The 80/20 Rule

Italian economist Vilfredo Pareto, 1848 – 1923, observed that 80 percent of the land in Italy was owned by 20 percent of the people. This observation was later named the Pareto Principle and is misused to say the 20 percent of everything causes 80 percent of the work. What is the real situation?

The "Old" 80/20 Rule

The 80/20 rule is often quoted as the "old 80/20 rule". I talk with people who first learnt management and engineering skills in the 1940s. They learnt the 50/50 rule, the 60/40 rule, the 90/10 rule, and others. The "old" 80/20 rule came later in management training from America.

I heard a lot about the 80/20 rule from American management experts when America was failing to compete against Japan and Europe. If the 80/20 rule was followed by American management when they were losing the sales battle against the rest of the world, why are American speakers still quoting the same rule today?

The 80/20 Rule Applied to the American Car Industry

In the 1970s, the American car industry focused on the 80/20 rule and, as a result, focused on the 20 percent of effort that produced 80 percent of sales, which was the styling of a car. They lost the battle.

Many American cars were faulty from day one. Americans were usually happy so long as the manufacturer kept fixing the faults. Some cars had so many faults on day one that they were undrivable. Those cars were called lemons. Among cars purchased by my friends, 1 percent of American designed or built cars were lemons.

I was once stuck with a lemon from Ford Australia. The car was so bad I decided to never buy a Ford again. Unfortunately I was stuck with another lemon from Ford a few years later. The second lemon proved to have tires so dangerous that I refused to use the car when I had to take my children anywhere. Both Ford and the leasing company refused to replace the tires. I grew to hate Ford even more.

A tire shop agreed to swap the dangerous tires for better tires. The shop owner had children the same age. He lied to the leasing company to get the leasing company to pay for the changeover. A few years later Ford released the Explorer with deadly faulty tires.

The Japanese focus on the 1 percent of sales that destroy repeat sales, the lemon. The Japanese adopted the theories of an American, W. Edwards Deming, and focused on quality. By working to eliminate the 1 percent of failures in each car part, they reduced the number of lemons and the number of cars that had to continually go back in to the repair shop for minor faults. Americans started buying Japanese cars in large numbers.

As a side effect, the Japanese found the cost of fixing the design was far less than the cost of fixing the cars.

Many European car manufacturers adopted a quality approach and had increased sales success in America. Later the Koreans adopted the same approach and started beating the Americans in several technology areas.

Instead of focusing on the 20 percent of work that created 80 percent of first time sales, the Japanese focused on the 1 percent of work that generated repeat sales. The 1/99 rule beat the 80/20 rule.

Use The Rule That Fits Your Work

I could write for hours on this subject. A better approach is to cut through all the generic stuff and talk face to face about your needs. You can then build the rules of most profit to your business.

I am producing a book on this topic. You will need 10 – 20 hours to read the 200 pages. You will then have to wait until several other people in your business have read the same book. I can cover the most relevant points faster in a customised one hour presentation.

The method you use to find rules is not important. The most important part is that you apply the right rule to focus on what is most important to your business.