Tuesday, January 9, 2007

The Pareto Principle Myth

In his 1966 book, The Effective Executive, management guru Peter F. Drucker admonished professional managers to put “first things first.” This expression, later popularized by Stephen Covey in his book, The 7 Habits of Highly Effective People, essentially instructs people to pay to attention to those things that are most important to the success of their company (or their own lives). Drucker embellished his own expression by stating, “If there is one secret to effectiveness, it is concentration. Effective executives do first things first and they do one thing at a time.”

What seems so funny is that virtually anyone who has been around business for any length of time has not only heard of the pareto principle, but can recite its definition and argue the logic of its principle, its reasonableness and its efficacy. This principle essentially says that 20 percent of any set of activities effectively produces 80 percent of the beneficial effects or results from those activities. In business terms, this implies that something on the order of 20 percent of a company’s products generate 80 percent of its profits or revenues, or that 20 percent of the research engineers produce 80 percent of the company’s innovative product ideas. This principle also implies that senior executives should spend the preponderance of their time and attention on those areas that produce the greatest benefits to the future of their company, whether it is developing a new strategy to the market, putting in new manufacturing lines, or recruiting and developing knowledge workers.

But many management consultants who work continually with and coach senior executives of major corporations bemoan that fact that many senior executives’ time seems driven not by what is important, but what is most urgent. The myth is that managers and workers, who always profess to believe in the pareto principle, actually apply it to the way they manage their daily activities and the way they set priorities. In fact, in talking one day at a Critical Chain conference with Fred Weirsma, author of The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market, he observed that getting senior executives to just focus on any single thing that would improve the company’s performance would produce significant benefits.

What is apparent over time is that senior executives tend to be driven by a myriad of issues of the moment—whether it’s a temporary shutdown on the factory floor, a quality problem, adverse publicity about the company’s stock price, or the latest budgeting exercise—issues not necessarily of their choosing and issues that continually diffuse their attention to the point that nothing is followed through consistently or expeditiously. And what’s even more interesting is that when asked, senior executives tend to think they spend much of their time on strategic thinking and problem solving. But recent studies show that most executives spend their lives in 6-7 minute meetings dealing with a multitude of everyday, mundane matters that burn a lot of time and accomplish little towards improving workplace productivity and bottom line performance.

The lesson here is that, whether you are a senior executive or anyone up and down the organization, first, be very clear about and set your priorities based on the significance that your defined tasks have to the long-term sustainability and profitability of the company. And, second, if you really believe in the pareto principle, make sure you allocate the preponderance of your time to the high priority item(s), the ones presenting 80 percent of the potential or expected return on your time. Otherwise, you may be misapplying your time and attention and your company may not be realizing its full potential.


Robin said...

Thank you for blogging, I love Stephen R. Covey and especially his book: The 7 habits of highly effective people. You can read my thoughts about it on my blogsite: http://robins-psychology.blogspot.com/ , GOD BLESS/ Robin

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