For Best Results Repeat Cost-Reduction Steps

Don't look back. Something might be gaining on you.
-- Satchel Paige

When you buy most vehicles, they come with an owner's manual that describes routine checkups and maintenance. The purpose of such checkups is to see that everything is working properly and, if necessary, to bring your vehicle up to safe and efficient standards of operation.

While a few items like oil changes need to be done frequently, most types of vehicle maintenance occur every 30,000 miles. You are usually told to change the air and fuel filters, as well as the spark plugs. You are also encouraged to rotate and balance the tires and align the vehicle. In addition, you inspect critical parts such as the engine, brakes, and battery. On some 30,000 mile checkups, you are also told to replace the coolant, if you have a radiator, and the transmission fluid. For some vehicles, the dealers can also do extensive electronic checks to see if any other function has degraded to below critical performance levels.

I have a different kind of checkup in mind for you in pursuing greater cost reductions for stakeholders. This checkup allows you to streak exponentially past the breakthrough solution level of cost-reduction success. Our checkup has two purposes:

1. To refresh and strengthen your cost-reduction capabilities as an organization after a success in implementing a breakthrough solution

2. To lift your organization to new heights of cost effectiveness, much like the second stage of a rocket launches the payload to a higher altitude by adding to the momentum provided by the first stage

Let's look at the astonishing size of the potential benefits from this checkup. First, you may be able to open up important new markets. Many people are inclined to leave well enough alone after having reduced costs by more than 95 percent for some stakeholders. After all, the absolute size of taking that cost down by a second 95 percent is a pittance compared to the prior cost reduction. That's certainly true, but that's also not the end of the story.

You should see the opportunity differently. Here's why: If you reduce the costs enough, at some point you begin adding important benefits.

Consider this example: You provide some kind of education that learners can apply to make money. Let's assume that you've reached the point where the value of that education to learners does not change as a result of further cost reductions. That change can instead often be accomplished by pruning away the unnecessary aspects of the education and improving the most valuable parts.

Transfer that essential experience into a virtually costless business model, and you've created a superior offering . . . even though its cost is much reduced. For example, many people assume they must spend money for educational resources that are unnecessary. They envision classrooms, teachers, people marking papers, and examinations.

But did very many people learn to speak their first language in that way? With electronic distribution and automated feedback mechanisms, delivery of learning experiences can be virtually costless.

Let's assume your original educational offering cost learners $300,000. After you apply a breakthrough cost-reduction solution, the education still costs learners $15,000. That's way beyond what 80 percent of the world's people can afford.

If you take that cost down again by 95 percent, you reach $750. That's great, but still too expensive for most people.

Take that cost down by another 95 percent and you reach $37.50. Now you've added tens of millions who can afford the education.

Take that $37.50 down by another 95 percent and you reach $1.88. At this level, hundreds of millions can afford your offering.

Take that $1.88 down to $0.04 and nearly everyone can use what you have to offer. Somewhere along the way, you will also reach a tipping point where you unleash other forces that will aid your efforts.

Here's one possibility of what that tipping point could be: If the income gains from the education are large, you've also created a happy customer who will want to invest a substantial portion of the new income to gain additional education from you.

If that additional education also helps create more income gains, even more education will be purchased. As long as the value is high enough, your student will buy more.

With low marketing costs, you can look forward to selling lots of services and having the opportunity to find lower costs to provide those other forms of education. You've created a virtuous cycle that makes growth and profit gains automatic, and you can serve most people on Earth, which allows for the potential of having an enormous enterprise.

That example may seem frivolous and unrealistic to you; forgive me if it does. But some people have seen such cost reductions occur within their own lifetime. For instance, the computing power of a $4.00 solar-powered calculator today cost more than $30 million in the early 1950s. That change is identical to reducing the cost of a $300,000 education to $0.04.

How much of the economic progress we've enjoyed since the 1950s came as a result of more people being able to make more calculations? No one knows, but clearly the effects must have been quite large. Certainly, we've seen the computing industry grow from less than $100 million in annual sales then to hundreds of billions of dollars today.

The second benefit of such a checkup is that further cost reductions may allow current customers to make greater use of your offering. When such greater use follows, your sales increase and your potential to reduce costs further improves.

For instance, consider a city that adds border-to-border wireless service for computer users with a time-based connection fee. Much of the cost of such a capability is involved in acquiring computers and equipment, installing transmission towers and dishes, renting transmission sites, and putting the system together.

When such a wireless service has only a few customers, the operating and overhead costs may be identical to when the service has 100,000 customers. In other words, there's some minimum scale involved in just setting up the business.

Because of the high startup cost, the initial service coverage is likely to be a minimal one. The connections won't work in a lot of locations, much like the dropouts that people experience now with cellular telephone coverage.

As the service adds customers, the provider can afford to put more towers and dishes in place so that connections work in more locations. That improvement, in turn, stimulates more usage by existing customers, which lowers the cost of providing connection time to the average customer.

The third benefit of such checkups is that tackling tough cost-reduction challenges can hone your organization's skills. With improved skills, you can move on to bigger opportunities competing against or acquiring organizations that aren't as effective as you are.

Let's look at how acquisitions can be used to gain such benefits. We saw that approach effectively taken by Coca-Cola and PepsiCo for many years as they purchased weak bottlers. Turning loose their best operating people, these operations would soon emerge as much more effective and with lower costs. When those new approaches were well understood by the bottler's management, these bottlers were then resold for a tidy profit while they remained more valuable members of the soft drink companies' distribution networks. Companies with such cost-reduction skills may also be able to become outsourcing providers.

With those benefits in mind, let's now consider how such checkups might be best done. I draw from my extensive experience with organizations that have developed breakthrough solution cost reductions to clarify the ideal approach to such checkups.