Pareto analysis

Abstract

Abstract Pareto analysis is based on the observation that operational results and economic wealth are not distributed evenly and that some inputs contribute more than others. It is referred to as the “80/20 rule,” a nomenclature which has popularized a complex economic concept introduced by Vilfredo Pareto, a nineteenth‐century Italian economist. The underlying concept is that the majority of problems (roughly 80%) are often caused by a small number of the sources (roughly 20%). The implication of the 80/20 rule is that most efforts are not efficient and should be reduced. The strategic objective would be to leverage and maximize the efforts that produce most of the results. In strategic management, Pareto analysis is linked to the analysis of an organization's internal environment. It is particularly useful to identify internal strengths and weaknesses through the evaluation of an organization's internal resources and capabilities, which are the source of its core competencies and which in turn, create competitive advantage.