164 I N N O VA T E B Y R A P I D E X P E R I M E N T A T I O N

Innovations, teams are invited to submit for the Dare To Try category—an
award that “recognises and rewards the most novel, daring and seriously
attempted ideas that did not achieve the desired results.” In its first year,
only three companies dared to submit a failed project for the Dare To Try
award. Five years later, the category had 240 entries (more than for some of
the “success” categories). The winner that fifth year (Tata Consultancy Ser-
vices) also won in the Service Innovations category. The example showed
employees how real innovation and smart failures go hand in hand.50

To innovate in the digital age, businesses must learn to experiment con-

tinuously and effectively. By continuously iterating and testing new ideas
and by getting real data and real customer feedback, even the largest enter-
prises can become as agile as a lean start-up. Only then will they be able to
innovate in a way that is fast enough, cheap enough, and smart enough to
create new value for customers in a constantly changing world.
However, launching new products and new ventures and refining
existing ones are not the end of the story if businesses are to innovate and
evolve. When faced with deep and profound changes in market needs, busi-
nesses and entire industries can find that the value they offer to custom-
ers is no longer the same, or as relevant, as it used to be. This uncertainty
means that every business must be prepared to adapt its value proposition
to customers over time. Rather than waiting until a profound change is
essential to survival, or even until it is too late to change, businesses in the
digital age need to develop a forward-looking attitude. The new imperative
is for businesses to adapt their value to customers when they can rather
than when they must. The next chapter explores how to do that.
 6
Adapt Your Value Proposition

VALUE

One of the long-standing industries most severely affected by the digital

revolution is the recorded music business. It is now bouncing back—but
after some brutal mistakes and a steep decline in the early years of the
Internet. A look back at that history may be instructional as businesses
consider the future.
In 1993, an industry body called the Moving Pictures Expert Group
publicly released a new technical standard that would allow for effec-
tive compression of the audio portion of motion pictures, what came to
be known as the MP3 format. This new format allowed musical record-
ings to be compressed into much smaller digital files, with minimal loss in
audio quality for the listener. That same year, the first popular Web browser
(Mosaic) launched the World Wide Web as a mass medium for communi-
cation. The opportunity created by the two in combination was unmistak-
able. For the first time, it would be possible to transmit music recordings
in digital format, almost instantly, and to store them effectively on the disc
drives of that era’s computing devices.
 166 A D A P T Y O U R VA L U E P R O P O S I T I O N

For the music industry, this opened the door to an incredible range
of new value that could be offered to music customers. With digital files
and distribution, record labels could offer customers instant access, a vast
selection of music unencumbered by the limits of a physical store, and the
ability to pick and choose just the album or even just the songs they wanted.
But instead of offering any new value to customers, the music industry,
as represented by the Recording Industry Association of America (RIAA),
pretended nothing had changed. Actually, the RIAA did take one step: it
sued the companies trying to create the first portable devices for storing
and playing MP3 files.
There are many possible lessons to draw from the dramatic decline of
the recorded music industry from 1999 to 2012, as worldwide sales dropped
from roughly $28 billion to $16 billion.1 One of the starkest, though, is that
if your business does not take advantage of a new opportunity to offer value
to your customers, someone else will.
In this case, that someone was a start-up called Napster. Launched
in 1999, Napster offered a peer-to-peer service for swapping MP3 music
files over the Internet, with no payment to the copyright holders whatso-
ever. Yes, it was illegal. But the value proposition was irresistible for many
customers. On the one hand, they had the RIAA, offering them great
recordings of their favorite music. On the other hand, they had Napster,
offering them all those same great recordings, plus instant access over the
Internet, a selection that outstripped that of any physical retail store, and
the ability to find and choose just the songs they wanted—and, oh yes, it
was all free.
After four years of punishing declines in sales, the major record labels
agreed to let Steve Jobs and Apple enter the market with a competing offer:
the iTunes Store, a legal MP3 superstore linked to Apple’s recently launched
portable player, the iPod.
MP3 players were niche products until the iPod, and even afterward,
MP3 owners lacked an easy way to legally purchase music. With Apple’s
design and branding savvy, combined with the RIAA’s deep catalog of
popular music, the iTunes Store became the first mass-market platform for
legal digital music sales.
Suddenly, a new value proposition was available to customers besides
the RIAA’s compact discs in retail store bins and Napster’s illegal digi-
tal cornucopia. With iTunes and an iPod, customers could reap all of the
benefits of a service like Napster, except the free price, but with an entry
price point so low ($0.99 for one song) as to seem negligible. In addition,
 A D A P T Y O U R VA L U E P R O P O S I T I O N  167

1999 2003
Great music × × ×
Instant access × ×
Vast selection at
× ×
your fingertips
Choose the
× ×
songs you want
Free ×
Popular portable
×
device

Figure 6.1
Three Value Propositions: Recorded Music.

they were offered the first real lifestyle-branded digital music device and
store, with a pleasing and intuitive user interface that made iTunes acces-
sible even to those who had no idea what peer-to-peer file sharing meant.
(See figure 6.1.)
From its opening in 2003, the iTunes Store grew quickly, while sales
of physical music formats continued to drop. Gradually, the industry’s
misery lessened until 2012, when global music sales finally bottomed
out, and even posted a modest upward tick on the back of iTunes and
other online services (such as streaming, the next growing trend). “At
the beginning of the digital revolution it was common to say that digi-
tal was killing music,” Edgar Berger, CEO of Sony Music International,
commented to the New York Times. Since 2012, he says, “digital is sav-
ing music.”2
The RIAA’s desire to resist the evolution of its industry was understand-
able. It was sitting on a streak of record-breaking profits with its existing
business model of selling compact discs. But in 1993, it was already clear
that this business model was unsustainable in the Internet era. By waiting
as long as possible to adapt what it offered to customers, the music industry
trained millions of young listeners to expect digital music to be free and
delayed putting in place an effective strategy for dealing with the changes
coming to the industry.
 168 A D A P T Y O U R VA L U E P R O P O S I T I O N

Rethinking Value: What Business Are You In?

The fifth and final domain of digital transformation is your business’s

value to its customers. Traditionally, a company’s value proposition has
been treated as fairly constant, ideally a source of sustained competitive
advantage for the long haul. Successful businesses found a differentiated
offer, used it to position themselves in the marketplace, and then did their
best to optimize that business model for as long as possible. But in the
digital age, unswerving focus on executing and delivering the same value
proposition is no longer sufficient. (See table 6.1.)
Think of the real estate business, which went relatively unchanged
for decades. Real estate agents were essential brokers between home sell-
ers and purchasers. With the arrival of the Internet, the core value of the
broker—providing access to listings of homes on the market—vanished.
With transparency of information online, buyers and sellers no longer
needed a middleman just to find each other. The real estate broker could
have gone the way of the travel agent, made superfluous for most custom-
ers and transactions. But, instead, real estate firms adapted by finding new
ways to add value for home buyers and sellers. Modern brokers go beyond
providing tools for searching for just the right listing (including mobile
apps with customizable searches and geolocation alerts to “open house”
events near you). They use digital tools to curate all sorts of information for
home buyers who are comparing neighborhoods (maps, video tours, infor-
mation on schools, and online forums to see how residents rate a suburb’s

Table 6.1
Value: Changes in Strategic Assumptions from the Analog to the Digital Age

From To

Value proposition defined by industry Value proposition defined by changing

customer needs
Execute your current value proposition Uncover the next opportunity for customer
value
Optimize your business model as long Evolve before you must, to stay ahead of
as possible the curve
Judge change by how it impacts your current Judge change by how it could create your
business next business
Market success allows for complacency “Only the paranoid survive”
 A D A P T Y O U R VA L U E P R O P O S I T I O N  169

pros and cons). They have become expert advisors, using blogs and social
media to share information on how to decide when to list your home, what
closing a credit card does to your credit score, and FAQs on titles and liens.
To survive in the digital age, brokers have shifted from being a gatekeeper
of home listings to becoming a resource for buyers and sellers in a high-
stakes decision process.
Every business today should follow the example of the real estate bro-
ker. Instead of defining its job by what its industry has done in the past,
your business must define its job to match your customers’ ever-changing
needs. It should judge each new technology not by how it impacts your
current business model, but by how it might create your next one. You need
to constantly examine the core value your business offers to customers and
ask these questions: Why does my business exist? What needs does it serve?
Are they still relevant? What business am I really in?
This chapter explores how businesses manage to adapt their value
proposition, why every business should adapt before it needs to, and why
many firms fail to do so. It compares different concepts for thinking stra-
tegically about your value to the market. And it examines the organiza-
tional barriers that may be preventing your business from adapting how
it serves customers. This chapter also presents a strategic planning tool:
the Value Proposition Roadmap. This tool allows any business to iden-
tify its key customer types, define the elements of its value proposition
for each customer, identify potential threats, and develop new offerings to
deliver value in a rapidly changing environment. By expanding the busi-
ness’s focus beyond current revenues and near-term profits, this tool gives
incumbents the opportunity to identify new sources of value in the face
of emerging threats.
Let’s start, though, by defining the fundamental challenge of maintain-
ing growth when your industry is under attack.

Three Routes Out of a Shrinking Market Position

There may be many reasons that businesses face a declining market. New
technologies can bring rapid changes in customer needs, the appearance of
substitute offerings, or a decline in the relevance of a once-valued product
or service. In some cases, product innovation and marketing can rejuvenate
growth in a business or even an entire industry. But in other cases, busi-
nesses find themselves in a truly constrained market position, where their
 170 A D A P T Y O U R VA L U E P R O P O S I T I O N

Both

New
New value

Value proposition
(new value and customers)

Same

Current position New customers

Same New
Customers/use case

Figure 6.2
Three Routes Out of a Shrinking Market.

current offering and their current customers show almost no chance for
continued growth.
What options exist for such a business? Igor Ansoff proposed two gen-
eral dimensions for growth: new versus existing products and markets.3
For a business whose current product-market mix is trapped in decline, we
can adapt his Ansoff Matrix to help identify three routes out of a shrinking
market (see figure 6.2). Let’s look at the dynamics and challenges of each
route.

New Customers (Same Value)

The first route out of a shrinking market is to find new customers to buy
your same offering. This can be extremely difficult in an era where markets
are already relatively flat and open (with even small businesses using digi-
tal communications to sell around the world). But in some cases, creative
thinking can identify a new customer or use case for the same value that
your business has been offering.
Like many paper manufacturers, Mohawk Fine Papers found itself in a
declining market at the start of the twenty-first century as the rise of digital
communications enabled customers to reduce their use of paper. Founded
in 1931, the firm had built its business selling high-quality paper to large
corporations like GE and Exxon Mobil for use in annual reports and other
glossy corporate brochures. Mohawk found its market declining severely
 A D A P T Y O U R VA L U E P R O P O S I T I O N  171

as its traditional customers relied more on digital communications. The

shift accelerated once the Securities and Exchange Commission started
allowing firms to submit financial reports digitally and the New York Stock
Exchange stopped requiring that annual reports be printed for sharehold-
ers (these had made up a third of Mohawk’s revenue). Mohawk’s manage-
ment led a turnaround by finding a new type of customer that could make
use of their fine-quality papers: online stationery services. With the growth
of websites for printing photos, greeting cards, and business cards, the firm
convinced companies like Shutterfly.com and Moo.com to try offering the
kind of high-quality papers that were Mohawk’s specialty. Stationery con-
sumers took to them immediately, happily paying extra for paper that gave
their materials a look and feel of real quality. Within a few years, Mohawk’s
sales to online businesses had increased dramatically, offsetting the loss of
its old customers and putting the company back on steady footing.4
Around the same time, Salt Lake City newspaper The Deseret News
found itself facing a declining market, just like many other smaller urban
newspapers across the United States. After thriving for 150 years, the paper
was losing two kinds of customers: reader subscriptions were slipping, and
advertisers were fleeing for cheaper opportunities to advertise on the Web.
The News’ classified ad revenues fell 70 percent from 2008 to 2010 as adver-
tisers shifted to free sites like Craigslist and national portals like Monster.
com. As the owners struggled to reverse the fortunes of their print news-
paper, they looked to see if they might be able to sell their same product
to new customers besides Utah residents. They realized that the paper’s
unique focus on a set of core issues—the Mormon faith, family, care for the
poor, and the impact of mass media on social values—could resonate with
a national audience of readers who shared similar values and concerns. The
paper launched a new weekly print edition for subscribers outside of Utah
in 2009. By 2012, Deseret’s total print circulation had doubled, to 150,000
readers nationwide, with growth in advertising revenue that made it one of
the fastest-growing print papers in the United States.5
There are often limits, though, to how many new customers can be
found for a value proposition that is losing relevance in its existing market.
If a new customer base is found, it may simply be a smaller niche that has
a unique reason to remain loyal while the larger customer base departs.
Westfield, Massachusetts, was home to forty different companies that
manufactured whips for the horse-and-buggy industry in the nineteenth
century. With the rise of the automobile, the buggy industry that supported
whip manufacturers vanished. One whip maker, Westfield Whip, managed
 172 A D A P T Y O U R VA L U E P R O P O S I T I O N

to survive by shifting its focus to new customers in the livestock industry as

well as those involved in horse riding and dressage competitions. Although
the company managed to find enough new customers to continue selling
whips into the twenty-first century, the other thirty-nine whip makers in
Westfield did not.6

New Value (Same Customers)

The second route out of a shrinking market is to continue serving your

same customers but to adapt your value proposition to stay relevant to
their changing needs. This is what the recorded music industry did once it
begrudgingly teamed up with Apple to launch the iTunes Store for music
consumers. It’s also what real estate agents have done as they continually
find new ways to stay relevant to home sellers and buyers.
Adapting its value proposition requires a business to be willing to
depart from what has brought it success in the past. When faced with a
decline in relevance and demand for its offerings, a business must resist
asking “How can I get my customers to still pay me?” and instead ask “How
can I become as valuable to my customers as I used to be—or more so?”
Remember the story of Encyclopædia Britannica from chapter 1. When,
after two centuries, sales of the printed encyclopedia began to drop with
the arrival of personal computers, the company knew it wouldn’t survive
by looking for new customers to buy its existing product. Instead, Ency-
clopædia Britannica, Inc. tried to reinvent the value it offered while staying
rooted in its mission to bring expert, fact-based knowledge to the public.
This led to experiments with a CD-ROM encyclopedia, then a free online
version with advertisements, and, finally, a successful new offering: a paid
online site for home users paired with a wider range of digital teaching tools
for educators in the K–12 market. Today, more than half of U.S. students
and teachers have access to Britannica content for the classroom, and half
a million households subscribe to Britannica Online. When the company
finally chose to end its print edition, it was simply because it was relevant to
so few customers. “Our people have always kept the mission separate from
the medium,” said Britannica President Jorge Cauz.7
A major ongoing example of value proposition adaptation can be seen
in the New York Times, a journalistic institution founded in 1851 that many
feared would not survive the dramatic shift to the digital age. Ever since
the Internet made the distribution of content nearly free, news as a product
 A D A P T Y O U R VA L U E P R O P O S I T I O N  173

has looked more and more like a low-value commodity. The prices that
publishers like the New York Times Company can charge advertisers have
dropped dramatically as readers have moved away from print editions. At
the same time, digital start-ups like BuzzFeed and Vox have proven more
adept at generating viral sharing in social media. In 2011, the documentary
Page One depicted the Times as an organization struggling to adapt to a
digital future; in 2014, an internal innovation report was leaked, showing
the company in the midst of rethinking its value proposition to customers
in the digital age. The Times knew it still had unique value in the reporting
abilities of its 1,300 newsroom employees and the credibility of its brand.
But it knew that value would need to evolve.
Over several years, the Times has shown a steady commitment to
rethinking journalism and finding new ways to add value for custom-
ers. It has pursued innovations in distributing its content via mobile apps
and social media channels. It has experimented with new digital formats
to help advertisers engage readers, including Page Posts based on a native
advertising model. And its content has embraced new digital forms from
blogs by diverse columnists to regular video content to interactive storytell-
ing through data visualizations and interactive graphics. One watershed
example is a dialect quiz developed with the help of a statistician intern
and based on scientific research in the demographics of regional American
vernacular. Combining the best of the Times’ rigor with a BuzzFeed-like
irresistible format, that quiz quickly became the publication’s most read
online article of all time. A few months later, the paper established The
Upshot, a seventeen-person laboratory that is reimagining what a news
story can look like.
The results of this years-long shift can be seen in a news organization
that is clearly offering new value to readers whose media habits are rapidly
evolving. By 2015, the Times’ share price had rebounded 150 percent from
its 2013 level; the company had $300 million in net cash, and total revenue
was growing again, thanks to digital subscribers and digital advertising.8
That same year, the company announced it had reached over 1 million
digital-only paid subscribers.

