because work is almost automatic and the above 20% of workers will not be able to complete the job with higher efficiency than the remaining 80%.
• Pay attention to the number 80/20: 80/20 is only relative, this number can still change depending on different circumstances and subjects.

In the framework of the above article, 1C Vietnam has joined you to learn what the 80/20 principle is and how to apply this principle in business. To apply the 80/20 principle properly, readers need to follow notes such as: Cases where the 80/20 principle should not be applied, errors when applying the 80/20 principle to business, and relativity of the number 80/20. If you have any questions, please contact us immediately for the most detailed support!