Understanding the Principle of Factor Sparsity with Examples

Quick Tip!
It is a common mistake for people to state the solution to a problem as the 80-20 rule, only because the solution fits 80% of the cases. To find the correct solution, it is also important that only 20% of the resources are needed to solve most or all the cases.

The principle of factor sparsity, also known as the Pareto principle, the 80-20 rule, or the law of the vital few, can be defined as the phenomenon wherein a small percentage of a population accounts for a large proportion of a particular characteristic of that population. The principle states that 80 percent of the results come from 20 percent of the actions.

The Pareto principle was named after Italian economist Vilfredo Pareto, who observed that in 1906, 80% of the income and 80% of the land in Italy was owned by approximately 20% of the population. This theory was advanced in 1940 by management consultant Joseph Juran, who named the 80-20 ratio as the Pareto Principle.

This principle has now been used for decades by business professionals to optimize operations and maximize results. The phenomenon can be observed in our daily lives too, which can be used to focus our energy on the tasks which are most productive. The 80-20 rule is not meant to be taken in a literal sense.

The ratio need not always be 80:20, and one can choose any combination, as long as there is a very clear and wide margin between the minority and majority. The numbers of the ratio do not need to add up to hundred either. For a better understanding, let's look at a few examples of the principle of factor sparsity.

• Distribution of wealth and resources on planet Earth, where a small percentage of the population controls a large chunk is a definite case of the Pareto principle.
• Only a small number of people are able to rise above the masses and reach the peak of their profession.

• 80% of the global market is controlled by 20% of businesses.
• 80% of crimes in the world are committed by 20% of all criminals.

• 80% of the resources involved in healthcare are consumed by 20% of the population.
• 20% of healthcare equipment is used in 80% of healthcare procedures.
• 80% of healthcare procedures are conducted by 20% of the doctors/hospitals.
• 20% of health procedures are the cause of 80% of the complications.

• 20% of health hazards will be responsible for 80% of injuries.
• 80% of all finances are put into 20% of all medical research.

The Pareto principle is also important in business and sales.

• Approximately 20% of the employees in a company are responsible for 80% of the company's production.
• Only a small number of entrepreneurs are able to successfully start and run their business in a sustainable manner for a long time to come.
• 80% of a company's inventory is tied up in 20% of the items.

• 80% of production problems come from 20% of production factors.
• 20% of an employee's work time is responsible for 80% of his production.
• The Pareto principle (80-20 rule) is seen to be quite important in marketing and sales. Approximately 80% of a company's revenue comes from 20% of the company's customers.

• In case of software, a minority of the bugs in the program cause most of the problems.
  20% of the investment that a company makes is what leads to 80% of its profits.
• Of all the products created by a company, 20% is responsible for 80% of the sales.
• 80% of complaints come from 20% of consumers.

Apart from business uses, let us look at a few examples of the Pareto principle that we use in our daily lives.

• On an average, most of the telephone calls a person makes is to a small group of people from the entire number list stored in his phone.
• Majority of the expenses made by a person are concentrated on a few select things, such as house rent/mortgage, food, transport, etc.

• When socializing, a person spends most of his time with a select group of people amongst all the persons he knows.
• Investigating which of the 20% of appliances and devices consume 80% of the overall energy will help increase potential savings.

• Choose 20% of the clothes which are used more frequently, and arrange the wardrobe to make these clothes more easily accessible.

• Ideally, 80% of a person's time should be utilized in 20% of activities which are most productive towards achieving his life goals. For example, focus on those activities which produce most money, increase most savings, reduce most stress, and help you live a happier life overall, and cut out the clutter.

One should prioritize the various causal factors while using the 80-20 rule. Tackling cases which have a high difference in ratio is more productive and should be handled first, rather than those which have a low difference.

This alternative management principle claims that, in most organizations, 20% of the population are for a development process, and another 20% are against it. Both these groups will have fixed views, and will not change their stance, no matter what the persuasion.

However, the remaining 60% are found to be interested in the process, but have to be convinced and persuaded to firmly make up their mind. Since both 20% groups cannot be affected, the 20-20-60 rule recommends that the organization should focus on the 60%, as these are the people who are likely to contribute in the future and increase productivity.

One of the best areas to begin the 80/20 rule in your life is on your personal possessions. Look at the 20% of your possessions which bring about 80% of your pleasure or happiness, and focus on those which you are passionate about.

However, following the Pareto principle does not mean that you do only 80% of the work, and ignore the 20%, as building 80% of a bridge is of no use if the remaining 20% is left out. Of course, to be most effective, this rule is not to be followed rigidly, and should be flexible depending on the situation.