New Value + New Customers

In some cases, a third route out of a shrinking market may be possible

with both new value and new customers. Usually, this may come when a
 174 A D A P T Y O U R VA L U E P R O P O S I T I O N

dramatic shift in the value proposition succeeds in capturing a new market

of customers.
One business that made such a leap is Williams, a leader for decades
in the manufacture of pinball machines, those popular twentieth-century
arcade games. With the emergence of electronic video games in 1972, the
company realized that the entire pinball category could be headed toward
irrelevance. It decided to reinvent itself by moving into a new kind of gam-
ing that was just emerging: electronic gambling. By the time Sony’s Play-
Station had arrived and the pinball and arcade industries had collapsed,
Williams had established itself with a string of hit casino games. Its new
products attracted a different customer base—and a much more profit-
able one at that. After more than a decade of growth, the company was the
third-largest manufacturer of casino slot machines when an even bigger
competitor, Scientific Games, bought it for $1.5 billion.
An even more remarkable example of revival through new value and
new customers is Marvel Comics. Despite being the progenitor of such
classic superheroes as Spider-Man, the Avengers, and the Fantastic Four, by
2004 the comic book company was facing an unpromising future. Young-
sters were turning away from printed paper comics in favor of digital media.
Licensing deals negotiated in the 1990s with vastly more powerful movie
studios had provided only a modest lifeline of income (e.g., $62 million
for two Spider-Man films that grossed nearly $800 million).9 The company
decided to take a leap and redefine its value proposition entirely by creating
a movie studio to produce high-budget films featuring its own comic book
characters. To raise capital, it had to put up its own rights to those charac-
ters as collateral. But the bet paid off with huge new audiences and financial
success for such movies as Iron Man, Thor, and The Avengers. Once a strug-
gling company making printed comics for a narrow base of enthusiasts, it
had transformed into a major movie studio with an enormous fan base,
an arsenal of sequels in production, and a small print publishing unit that
could serve as a lab for testing new characters and storylines. Within five
years, this burgeoning Marvel empire was purchased by the even larger
Walt Disney Company for $4 billion.
It is worth noting that in the cases of Williams and Marvel, a new cus-
tomer base was discovered only after a reinvention of the value proposition
(from pinball machines to gambling games, from pulp-paper superheroes
to silver-screen blockbusters).
In the digital age, a mature business that is facing decline is less likely
to uncover some previously unreached markets for its same products and
 A D A P T Y O U R VA L U E P R O P O S I T I O N  175

services. Digitization has simply removed too many barriers to entry for
markets. The customers were already reachable. It is much more likely that
adapting and extending the value of your offering is what will lead you into
new markets. (Indeed, the New York Times Company has reached many
more international readers as it pushes into digital delivery.)
In sum, for any business in a shrinking market, focusing on adapting
its value proposition to provide new relevance to customers is absolutely
essential.

Adapt Before You Must

There is no need to wait for a crisis, though. Value proposition adaptation

is a strategy that every business can apply even when it appears to be doing
well. In a rapidly changing digital environment, it is worth remembering
Andy Grove’s maxim: “only the paranoid survive.”
This attitude toward customer value can be clearly seen in today’s digi-
tal titans, whether Google, Amazon, Facebook, or Apple. Even as they are
achieving great success, they are looking ahead to shifts in customer needs
and preparing to enter new markets with new value propositions. (This
year’s impregnable monopoly might be next year’s declining incumbent—
think Microsoft Windows.)
But we can find examples among pre-digital enterprises, too, that are
focused on staying ahead of the curve of change.
Founded in 1870, the Metropolitan Museum of Art has long been one
of New York’s top tourist attractions. With over 6 million annual visits, it is
far from in decline. But the museum is keenly aware that its audience’s lives
are changing dramatically due to the digital revolution in media and com-
munications. It also knows that if it hopes to continue to be an integral and
enriching part of people’s lives, it needs to think differently about the value
it provides. In 2013, my friend Sree Sreenivasan was hired as the museum’s
first chief digital officer, in charge of a team of seventy staff. Their task has
been to extend and enrich the experience of the art in the museum for both
the 6 million who walk through its doors and the 30 million who visit its
website and digital properties each year.
For those inside the Met, this includes new mobile apps for discover-
ing curator recommendations; mobile games for kids, like “Murder at the
Met” (which challenges teens to study various artworks for clues to a mys-
tery about a John Singer Sargent painting); and hashtags for visitors to use
 176 A D A P T Y O U R VA L U E P R O P O S I T I O N

when sharing their own photos of each exhibit on social media (#Benton-
Mural or #AsianArt100). “Our audience was demanding it!” Sreenivasan
told me. The museum is also using social media to engage those outside
its halls—not just on Facebook and Instagram but also on Pinterest, where
curators collaborate on joint pinboards, and on the Chinese network Sina
Weibo, where the Met received 3 million views of its first sixty posts. Online
interactive tools to explore the collection include the kaleidoscopic One
Met. Many Worlds, which allows for keyword-based exploration in eleven
languages, and the Timeline of Art History, a teachers’ favorite that receives
one-third of all the museum’s Web traffic. Sreenivasan told me that they are
still learning how best to engage their diverse audiences. “One thing we’ve
learned is that everyone wants a peek behind the scenes.” After acquir-
ing a seventeenth-century family portrait by Charles Le Brun, instead of
working in secret to prepare it for exhibition, the museum began blogging
and posting photos and videos that show the restoration work. One post
showed Michael Gallagher, the head of painting conservation, using a cot-
ton swab to clean the oxidized varnish off a baby’s toes. “Now you’re inter-
ested, because you want to see what happens to the rest of the painting,”
Sreenivasan said. “And when you come to the Met, you’ll get to see that!”10
The Met is a perfect example of an organization changing before it has
to and staying ahead of trends in customer needs. This kind of forward
thinking and willingness to invest in new capabilities before an old busi-
ness model falls into decline is essential to strategy today. My Columbia
Business School colleague Rita McGrath describes this as strategy focused
on “transient advantage” (in her excellent book The End of Competitive
Advantage). In today’s world, no advantage enjoyed by any company can
be treated as defensible for the long term. Instead, businesses need to think
in terms of developing transient advantages, which drive profitability for a
time but must be constantly buttressed by new value drivers as old posi-
tions of strength may quickly come under threat.
The speed with which a position of strength can flip to one of decline
can be seen in the experience of Facebook. In 2012, the social network-
ing colossus seemed to dominate the digital world, disrupting traditional
media and advertising companies as it attracted a billion users and ever
more hours of their precious attention each day. But just as it was prepar-
ing for its IPO, the firm disclosed in its securities filings that it faced a huge
unknown threat: the shift of users to mobile devices. All of its revenue had
been based on advertising on its desktop display. Companies like Google
were struggling to retain the profitability of their advertising as consumers
 A D A P T Y O U R VA L U E P R O P O S I T I O N  177

switched to the small screen. Facebook had no mobile revenue at all. At the
peak of its triumph on the desktop, the burning question was, How will
Facebook deliver value to advertisers in a mobile world without turning
off its users?
Facebook succeeded by adapting its value proposition for both audi-
ences. For users, it added value through simplicity. Its mobile app kept the
focus on the News Feed (the stream of posts by your friends) and split off
other features into separate apps, like Messenger. When it bought photo-
sharing app Instagram, it kept that separate as well. Within its main app,
it dropped the website’s sidebar full of countless cheap and irrelevant ads;
it raised the price for the ads that remained and formatted them so they
wouldn’t overwhelm the user’s field of vision. For advertisers, it similarly
rethought the value it offered in mobile. It dropped the old ad formats that
wouldn’t work on a small screen and developed new ones like video ads,
which performed much better. By harnessing its data with its new Custom
Audiences, it allowed advertisers to, in effect, pay to reach just the right and
most relevant audience, both inside Facebook and in ads placed anywhere
else on the Web. The result: mobile advertising became the company’s big-
gest growth engine, quickly taking over as its top source of revenue. Total
profits soared, and the company’s stock bounced back from a dip after the
IPO, doubling in price over two years.

Five Concepts of Market Value

Value proposition is just one of several strategic concepts available for

thinking about your offerings and value to the market. But it is a particu-
larly useful, and underutilized, concept. To better understand the concept
of value proposition, let’s compare it with four of the most common ways
of thinking about market value (see table 6.2).

r
Product: Thinking about products is something every manager is com-

fortable doing. If you’re an automaker, you spend a lot of time thinking
about your different models of SUVs, sedans, and minivans. Product
thinking is useful (indeed essential) when making decisions about
engineering, design, launch dates, pricing, and other factors as you
prepare to go to market. But product is probably the most overused
strategic lens in companies. Thinking about products can limit your
vision. It allows you to ignore the customers who are actually using
 178 A D A P T Y O U R VA L U E P R O P O S I T I O N

Table 6.2
Five Concepts of Market Value

Concept Concept pros and cons (in italics) Examples as applied to

automotive

Product Important in portfolio decisions SUV

Ignores customers and value to Sedan
them Minivan
Leads to strategic myopia
Customer Customer-centric College student drivers
Helps identify whom to focus on Parents with small kids
Not focused on value
Use case Value-centric and Night out with friends
customer-centric Driving and carpooling with kids
Helps with better segmentation
Obscures that a customer may
have multiple use cases
Job to be done Value-centric and Safely and comfortably transport
customer-centric several kids from points A to B
Helps identify nontraditional
competitors
Lacks concrete specifics
Value proposition Value-centric and Reliable transportation
customer-centric Accommodates several passengers
Helps assess threats and ideate Safety in an accident
new innovations outside of Personalization of car zones
existing products (e.g., for climate or audio)
More concrete and specific Communication for driver
(includes multiple elements) (e.g., hands-free calling)
Entertainment for passengers
(e.g., Wi-Fi or video)

the product as well as the value that it may provide them. An excessive
product focus has long been recognized as a source of what Ted Levitt
called “marketing myopia,” where a company assumes it is in the busi-
ness of making a particular line of products (e.g., daily newspapers)
rather than being in the business of meeting a particular need (e.g., to
stay informed).11
r
Customer: Another very common approach is to think about your
business in terms of your customers—who they are and how they dif-
fer from one another. This is certainly the first step toward becoming a
customer-centric company. By focusing deeply on customers, you can
 A D A P T Y O U R VA L U E P R O P O S I T I O N  179

begin to learn which customers matter more, have different needs, and
should therefore be treated differently. However, looking at traditional
profiles and “personas” of customers (fictional stand-ins based on
demographics, attitudinal data, and product consumption) can some-
times take the place of actually talking to flesh-and-blood customers
to find out why they are using your products and what needs you may
not yet be meeting. Again, you are still short of focusing on the value
delivered.
r
Use case: This concept arose in software engineering and is credited
to Ivar Jacobsen,12 but it has been applied more broadly in design and
marketing. In the broader sense, a use case is the context within which
a customer utilizes your product or service. For example, if your prod-
uct is a minivan and your customers are parents with small children,
one important use case is driving and carpooling with children. The
use case concept combines a focus on the customer with a focus on
the context, which helps you think about the value being delivered.
However, it is important to recognize that the same customer may have
different use cases for the same product (e.g., parents of small children
may use the same minivan for a night out socializing with friends).
But, used properly, use cases can lead to better customer segmentation
and a focus on the value of your products in customers’ lives.
r
Job to be done: This concept has been popularized by Clayton Chris-
tensen and Michael Raynor.13 In the job-to-be-done framework, the
concern is not just the context in which a customer is using a prod-
uct but also the customer’s purpose for using it. By focusing on the
underlying problem that the customer is trying to solve, your business
becomes more customer-centric and more value-centric. You can also
begin to identify nontraditional competitors: if the job your customer
is “hiring” your minivan to do is to safely and comfortably transport
their children from point A to point B, there could be another competi-
tive solution besides a different brand of minivan. Perhaps Uber will
develop a verified “child-safe” service that will become popular with
overbooked parents. The fact that using the job-to-be-done concept
results in a high-level summation is valuable (it can focus your think-
ing), but it can also sometimes be a limitation (it can lack specificity).
r
Value proposition: This term was coined by Michael Lanning and
Edward Michaels.14 It has come to be used broadly in marketing and
strategy as a concept that defines the benefits received by a customer
from a company’s offering. Like job to be done, it is a concept that is
 180 A D A P T Y O U R VA L U E P R O P O S I T I O N

both value-centric and customer-centric. However, it is often used to

identify multiple elements of value to the customer (that is how I will
use it in this chapter’s tool). For example, if the job to be done for par-
ents by a minivan is to transport their children safely and comfortably,
the value proposition you offer them could include several elements:
reliable transportation, spacious accommodation for passengers, safety
features for accidents, personalization of different zones in the car (for
climate or audio), hands-free communication for the driver, and enter-
tainment options for the passengers. By breaking the customer value
down into more-concrete and more-specific elements, you can assess
threats to each one (e.g., your minivan’s entertainment options may
become irrelevant to customers as their children acquire more portable
devices) and innovate new elements that can be added.

All five of these strategic concepts are useful at different times in deci-
sion making and planning. (I certainly wouldn’t recommend that you
never discuss your product portfolio or customer segments.) But the value
proposition is especially useful when you face the challenges of adapting
and evolving your value to customers in response to changing needs and
new opportunities posed by technologies. This is why it is used in this
chapter’s tool.
Now that you’ve seen the importance of value proposition adaptation
for any business in today’s fast-changing environment, let’s take a look at a
strategic planning tool for making this happen.

Tool: The Value Proposition Roadmap

The Value Proposition Roadmap is a tool that any organization can use to
assess and adapt its value proposition for its customers. You can use it to
identify new and emerging threats as well as new opportunities to create
value for your customers. It will help you synthesize those findings into a
plan to create new, differentiated value in a changing landscape. Above all,
if your company is under pressure, the tool will force you to challenge your
assumptions, step back from focusing on defending your past business, and
use your customers’ perspective to imagine new ways forward.
The Value Proposition Roadmap uses a six-step process to map out
new options for your business (see figure 6.3). Let’s look at each of the steps
in detail.
 A D A P T Y O U R VA L U E P R O P O S I T I O N  181

Value Proposition Roadmap

1. Identify key customer types by value received

Overall

2. Define current value for each customer

Value elements Overall value proposition

3. Identify emerging threats

New tech Changing needs Competitors & substitutes

4. Assess the strength of current value elements

Per customer

5. Generate new potential value elements

New tech Sociocultural/business trends Unmet needs

6. Synthesize a new forward-looking value proposition

Four-tiered elements Overall value prop. Areas for innovation

Figure 6.3
The Value Proposition Roadmap.

Step 1: Identify Key Customer Types by Value Received

The first step is to identify your key customer types, distinguished by the
different kinds of value they receive from your business.
For a hypothetical University XYZ, for example, the key customer types
might include undergraduate students, their parents, alumni, and employers
(looking to recruit students and alumni). Note that each of these customer
types gains somewhat different value from the university. For undergradu-
ate students, the value may be a mix of education, social environment, and
certification to help in job seeking. For alumni, the value of their ongoing
relationship with the university may be based more on career networking
or a sense of pride in the school’s athletics, research efforts, or reputation.
For employers, the value of the school may be in preparing graduates with
certain skills (topical knowledge, critical thinking, or technical skills) as
well as credentialing and assisting in finding the right recruits.
 182 A D A P T Y O U R VA L U E P R O P O S I T I O N

If you are having trouble identifying different customer types, look to

differences in customers’ motivations or jobs to be done (For what different
reasons do they do business with me?) or in their use cases (In what differ-
ent circumstances do they do business with me?). Looking at these is more
useful than looking at differences in demographics (students come from all
over the world; alumni are of all different ages; neither of these factors is
as critical to their relationship with the university as the different kinds of
value they receive).

Step 2: Define Current Value for Each Customer

The next step is to define your current value proposition for each customer
type.
This starts with a list of value elements—the various benefits that each
customer type gains from the relationship with your business. After listing
the value elements, write a summary statement of the value that this type
of customer receives from your business—the overall value proposition.
In table 6.3, you can see value proposition definitions for University
XYZ’s key customer types.
Notice that nowhere in the university’s value propositions is there a list
of products or services or a list of fees paid or ways that it will monetize
each customer type. Your value proposition should always be defined in
terms of benefits that matter to your customers.
Notice also that each of the university’s customer types has a distinct
overall value proposition. Customer types may have some value elements
in common (undergraduate students and alumni both care about a career
network; parents and employers both care about credentialing). But no two
customer types should have identical lists of value elements. If you arrive
at identical value propositions for two customer types, dig deeper. If you
still don’t find a significant difference in the value they receive from your
business, combine them into a single customer type.

Step 3: Identify Emerging Threats

Now that you understand your current value to customers, it is important

to understand emerging threats that could undermine it. They could do so
by competing with the value you offer, substituting for it, or simply making
it less important to your customers.
Table 6.3
Value Proposition Definitions for University XYZ’s Customers
Customer type Value elements Overall value proposition
(What benefits do they gain?)

