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How can Pareto analysis improve your decision-making skills?

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You may have heard of the Pareto principle, also known as the 80/20 rule, which states that 80% of the results come from 20% of the causes. But how can you apply this principle to improve your decision-making skills as a manager? In this article, we will introduce you to Pareto analysis, a simple and powerful tool that can help you prioritize your actions, identify the root causes of problems, and allocate your resources effectively.

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Marwan Ayesh PMP Certified

Managing Director | Interim General Manager and Consultant

1 What is Pareto analysis?

Pareto analysis is a technique that uses a bar chart and a line graph to display the frequency or impact of different factors or categories related to a specific issue or goal. The bars are arranged in descending order of magnitude, and the line shows the cumulative percentage of the total. The idea is to find the point where the line crosses 80%, which indicates the most significant or influential factors or categories that account for 80% of the results.

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Marwan Ayesh PMP Certified

Managing Director | Interim General Manager and Consultant
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Pareto analysis lists the impact of multi-issues and their weights on the outcomes individually. This will assist enable decision-making to direct resources to resolve the vital few that contribute to the most significant results.

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2 How to perform Pareto analysis?

To perform Pareto analysis, you need to first define your issue or goal and the unit of measurement. Then, identify the factors or categories that affect or contribute to your issue or goal. After collecting and analyzing data for each factor or category over a specific period of time, calculate the frequency or impact of each factor or category and the percentage of the total. A bar chart with the factors or categories on the x-axis and the frequency or impact on the y-axis, in descending order, should be drawn next. Additionally, draw a line graph with the cumulative percentage of the total on the secondary y-axis, starting from zero at the first bar and ending at 100% at the last bar. Finally, identify where the line crosses 80%, marking it with a vertical line. This is known as the Pareto point which separates the vital few from the trivial many.

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Puneet Dang

?? Strategy & Growth Leader | Author | Founder of EDZER | Ex-Marsh McLennan | Helped over 27,000 Job Seekers | AI & EdTech Innovator | 5x LinkedIn Top Leadership Voice
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Pareto analysis is a powerful tool for prioritizing and decision-making. In my edtech startup journey, coupled with my background in financial analysis and risk consulting, I've leveraged this principle numerous times to hone in on the critical few drivers impacting our goals. Visualizing this data on a chart provides clarity, helping teams discern where their efforts can yield the most significant impact, ensuring resources are efficiently allocated.

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3 How to use Pareto analysis for decision-making?

Pareto analysis can help you improve your decision-making skills in several ways. For instance, it can help you prioritize your actions by focusing on the few factors that have the most impact on your issue or goal, saving time and effort. Additionally, it can be used to identify the root causes of problems and allocate resources effectively. For example, if you want to increase customer satisfaction, you can use Pareto analysis to identify the main sources of complaints and address them first. If you want to reduce defects, you can analyze which processes, machines, or materials are causing the most errors and fix them. And if you want to boost sales, Pareto analysis can help you determine which products, customers, or regions generate the most revenue and invest accordingly.

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4 What are the benefits of Pareto analysis?

As a manager, Pareto analysis can offer several benefits. It can enhance your analytical and problem-solving skills by allowing you to collect, organize, and interpret data. Additionally, it can improve your communication and presentation skills by creating clear and concise visual aids. Finally, it can increase your productivity and performance by optimizing work processes and eliminating waste.

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Puneet Dang

?? Strategy & Growth Leader | Author | Founder of EDZER | Ex-Marsh McLennan | Helped over 27,000 Job Seekers | AI & EdTech Innovator | 5x LinkedIn Top Leadership Voice
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As an edtech founder with roots in financial analysis and risk consulting, I can attest to the transformative power of Pareto analysis for managerial roles. It not only sharpens one's analytical prowess but, by visualizing core issues, paves the way for streamlined operations. This methodology has consistently helped in discerning high-impact areas, ensuring our team's efforts are both targeted and effective.

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5 What are the limitations of Pareto analysis?

Pareto analysis is not a flawless or comprehensive tool and there are some limitations you should be aware of. To get the most out of Pareto analysis, you should always verify your data sources and methods for accuracy. Additionally, Pareto analysis can identify the most significant factors or categories, but it cannot provide causal relationships or solutions. Therefore, it should be used in conjunction with other tools and techniques such as root cause analysis, brainstorming, or action planning. Additionally, Pareto analysis assumes each factor or category is independent and separate, but this may not be the case in reality. As such, you should always consider the possible effects or consequences of changing one factor or category on another.

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Puneet Dang

?? Strategy & Growth Leader | Author | Founder of EDZER | Ex-Marsh McLennan | Helped over 27,000 Job Seekers | AI & EdTech Innovator | 5x LinkedIn Top Leadership Voice
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Having utilized Pareto analysis extensively in shaping my edtech venture and informed by my background in risk consulting, I recognize its constraints. It's pivotal to corroborate data integrity and remember that while Pareto sheds light on significant pain points, it doesn't necessarily diagnose their root causes. The marriage of Pareto with other analytical instruments ensures we're not just identifying problems, but also architecting holistic solutions.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Puneet Dang

?? Strategy & Growth Leader | Author | Founder of EDZER | Ex-Marsh McLennan | Helped over 27,000 Job Seekers | AI & EdTech Innovator | 5x LinkedIn Top Leadership Voice
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In my journey as an edtech founder, and drawing upon my experience in financial analysis and marketing, I've realized that beyond analytical tools, the human element plays a paramount role. There was an instance where Pareto analysis spotlighted a major challenge in our user engagement, but it was the candid feedback from a student-user that truly illuminated the root cause. Thus, while structured analyses are invaluable, the qualitative insights from real-world interactions often provide the depth and context crucial for transformative solutions.

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How can Pareto analysis improve your decision-making skills?

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6

1 What is Pareto analysis?

2 How to perform Pareto analysis?

3 How to use Pareto analysis for decision-making?

4 What are the benefits of Pareto analysis?

5 What are the limitations of Pareto analysis?

6 Here’s what else to consider

Management

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How can Pareto analysis improve your decision-making skills?

1

2

3

4

5

6

1 What is Pareto analysis?

2 How to perform Pareto analysis?

3 How to use Pareto analysis for decision-making?

4 What are the benefits of Pareto analysis?

5 What are the limitations of Pareto analysis?

6 Here’s what else to consider

Management

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