Pareto analysis is a business decision-making analysis tool that is based on the famous Pareto Principle, which is also known famously as ‘The 80-20 Rule’. Pareto Analysis is based on the presumption that 80% of a project’s work can be done by doing only 20% of the work. Conversely, it also means that 80% of the problems that arise in a plan or business venture can be traced back to 20% of the causes.
As a decision-making tool, Pareto analysis statistically demarcates a small number of input factors, which can be desirable or undesirable, which have the highest impact on the output of that particular task. Pareto analysis is generally used by business managers, whose approach usually involves conducting a statistical analysis (like a cause and effect analysis) to produce a list of potential problems and the subsequent outcomes of those problems.
Here is a basic breakdown of the methodical process of Pareto analysis:
- Identify the problem/problems being faced.
- Identify the cause of those issues or problems. These issues may be monocausal or multi-causal, they need to be identified and categorized separately.
- Rank the problems by assigning a number for every issue that prioritizes it on the basis of the level of negative impact on the company.
- Organize the problems into groups, for example – client service, sales system issues, etc.
- Create and implement an action plan, focusing on the problems that were ranked first, in order to solve the problems more effectively.
Not all problems will have a high rank in the analysis, and certain small problems may not be worth pursuing at all. By allocating resources to issues that have a higher impact, companies can be sure to solve problems more efficiently by targeting the respective high-impact areas.