Undergraduate students Foundational knowledge (e.g., “Launchpad for your personal

chemistry) and professional life as an
Exploration of interests/ adult”
self-discovery
Socializing and formation of
friendships
School pride (athletics, etc.)
Career network (peers who
will be part of their career
network after graduation)
Credentialing (i.e., a
degree, which provides
opportunities)
Parents Foundational knowledge (e.g., “Foundation for your child’s
chemistry) independence and career
Critical thinking (e.g., writing, success”
analysis)
Credentialing
Career network
Career counseling and
assistance (to help their
children in finding a first
job)
ROI (average boost in
graduate’s expected income
vs. total cost of education)
Employers Foundational knowledge (e.g., “A source of talent for your
chemistry) firm’s long-term growth”
Critical thinking (e.g., writing,
analysis)
Applied/job skills (e.g.,
programming languages)
Credentialing
Recruiting (helping them
recruit students on campus)
Alumni Career network (those met “A lifelong network and source
during school as well as of pride”
fellow alumni met later)
Career counseling and
assistance
School pride (athletics,
professional reputation, etc.)
 184 A D A P T Y O U R VA L U E P R O P O S I T I O N

At this point, you are not looking for factors that you know will under-
mine your business but simply ones that might have the potential.
Following are three sources to consider for potential threats to your
current value proposition:

r
New technologies: Look for emerging technologies that seem relevant to

your industry and your customers’ experience. For the recorded music
industry, the MP3 compression format was one such technology. For
pinball machine maker Williams, early video games like Pong were
identified as a potential threat to established games.
r
Changing customer needs: These can include changes in consumers’
habits, lifestyles, and social behaviors. Facebook recognized the shift
in its users’ computing time from desktop to mobile devices as a poten-
tial threat. For B2B companies, changing customer needs may include
changes in laws, regulations, or the business environment. Think of
Mohawk Fine Papers and the shift in financial reporting rules, which
meant that its client businesses had less need of printed documents.
r
New competitors and substitutes: A threat to your current value propo-
sition can often come from an asymmetric competitor entering from
another industry. For Encyclopædia Britannica, Inc., that included
Microsoft, when the software maker bundled a free encyclopedia with
its operating system. Other times, the new entrant may substitute for
your value proposition by meeting your customers’ need in a new way.
The publishers of The Deseret News saw this as websites like Craigslist
filled the need that used to be met by newspaper classified ads.

In table 6.4, you can see emerging threats to University XYZ from each
of these three sources.
The rest of the tool will focus in detail on each of your customer types.
You may want to start by completing steps 4 through 6 for a single customer
type and then repeat the process for the next customer type. Alternatively,
you can analyze all your different customer types as you go through each step.

Step 4: Assess the Strength of Current Value Elements

At this point, you should return to the lists of value elements you developed
for your customer types in step 2. You can now assess the strength of the
specific elements of value that you provide.
 A D A P T Y O U R VA L U E P R O P O S I T I O N  185

Table 6.4
Emerging Threats to University XYZ’s Value Proposition

Source Examples
New technologies Video
Podcasts
Telepresence
MOOCs
Changing customer needs Millennial students seeking more digital, anytime experiences
Alumni needing more lifelong learning
Employers seeking different skills for new job hiring
Government funders looking for more measurable economic impact
New competitors and substitutes Universities offering purely online degrees: ASU Online, etc.
Nonuniversities offering online courses: Coursera, etc.

For each value element that you listed, ask three questions:

r
Are there any ways that this is a source of decreasing value to the cus-
tomer? This decrease could come from one of the emerging threats
identified in step 3 (a new technology, customer need, or competi-
tor). Other factors could include declining relevancy to the customer,
cheaper options, and underinvestment by your business (e.g., if cost
cutting has led you to deliver less value here than in the past).
r
Are there any ways that this is a source of increasing value to the cus-
tomer? New innovations by your business may mean you are increas-
ing the value you deliver through this particular element. Or the value
may be increasing due to this element’s growing importance to the
customer, scarcity in the market, or differentiation compared to your
competitors.
r
What is the overall verdict? Based on these combined factors, you
should now make an overall assessment for each value element. Is it
strong (still a powerful source of value for your customer); challenged
(under threat and perhaps not as strong a source of value as in the
past); or disrupted (no longer relevant or meaningful to this customer
type and uncertain to recover in value).

This process should provide a clear assessment of the strength of your

current value elements. Table 6.5 shows University XYZ’s assessment of
value elements for its undergraduate students.
 186 A D A P T Y O U R VA L U E P R O P O S I T I O N

Table 6.5
Assessing the Strength of University XYZ’s Current Value Elements
Company: University of XYZ
Customer type: Undergraduate students
Overall Value Proposition: “Launchpad for your personal and professional life as an adult”

Value element Decreasing value to Increasing value to Overall verdict

customer? customer?

Foundational knowledge Large introductory lecture Challenged

(e.g., chemistry) classes have worst ratings
MOOCs provide cheaper
access to this content
Best students are testing
out via AP exams
Exploration of interests/ New internship and study- Strong
self-discovery abroad programs have
had very strong interest
Socializing and formation More socializing happens Challenged
of friendships through online networks
(but not all)
School pride (athletics, etc.) Less relevant to many Challenged
students (rank low on
surveys)
International students not
participating
Career network (peers Underinvested for several Challenged
who will be part of their years (no strong
career network after programs to support
graduation) students)
Credentialing (i.e., a Reputation continues to be Strong
degree, which provides strong
opportunities) Is attracting increasing
numbers of international
students

Step 5: Generate New Potential Value Elements

Your next step is to try to identify new value elements that you could
offer to this customer type. This is a chance to examine some of the exter-
nal forces that may be weakening your value proposition and use them
as a source of opportunity for new value that you can create for your
customers.
 A D A P T Y O U R VA L U E P R O P O S I T I O N  187

Table 6.6
Generating New Value Elements for University XYZ’s Undergraduate Students

Source Examples Possible new value elements

New technologies Video, podcasts, MOOCs On-demand learning experiences

Telepresence (e.g., versions of large lecture
classes)
Telepresence to provide more
internship and professional work
exposure
Trends in customer Millennial students seeking more Micro-classes to explore student
environment digital, anytime experience interests between semesters before
enrolling in classes
Unmet customer Career counseling New “life coaching” program that
needs Interpersonal skills coaching on combines career and social skills
“emotional intelligence”

To generate new value elements that you could offer to your customers,
look in three areas:

r
New technologies: How could new technologies allow you to create

additional elements of value for your customers?
r
Trends in your customers’ sociocultural or business environment:
Consumer lifestyle and business trends may provide new opportuni-
ties for you to create value, even with the same products.
r
Unmet customer needs: Get close to your customers. Observe them
directly. Talk to lead users. You’re sure to find some unmet needs that
no one is fulfilling; one of them may be an opportunity for your busi-
ness to add new value.

Table 6.6 shows some new value elements that University XYZ might
consider adding for its undergraduate students.

Step 6: Synthesize a New Forward-Looking

Value Proposition

The final step of the Value Proposition Roadmap is to synthesize every-

thing you have learned about your value proposition for each customer
type.
 188 A D A P T Y O U R VA L U E P R O P O S I T I O N

Review your value elements, and place each into one of four columns:

r
Core elements—to build on: These elements are a source of strength that
you plan to use as a focus of continuing innovation.
r
Weakened elements—to bolster: These are current value elements that
are losing their impact for your customers and that you have chosen to
try to reinforce and improve.
r
Disrupted elements—to deprioritize: These are former sources of value
that have lost their ability to deliver for your customers and that you
have chosen to move away from and drop from your strategic focus.
r
New elements—to create: These are new value elements that you have
identified as opportunities to add more value for your customers and
that you have chosen to invest in for future growth.

Now you can craft a revised overall value proposition for each customer
type. This should be a forward-looking statement of how you intend to create
value as you continue to evolve your offerings for this particular customer type.
Finally, list any ideas you have for specific initiatives (new product features,
service offerings, etc.) you can use to deliver on your revised value proposition.
Table 6.7 shows a new forward-looking value proposition for Univer-
sity XYZ’s undergraduate students.

If you are looking at your customer types separately, you can now go back
and complete steps 4–6 of the tool for the remaining customer types that
you identified in step 1.
When you have finished, you will have in your hands a complete roadmap
for adapting your value proposition. This roadmap includes a strategic analysis
of emerging threats, an innovation brief that can be used by those working on
your next-generation products and services, and a customer-centric analysis of
where your business is today and where it is going in the future.
If applied as a regular part of strategic planning, the Value Proposition
Roadmap can be a helpful tool for anticipating customer needs, assessing new
technologies proactively, and applying resources to new strategic opportunities.

Organizational Challenges of Adapting Your Value Proposition

The benefits of continuously adapting a business’s value proposition may be

clear. But that does not make it easy. It requires the business to step outside
 A D A P T Y O U R VA L U E P R O P O S I T I O N  189

Table 6.7
Synthesizing University XYZ’s New Value Proposition
Company: University of XYZ
Customer type: Undergraduate students
Existing Overall Value Proposition: “Launchpad for your personal and professional life
as an adult”

Core elements— Weakened Disrupted New elements—

to build on elements— elements— to create
to bolster to deprioritize

Exploration Foundational Expensive school On-demand

of interests/ knowledge pride events and learning and
self-discovery (especially large social activities preprofessional
lectures) experiences
Credentialing and Peer network for Career and personal
international careers “coaching”
brand reputation

Revised Value “Your launchpad for personal discovery and professional success”
Proposition

Specific areas for On-demand learning experiences (e.g., versions of large lecture classes)
innovation Expanded international internships and telepresence-based work
projects
Online micro-classes for students to explore interests between semesters
“Life-coach” program for final two years that combines career and
social skills
Alumni-to-student mentoring programs

the inward-looking habit of focusing on its own products and processes and,
instead, to take the point of view of the customer. It also requires the busi-
ness to imagine a version of itself that is different than what perhaps worked
very well in the past. In particular, a larger or longer-established organiza-
tion may find it much harder to gain a clear view of its value to the customer
and of the opportunity, and necessity, to adapt while it still has the chance.

Dedicating Leadership

The first challenge for value proposition adaptation is leadership. Who will
be in charge of making the change happen? Even when a strategy team
is effectively set up to identify opportunities for evolving the business’s
value proposition, someone needs to be in charge of acting on the new
opportunities. For years, the U.S. Postal Service has struggled to balance its
 190 A D A P T Y O U R VA L U E P R O P O S I T I O N

finances as technology has changed the needs of customers for its services
(When did you last send anyone a post card?). In 2014, its inspector gen-
eral released a report arguing that the USPS should move into providing
nonbank financial services (bill payments, money orders, prepaid cards,
international money transfers, etc.) to its customers, many of whom are
underserved by traditional banks.15 The report was praised in the press, on
Capitol Hill, and even in the pages of American Banker.16 But more than
a year later, no action had been taken, despite support for the idea from
the American Postal Workers Union. A newly sworn-in postmaster general
had focused on the current value proposition (e.g., whether to trim Satur-
day mail delivery), but no one appeared to be in charge of turning innova-
tive ideas for new customer services into a reality.17
Leadership tenures may be another important factor in value propo-
sition adaptation. As Henry Chesbrough has observed, many large firms
move their general managers in two- or three-year rotations among differ-
ent business units in order to develop their leadership and knowledge of
the whole firm. However, undertaking significant change to a unit’s value
proposition or business model often takes more than two years. These kind
of short-term leadership roles encourage managers to simply continue to
optimize the existing model rather than pushing the company to adapt for
the future.18

Allocating Talent and Treasure

Another key challenge for an organization seeking to adapt is the need to

allocate the necessary human and financial resources away from existing
areas of business and into new, unproven ventures.
New managers with appropriate skills and authority are often the driv-
ing force behind new strategic direction. At the New York Times Company,
adapting the value proposition of its business for both readers and advertis-
ers required organizational changes as well. The company hired Alexandra
MacCallum, founding editor of the digital Huffington Post, to lead a unit
focused on audience development in an age of social media. Chris Wig-
gins was named chief data scientist and assigned to help guide a burgeon-
ing engineering division. Its job was to harness data and analytics to help
inform decisions by both editors and publishers on the Times’ content, dis-
tribution, audience, and new advertising products.
 A D A P T Y O U R VA L U E P R O P O S I T I O N  191

Often, adapting a business’s value proposition requires changing the

lines of reporting of existing employees. When Facebook began its strate-
gic shift to focus on the best mobile experience for users and advertisers,
it had to redesign the organization chart for the company’s engineering
teams. In the old organization, the desktop team led the development of
each new feature, and separate teams handling mobile apps for iOS and
Android were left to play catch-up. To support the new strategy, all engi-
neers were reassigned to teams focused on a single Facebook feature (photo
albums, group messages, upcoming events, etc.) so they could build it for
both mobile and desktop from the very beginning.19
Financial resources must also be allocated carefully to support the evo-
lution to new value propositions. This often requires leveraging revenue
or assets from existing units to finance the launch of new ones. During
Williams’s strategic transition, the firm was simultaneously taking money
out of its existing pinball machine business and launching its first casino
games. Marvel Comics had to leverage its prized rights to its comic book
characters as collateral to secure funding for its move into film produc-
ing. This kind of transition is critical. McGrath describes this as a process
of “continuous reconfiguration” of assets, people, and capabilities as busi-
nesses adapt from one transient advantage to another.20

Avoiding Myopia

Perhaps the biggest challenge to adapting the value proposition of an orga-

nization is that it requires looking beyond the conventional wisdom of
its current business. Bold new opportunities (like selling music as digital
files over the Internet rather than as physical products) can often provoke
a response of “That’s not how we do things around here!” To paraphrase
entrepreneur Aaron Levie, “Businesses evolve based on assumptions that
eventually become outdated. This is every incumbent’s weakness and every
startup’s opportunity.”21
Numerous psychological experiments have illustrated the power of
confirmation bias. When faced with new information, we have a strong
tendency to selectively notice facts that fit our preexisting theories of the
world and to discount or filter out the ones that conflict. Think of the pin-
ball machine industry. When computer games first arrived in arcades, pin-
ball machine sales actually improved temporarily because the new games
 192 A D A P T Y O U R VA L U E P R O P O S I T I O N

were bringing in more customers. It would have been easy for Williams to
have concluded that video games posed no threat to its legacy business.
Actually, that is what their competitors concluded; almost all of them van-
ished while Williams was making its pivot to casino gaming.
Avoiding myopia requires a business to take the customer’s point of
view rather than its own. This kind of customer-centric thinking is difficult,
as an organization naturally focuses its energy and attention on its own pro-
cesses, strategies, and immediate self-interest. If a company has been mak-
ing encyclopedias for 200 years, it would be easy for it to focus on all the
hard work that goes into making them and to wish customers would just pay
for its new CD-ROM version rather than cultivating the perspective to see
that its CD-ROM isn’t really the best solution for those customers.
To cultivate the customer’s point of view, a business needs to insti-
tutionalize listening to its own customers, particularly lead users (as dis-
cussed in chapter 4). These avidly involved customers actually drive most
commercially successful new innovations because they tend to face new
needs earlier than the general population.22
The challenge, though, is often not in finding the right customers to
listen to but in keeping our ears open. My friend Mark Hurst has spent his
career trying to help companies develop customer empathy through direct
customer observation. “The difficult truth is that customers often bring the
bad news when something is wrong,” Hurst says. “Some executives simply
don’t want to hear it.”23

In a world of rapidly changing technology and customer needs, it is no

longer sufficient for a business to deliver the same value that has brought
it success in the past. A rapid pace of change demands that every business
continuously adapt how it serves its customers, what problems it solves,
and what value it delivers. By taking a truly customer-centric attitude, a
business can stay ahead of the curve of change. If it can learn to continu-
ously reevaluate the value it delivers, identify changing customer needs,
and spot emerging opportunities, it can continue to be the most valuable
option for its customers.
We have now examined all five domains of digital transformation. We
have seen, in detail, how businesses today need to think quite differently
about customers, competition, data, innovation, and value to customers.
By applying new tools and concepts to each of these five domains, any
 A D A P T Y O U R VA L U E P R O P O S I T I O N  193

organization can move beyond the assumptions of the analog age. By trans-
forming its strategic thinking across the five domains, any business can
adapt and create new value in the digital age.
But success in the digital age also requires us to prepare for the unex-
pected: the most challenging ruptures and dislocations that can strike any
industry. This requires a clear understanding of what we mean when we
talk about business disruption. That concept is surrounded by many mis-
conceptions. True business disruption does not happen every day. But there
might be times when a business must face a truly disruptive challenge—an
asymmetric threat that radically undermines its current position, calling
into question its core value proposition and threatening to make it unat-
tractive to customers or, worse, irrelevant. In such times, that business
needs additional tools: a theory to understand the difference between com-
petition and true disruption, a rubric to assess any potentially disruptive
threat, and a guide to judge what the appropriate response is.
The prevailing theory of disruption, developed just as the Internet age
was dawning, was based in the prior revolutions of the late industrial and
early information ages. Successful leadership today requires an updated
theory of disruption for the digital age. That is the subject of the next and
final chapter.
 7
Mastering Disruptive Business Models

There is a specter that lurks in the background of almost every discus-

sion of digital transformation. For many, the need to rethink and adapt
their organizations arises in response to a fear of a different, dire outcome:
disruption.
This concern is prudent. Even if your business absorbs the best strate-
gic thinking of the digital age and works diligently to apply it toward your
own strategies, no method is foolproof. It is still possible—in some cases,
even inevitable—that you will wind up faced with a truly disruptive threat
from an asymmetric competitor. It is critical, then, to be prepared to cope
with disruption.
In this last chapter, we will examine the nature of business disruption
and its relationship to everything we have learned about the five domains
of digital transformation. I will present two final strategic tools. The first
tool, the Disruptive Business Model Map, allows you to assess any emerg-
ing threat to determine whether it truly poses a disruptive challenge to
your business. (Spoiler: in most cases, it does not.) If you are dealing with
a true case of disruption, the second tool, the Disruptive Response Plan-
ner, reveals the full scope of the threat and helps you choose among the six
responses possible for an incumbent business under attack. In order to do
all this, we will first need to revisit the existing theory of disruption and
update it to account for the changed dynamics of the digital age.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  195

Throughout this chapter, our understanding of disruption will be

informed by all that we’ve learned about the five domains of digital trans-
formation—customers, competition, data, innovation, and value. We will
see why disruption differs from most cases of innovation. We will see how
it is best understood as an asymmetric competition between business
models. We will discover why value proposition is an essential lens to
understanding and mastering disruption. And we will discover how plat-
forms, data assets, and customer networks are among the key drivers of
disruptive value in the digital age.
But to start, let’s be clear about what we are trying to understand when
we talk about business disruption.

