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The Pareto Principle is about focusing on factors that have largest impacts on a problem/case solution

Prioritize issues with the Pareto Principle

Pareto`s 80-20 principle is a general rule of thumb that describes an unequal distribution between causes and effects. The principle states that 80% of overall results are driven by 20% of inputs. For example: 80% of work requires 20% effort, 80% of a project requires 20% of time, and 80% revenue comes from 20% of clients. When analyzing case problems, the Pareto rule can be utilized to diagnose big issues that might be caused by a much smaller problem. On the other hand, problems that seemingly look huge might result in only a small issue.

Use the Pareto Principle to logically focus on critical high impact areas

The Pareto Principle highlights a common approach for consultants: solving a problem where you can produce the highest positive impact with the lowest amount of effort because consultants usually have very limited time to work on a problem. During a McKinsey, BCG or Bain interview, you need to find a solution in less than an hour. Therefore, focusing on important aspects of the case is crucial.

Apply the Pareto Principle in case interviews

The Pareto Principle should be intuitive when evaluating options to determine root causes of problems and their solutions. For instance, look at the chart below, the costs per sold product from an analysis of an online store:

Cost Split depicting the pareto principle

Want to see the full case behind the example? View and solve the Madflix case

If you want to reduce the total costs by 10%, you need to save 17.5 cents. By a thorough break-down of costs, you can focus on the ones with the highest impact: distribution and amortization costs.

Reducing only distribution and amortization costs by 10% will yield in savings of 16 cents.

Impact Analysis:

  • Changing 50% of costs positions (distribution and amortization) leads to 91% (16/17.5) of planned cost reduction.
  • In other words, only 50% of possible effort is required (assuming reduction of costs by 10% requires the same effort for every cost position).

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4 Comment(s)
January 27, 2017 09:58 -
Lily

Thank you so much Regis!

January 26, 2017 13:11 -
RĂ©gis

Hi Lily,
My understanding here is that we change 2 out of 4 of the cost types (that's the mentionned 50%), and the impact of working on half of these cost types can lead to 91% of the goal, i.e. reducing the overall costs by 10%.

Cheers from France

January 26, 2017 12:15 -
Lily

What do you mean by " changing 50% of cost positions", when we're reducing or "changing" both distrubution and amoritzation costs cumulatively by 20%? Anyone?

March 07, 2016 14:20 -
Anu

Q1 - "stuff shortage" ?

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