Wednesday, December 21, 2005

Why You Need to Reduce the Company and Stakeholder Costs by 95% to Create and Use Your Offerings

Good morning, Billion Dollar Business Creators!

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

Cost-cutting: It's like a religion these days.

When I propose that entrepreneurs find ways to cut company and stakeholder costs to create and use offerings by 95% to raise resources to provide new and more valuable benefits, no one has argued with me recently.

Perhaps the reason that they don't argue is that they think I'm crazy.

I remember attending a discussion group in 1999 where several seasoned executives were deeply skeptical that costs could be reduced by more than a few percentage points. Interestingly, I note now that the companies they worked for have had severe competitive and financial problems since then . . . and that these executives are no longer employed by those firms.

I was especially struck when these skeptical executives announced that they didn't believe that semiconductor costs often decline by as much as 15-20% a year. In new semiconductor technologies, the rate of cost decline can be even greater. These executives had buried their heads in the sand.

Since then, I've learned never to assume that everyone understands how much cost reduction potential remains . . . even after enormous efforts to reduce costs.

Several times a week, clients and students report to me their latest successes in eliminating 95% of costs from long-established processes where much attention has previously been focused on cost reduction.

What's the difference? These successful cost cutters are using the 2,000 percent solution process while conventional cost cutters try to trim off a small amount of costs like a butcher might take a knife to cut off a little fat around the edges of a Porterhouse steak.

Why focus on 95% cost reductions?

I could provide hundreds of answers to that question that would all be helpful to you (and I will go into the point in more detail for
The Billionaire Entrepreneurs' Master Mind when it begins to operate in 2006). But for now, let me just hit a few high points:

Let's begin by looking at billion dollar businesses. There aren't very many of them. There are even fewer new ones. Since creating a billion dollar business is our goal, we should be sure to study what we are trying to achieve.

I've been studying this question of creating billion dollar businesses since 1972. Here are some things that I've learned in the process of meeting with the entrepreneurs who founded many of these businesses:

1. Most revenue gains came from adding customers who hadn't been participating in the market before.

Consider Paychex. That payroll and human resources data processor began serving small employers which had been doing their own payroll and human resources administration. Virtually none of the company's growth came at the expense of the industry leader Automatic Data Processing which was serving larger employers in similar ways.

Paychex found a way to serve a company with only five employees at a cost that was much lower than the company doing the same tasks itself and at less than five percent the cost of a company using Automatic Data Processing for the same tasks.

2. It's been easier to create new benefits and lower prices for potential customers than it is to wrestle away customers from existing, competent suppliers.

Consider the airline industry in the United States. For decades companies followed one of two business models: Hub and spoke connections with full fare prices for business people and discount prices for individuals who booked in advance; or low prices for everyone with hub and spoke connections. The effect was for airlines to regularly go bankrupt as they competed brutally through price wars. Gaining market share by doing more of the same was a loser's game.

Southwest Airlines began to change all that with a third business model: Friendly service on frequent, short flights at rock bottom prices from low-cost airports while operating as simply and inexpensively as possible. When Southwest entered a new airport, it wasn't unusual for volume at that airport to expand by several hundred percent. Southwest liked its approach so much it didn't look elsewhere.

In Europe, Ryanair realized that the Southwest business model with some tweaks could be an even bigger success because flights in Europe cost a lot more per mile flown than those in the United States. Ryanair is now in the process of greatly expanding those local flight markets all over Europe.

On some routes, Ryanair charges as little as two pounds each way (before airport taxes) where competitors used to have costs of over fifty pounds.

But Ryanair didn't just slash costs, it also reinvested in customer service. After all, who wants to have a cheap flight that is a lousy flight? For several years, Ryanair has led all European airlines in punctuality, fewest cancellations and lost bags. Notice that these benefits save and make customers money by reducing the time they spend with their cars in airport parking, buying airport food and not being able to conduct their business meetings.

3. Continuing to focus on gaining market share and operating in traditional ways drains resources and attention needed to develop and expand innovations required to add customers more rapidly.

Growth is a difficult mistress. You have to run hard just to keep from having your offerings deteriorate in quality. An organization knows that if it can simply get its offerings into the market, they can sell all they want. Given the choice between squeezing out a little more growth of the old sort and doing some innovating, almost everyone will focus on the old business model.

You see this effect when old business model companies attempt to innovate by putting in place new business model operations alongside of the old business model. Pretty soon the new business model operations will either be shut down or converted to the old business model. As an example of the former, consider the fate of "low cost" airlines run by traditional airlines. As an example of the latter, consider how Saturn is now run as part of General Motors. Only the dealer network innovations seem to have stuck while design and production now pretty much follow the GM traditional model.

Those with 95% cost-advantaged business models can simply continue to improve their models while sustaining high growth. For example, Ryanair has grown its passenger base by 27% a year for many years now. For more information on this case, see

I hope you will share your questions about my suggested approach to helping you create a billion dollar business
by e-mail . I will create a FAQ section to answer those questions after I have a better sense of what aspects are of most interest.

Send your question by e-mail to and label it "I Have a Question about Building a Billion Dollar Business" in the subject line.

If you would like to learn more about how you can build a billion dollar business, send me an e-mail at and label it "I Want to Build a Billion Dollar Business" in the subject line. I offer a variety of services that can help.

Read the December 19, 2005 blog post to learn more about
The Billionaire Entrepreneurs' Master Mind.

May God bless you. Merry Christmas!

Donald W. Mitchell

Mitchell and Company

Copyright 2005 Donald W. Mitchell