Bare (or is it bear like the big furry things) with me here.

If I save a text file, what are the smallest units that make up that text file? (Or any other file for that matter.) Is it 0s and 1s? If so I guess it would be bits, right?
Is it just 1s and 0s though, or do different characters in a different number system (or ascii) characters make up certain combinations of 1s and 0s. I really would appreciate someone explaining this to me clearly.

But why do I ask?
Well, and I think this is not right, but let's say...
File x.txt is made up of numbers in base 8 (octal) like this-

3343472

If I made a program that makes certain combinations equal a single character in base 16 (hex), thereby making two or three characters equal one character like so-

D = 33
A = 47

D43A2

would it be possible to use this as a compression utility?
If this worked would it be possible to go even further and use all the ascii characters?
Can you get data from a file bit by bit or byte by byte (question is can you get it)?

This was just a thought and it seems like it could make sense, but then again I could be wrong.