Disruption Defined

The idea of disruption has grown in relevance as every industry faces increas-
ingly unpredictable threats. But at the same time, disruption has become a
buzzword, bandied about indiscriminately. Any new business or product
is heralded as disruptive to lend it credibility. (“You have to fund our new
start-up; it is going to disrupt the XYZ industry!”) Countless speeches have
been made exhorting entrepreneurs to be disrupters. At times, the rhetoric
seems to mistake the point of innovation, which is not simply to disrupt
existing enterprises but rather to create new value for customers.
If we are to inform our own business strategy by thinking construc-
tively about disruption, it is essential that we develop a clear understanding
of the phenomenon.
To start, let me offer a definition:

Business disruption happens when an existing industry faces a chal-

lenger that offers far greater value to the customer in a way that existing
firms cannot compete with directly.

Let’s unpack that definition.

r
Business disruption: We are talking specifically about disruption in

the sphere of business. I state this because the idea of disruption is
frequently applied to changes in culture, society, politics, and other
domains. For example, one can argue that the birth control pill was a
disruptive innovation in terms of its impact on social mores, marriage
law, and political ideologies. But it may not have transformed business
 196 MASTERING DISRUPTIVE BUSINESS MODELS

or industry. In a case like this, an innovation may be disruptive to soci-

ety but not be an example of business disruption.
r
Existing industry: Disrupt is a transitive verb! In order for something
to be disruptive, something else must be disrupted. When we see a
radically innovative new business or product, we sometimes leap to
the conclusion of disruption before considering its impact on exist-
ing industries. Think of the self-driving car first pioneered by Sebas-
tian Thrun and others in Google’s Google[x] division. A mainstream,
affordable self-driving car may soon be commonplace—and even
become the dominant mode of transportation within a decade or two.
If so, this will clearly be a transformative technology for drivers. But
it is less clear that self-driving cars will disrupt existing automakers.
So far, Google has shown little interest in entering car manufacturing
and is looking to partner with major automakers. Some of them, like
Toyota, are even launching their own parallel efforts in this area. It is
quite possible that self-driving cars will radically transform the expe-
rience of driving and the world of transportation but do so without
undermining the existing automobile industry.
r
Offers far greater value to the customer: Whenever disruption occurs,
it is because a new offering is suddenly much more attractive to cus-
tomers than the offering that the existing industry provides. Photo-
graphic film maker Kodak did not collapse into bankruptcy because
digital cameras offered somewhat better value for consumers. It did so
because digital cameras—with nearly unlimited shots, instant display
of the picture taken, and free replication and transmission of images—
were vastly better than film cameras for the average snapshot taker. The
first thing that separates disruption from traditional competition is this
wide gap in value, which can lead to a tipping point when customers
shift en masse to the new offer.
r
Cannot compete with directly: This is the other key distinction between
disruption and traditional competition. In traditional competition,
roughly similar businesses duke it out to offer the customer better
product features, lower prices, or greater personalization and service.1
When Ford Motor Company comes out with a faster, more fashion-
able, or more fuel-efficient car, Chrysler redoubles its efforts to com-
pete on the same dimensions. When Macy’s draws traffic with holiday
sales, JCPenney does the same. When British Airways uses data to offer
more personalized service to its travelers, Virgin Airways may aim to
do the same for its customers. But disruption is different. Disruption
is caused by asymmetric competitive threats. A disruptive challenger is
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  197

not selling a different version of the same product or service. It meets

the customer’s needs with a product, service, or business model that
the existing industry does not, and cannot, offer.

The most important lesson to take from a clear definition of disruption

is this: not all innovation is disruptive. I stress this because many times
disruptive is used simply to mean “extremely innovative.” In fact, many
new business ideas create new customer value, and they do so by defying
common assumptions, or sacred cows, in their industry. But most of these
innovations don’t actually disrupt the preexisting shape of the market. The
result is a better product or a new brand but not disruption.
Take, for example, socks. In 2004, Jonah Staw and three cofounders
launched LittleMissMatched, a company selling socks by the threes, each
set intentionally not matching but with playful colors and patterns that
looked stylish when paired with each other. It was a new lifestyle brand
aimed at girls aged eight to twelve, and it went on to great success. The
socks were a brilliant idea, one that defied conventional wisdom and added
new value for the right customer. But they were not disruptive. The socks
were still manufactured, sold, distributed, priced, and used roughly the
same as other socks. So there was no hurdle to existing sock manufacturers
competing directly. Indeed, as LittleMissMatched proved to be a winner,
other brands copied the product idea.
Even an innovative business model is not necessarily disruptive—as
long as the jobs and revenues it creates are entirely additive to the mar-
ket. In their book Blue Ocean Strategy, W. Chan Kim and Renée Maubor-
gne describe how “value innovation” can be used to create new value and
growth by opening up new uncontested space; they use examples like
Cirque du Soleil’s invention of a new hybrid form of entertainment com-
bining circus and theater.2 In this and many such cases, the innovator is
not undermining an existing industry but simply carving out a new market
space (the “blue ocean”).
None of this is to dismiss the value of blue oceans, unconventional
thinking, or innovative products, services, or brands. It is simply to make
clear that innovation is not always disruption.

Disruption in the Digital Age

Now that we have an understanding of what we mean by disruption, why

does it seem to be on the rise in the digital age?
 198 MASTERING DISRUPTIVE BUSINESS MODELS

The answer is simple. As we have seen throughout the last five chapters,
digital technologies are rewriting the rules of business. These new rules
have created opportunities for countless new challengers to take on long-
profitable businesses that have failed to adapt. No industry is immune. If
the Industrial Revolution was about machines transforming nearly every
physical act of labor and value creation, we are still at the beginning of a
revolution in which computing will transform nearly every logical act of
value creation.
Marc Andreessen has famously said that “software is eating the world.”
He invented the first Web browser, the software that unleashed the Internet
as a network for mass participation. In chapter 6, we saw the existential
threat that it posed to the recorded music industry. Today, Andreessen
sees the digitization of every industry leading to ever more battles between
incumbents and software-powered disrupters.3
It’s certainly easy to find examples.
Think of Craigslist, the online classified service, and its impact on
newspapers’ business model. Traditional newspapers were very expensive
to produce. Certain sections, such as international news coverage, would
never pay for themselves if sold alone, but newspapers were always sold
in bundles so the more profitable sections could support the cost. One of
the most profitable parts of every newspaper was the classified ads, where
individual readers would pay to place a small advertisement announc-
ing items for sale (a used car, furniture, a television) or services (college
movers, lawn mowing). Then along came Craig Newmark, a software
programmer in San Francisco with the simple idea of using the Internet
to allow anyone to publish their classified ads for free. His small hobby
project was called Craigslist, and it quickly grew from an e-mail list into
a self-service website and a global enterprise that operates in seventy
countries and thirteen languages, with 50 billion page views per month. 4
Craigslist’s success was inevitable. For customers, it offered a vastly bet-
ter deal than using newspapers: the ads were free to post (in almost all
categories), appeared instantly, and could be searched through a simple
interface. Newspapers, watching one of their highest margin sources of
revenue disappear, found themselves unable to do much but wish the
Internet had never been invented. Certainly, they could have created their
own free classifieds listings, but that would have done little to stanch the
loss of income. With their completely different cost structure, newspapers
were unable to compete with this disruptive challenger.
We’ve already seen the example of Airbnb, the software-powered chal-
lenger to the traditional hotel industry. Rather than building expensive
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  199

properties and renting rooms to travelers, Airbnb provides an online plat-

form that allows homeowners to rent out their homes when they aren’t
using them and travelers to find them. With over 10 million guests per year
staying in more than 192 countries, the start-up surpassed InterContinental
Hotels Group and Hilton Worldwide to be “the world’s largest hotel chain”
without owning a single hotel.5 For many customers, Airbnb offers a much
better deal than a traditional hotel in New York or Paris—a better price,
more choice among neighborhoods, and a more “local” and personalized
experience. It is also a deal that hotel chains cannot hope to replicate, given
their investment in completely different business assets. Their best hope to
restrain the disrupter may be local governments, many of which are losing
tax revenue on these nontraditional hotel stays.
Another example can be seen in the category of restaurant food deliv-
ery with the digital challenger GrubHub. For hungry residents in cities like
Chicago, New York, and London, GrubHub (and its local brands, like Seam-
less) offers a great experience. Using a single, well-designed GrubHub app
or website, customers can browse numerous nearby restaurants, pick items
off their menus, and order for delivery with a preregistered credit card.
It’s a far superior experience to clicking through an assortment of badly
maintained websites, calling a restaurant, and dealing with sometimes poor
phone service. For individual urban restaurants, GrubHub’s platform offers
access to new customers and an online ordering system they couldn’t afford
to build themselves. But as its app becomes more popular and its power
grows, individual restaurants feel they have no option but to join up and
give a share of their already thin profit margins to the new digital platform.
Trying to compete directly with GrubHub is out of the question. Even if it
had the technical savvy, a single restaurant could never offer the variety of
GrubHub’s aggregated menus.
In each of these industries, a new digitally powered business has created
great value for the customer while weakening or undermining the position
of the traditional incumbent businesses. Although the digital challenger is
eating into their profits, traditional incumbents find themselves unable to
respond by competing directly with the same offer.
The exact strategy of the digital disrupter may vary. It may be offering
a new service for free, like Craigslist. It may use intermediation, like Grub-
Hub, to place itself between traditional businesses and the final consumer.
It may offer a substitute solution to a long-standing customer need, like
Airbnb does in place of a traditional hotel.
In every case of disruption, though, the challenge arises from a new busi-
ness offering new value to the customer. Incumbent businesses may wring
 200 MASTERING DISRUPTIVE BUSINESS MODELS

their hands and declare an unfair advantage for their challenger. But whether
the disrupter is a well-monetized new business (Airbnb is valued at over $10
billion) or not (Craigslist is run almost like a nonprofit), every disrupter is
creating new value for the customer. No one ever created a disruptive business
without creating an incredibly appealing new value proposition.
But is that it? Are we simply talking about new value propositions—or
something more? What really defines disruption? And can we model it,
understand it, and even predict it?

Theories of Disruption

The first major theorist of business disruption was the Austrian economist
Joseph Schumpeter. He didn’t use the word itself, but he wrote influentially
on a phenomenon he called “creative destruction,” whereby capitalism
inherently destroys old industries and economic systems in the process of
innovating new ones. In describing the arrival of railroads like the Illinois
Central to the midwestern United States, he wrote, “The Illinois Central not
only meant very good business whilst it was built and whilst new cities were
built around it and land was cultivated, but it spelled the death sentence for
the [old] agriculture of the West.”6
Schumpeter identified industry disruption as an inherent pattern in
capitalism. Successive cycles of capitalist invention birth new industries
while destroying their predecessors. But it was Clayton Christensen who
offered our first theory of how disruption happens and began to delve seri-
ously into its mechanisms. His brilliant and elegant theory of disruptive
technology (later redubbed disruptive innovation) was laid out in a 1995
article and subsequent book, The Innovator’s Dilemma.7
Christensen’s theory shows how disruptive challengers can unseat
long-standing incumbents. The disrupter always starts out selling to buyers
in a new market—that is, buyers who are outside the market of customers
currently served by the incumbent. This “new market” disrupter offers an
innovative product that is inferior in terms of performance and features but
is cheaper or otherwise more accessible to those who cannot make use of
the incumbent’s offering. The pattern that follows is predictable: the incum-
bent ignores the challenger’s inferior product because its own customers
aren’t interested and instead continues to improve the performance of its
higher-priced products. Over time, though, the performance of the chal-
lenger’s innovation gets gradually better while it remains much cheaper or
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  201

more accessible. At a critical juncture, the new technology becomes good

enough to be a viable alternative for the incumbent’s own customers, and
they begin to defect rapidly in favor of the much cheaper or more accessible
alternative. The incumbent, who has remained wedded to its long-standing
product and business model, finds it almost impossible to compete. Rapid
decline follows.
It is a powerful theory and one that fits uncannily well in cases from
many, many industries—computer hard drives, mechanical excavators,
steel mills, stock brokerages, printing presses, and more.
But as tech analyst Ben Thompson has noted, “Christensen’s theory
is based on examples drawn from buying decisions made by businesses,
not consumers.”8 In the mid-1990s (when Christensen’s book was written),
technology was mostly sold to businesses, not consumers. Not surprisingly,
this allowed for a very straightforward theory of disruption. Customer
motivations were driven by a few clear, functional attributes: price, acces-
sibility, and performance. Incumbent businesses were particularly blind to
new customer markets. Due to their B2B sales process (with a dedicated
salesforce visiting corporate customers), incumbents found it extremely
difficult to switch from serving their current customers to focusing on the
emerging customer populations that their disrupters served.
Its origins in B2B industries may be the reason Christensen’s theory
explains a great many cases of disruption but has missed others. Famously,
when Christensen was interviewed about Apple’s iPhone, he predicted that
it would fail to disrupt the incumbent mobile phone manufacturers like
Nokia. “The iPhone is a sustaining technology relative to Nokia. In other
words, Apple is leaping ahead on the sustaining curve [by building a bet-
ter phone]. But the prediction of the theory would be that Apple won’t
succeed with the iPhone. They’ve launched an innovation that the existing
players in the industry are heavily motivated to beat: It’s not [truly] disrup-
tive. History speaks pretty loudly on that, that the probability of success is
going to be limited.”9
After the colossal success of the iPhone, Christensen said that it had,
in fact, been a disrupter but that the incumbent was actually the personal
computer industry.10 This is an interesting point and is still playing out as
global PC sales have flattened and been overtaken by smartphones. But it
would be nonsensical to argue that Nokia was not disrupted by the iPhone
as well. The incumbent king of the mobile phone industry before the iPhone
was completely unable to match the new challenger; Nokia fell rapidly into
irrelevance, and its phone division was sold to Microsoft six years later.
 202 MASTERING DISRUPTIVE BUSINESS MODELS

But I don’t believe that Christensen spoke hastily or misapplied his

theory. Clearly, the case of iPhone versus Nokia didn’t fit his original model.
From the start, the iPhone sold to the kind of affluent, technology-adopt-
ing consumers who were a mainstay of Nokia’s customer base. The iPhone
was neither cheaper nor more accessible than Nokia’s phones. It did not
start out performing at a lower level and gradually build up to overtake the
incumbent. So how did Nokia come to be so thoroughly disrupted?
I will attempt to answer that question by offering a new theory. My
aim here is not to replace Christensen’s theory but to extend it to account
for newer dynamics of disruption that are now visible in the marketplace—
disruption that is driven by consumer purchase behaviors, disruption that
starts with the incumbent’s core customers (rather than starting with new
markets), and disruption that is driven by values other than price or access.
As we will see, Christensen’s theory of new market disruption is actually a
specific case of the broader theory that I will present.

A Business Model Theory of Disruption

My theory begins with the assumption that the best lens through which
to view disruption is business models. Many of today’s biggest disrupters
are not introducing a new fundamental technology to the market (e.g., a
new type of hard drive or mechanical excavator). Instead, they are apply-
ing established technology to the design of a new business model. (Craigs-
list invented neither e-mail lists nor websites; GrubHub invented neither
e-commerce nor mobile apps.) Business disruption is, at its core, the result
of the clash of asymmetric business models.
As with disruption, business model is a term that has taken on varying
definitions with its growing popularity as a tool for strategy formation. I’ll
use the common definition: a business model describes a holistic view of
how a business creates value, delivers it to the market, and captures value
in return.11
A detailed business model may comprise several components. Alexan-
der Osterwalder and Yves Pigneur describe it as including nine “building
blocks”: customer segments, value propositions, channels, customer rela-
tionships, revenue streams, key resources, key activities, key partnerships,
and cost structure.12 Mark Johnson, Clayton Christensen, and Henning
Kagermann define it in terms of four parts: customer value proposition;
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  203

profit formula (including revenue model, cost structure, margin model,

and resource velocity); key resources; and key processes.13
My intent is to use the business model specifically as a predictor of
business disruption, and for this purpose, the schema can be simpler.

