Better business models lead to better businesses. One critical part of building a better business model is getting your value proposition right.

An excellent value proposition means that you have to be excellent at, well, something.

But what?

One framework that John uses a lot in his classes is this from The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market:

There’s a nice explanation of the figure here, but basically, it means that you have to choose. You can’t be everything to everyone – you need to build your value proposition around differentiation, customer responsiveness, or lowest total cost.

One important part of the diagram though, which is often overlooked, are the lines on each bar. These mean that even while you concentrate on excellence in one area, you have to be at least competent in the others. Where this baseline lies will vary from industry to industry.

Here’s an example, from the engineering company that I mentioned yesterday. They are in a very competitive industry. We evaluated the business model of four of their different business units. This turned out to be a pretty useful application of the business model concept to a large, well-established firm.

The one common thread across all four business units is that they have customers that are willing to pay a premium for reliable delivery of on-time and on-budget work. They have an opportunity to differentiate in this area.

However, their industry is fiercely competitive. So the benchmark level of operational excellence that is required just to be in the game is very high. While they are trying to build excellence and differentiation in reliability of delivery, they also have to keep improving efficiency.

So one way to identify a potential area of excellence is finding the things that your customers value and being fanatical about delivering in that area.

In his latest book, which, as usual, is excellent, The Little Big Things: 163 Ways to Pursue EXCELLENCE,Tom Peters includes a great quote from an anonymous commenter on his blog about how to do this:

Excellence can be obtained if you:

…care more than others think is wise;

…risk more than others think is safe;

…dream more than others think is practical;

…expect more than others think is possible.

So, to sum up. Better business models are built on excellent value propositions. To build one, you have to avoid trying to be excellent in all areas (differentiation, customer responsiveness, or lowest total cost), because you’ll spread yourself too thin, and get caught in the middle.

On the other hand, if you are simply competent in all three areas, you’ll also fail because you’re not excellent at anything.

You need to be competent at a couple, and excellent at one. You can help yourself define what you should be excellent in by thinking about that quote from Peters.

Excellence requires going fanatically overboard in something. That’s what excellent value propositions are built on, and those are what drive better business models.