The Pareto managerial principle: when does it apply?

Abstract

The well-known 80/20 Pareto principle and its refinement into “A”, “B”, and “C” categories give rise to a managerial methodology consisting of three steps: classification; differentiation; and resource allocation. This is an easy-to-implement and extremely effective methodology. It starts with the creation of “Pareto diagrams”, i.e. bar charts of attributes and their relative frequency, presented in descending order. Typically, Pareto diagrams are useful in that they provide managers with a summary of practical information, revealing critical attributes. However, sometimes a Pareto diagram is less informative than it might be, because the relative frequency is almost uniform. The objective of this article is to provide an analytical tool (an index) that employs the above-mentioned methodology to measure the closeness of empirical Pareto diagrams to an “ideal” Pareto diagram. The index developed is based upon entropy.