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"The rich-proud cost of outworn buried age."-- William Shakespeare"We might as reasonably dispute whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or the cost of production."-- Alfred MarshallLook back at the costs of operating your business from several years ago.-What indispensable costs from those days do you easily do without today?-What prevented you from cutting those once-indispensable costs sooner?If you are like most people, it is that you assumed that your business model and ways of operating should be unchanged. Change that business model, and costs suddenly become redundant in all sorts of unexpected places.For instance, when a business goes from full service to self-service, the number of service-providing employees predictably drops. Without changing that model, it might have been a disaster to reduce the number of service-providing employees.Few are reluctant to reduce costs except when the human price is high in terms of cutting jobs or making working conditions less tolerable. At the same time, few are excited about seeking out ways to lower costs levels.To many, this activity is like doing another fire drill when there seems little likelihood of a future fire. In addition, finding new, large cost reductions is often a more difficult task than locating more benefits at the current price or creating new price structures that stimulate demand. In part, this is because costs are always scrutinized, so there are fewer stones to turn over for the first time. In part, the difficulty ties back to misconceptions about how to find large cost reductions.In addition, focusing on the current business model as the context for reducing costs is like looking for dark-colored items wearing dark glasses on a moonless night. You won't see most of the possibilities.Despite all the attention that cost reduction seems to receive, it is clear that normal cost reductions rarely cause a company to gain much ground on the industry's low-cost leader. So most of the announcements you read about companies slashing costs amount to running on a squirrel cage of speeding shifts in industry practices. After lots of painful hard work, companies usually end up staying in the same cost position relative to competitors as they were a year before.Routinely, however, new business models do create large cost reductions that boost margins and profit growth in sustainable ways. Most of these new business models have come from start-ups which were funded by entrepreneurs and venture capitalists on the premise that there was a better way of serving needs that the current suppliers were ignoring.Consider the advantages that mighty Microsoft has had in software design and production for personal computers for over 20 years. Microsoft's muscle is so great that it lost its antitrust trial concerning the way it competed with Netscape, which had been all but wiped out in the Web browser market even though Netscape was the original industry leader and that Netscape literally gave the product away for free. Microsoft's Explorer software was not only free, it came already loaded on new machines so the consumer saved time by using the unavoidable Microsoft offering. How could anyone hope to develop costs low enough to vie with such a powerhouse?Red Hat did, and now shows signs now of creating a still lower cost business model than Microsoft's for personal computer and Web server operating systems. Red Hat's software is only partially developed by the company's staff. The kernel of its offerings was developed and is now maintained by programmers who did not and do not now charge for their time and effort.The operating system is called Linux, and has drawn upon the talents of hundreds of the world's most innovative software designers. In the process, many customers find that Linux (an improved version of the original UNIX software) works better and is easier to work with than the Microsoft alternatives. Why do such programmers provide such a favor to Red Hat? Primarily because they want to be able to have access to the software's source code in order to create applications that are more pleasing and effective for their own use.Microsoft refuses to open up it source code. While it is too soon to know, it may be that basing one's business on open source software is a superior business model for producing the best products and services at the lowest cost.Notice that this model has much in common with the Goldcorp approach to finding more gain and low costs through open competitions with freely shared information. Yet few companies even consider how to access top talent in such inexpensive ways. Instead, they compete to hire these highly sought-after people for top dollar as full-time employees.The biggest cost-reduction challenge is hidden. They do not know where to look! Like the person who has misplaced his or her keys, they keep looking in all the same places.Copyright 2008 Donald W. Mitchell, All Rights Reserved Article Tags: Business Model, Large Cost, Cost Reductions