Two Sides of a Business Model

For the purpose of understanding disruption, let’s split the business model
into two sides.
The first side is the value proposition—the value that a business offers
to the customer. Due to the extreme importance of value creation and its
role in business disruption, for this framework I’ll consider it on par with
all the other elements of a business model combined. I am not alone in this
priority: Johnson, Christensen, and Kagermann picked value proposition
as “the most important to get right, by far.”14 And although it is just one of
nine building blocks in Osterwalder and Pigneur’s first book, their next
book was focused entirely on value propositions.15
The second side of the business model is the value network—the
people, partners, assets, and processes that enable the business to create,
deliver, and earn value from the value proposition. This includes things
like channels, pricing, cost structure, assets, resources, and the customer
segments on which a business is focused. The term value network emerged
in the 1990s to provide a model of value creation that is less atomistic, less
manufacturing-oriented, and less confined inside the firm than the model
of value chains.16
A quick example: I often present this framework when teaching short
programs for international executives through Columbia Business School
Executive Education (often in partnership with leading universities in
Asia, Europe, or Latin America). I introduce it by asking the executives to
describe the value proposition of an executive program like the one they
are participating in: “What is the benefit you gain as a customer?” They
typically identify several things: cases studies and best practices, exposure
to new industry trends, and practical frameworks and tools—but also peer
relationships, access to faculty, the recognized credential of a certificate,
and a chance to step outside their daily rush for some big-picture perspec-
tive taking. In any complex business, the value proposition will include
numerous elements such as these.
 204 MASTERING DISRUPTIVE BUSINESS MODELS

I then ask the participants about the value network: “What enables the
business school to create and deliver this value and to earn revenue from
it?” They typically point to the faculty, the campus (being in New York is
sometimes important), and the program development staff—but also the
brand name and reputation of the school, relationships with industry, a
network of partner business schools, and being part of a broader research
university. Each of these, in different ways, helps to make the value proposi-
tion possible.
Once we can see any business model in terms of these two sides—
value proposition and value network—we are ready to apply them in a new
theory of how disruption happens.

The Two Differentials of Business Model Disruption

The theory of business model disruption is simply this: in order to disrupt

an existing business, a challenger must possess a significant differential on
each side of the business model:

r
A difference in value proposition that dramatically displaces the value

provided by the incumbent (at least for some customers)
r
A difference in value network that creates a barrier to imitation by the
incumbent

Business disruption happens when both of these conditions are met—

and only then.
Without the first differential, there is no disruption, just traditional
competition. If the challenger’s offer is merely incrementally better (slightly
better price, availability, simplicity, features, etc.), then there may be some
loss of business, but the incumbent can simply respond with normal com-
petitive tactics to catch up, close the gap, or minimize losses. For disruption,
the challenger’s offer must be dramatically better. For at least some types of
customers, it should be no contest at all to decide whether to switch to the
challenger. When local newspaper readers discovered Craigslist, the option
of instant, free online listings of their advertisements (as compared to slow,
expensive newspaper listings) was incontestably better. Not every traveler
wants to stay in an apartment like the ones they can find via Airbnb, but
for those who do, the various benefits (price, availability, choice of location,
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  205

personal interaction, and local flair) mean that a traditional hotel room
simply can’t compete.
Without the second differential, however, an incumbent would simply
be able to watch the success of an innovative new challenger and profit-
ably imitate it with a copycat offering of its own. An incumbent that gets
disrupted is unable to replicate its challenger for varied reasons, but they
all stem from the value network that the incumbent established in build-
ing its business. For newspapers facing Craigslist, their high cost of opera-
tions meant they saw no benefit in imitating a free service run by a small
group of iconoclasts who persisted for years with no revenue and never
attempted to build a large for-profit enterprise. For global hotel chains like
Hyatt, offering a bed-sharing service like Airbnb’s would make no use of
their real estate, confuse their brand image, irritate their partners (many
of the hotels are owned by franchisees), and draw even more tax scrutiny
from local governments than Airbnb has. In both cases, the existing value
network of the incumbent prevents it from imitating the appealing new
offering of its challenger.
Let’s look at both differentials in a bit more detail.

Value Proposition Differential

Every disrupter requires a difference in value proposition that dramatically

displaces value provided by the incumbent. That difference can come from
many possible sources, which I call value proposition generatives (a term I
am adapting from Kevin Kelly).17
Key value proposition generatives that are common to digital disrupt-
ers include the following:

r
Price: Digital business models often allow for the same product or ser-
vice to be offered at a substantially lower price.
r
Free or “freemium” offer: Research has shown that free offers stimu-
late many more customer trials than a low price, even a penny.18 Many
new business models add customer value with a freemium offer, where
some level of service is available for free but a premium paid version
offers additional benefits.
r
Access: One of the most common generatives of a digital business model
is the ability to access content or services remotely, anywhere, any time.
 206 MASTERING DISRUPTIVE BUSINESS MODELS

r
Simplicity: Many digital business models disrupt by removing friction

from the sales process, making decision, purchase, and enjoyment of a
product much simpler and easier.
r
Personalization: Customers prefer to have more choices to pick from
(provided there are tools to assist) and the choice of a product or ser-
vice that fits their particular needs. Sometimes this personalization
occurs through recommendation engines like Netflix’s; in other cases,
a new business offers customers the chance to customize a product.
r
Aggregation: Many platform business models add value by aggregating
many sellers for the customer to choose from.
r
Unbundling: A lot of digital innovation involves splitting apart tra-
ditional bundles—groups of products, services, or features that cus-
tomers needed to purchase together. The added value can come from
letting the customer buy only the part they need or from focusing on
and improving the one part of the bundle that matters most.
r
Integration (or rebundling): In the opposite direction, businesses can
generate new customer value by bundling together services that are
currently separate. (Think of the first iPhone customers, carrying one
device rather than a phone, an MP3 player, and a personal digital assis-
tant.) The real value of integration comes when the various parts work
together in a seamless way that was not possible when they were sepa-
rate. (Think of how your address book, maps, calendar, e-mail, phone
calls, and texts all work together and interact in a smartphone.)
r
Social: The ability to share the experience of a product or service with
others is increasingly valuable to many customers.

This list is not meant to be exhaustive. Other value proposition gen-

eratives that may be less tied to digital technologies include purpose (e.g.,
how each purchase from Warby Parker or Patagonia supports a social
cause), authenticity (e.g., how Etsy allows shoppers to interact with and
buy directly from craft artisans), or freedom from ownership (e.g., how
Rent The Runway allows customers to rent a different designer dress each
time they go out rather than owning any of them).
You will notice that the generatives above arise from many of the
strategic concepts we have seen throughout the book—such as customers’
networked behavior, the path to purchase, the use of data for personaliza-
tion, and the aggregating value of platforms. All of them are applied in
the service of adapting or inventing new value propositions, the subject
of chapter 6.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  207

Value Network Differential

Every disrupter also requires a difference in value network that creates a

barrier to imitation by the incumbent. Recall that the network includes
anything—people, partners, assets, processes—that enables a business to
create, deliver, and earn value from its value proposition. The differences
can be found by looking at many different elements—what I call value net-
work components.
Key components to consider in analyzing a challenger’s value network
include the following:

r
Customers: The challenger may be pursuing different customer seg-

ments or types than the incumbent currently serves.
r
Channels: These may include retail or online distribution, direct deliv-
ery to the customer, or distribution through intermediaries. (Is the
challenger using different channels to come to market?)
r
Partners: These may include sales, manufacturing, supply chain, or
other key partners that are critical to the challenger’s offer.
r
Networks: If the challenger has a platform business model, then an
established network of customers or partners may be essential to how
it delivers its offer. (This may include networks of consumers, advertis-
ers, app developers, etc.)
r
Complementary products or services: The challenger may already pro-
vide the customer other products or services that are essential to the
value created by its new offer. (Think of Apple’s iTunes music service,
which predated the iPhone and added to its value.)
r
Brand: Reputation, brand image, and the prior relationship with the
customer may be essential to the challenger’s ability to provide the
value of its offer (and to charge the right price for it).
r
Revenue model: This includes the pricing and profit margin as well as
the payment model. (Is the customer paying for the offer on a product
basis, per use, monthly subscription, revenue share, etc.?)
r
Cost structure: This includes both the fixed and the variable costs incurred
by the challenger in order to provide its offer to the customer.
r
Skills and processes: The challenger may have unique or differentiated
processes and organizational skills that are essential to the value it
delivers (from Apple’s design capability behind the iPhone to Zappo’s
highly developed customer service).
 208 MASTERING DISRUPTIVE BUSINESS MODELS

r
Physical assets: These may include factories, equipment, stores, and so

on owned by the challenger.
r
IP assets: Critical intellectual property may include patents, rights, licenses,
and unique technologies.
r
Data assets: The challenger’s value proposition may rely on unique data
assets and capabilities, such as Amazon’s and Google’s use of their cus-
tomer data to deliver all kinds of personalized offerings.

The Two Differentials in Christensen’s

New Market Disruption

As mentioned earlier, Christensen’s original model of business disruption,

often called new market disruption, is actually a specific case of this more
general theory of business model disruption.
Within this new theory, Christensen’s new market disruption is simply
a description of all those cases of disruption where the value proposition
differential is a difference in price or access and the value network differen-
tial includes a difference in customer segment (the challenger is pursuing a
different customer segment).
By expanding our model to include other differentials of both value
proposition and value network, we can account for and explain many addi-
tional examples of business disruption, particularly those involving some
of the biggest disrupters of the digital age.

Digital Disrupters: iPhone, Netflix, Warby Parker

Let’s see how this model applies to three recent cases of business disruption.
All three are in consumer businesses, and the disruption did not follow the
traditional new market theory of disruption.
Two of the incumbents were completely disrupted and left the business
where they had recently been the market leader; one disruption is newer
and still ongoing. (As we shall see, a disruptive challenger does not always
spell doom for the incumbent.)

iPhone Versus Nokia

Why did Apple’s iPhone so thoroughly supplant Nokia’s mobile phones?

 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  209

By looking at the differences in their value propositions, we can see

why customers quickly came to see the iPhone as not slightly better but
vastly better—no comparison at all, really. (See table 7.1.)
Certainly, one difference was in the physical design—the iPhone’s
shape, weight, and large glowing screen and the tactile experience of its
touchscreen provided a totally different customer experience. Simplicity
was another critical difference. Mobile phones in 2007 were notoriously
difficult to navigate, even for common features like managing voice mail
messages. The iPhone’s operating system offered a much easier user inter-
face. Another important difference was integration—rather than carrying
around a phone (for calls), a PDA (for address book and calendar), an MP3
player (for music), and a GPS device (for maps), the user had all these
integrated seamlessly into one device. Lastly, there were the apps—starting
with a Web browser and a few others and then exploding into thousands
of programs in the iPhone’s second year when Apple opened it up to out-
side developers to create programs. The apps turned the iPhone into a true
computing device.
Why couldn’t Nokia compete? It was very clear within a couple of years
that the iPhone was a huge hit with enviable profit margins. But Nokia,
despite being the global leader in mobile phones (and valued at over $100
billion), was unable to imitate Apple’s success with a copycat smartphone
of its own. The reasons can be seen in the difference between the value
networks of the two companies.
Much attention is often paid to Apple’s highly developed design capa-
bilities, which were doubtless critical to the creation of the iPhone’s com-
pelling physical design and touchscreen interaction. But there were several
other differences in Apple’s value network that allowed it to create, deliver,
and monetize the iPhone. One was the partnership Apple had struck with
its retail partner, AT&T. This included a large price subsidy, with AT&T

Table 7.1
Business Model Disruption: iPhone (Disrupter) Versus Nokia (Incumbent)

Value proposition differential Value network differential

Physical design Design capability

Simplicity of use Retailer subsidy
Integration (music, phone, PDA, browser, Unlimited data
e-mail, maps) OS design experience
Apps iTunes integration
App developers
 210 MASTERING DISRUPTIVE BUSINESS MODELS

covering most of the consumer purchase price of the iPhone and rolling it
into consumers’ (higher) monthly payments for data over two years. With-
out this, the iPhone would have been so expensive as to remain a niche
luxury product. AT&T also offered unlimited data usage for a fixed price
in the early years of the iPhone; this led consumers to fully explore the
apps and features of the new device, thereby cementing radically new habits
and expectations for mobile devices. Other key elements of the iPhone’s
value network lay in Apple itself: its skill in designing simple computing
operating systems (from years of designing desktop computing products)
and its ownership of the iTunes music platform. Thanks to the iPod, Apple
already had the dominant digital music platform for U.S. consumers, and
who really wanted to buy their music all over again in a new market from
Nokia or anyone else? Lastly, once the App Store was opened up, explosive
growth in users and sales attracted an ecosystem of tens of thousands of
developers who learned to program apps for the iPhone. Nokia could never
program the same number of apps for any phone of its own and was badly
behind in the race to attract outside developers. Taken together, these dif-
ferences in the companies’ value networks made it impossible for Nokia to
imitate the iPhone’s strategy.

Netflix Versus Blockbuster

Let’s take a look at another recent case of massive disruption: how Netflix’s
original DVD service defeated the leading retail chain for movie rentals,
Blockbuster.
Blockbuster was an extremely entrenched and dominant player in the
retail space, so Netflix chose to compete by offering a dramatically different
value proposition to the customer. (See table 7.2.)

Table 7.2
Business Model Disruption: Netflix DVD Service (Disrupter) Versus Blockbuster
(Incumbent)

Value proposition differential Value network differential

No late fees Subscription pricing model

Easy access (product comes to you) E-commerce website
Wider choice Data assets and recommendation engine
Personalized recommendations Warehouse and mail distribution system
No retail costs
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  211

The first difference was the elimination of late fees. In the retail model,
the customer picked up a movie and paid for a fixed number of days. If they
returned it past that time period, they were charged a late fee—aggravating
and unavoidable. But Netflix did away with the hated late fees entirely,
with a flat monthly fee that allowed the customer to keep three movies at
home at a time, exchanging them as quickly or as slowly as they wanted.
The product was also more accessible. Rather than going to a retail store,
the customer simply picked the movies out on Netflix’s website. A few days
later, they arrived in the mail, with a handy return envelope to send them
back. Because Netflix was shipping from centralized warehouses, it was able
to offer every customer 100,000 movies, a much wider product choice than
at any of Blockbuster’s retail stores. To help the customer choose among all
those (potentially overwhelming) options, Netflix’s website also offered a
sophisticated recommendation tool. The cumulative effect of these differ-
ences in value proposition was that consumers who tried Netflix loved it,
never went back, and recommended it to their friends. Blockbuster quickly
realized it was a facing a real threat.
Why didn’t Blockbuster launch a copycat of Netflix—a mail-order ser-
vice of its own? Actually, it did. Once the threat of Netflix’s service was clear,
the retailer tried to launch its own mail-order service. The hurdles it faced
could have been predicted, though, by looking at the differences between
the two companies’ value networks. One difference was the pricing model
(subscription pricing vs. per product fees)—but that was easy enough for
Blockbuster to simply adopt as part of its copycat effort. The next difference
was Netflix’s website and recommendation engine. Although Blockbuster
could build an e-commerce website, it lacked the massive data sets as well
as the sophisticated technology assets to provide movie recommendations
as good as Netflix’s. Another difference was Netflix’s sophisticated ware-
house and mail distribution system. With great expense, Blockbuster was
able to build one of its own. But, critically, Netflix had spent years care-
fully iterating and optimizing every aspect of its mailing system (includ-
ing the precise shape and size of the mailing envelopes and DVD sheaths)
to allow for maximum automation, minimum errors, the fastest possible
turnaround, and minimal cost. It was possible for Blockbuster to replicate
the delivery service—but not at the same price and with the same profit
margins. Lastly, a huge difference was that Netflix lacked the overhead costs
of running 9,000 retail stores. In the end, Blockbuster was able to offer a
roughly comparable value proposition to customers for a while, but it could
not do so profitably at the same customer price. After years of rapid decline,
Blockbuster closed its final 300 stores in 2014.
 212 MASTERING DISRUPTIVE BUSINESS MODELS

Warby Parker Versus Luxottica

Warby Parker is an American eyeglasses brand that is seeking to disrupt the

way prescription glasses and sunglasses are sold to consumers. The tradi-
tional behemoth in this industry is Luxottica Group, which controls more
than 80 percent of major eyewear brands (including Ray-Ban, Oakley, Per-
sol, and licensed designer brands such as Armani and Prada).
Perhaps because of the highly consolidated market, the traditional cus-
tomer experience when purchasing glasses is far from inviting. Glasses cost
upward of $300, and buying them involves going to a retail store, placing
an order, and returning later for the product. Warby Parker offers its own
brand of fashionably designed glasses primarily through e-commerce sales
at a price of $95. To surmount the challenge of picking out glasses from afar,
the company allows consumers to select five frames to be mailed to them
free to try on. Once they choose the frame they like, the prescription lenses
are added, and the final product is delivered.
Does Warby Parker pose a disruptive threat to the incumbent? Let’s
take a look at the two differentials to judge (see table 7.3).
The biggest difference in Warby Parker’s value proposition is its price—
less than one-third the traditional price for the product. There is also a
potential difference in access: for consumers who want to avoid multiple
trips to a store or who don’t have many retailers in their area, the online
service may be another big advantage. (To appeal to customers in major
cities, the start-up has launched a limited number of retail stores and show-
rooms.) In addition, it donates one pair of glasses, via nonprofit Vision-
Spring, for each pair that it sells to consumers. This and other social causes
(Warby Parker is a certified B corporation and 100 percent carbon neu-
tral) matter a lot to some consumers. So it would appear that, at least for

Table 7.3
Business Model Disruption: Warby Parker (Disrupter) Versus
Luxottica (Incumbent)

Value proposition differential Value network differential

Much lower price ($95) Online channel

Accessibility Low retail costs
Social cause Vertical integration
B corporation status
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some consumer segments (price sensitive, preferring to avoid retail hassles,

or favoring social cause brands), the company offers a dramatically more
attractive value proposition.
What about the value networks? Is there any difference that allows
Warby Parker to deliver this value? The first differences are its online sales
channel and its much lower retail costs. It also can keep prices low due
to its vertical integration (it owns the brand, manufactures the product,
and owns the entire sales channel). By contrast, Luxottica licenses many
of its brands, and although it owns large retail chains, it also sells products
through other retailers. It could certainly launch an e-commerce portal for
its own brands, but its cost structure would likely prevent it from coming
close to Warby Parker’s price. As a standard, publicly listed corporation,
Luxottica would also have difficulty matching Warby Parker’s level of sup-
port for social causes.
Clearly, Warby Parker poses a disruptive threat for Luxottica—having
a much better value proposition that the incumbent cannot emulate. But it
is not yet clear how broad the disruption will be. Perhaps many customers
are willing to pay the higher prices for global brands like Prada, or prefer
to shop in a nearby store, or won’t care as much about carbon footprints
and donated eyeglasses.
These kinds of issues will determine the scope and impact of a disrup-
tive challenger like Warby Parker. Such variables can significantly affect
success. Let’s take a look at some of the key variables that impact the out-
come of business model disruption.

