The Shannon-Fano algorithm is a variable-length coding technique developed by Claude Shannon and Robert Fano, which involves sorting symbols by frequency and recursively dividing them to create a binary tree for encoding. An example using the word 'speaker' illustrates the encoding, leading to a compression ratio of 3.11 and an average of 2.57 bits per symbol. The algorithm effectively compresses data while the entropy calculation indicates the minimum bits required to encode each character.