Pareto analysis is the concept which is used in the decision-making process where it is assumed that the majority of the problems which are there in the company are due to the small number of causes while few factors are responsible for the success of the company or project while other factors play only supporting role. In simple words, just like in the case of stock markets the stock market index comprises 50 or 100 top stocks of their respective industries, and index movement is guided by the movement of blue-chip stocks in the same way Pareto analysis helps in finding out the main causes behind problems faced by the company as well as the main reasons for the success of the company. In order to better understand this concept, one should look at some of the advantages and disadvantages of Pareto analysis –
Advantages of Pareto Analysis
The Elephant in the Room
The first and foremost advantage of Pareto analysis is that it helps the company in seeing the elephant in the room in the sense that it helps the company in identifying the major issues which are impacting the performance of the company so that company can focus on the major issues which in turn will help the company in solving the issues fast and effective way as once the problem or major reason affecting the company’s performance is identified than half the problem is solved as finding the major cause affecting the performance of the company is a big task.
Easier Decision Making
It helps the company is easier decision making because the whole idea behind using Pareto analysis is to enable the company to identify that 20 percent of causes which is the reason for 80 percent of the problems faced by the company and once the 20 percent causes are known it is easier for the company to take important decisions regarding the solution for those 20 percent causes. In simple words just like in the case of stock markets where there are thousands of listed stocks if you want to invest in blue-chip stocks then you invest only in index stocks and thus it is easier to make the decision regarding the investment.
Elimination of Trivial Things
The company always has to deal with so many things and if the company keeps itself busy in trivial things then it won’t be successful and that is where Pareto analysis comes in handy as it eliminates trivial things or matters and focuses more on important factors affecting the performance of the company.
Disadvantages of Pareto Analysis
Lack of Universal Applicability
The biggest drawback of Pareto analysis is that it has lack of universal applicability implying that it cannot be used everywhere as the assumption that 20 percent of causes are the reason for 80 percent of the problems faced by the company may not hold for all types of companies as in some companies or project every activity assumes equal importance and weightage and in such situations, this analysis is of no use.
Future Uncertainty
Another problem with this analysis is that it is based on past data and since the companies are working in a constantly changing business environment there is no surety that the past will repeat itself. In simple words, just like the past performance of stocks in the case of stock markets is no guarantee that stock will continue to perform in the same way there is no guarantee that the same 20 percent causes will be the reason for 80 percent of the problems.
No Concrete Solution
While Pareto analysis helps in finding out 20 percent of causes responsible for 80 percent of problems but it does not provide any concrete solution about solving those problems and it requires other methods or systems to help in solving the problems. In simple words when you are going on a road and you see a big hole then you will avoid the hole without thinking about how to fill that hole as the real solution will be filling the hole so that others do not fall into the hole in the same way Pareto analysis helps in finding the holes in the company but does not provide the complete solution for filling those holes.
As one can see from the above that Pareto analysis has pros as well as cons and that is the reason why any company thinking of doing Pareto analysis should carefully read the above points and then only should take any decision regarding the Pareto analysis.