Three Variables in Business

Model Disruption Theory

The theory of business model disruption can identify and explain the cause
of disruption by a wide variety of challengers and in different industries.
But just because a challenger poses a genuine disruptive threat does not
mean that others in the industry are doomed. Incumbents may have some
choices in how they respond. And the nature of the disrupter itself—its
value proposition and its value network—can predict much of how the dis-
ruption will play out.
Three important variables that complete the theory of business
model disruption are customer trajectory, disruptive scope, and multiple
incumbents.
 214 MASTERING DISRUPTIVE BUSINESS MODELS

Customer Trajectory

The first variable to consider in any case of business model disruption is the
customer trajectory. Which customers will provide the initial basis for the
challenger’s market entry, and are they already customers of the incumbent?
Business model disrupters can enter the market through one of two
trajectories:

r
Outside-in: The disrupter starts by selling to buyers that are not cur-
rently served by the incumbent (that are “outside” the incumbent’s
market), and over time, the disrupter works its way in until it starts to
steal customers directly from the incumbent’s own market.
r
Inside-out: From the beginning, the disrupter starts by selling to
some subsegment of the incumbent’s current customers. This initial
subsegment may be small (sometimes the most affluent or the most
eager to try new things), but over time, it grows as the successful dis-
rupter expands outward to claim more and more of the incumbent’s
customers.

Christensen’s new market theory of disruption is based solely on

cases that follow the outside-in customer trajectory. Indeed, one of the
fundamental keys to his theory is that by starting outside the incumbent’s
customer base, the disrupter makes it very hard for the incumbent to
respond.
However, many cases of business disruption today take the opposite
customer trajectory: inside-out. All three of the cases we just saw were
inside-out cases. The iPhone did not start by selling to buyers who were not
previously in the market for a mobile phone. Rather, it began with a small
subsegment of the type of customers who would certainly have owned a
Nokia previously. At first, Nokia could reason that Apple was stealing a
profitable but small part of the market and that Nokia could aim to hold
on to the much larger majority of customers who were so far unwilling to
pay the higher monthly fees for a smartphone. But over time, the iPhone’s
customer base expanded outward to attract more and more of these cus-
tomers. Similarly, Netflix did not start by appealing to customers who had
never used video rental services like Blockbuster. Instead, its appeal was
specifically to those who had—pointing to their frustration with late fees
and promising a better customer experience. And Warby Parker obviously
had no option but to go after customers served by the incumbents like
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  215

Luxottica. If you didn’t already own or need prescription glasses, you were
unlikely to sign up for Warby Parker. The company’s rise may have started
with some of the more price-sensitive customers from the current customer
base (those who would give online ordering a try primarily for the $95 price
tag), but it then expanded outward as it proved itself capable of delivering a
true high-fashion brand as well as a superior customer experience.

Disruptive Scope

The second important variable in cases of business model disruption is

the likely scope of the disruption. There is sometimes an assumption that
whenever disruption occurs, the incumbent’s business, product, or service
will be replaced 100 percent by the disruptive challenger. Out with the
old, in with the new. In some cases, this does happen. When Henry Ford’s
mass-produced automobile arrived, it was only a matter of years before
the horse and buggy had basically vanished as a means of transportation.
(Kevin Kelly has argued persuasively that no technology ever disappears
from use entirely19—and, indeed, you can still enjoy a carriage ride around
New York’s Central Park as an expensive tourist treat.)
But in many cases of business disruption, the scope is not 100 percent.
Even after being disrupted, the incumbent’s product or business model
hangs on, confined to a diminished portion of the market but still a notable
player in the industry.
A recent example of this can be seen in bookselling, with the arrival
of e-books. Thanks to Amazon’s development of the Kindle e-book for-
mat and electronic readers, consumers discovered they had a new choice
for reading. The e-book and its online bookstore offered many compel-
ling advantages: a lower price per book, a vast selection of choices, nearly
instant purchase and download, and the ability to carry hundreds of books
in your purse or bag at the weight of a paperback. The threat to booksellers
was clear: there is no need for a customer to walk into their local bookstore
to download an e-book.
In the first few years after the launch of the Kindle, e-books enjoyed
steady growth in market share. Many in the publishing industry looked at
that growth curve, projected it outward, and nervously predicted that in
a few short years, e-books would comprise the majority of book sales and
publishers would no longer be able to afford to produce print editions.20
But then something unexpected happened. After a spurt of rapid growth,
 216 MASTERING DISRUPTIVE BUSINESS MODELS

e-book sales leveled off. Various reports, confirmed to me by insiders in

the industry, say that the plateau was about 30 percent of book sales by
revenue.21 This was still enough to spark major disruption and shifts in the
balance of power in the industry. (Borders, one of the largest retail book-
sellers in the United States, filed for bankruptcy in 2011.) Yet printed books,
while diminished, certainly did not disappear into obsolescence.
Although this surprised many observers, it was no fluke. In fact, I
believe that by looking at the behavior of book buyers, it would have been
quite easy to predict the scope of this particular disruption.
One important lens for predicting disruptive scope is the product’s dif-
ferent use cases (as discussed in chapter 6). Customers buy books on a
variety of occasions, and they read books in a variety of settings. In some
use cases for reading, it is quite clear that the e-book provides a far superior
value proposition—for example, when you are going on a trip and would
like to have a variety of reading options but don’t want to be weighed down
by a bag of books. In other reading use cases, however, a printed book may
be better—for example, if you want to take notes in the margin or read on
the beach in direct sunlight (cases where e-book software and screens have
continued to lag the paper medium). We can also look at use cases for book
purchase. When the customer is seeking to try a new book while lying in
bed, there is no match for the benefit of being able to download a sample
chapter in seconds to their e-reader (and purchase the rest if they quickly
decide they like it). But what about gift giving? No one I have ever asked
has thought that an e-book was an acceptable substitute for a printed book
when giving a gift. This is not a small point: a large portion of book sales
takes place around holidays and other gift-giving occasions. If only a few
use cases favor the old value proposition, we might expect consumers to
sacrifice those benefits to shift entirely to a new value proposition. But in
cases like books, where the customer can easily alternate purchases of the
old product and the new one, it is predictable that we will wind up with a
split market—with some sales shifting to the disrupter’s offer and others
remaining with the incumbent.
In addition to use cases, the scope of disruption of a new business
model can be influenced by customer segments. Sometimes the disrupter’s
value proposition is highly preferable for some types of customers but not
for others with different needs. In the Warby Parker case, we may see that
certain eyeglasses wearers are likely to shift to its sales model, whereas oth-
ers (those that buy luxury brands and specialty lenses or those that have
better access to retail options) will stay with an incumbent like Luxottica.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  217

Lastly, network effects can play an important role in determining the

scope of disruption. (This is particularly true for platform businesses, as
we saw in chapter 3.) If a disrupter’s product or service increases in value
as more customers use it (think of a platform like Airbnb, which relies on
ample hosts and renters), this will initially be a hurdle to the new business.
But it also means that if the disrupter manages to achieve a certain critical
mass of adopters, its continued growth is nearly assured, and it will more
likely end up with a very large share of the market.

Multiple Incumbents

The third variable to consider is multiple incumbents. A single disruptive

business model can actually disrupt more than one incumbent. By multiple
incumbents, I don’t mean similar companies in the same industry (e.g., the
iPhone disrupting Motorola along with Nokia) but entirely different indus-
tries or classes of companies that are each challenged by the same new dis-
ruptive business model. The iPhone posed a disruptive threat not just to
mobile phone companies (like Nokia) but also to desktop software compa-
nies (as Microsoft discovered that Windows was no longer the world’s domi-
nant operating system) and online advertising companies (as Google had
to move rapidly to stay relevant as computing moved to the small screen).
Another interesting case of disrupting multiple incumbents can be seen
in the meteoric rise of online messaging apps, such as WhatsApp, WeChat,
LINE, and Viber (each of which has grown initially in somewhat different
global markets). Their full range of features may vary, but at their core, each
service has attracted hundreds of millions of customers with the ability to
send mobile messages for free over Internet connections rather than being
charged per message by the mobile phone’s service provider.
Obviously, one incumbent industry that is being disrupted by this busi-
ness model is telecommunications—companies like Vodafone and América
Móvil. For years, text messages had been a large source of revenue for these
companies. By one estimate, services like WhatsApp cost the phone com-
panies over $30 billion in texting fees in a single year.22
But telecommunications is not the only incumbent industry threat-
ened by the free messaging apps. When Facebook chose to buy the largest
one, WhatsApp, for 10 percent of its own stock (a $22 billion price), it was
not because WhatsApp promised to generate huge new revenues for the
social network. It was purely a defensive strategy against a new app that
 218 MASTERING DISRUPTIVE BUSINESS MODELS

was on track to attract 1 billion customers of its own. If consumers spent

more and more of their mobile screen time in apps like this one, they would
spend less time in the world of Facebook-driven socializing.
There may be another, even less likely industry that is being disrupted in
part by WhatsApp. A long article by Courtney Rubin in the New York Times
detailed the rise of mobile social networking (via text messaging, Insta-
gram, Facebook, and Grindr) in the social life of multiple American college
towns. Rubin’s ethnographic reporting uncovered a broad shift, described
by both students and owners of college bars. Each described how students
are spending less time and less money in the bars and coordinating more
of their socializing through mobile networking, with alcohol purchased in
stores and consumed in residences. College bars have always made their
money charging for drinks. But the value they provided to customers was
mostly the opportunity for serendipitous encounters and socializing. Now
students find they can get that through their phones and are showing up to
the bars sometimes only for a last drink before closing time (hardly enough
to keep a bar in business). Many college bars are struggling, and some that
have operated for decades are closing down. Yet another incumbent indus-
try has been disrupted by the rise of mobile messaging.23
Now that we’ve examined the theory of business model disruption,
how it expands on previous theories, and some of the key variables in its
application, let’s put it to work with two strategic planning tools. These
tools will allow businesses to gauge whether a threat they’re facing is dis-
ruptive to their business and, if so, to assess its likely course and then select
among six possible incumbent responses.

Tool: The Disruptive Business Model Map

The first tool is the Disruptive Business Model Map. This strategy mapping
tool is designed to help you assess whether or not a new challenger poses a
disruptive threat to an incumbent industry or business.
If your business is the incumbent, you can use the map as a threat
assessor—to judge whether a challenger poses a traditional competi-
tive threat that you can respond to with traditional countermeasures or
whether it is a genuine disrupter. You can also use the map if your business
is a start-up or an innovator within an enterprise. As you develop new
ventures, the map will help you to identify the industries where you may
pose a disruptive threat and those that may be less affected or more able
to respond to your challenge.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  219

Disruptive Business Model Map

Challenger Incumbent
Customer

Value proposition Value network

Generatives Components

Differential Differential

Two-part test
Radically displace value? Barrier to imitation?

Figure 7.1
The Disruptive Business Model Map.

Figure 7.1 shows the Disruptive Business Model Map. It includes eight
blocks, each of which you will fill out in making an assessment of a poten-
tially disruptive threat. Let’s look at each block and the question you must
answer to fill it in.

Step 1: Challenger

The first step of the Business Model Disruption Map is to answer this ques-
tion: What is the potentially disruptive business?
The challenger you identify here may be a new competitor to your own
established business. It may be your own start-up, attempting to disrupt an
existing industry. Or it may be a potential new venture or initiative within
your organization whose disruptive potential you are seeking to judge.
Note that we are not yet labeling this challenger as “the disrupter.” The
point of the map is to apply business model disruption theory to analyze
the challenger, incumbent, and customer to determine if there really is a
threat of disruption. In my experience running this scenario with numer-
ous executives—both to analyze existing threats and to test the market for
a proposed new venture—many challengers who have been dubbed disrup-
tive do not in the end pass the test.
In describing the challenger, you need to include its key offering: What
are its unique products and services? What is it bringing to the market that
does not exist yet? If your challenger were Netflix, you would include not
just the name of the company but also a description of the monthly sub-
scription service model that it is offering for movie rentals.
 220 MASTERING DISRUPTIVE BUSINESS MODELS

Step 2: Incumbent

The second question of the Business Model Disruption Map is, Who is the
incumbent?
You may choose either a category of related businesses (e.g., video
rental retail chains) or a leading example of the category (e.g., Blockbuster)
in order to make the analysis more concrete as you compare the business
models of the challenger and the incumbent.
The other key point here is that, as we have seen, a challenger may
pose a disruptive threat to more than one incumbent. Especially if you are
the challenger, you should try to identify multiple incumbents who may
be threatened by your new business model. Whenever you do identify
more than one possible incumbent, you should complete the map mul-
tiple times—once per incumbent. You may well find that your new business
model poses a disruptive threat to one incumbent industry but that another
incumbent can accommodate the success of your model or can co-opt and
imitate it.

Step 3: Customer

The third question of the Business Model Disruption Map is, Who is the
target customer?
This is the customer being served by the challenger. In some cases, it
may be a direct customer of the incumbent, but it also could be another
key business constituency (e.g., a challenger could disrupt an incumbent
by stealing away all its employees). It is critical to state who the challenger’s
target is before you move on to the next stage to consider the value proposi-
tion being offered to that target customer.
Once again, it is possible that a challenger could aim to usurp the
incumbent’s relationship with more than one type of customer. In this
case, you should also complete the map multiple times—once per cus-
tomer type.

Step 4: Value Proposition

The next question of the Business Model Disruption Map is, What is the
value offered by the challenger to the target customer?
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  221

It is very important to answer this question from the point of view of

the customer: What benefits do they stand to gain?
Remember, the aim here is not to describe the product or service
offered by the challenger (that should have been done in step 1). Nor it is
to describe how the challenger will get customers to pay it (the revenue
model will come in step 6, as part of the value network). The focus here is
exclusively on the benefit to the customer: What value could they gain from
the challenger’s offer?
You can refer back to the list of value proposition generatives earlier in
this chapter to consider some of the many ways that digital business models
provide value for customers.

Step 5: Value Proposition Differential

After you have described the challenger’s value proposition, the next ques-
tion is, How does the challenger’s value proposition differ from that of the
incumbent?
The point here is to identify those elements of the challenger’s value
proposition that are unique and different—this is the value proposition
differential.
There is certain to be some overlap between the values offered by
incumbent and challenger (e.g., Craigslist and newspapers both offer users
the same core benefit of being able to advertise personal items for sale to
a large local audience looking for them). You do not need to include those
commonalities here.
For some challengers, such as Craigslist, the differences in value propo-
sition may all be positive—that is, they are ways that the challenger offers
additional customer value. In other cases, the value proposition differential
may include benefits but also deficits, which you should indicate as such—
for example, for e-books as a challenger to print, you might indicate “less
easy to read in direct sunlight.”

Step 6: Value Network

The next question of the Business Model Disruption Map concerns the
value network: What enables the challenger to create, deliver, and earn
value from its offering to the customer?
 222 MASTERING DISRUPTIVE BUSINESS MODELS

You can refer back to the list of value network components earlier in this
chapter as you map out the value network that makes the challenger’s offer-
ing possible. Your goal is to identify everything—people, partners, assets,
and processes—that enables the challenger to offer its value proposition.
If the challenger is new and unproven, this step should help to identify
unanswered questions about its business model and whether it will actually
be able to deliver the value proposition it is promising to the market.

