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Apr 9, 2015

why we use Pareto Analysis?

The more you analyze business performance and company position in various external environments the more information you get. This information is used in strategic planning and decision-making. As known, it is really impossible to succeed in business without making plans for the future and without getting yourself ready to face difficulties and challenges. The company may face problems that arise in the internal environment. On top of that there are challenges that show up in external environment, and these challenges do not depend on the company. Thus the only thing a business owner can do is to adapt to such changes. Through various analysis types business owners obtain information on what should be done to improve current performance or to achieve adopted future plans. It should be noted that a great variety of analysis types have been developed by business experts. Some of them deal only with internal environments, while others focus on external markets. However most of analysis types deal with both. These are well known PEST analysis, SWOT analysis, ANOVA and others. Some analysis types come from mathematics and statistics. Pareto is one of them. Pareto analysis is known as statistical method that is widely used in decision making. This method claims that a limited number of tasks and variables influence overall performance. Pareto analysis is also called 80/20 rule which means that by performing 20% of work it is possible to get 80% of benefits. Pareto is used in various business management models for example in quality improvement and performance evaluation. This is to say that 80% of problems are actually caused by 20% of mistakes. The name for Pareto analysis was suggested by business guru Joseph M. Juran who offered to use Italian economist's name Vilfredo Pareto. It was observed that 80% of income in Italy was going to 20% of citizens. Studies were performed in other countries as well and results were pretty much the same. Pareto analysis is used in various business models, as already said above. Some of the rules include •20% of company products and services cause 80% of customer complaints •20% of causes resulting 80% of schedule delays •80% of your revenue comes from 20% of your products and services •80% of company revenues are generated by 20% of sales staff Sure thing this list is not complete. Quality control has so many issues, as well as systems of budgeting and cost control where Pareto is particularly helpful. Continuous improvement is a key principle in quality control and Pareto helps obtain very valuable information in this sense. Besides, Six Sigma and quality control systems use special Pareto diagrams that are very important tools. Pareto analysis is successfully used in combination with other performance evaluation, quality control and strategic management tools. Balanced Scorecard is not an exception here as it uses performance evaluation principle for strategic planning purposes. Pareto model is perfect for improvement of co performance, locating problematic areas and focusing on most profitable products and customers.