How the Value-Cost Model solves the corporate existential crisis

If only there were a theory for managers that could scientifically predict success in business. It should be easy. Entrepreneurs know that the purpose of a business is to deliver value to the customer at minimum cost to itself; the manager’s job is to keep the show on the road over the long term.  

The Value-Cost Model focuses managers on the two things they know: the customer and their own company. Contained therein is why the company exists, how it is sustained and, ultimately, what will kill it.

Science vs instinct

Business is rational, but not quite scientific. We can only aspire to the heights of, say, medicine, where a theory can predict not just how a treatment can succeed, but also how it may fail. For example, vaccine theory tells us the body’s defence systems can be taught to resist a specific virus, but also that if the virus mutates enough, the vaccine becomes ineffective. 

In business, we do not have scientific theories that can define the one true path to success or the precise conditions for failure. There is a missing element, an insight or instinct, that only the manager possesses. In some cases, even the character of the manager may be integral to the business. 

Outward vs inward perspectives

Business theories often require the manager to make a pseudoscientific assessment of the opportunities and threats in the environment. Yet, in this, managers are doomed to be reactive, not proactive. Porter’s Five Forces Model, with its identification of the external pressures on profitability, is the go-to theory. However, it also directs the manager to calculate the threat of new rivals and the emergence of a substitute good or service, both being in the realms of speculation. It could even be argued that growing competition is a sign of an expanding market, not shrinking profits.

The product life cycle strives to be a comprehensive theory as it traces out the heartbeat of a product or service over its lifetime. Yet, it offers no formula for business, as it abandons the manager to speculating as best they can about the future. Let’s face it, if a theory or model cannot prepare a manager for the road ahead, it is of little use. 

Value-Cost Model