Step 7: Value Network Differential

After you have described the challenger’s value network, the next ques-
tion is, How does the challenger’s value network differ from that of the
incumbent?
Again, there may be some points of overlap between the challenger and
the incumbent. If so, you can leave these out. The point here is to identify
those elements of the challenger’s value network that are unique and different.
Does the challenger’s offering rely on a unique data asset or on specific
skills that the incumbent currently lacks? Does it come to market via dif-
ferent channels than the incumbent uses? Does the challenger have a differ-
ent pricing model or a different cost structure (e.g., less overhead costs for
retail space or staff) than the incumbent? Is the challenger launching with
a focus on a different market segment?
The set of all these differences between the challenger and the incum-
bent is the value network differential.

Step 8: Two-Part Test

You are now ready to answer the ultimate question of the Business Model
Disruption Map: Does the challenger pose a disruptive threat to the
incumbent?
As described by the business model disruption theory, this question is
answered by a two-part test.
First, you need to assess how significant the differential in value is to the
customer. Is the challenger’s value proposition only slightly better than the
incumbent’s? Or does it radically displace the value of the incumbent? In some
cases, this could be because the challenger offers a comparable product or ser-
vice but with much better terms (think of Craigslist’s free version of classified
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  223

ads). In other cases, the challenger may solve the same customer problems as
the incumbent but also meet other customer needs at the same time (think of
the iPhone, which was both a great cell phone and much more). In still other
cases, the challenger may provide an offering that simply makes the incum-
bent’s offer much less relevant to the customer (as mobile social networking
apps have made college bar rituals less relevant to American students).
The first question of the disruption test, then, is this: Does the chal-
lenger’s value proposition dramatically displace the value proposition pro-
vided by the incumbent? If the answer is no, then the challenger does not
pose a disruptive threat to the incumbent. The challenger may be a great
innovator with a terrific new value proposition for customers. But if that
offer grows to threaten too much of the incumbent’s business, the incum-
bent should be able to respond by matching, or remaining closely competi-
tive with, the challenger’s value to the customer. If the answer to the first
test is yes, then you can move to the second test of disruption.
Here you need to assess the barriers that are posed by the differences
in value networks between incumbent and challenger. Could the incum-
bent bridge these gaps, if it wished, so that it could deliver the same value
to customers that the challenger does? For example, could the incumbent
strike deals with channel partners similar to those employed by the chal-
lenger? Could the incumbent eliminate any difference in its fixed costs or
compensate for them otherwise? Is it possible for the incumbent to over-
come the network effects that the challenger may have already built up to
its own benefit? Any major difference in value network could be the hurdle
that prevents the incumbent from responding effectively.
The second question of the disruption test is this: Do any of the differ-
ences in value networks create a barrier that will prevent the incumbent from
imitating the challenger? If the answer is no, then the challenger does not
pose a disruptive threat to the incumbent. It may be a dire asymmetric com-
petitor, but there is no fundamental obstacle to the incumbent responding by
matching its strategy. The incumbent may have to sacrifice some of its current
profit margins in the process, just as it would in a price war with a traditional
competitor. But the challenger is not truly disruptive. On the other hand, if
the answer is yes, then the challenger has passed both tests of business model
disruption. The value it offers to the customer will dramatically outstrip or
undermine the value delivered by the incumbent, and the incumbent will
face intrinsic structural barriers that prevent it from responding directly. This
matches perfectly the definition with which we started the chapter: business
disruption happens when an existing industry faces a challenger that offers
 224 MASTERING DISRUPTIVE BUSINESS MODELS

far greater value to the customer in a way that existing firms cannot compete
with directly. The challenger is a disruptive threat.

But is all hope lost? In the face of a real disruptive threat, can the incum-
bent expect complete and rapid extinction (like the horse carriage indus-
try facing automobiles), or is there an opportunity for the incumbent to
respond—or at least hold on to some of its glory?
That is where the next tool comes in.

Tool: The Disruptive Response Planner

If you have determined that you are, in fact, looking at a true disruptive chal-
lenger to an incumbent business, you are now ready to apply the second tool.
The Disruptive Response Planner is designed to help you map out how
a disruptive challenge will likely play out and identify your best options for
response.
The first three steps help you to assess the threat from the disrupter in
terms of three dimensions: customer trajectory, disruptive scope, and other
incumbents that may be affected. You can then use these insights in the
last step to choose among six possible incumbent responses to a disruptive
challenger. (See figure 7.2)

Disruptive Response Planner

Customer trajectory Disruptive scope Other incumbents
Outside-in v. Inside-out Use case Value train
Who’s first Customer segments Substitution
Next + triggers Network effects Laddering

Six incumbent responses

Becoming the disrupter Mitigating losses
Acquire Refocus
Launch Diversify
Split Exit

Figure 7.2
The Disruptive Response Planner.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  225

Step 1: Customer Trajectory

The first step in predicting the possible impact of a new disruptive business
model is to understand its customer trajectory: What customers are likely
to adopt the disrupter’s offer first, and how will its market spread from there
if it is successful?

O U T S I D E -I N OR I N S I D E -O U T ?

As we have seen, there are two types of customer trajectories for disrup-
tive business models: outside-in and inside-out. It is critical to start by
judging which of these paths your disrupter is likely to take in entering
the market.
Outside-in disrupters begin by selling to noncustomers of the incum-
bent and then work their way inward to encroach on the incumbent’s own
customers. As described by Christensen, outside-in disrupters don’t appeal
at first to the incumbent’s customers because of their lesser features, but
they do appeal to customers who could not afford or access the traditional
incumbent’s services. As the disrupter improves, it begins to attract the
incumbent’s customers as well. Christensen’s theory has shown how indus-
tries with barriers that exclude many potential customers—higher edu-
cation, health care, financial services—are ripe for disruption. As he and
Derek van Bever write: “If only the skilled and the rich have access to a
product or a service, you can reasonably assume the existence of a market-
creating opportunity.”24
Inside-out disrupters follow a different path. They begin by selling to
a segment of the incumbent’s current customers and then work their way
outward to take more of its market. We have seen many examples of these:
iPhone versus Nokia (started by selling to existing mobile phone users) and
Netflix versus Blockbuster (explicitly marketed to existing movie renters
as a better alternative). Rather than starting out as inferior to the incum-
bent’s offer but “good enough” for buyers who could not afford the incum-
bent, these disrupters offer much better value from the beginning. These
are business model innovations that would quickly draw a competitive
response from the incumbent except that they rely on a value network that
the incumbent finds impossible to imitate.
 226 MASTERING DISRUPTIVE BUSINESS MODELS

WHO IS FIRST?

Once you know if the disruption will be outside-in or inside-out, you will
want to identify which specific types of customers will likely be first to
adopt the disrupter’s product or service.
For inside-out disruptions, you should ask these questions: Who
among your current customers would be most attracted to the disruptive
offer? Are there any hurdles to their early adoption (e.g., reliability is not yet
proven)? Are there some current customers for whom those hurdles matter
less (e.g., they are eager to try out new products or are less concerned about
established brands)?
For outside-in disruptions, you should ask these questions: Who is
currently most motivated but unable to afford or access your products
or services? Which of these hurdles (price or access) is the bigger bar-
rier for them? Which hurdle does the disrupter’s offer help them more to
surmount?

WHO IS NEXT, AND W H AT W I L L T R I G G E R T H E M ?

Once you identify the likely first customers for a disrupter’s offer, you
need to identify who will be attracted to the offer next. For inside-
out disrupters, that is likely another subgroup of your customers. For
instance, if Warby Parker starts by appealing to the supporters of social
causes, will its next customers be tech-savvy eyeglasses wearers? For
outside-in disrupters, the key question here is this: When will the dis-
rupter “tip” from selling to noncustomers and start to reach your own
customers?
You also need to think about what will trigger these second-wave cus-
tomers to come on board. These triggers can often be other customers’
behaviors; wait-and-see customers, for example, may become interested
as they see others using a product, or they may be persuaded by word of
mouth. The trigger may be some further innovation by the disrupter, such
as dropping prices further or improving features or both. Or the trigger may
simply be visibility—as press coverage, marketing, or geographical distribu-
tion brings the disrupter’s offer to the attention of the next wave of new
customers.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  227

I M P L I C AT I O N S

Knowing the likely customer trajectory has important implications. As the

incumbent, you need to know which of your current customers to keep
an eye on first to see if they defect. You must also know if the challenger
doesn’t need any of your customers to get started (an outside-in disrupter).
In that case, you should develop a strategy to compete for these same “out-
side” customers, where the disrupter may grow first before moving into
your own market.

Step 2: Disruptive Scope

The next step in assessing the threat from a disruptive business model is
to consider its likely scope. This describes how much of the market (how
many customers) are likely to wind up switching to the disrupter once it
is well established. Disruptive scope can be predicted by looking at three
factors: use case, customer segments, and network effects.

USE CASE

You should first identify various use cases where customers purchase and
use your product or service. Make two lists: In what situations do custom-
ers purchase your offering? In what situations do they utilize it? (There
should be overlap in the lists but also some differences.) Then, for each use
case on both lists, consider the disrupter’s value proposition. In which cases
is the disrupter clearly preferable for the customer? In which cases is there
an advantage for your offer?
As we saw in the case of e-books versus print books, a disrupter may
have a clear advantage for some use cases (e.g., boarding a plane with a
variety of reading material) but be at a disadvantage in other use cases (e.g.,
giving a gift to a friend). You should also consider whether there are costs
to multihoming (as discussed in chapter 3). How difficult is it for a cus-
tomer to buy from your business for some use cases and from the disrupter
for others? For readers, it is not that difficult to buy printed books as gifts
while keeping an e-reader stocked for their own travel.
 228 MASTERING DISRUPTIVE BUSINESS MODELS

C U S TO M E R S E G M E N T S

Next you should subdivide the customers for which you and the disrupter
are competing. Rather than seeing them as one monolithic group, try to
divide these customers into segments based on their shared needs. What
drives them to use this product category? What are their relevant needs?
(This may sometimes correspond to some of your use cases.) Then, for each
segment, consider whether the disrupter is extremely attractive in compari-
son to your business.
Recall Zipcar (discussed in chapter 5). This on-demand car rental service
seemed to pose a disruptive challenge to traditional car rental companies
when it launched. Zipcar members pay a small monthly fee to have access
to any of the Zipcars parked in their metropolitan area. They simply look on
their phone app, walk up to a nearby car, and type an entry code into the key-
pad lock on the car door. This self-service model appears much more conve-
nient than the customer service experience of picking up a car at a traditional
rental agency. But Zipcar never supplanted the traditional rental model for
most customers. It turns out that certain types of consumers (e.g., those in
dense cities with regular needs for short-term car rentals) were ideally suited
to the membership model. But other consumers (e.g., those in rural areas or
those with more infrequent rental needs) did not benefit as much from that
model. While expanding to four countries and nearly a million members,
Zipcar has stayed focused on college campuses and major cities.

N E T WO R K E F F E C T S

The third factor to consider in predicting a disrupter’s scope is network

effects. Many services, especially platform businesses, become more valu-
able with each new customer that participates. As more customers bought
iPhones, it became easier for Apple to attract more developers to create
apps for the platform. As more developers built apps, the advantages of the
iPhone versus an incumbent like Nokia grew as well. If you look at a cryp-
tocurrency like Bitcoin, there is certainly the possibility that it could dis-
rupt various incumbents that provide traditional financial services (credit
card payments, savings accounts, foreign exchange). But the biggest hurdle
to a currency like Bitcoin is that currencies are extremely dependent on
network effects. As long as few merchants accept Bitcoin and few other
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  229

customers are using it, the benefits to a new user are mostly hypotheti-
cal. On the other hand, incumbents watching Bitcoin need to realize that
enough momentum in user adoption could quickly lead to a snowballing
effect (much like users flocking to a fast-growing social network such as
Instagram or Snapchat) that transforms it quickly from a curiosity to a
major disruptive force.

I M P L I C AT I O N S

Now that you have examined use cases, customer segments, and network
effects, you should be able to make an informed prediction of the likely
scope of impact of a new disrupter. Broadly, we can think of three likely
outcomes of a disruptive business model. One is a niche case, where the
disrupter is attractive to only a very specific portion of the market. Other
disrupters may wind up splitting the market, with the disrupter’s and the
incumbent’s business models each taking large shares. And in cases of a
landslide, the disrupter quickly takes over the entire market, pushing the
incumbent into obscurity.

Step 3: Other Incumbents

We saw earlier how a single new business model can disrupt multiple
incumbent industries. When assessing a disrupter to your business, it is
easy to focus on its impact on only one industry (your own). But to under-
stand the competitive dynamics at work, it is critical to expand your refer-
ence frame to consider other incumbent businesses and how they will be
impacted and respond to the disrupter.

VALUE TRAIN

The first place to look for additional businesses that may be disrupted is in
your own value train (as discussed in chapter 3).
Start by asking which product or service the disrupter most resembles.
For example, the product most like e-books would be printed books. You
can then look at a value train of everyone involved in delivering that prod-
uct or service—from the originator (authors), to producers (book publish-
ers), to distributors (book printers, distribution companies, and retail and
e-tail booksellers)—until the value reaches the final consumer. Then ask
 230 MASTERING DISRUPTIVE BUSINESS MODELS

which of these different types of companies may be disrupted if the new

business model is successful? For e-books, the answer would likely be retail
booksellers, printers, and distributors; authors and publishing houses are
most likely able to adapt to the new business model.

SUBSTITUTION

Another way of identifying additional incumbents is to think of products

or services for which the customer may substitute the disrupter’s offering.
Ask yourself two questions: If a customer starts spending more money on
the disrupter’s product or service, where else might they spend less money?
If the customer starts spending more time on the disrupter, where might
they spend less time?
Considering the early iPhone, you can easily see that if customers
spend money on an iPhone, they are less likely to spend money on a phone
by another handset maker like Nokia. (Digging deeper, you might deter-
mine that if they spend more money on iPhone apps, they are likely to
spend less on other entertainment.) If you ask where avid iPhone users
spend their time, you might realize that they spend less time conducting
Web searches on their desktops (a hugely profitable business for Google)
and more time on mobile Web searches (much less profitable).
One other question about substitutes is worth asking: If the disrupter’s
current product continues to become much better in terms of performance
and quality, for what other products or services might it start to become
a substitute? Looking at the initial iPhone, it is possible to imagine that if
it continues to get faster, more powerful, and a bit bigger, it does indeed
pose a threat as a substitute for laptop computers, televisions, and other
categories.

LADDERING

The last way to identify more incumbents who may be impacted by a dis-
rupter is to look at both immediate and higher-order customer needs.
You start by asking these questions: What problem or need does the
disrupter solve or meet for its customers? Who else tries to solve that prob-
lem? For example, looking at messaging apps like WhatsApp, you can see
that customers use them to meet their need for expedient text messag-
ing with friends (especially friends in different countries). That need was
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  231

previously met by telecommunications providers, which, as we saw, lost

billions of dollars in texting fees due to this disruption.
Next you can attempt to unearth higher-order customer needs through
a process known as laddering. In this market research technique, you ask
a customer a series of “Why?” questions to get at the reasons behind their
immediate motivations. For example, if you ask college students why they
use WhatsApp, they might say “to message easily with my friends.” If you
ask why they use it for that, they might say “to be able to make plans and
swap photos.” If you ask why that matters, they might say “so we can meet
up and find out wherever the cool get-togethers are happening.” This might
lead you to realize that mobile messaging apps are meeting the need for
convening social interactions, which was formerly met by visiting the col-
lege bar. This kind of laddering can reveal products or services that are
made less necessary for customers by the disrupter, even though the dis-
rupter doesn’t appear to be competing directly.

I M P L I C AT I O N S

By looking at value trains, different means of substitution, and different lev-

els of customer needs, you may have identified multiple incumbents—types
of companies that will be disruptively challenged by the same new disrupter.
As an incumbent, it is always valuable to know who else may be threat-
ened by the same disrupter that is threatening you. In planning your own
response, it is important to see how these other incumbents are responding
or consider how their responses might parallel yours. You may also find that
these “enemies of my enemy” could serve as allies in response to the disrup-
tive threat. As described above, Google saw that it was threatened just as
much by the rapid rise of the iPhone as were cell-phone handset makers. As
we will see, this led to Google’s choice of response to the disruptive threat.

Step 4: Six Incumbent Responses to Disruption

The final step of the Disruptive Response Planner is to plan your response
as an incumbent. To do so, you will use what you have learned regarding
the trajectory, scope, and other incumbents of the disrupter you are facing
to help you choose which strategic responses are most promising for your
circumstances.
 232 MASTERING DISRUPTIVE BUSINESS MODELS

As an incumbent, you have six possible responses when faced with a

disruptive challenger:

THREE STRATEGIES TO BECOME THE DISRUPTER

r
Acquire the disrupter

r
Launch an independent disrupter
r
Split the disrupter’s business model

THREE STRATEGIES TO MITIGATE LOSSES FROM THE DISRUPTER

r
Refocus on your defensible customers

r
Diversify your portfolio
r
Plan for a fast exit

These six strategies are not exclusive; you can combine them (and, in fact,
some of them work best together). The first three responses seek to occupy
the same ground as the disrupter. The last three responses seek to reduce
its impact on your core business. Depending on your own circumstances,
only one or a few of these incumbent responses may be workable, so it is
best to be familiar with each of them.
Let’s look at each response and see where and how you might best
apply it.

