Saturday, December 31, 2005

Follow Mitchell's Law to Achieve Your Dreams in 2006

Good morning, Billion Dollar Business Creators!

Are you feeling motivated this morning? I hope so. I certainly know that I am.

Let me share one idea with you . . . that may be more valuable than any other idea you can apply in 2006.

Management gurus all have their ideas about how to make you more effective. Here are some of the practices that they advocate:

Time management
Management by objectives
Six Sigma quality
Non-stop innovation
Top grading
Team building
Employee ownership

and on it goes.

There's a problem with what they propose: Such solutions ignore the potential of compound expansion of benefits.

Let me explain. If you gain a benefit in one area, your organization's results improve only by that amount . . . unless the benefit triggers a gain in another area. It's like having a saving account that earns interest for one year, but doesn't earn any interest after that year.

Why does that occur? Competitors are improving every year. By next year, they have matched your gain in some other area and your improvement no longer adds more profit and cash flow.

When you link together larger gains that multiply their organizational benefits faster than competitors, you create ever increasing scales of benefit.

Here's an example. Imagine that a company finds a way to expand its sales by 20 times. That's a great breakthrough. The first year profit gain is likely to be equivalent of 30 years of normal progress!

But that's just the beginning. Now have the same company find a way to reduce its cost of providing its offerings by 95%. These cost savings multiply over the increased volume. The first year gain in earnings and profits is likely to be the equivalent of 600 years of normal progress (profits are now approximately 40,000 percent of the beginning level).

Don't stop now. Next have the same company be able to expand the market growth by 20 times annually. This multiples sales, profits and cash flow even faster because the company's ability to gain market share from the first improvement is further increased. The first year gain in earnings and profits is likely to be the equivalent of 12,000 years of normal progress (profits are now approximately 80,000 percent of the beginning level). And each year of market growth at that rate adds 20 times more profits.

We can keep going by putting in innovations to reduce capital needs by 95%. This means that free cash flow will increase by several hundred thousand percent.

By now, you are probably ready for Mitchell's Law:

Organizational growth in cash flow and value expands geometrically as a function of market growth times cost reductions faster than competitors times gains in market share times capital intensity reductions faster than competitors times use of lower cost capital than competitors.

Here's the mathematical expression of that law:


Organizational Growth in Cash Flow and Value = OG

Market Growth = MG

Cost Reductions Faster than Competitors = CR

Market Share Gains = MSG

Capital Intensity Reductions Faster than Competitors = CIR

Use of Lower Cost Capital than Competitors = ULCC

If you have questions about Mitchell's Law, please make comments on this blog post or contact me at Please label your subject as "Mitchell's Law" so I will know to be sure to look at your e-mail.

Donald W. Mitchell
Mitchell and Company

Copyright 2005 Donald W. Mitchell