ACQUIRE THE DISRUPTER

The most direct response for an incumbent faced with a disruptive chal-
lenger is to simply acquire the challenger. This is how Facebook dealt with
the challenge of WhatsApp. When Google’s Maps product faced a potential
disrupter in Waze, it bought the company. When the car rental giant Avis
saw that Zipcar had invented a disruptive business model, Avis also bought
its challenger. If you are considering buying your disrupter, knowing who
the other incumbents are will help you predict who else might compete
with you to drive up the price.
If you do acquire your disrupter, you should continue to run it as an
independent division. That’s what Facebook, Google, and Avis did in all
the above cases. That means the disrupter you own will continue to steal
customers from your core business (and possibly at a lower profit margin).
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  233

But if you don’t take measures to keep the acquired disrupter independent,
you will inevitably put the interests of your core business above the goal
of serving your customers. And that will create an opportunity for some-
one else to launch a similar business and steal away your disappointed
customers.
Acquiring the disrupter is not always possible. A start-up with suf-
ficient venture capital may refuse to sell, as was the case with Facebook’s
failed $3 billion bid for messaging app Snapchat. Or the disrupter may be
part of a bigger company than the incumbent. Amazon’s e-books posed a
clear disruptive threat to retail booksellers like Barnes & Noble, but the
retailers were much smaller than Amazon (for whom e-books was just a
part of its business).
Often, acquiring the disrupter is overlooked or rejected in the early
stages, when acquisition is still an option. In 2000, shortly after Netflix
launched its subscription DVD model, the start-up’s CEO, Reed Hastings,
flew to Dallas to meet with Blockbuster’s CEO, John Antioco. Hastings pro-
posed the video giant and the newcomer form a partnership, with Netflix
handling online distribution and Blockbuster the retail channel. Hastings
was laughed out of the office.25 Blockbuster didn’t get a second chance.
Acquisition does not always need to be 100 percent (a partnership with
Netflix would have proved a godsend for Blockbuster), but it does require
swallowing your pride and recognizing the disrupter’s advantages before it
scales so big as to no longer need your help.

LAUNCH AN INDEPENDENT DISRUPTER

The second incumbent response is to launch a new business of its own

that imitates the business model of the disrupter. Instead of purchasing the
disrupter outright, the incumbent leverages its scale and resources to try to
beat the disrupter at its own game. This is the response Christensen pro-
poses: “Develop a disruption of your own before it’s too late to reap the
rewards of participation in new, high-growth markets.”26
In order to launch your own disrupter, however, you, the incumbent
must be willing to cannibalize your own core business. After all, you are try-
ing to re-create the very business model that is disruptively attacking your
traditional business. Charles Schwab implemented this strategy when it saw
the growth of online brokerages like Joe Ricketts’s TD Ameritrade, launch-
ing its own online service that competed with its full-service offerings.
 234 MASTERING DISRUPTIVE BUSINESS MODELS

This strategy again requires you to keep the new disruptive initiative
walled off in an independent part of your company. You should run it on
its own P&L, with no responsibility to save or support your core business.
Although the independent unit should have access to some of the main
company’s resources, it should maintain a small and lean organization so
that it can evolve quickly rather than becoming a sclerotic version of the
nimble disrupter it is trying to beat.
You may even launch an independent disrupter preemptively—as you
see a possible new business model based on emerging trends and tech-
nology. Saint-Gobain, a leading global retailer of construction materials,
looked at the trends in e-commerce and recognized the opportunity for an
online store in its industry. Rather than waiting for a start-up to capture
this opportunity, Saint-Gobain launched Outiz, an online-only retailer in
the French market. Outiz has been tasked with competing directly with the
parent company’s own brick-and-mortar retail brands.
Launching an independent disrupter is not easy, but it is plausible if the
differences in value networks are your company’s organizational culture,
cost structure, revenue model, and customer segments. You can potentially
overcome these kinds of barriers by insulating the self-launched disrupter
from the rest of your business.

SPLIT THE DISRUPTER’S BUSINESS MODEL

What if the incumbent lacks some core capabilities—like intellectual

property, brand reputation, essential skills, or the right partners—that are
needed to re-create the disrupter? In that case, simply insulating a new ini-
tiative from the rest of the organization is not sufficient. But the incumbent
may still be able to re-create the disrupter’s business model by splitting the
job with other businesses.
This may be a good strategy if your prior analysis uncovered multiple
incumbents and their value networks are complementary to your own. This
was the strategy used by Google when it launched the Android operating
system in response to Apple’s iPhone, which was threatening its advertising
business. Google already had a core mobile operating system from its 2005
acquisition of Android Inc. It also had the key software assets required for
an iPhone-like device: Google Search, Google Maps, YouTube video, and
the Chrome Web browser. But Google knew it lacked the skills and assets
required to design and manufacture hardware to compete with Apple, so it
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  235

licensed its operating system and mobile software to diverse companies—

Samsung, Sony, HTC, and others—with the capabilities to build great
smartphone hardware. By splitting the iPhone’s business model with these
firms, Google was able to bring Android phones to market with a value
proposition that rivaled that of the iPhone.
The key to splitting a disrupter’s business model is to find other busi-
nesses that complement your own value network and partner with them to
bridge the gaps that are preventing you from launching your own disrupter.
Ideally, those partners are also threatened by the same disrupter, so they
will be motivated to collaborate.

REFOCUS ON Y O U R D E F E N S I B L E C U S TO M E R S

Incumbents don’t have to react just by becoming the disrupter; they can also
act defensively in shoring up their own core business. That is the focus of
the next two incumbent responses. These strategies can often be deployed
in combination with the previous ones.27
The first of these defensive strategies is to refocus the incumbent’s core
business on those customers it has the best chance of retaining. You should
use this strategy whenever you have identified a likely split market or niche
market for your disrupter.
It is essential that you not engage in wishful thinking and simply con-
tinue to invest in your traditional business as if its future will look the same
as its recent past. Refocusing should appeal to the customers that you think
are most likely to stay with you despite the disrupter. Remember, they won’t
stay with you out of loyalty; they will stay because your business model still
offers more value to them. Look back at your scope analysis and the cus-
tomer segments and use cases that favored your product. Look also at the
customer trajectory you predicted: Who will likely depart for the disrupter
first, and who may follow? Then plan to shift your core business to focus on
them, even while that business is likely shrinking.
When book retailer Barnes & Noble found its business disrupted
by online book delivery, it refocused its business model on high-margin
products like children’s books and coffee-table books because the custom-
ers buying these still valued the ability to browse the products in a store
environment.28
In refocusing your core business, you should aim your marketing,
messaging, and continued product innovations at these most defensible
 236 MASTERING DISRUPTIVE BUSINESS MODELS

customers. If your strategy involves cutbacks, focus on reducing the opera-

tions serving those customers that you are likely to lose and on continuing
to deliver value to those you are likely to retain.

DIVERSIFY YOUR PORTFOLIO

The next way that incumbents can mitigate the disruption of their core
business is by diversifying their portfolio of products, services, and busi-
ness units. They can accomplish this by repurposing the firm’s unique skills
and assets in new areas and by acquiring smaller firms in the areas into
which they want to extend.
When digital photography was going mainstream and disrupting the
business of photographic film, the top two incumbent businesses were
Kodak and Fujifilm. While Kodak slid into a long decline that ended in
bankruptcy, Fujifilm managed to adapt and survive. “Both Fujifilm and
Kodak knew the digital age was surging towards us. The question was, what
to do about it,” said Fujifilm’s CEO, Shigetaka Komori. “Fujifilm was able
to overcome by diversifying.” Under Komori’s leadership, the firm spent
years applying its technical expertise in chemicals, developed in producing
film, in diverse areas such as flat-panel electronic screens, drug delivery,
and skin care. By the time Kodak filed for bankruptcy, Fujifilm’s film busi-
ness was only 1 percent of its revenue, but health care and flat-panel displays
were 12 percent and 10 percent, respectively.29
Diversification allows you to leverage the strengths in your value net-
work in new business areas, and although these areas may not initially be
as profitable as your core business, they can create new opportunities for
growth and make your firm less susceptible to total disruption.

PLAN FOR A FAST EXIT

The last strategy for an incumbent response to disruption is the least

desirable one. When a disruptive challenger poses an irresistible threat
to an incumbent’s entire market and there is no feasible way to launch a
disruption of its own, the incumbent needs to plan for a fast exit. This is
the case when the disruptive scope is a landslide because all customers
and use cases are vulnerable or because strong network effects lead to a
winner-take-all scenario.
In planning to exit a market, you should assess all your firm’s assets,
especially intangible assets (patents, brand names, etc.) that can be sold.
 M A S T E R I N G D I S R U P T I V E B U S I N E S S M O D E L S  237

You may also choose to spin off the indefensible part of your business from
other divisions that can survive on their own rather than letting the vulner-
able part bring down your entire enterprise. In most cases, you can pursue
one or a combination of the first five incumbent responses, but sometimes
an orderly liquidation of assets is the necessary call.

Beyond Disruption

The fact of disruption is inescapable. The very strategies that comprise

the digital transformation playbook for traditional enterprises are also the
source of their biggest disruptive threats. And yet disruption is both more
and less than it seems.
Disruption is more diverse than our prevailing theory has held.
Disruption is driven by more than just lower prices and accessibility for
new customers; it can be triggered by any dramatically greater value propo-
sition for the customer. Disruption can happen not just on the familiar
trajectory of outside-in but from inside an existing market outward as well.
But disruption is also less than we sometimes imagine it to be. First and
foremost, not every innovation (no matter how breathtaking) is necessarily
a disrupter of an existing industry. Disruption is rarely total; most disrupt-
ers attract a significant part of an incumbent’s market without taking 100
percent. Disruption is also less than irresistible. Even though it may pose
an existential threat to an incumbent’s business model, there are strategies
the incumbent can use to adapt, diversify, and continue its enterprise by
adding new value for customers.
More than anything else, responding to disruption requires that a busi-
ness be willing to question its own assumptions and focus on the unique
mission of how it serves customers.
 Conclusion

Digital transformation is fundamentally not about technology but about

strategy. Although it may require upgrading your IT architecture, the more
important upgrade is to your strategic thinking.
Traditionally, digital leaders, such as CIOs, were tasked with focusing
on automating and improving the processes of an existing business. Today,
digital leadership requires the ability to reimagine and reinvent that busi-
ness itself. What business are you in? How do you create value for custom-
ers? What do you keep inside the borders of your organization, and what
processes, assets, and value should reside in your relationships outside?
How do you balance your relationships with customers and other organi-
zations to ensure profitability, sustainability, and growth?
Reimagining your business requires challenging some of its underlying
core assumptions. It requires recognizing blind spots you may not real-
ize you have. It requires thinking differently about every aspect of your
strategy—customers, competition, data, innovation, and value. This kind of
rethinking is difficult—but certainly possible. Just as factories built before
the era of electrification were able to revamp their entire way of working
and manufacturing, businesses today that were born before the Internet are
quite capable of transforming for the digital age.
 240 CONCLUSION

So why don’t more businesses do this successfully? The sober truth is

that for every Encyclopædia Britannica that succeeds in transforming for
the digital age, there is a Kodak or a Blockbuster that fails. Why are so many
of our institutions struggling to adapt and keep up?
One of the key reasons is organizational agility. It is not enough just to
recognize and overcome your strategic blind spots—or even to see how the
principles of digital transformation apply to your own industry and busi-
ness. Legacy organizations must be ready to make change happen—and at
a very rapid pace. The curse of successful enterprises is often their very size
and scale: their enviable resources can become a trap as future decisions are
held hostage by past success.
To develop true organizational agility, your business needs to focus on
three areas:

r
Allocating resources: How will you decide what to invest in? Are you
able to disengage from initiatives and lines of business that lack future
potential? Can you apply resources from older business lines to sup-
port new ventures?
r
Changing what you measure: What outcomes are being measured by
senior decision makers? Do they simply relate to existing business
practices, or can they support new directions? What should you be
measuring at different stages of a transition to a new business model?
r
Aligning incentives: What kind of behavior is enabled, supported, and
rewarded in your organization? What are managers held accountable
for? How are they assigned to new positions? Do compensation and
recognition support or hinder the necessary changes in your strategy?

It may be helpful to conduct an audit of your business’s readiness for

digital transformation. At the end of this book, you can find such a diagnos-
tic tool, titled Self-Assessment: Are You Ready for Digital Transformation?
It includes questions to assess your own organization’s current readiness
for digital transformation—in terms of both strategic thinking and agility
to carry out new strategies.
You can think about the challenge of digital transformation in terms
of mastering two different kinds of management. To succeed in any trans-
formation, your organization must be able to develop truly new ideas, pro-
cesses, ventures, and ways of thinking. But it must also be able to spread
these ideas or processes throughout the organization. This is quite a differ-
ent task—and one that is particularly hard for large organizations.
 C O N C L U S I O N  241

The head of British Airways’ Know Me program explained to me how

the company is tackling this transition. Having built a powerful data asset,
developed tools to capture customer insight and apply it in customer inter-
actions, and launched pilot programs to prove the impact for the business,
she now faces a different challenge. The next stage is to scale up the pro-
gram, to embed the use of data for customer service into the company’s
DNA, and to transition Know Me from an innovative initiative to a part of
British Airways’ day-to-day operations.1
My colleague Miklos Sarvary, who teaches in my digital strategy execu-
tive programs at Columbia Business School, talks about this transition as a
shift from “incubation” (seeding and nurturing new strategies) to “integra-
tion” (building the best ones into the fabric of the organization).
But incubation and integration require very different skills in an orga-
nization. The ability to incubate is seen best in start-ups and venture capital
firms. It relies on specific skills: tolerating risk, seeding diverse ideas with
resources, welcoming outsiders who don’t fit your organizational culture,
empowering entrepreneurs, developing a robust innovation process based
on discovery and assumptions testing, maintaining a customer-centric
view, and being willing to let new ventures cannibalize existing ones.
By contrast, the ability to integrate and replicate successful ideas at
scale is most often seen in larger enterprises. It involves a different set of
skills: building a compelling business case, developing a clear proof of con-
cept, selling new ideas to diverse internal constituencies, finding the right
executive sponsorship, working with budgets based on business outcomes,
managing accountability to multiple stakeholders, and being able to scale
up operations.
The organizations that flourish in the digital age will combine the right
strategic mindset with the right leadership skill set. They will understand
the new strategic fundamentals of the digital age and use them to craft new
products, services, brands, and business models. Whatever their size, they
will maintain the organizational agility to seize new opportunities, and they
will balance the art of incubating and learning like a start-up with the art of
scaling and integrating like an enterprise.
These organizations will be guided, as their strategies and business
models change, by a focus on continuous value creation. Going back to
Peter Drucker, management thinkers have argued that the true and ulti-
mate purpose of business should always be creating value for the customer:
“to create a customer,” as Drucker wrote,2 or “to get and keep a customer,” as
Ted Levitt put it.3 Today, though, this doctrine may require a slight update.
 242 CONCLUSION

Amidst constant digital change, no business can thrive for long just deliver-
ing the same value proposition to customers. The need for value creation
is now intertwined with the need to constantly relearn and reinvent what
that value will be. The purpose of business, then, may be thought of as the
continuous creation of new value for the customer.
The digital revolution is still just getting started. With an ever-unfold-
ing cascade of new technologies and all the potential they provide, it is
impossible to predict how the digital future will impact your business or
any industry. But if you are savvy, your business can choose to use each new
wave of change as an opportunity to create new value for your customers.
Onward!
 se l f - as se s sme n t :
are you ready for digital
transformation?

Even extremely successful companies built in the pre-digital age struggle to

adapt their strategic thinking in order to thrive and grow in the digital age.
This self-assessment tool is designed to assess the readiness of your own
business or organization for digital transformation.
For each pair of statements, reflect on the current state of your own
business. Choose the number, on the scale from 1 to 7, that reflects where
your organization stands in relation to the two statements: 1 indicates fully
aligned with the left, 7 with the right.
The first group of questions relates to the strategic concepts presented
in this book. These questions are designed to measure the degree to which
your organization has adapted its strategic thinking to the digital reality.
The second group of questions relates to organizational agility. These ques-
tions are designed to measure your organization’s ability to put into prac-
tice these new strategic principles and successfully drive change in your
business.
After completing the self-assessment, look back at your results. Those
areas with a score on the left (e.g., 1–3) are where change is most needed.
You can use this diagnostic tool to focus your leadership attention and ef-
forts as you guide your own organization into the future.
Strategic Thinking

We are focused on selling to and 1234567 We are focused on our customers’

interacting with customers changing digital habits and path to
through the usual channels. purchase.
We use marketing to target, reach, 1234567 We use marketing to attract, engage,
and persuade customers. inspire, and collaborate with
customers.
Our brand and reputation are 1234567 Our customers’ advocacy is the
what we communicate to our biggest influence on our brand and
customers. reputation.
Our sole competitive focus is beating 1234567 We are open to cooperating with our
our rivals. rivals and to competing with our
partners.
We look to create value exclusively 1234567 We look to create value through
through our own products. platforms and external networks.
We are focused primarily on 1234567 We view our competition as broader
own industry and on direct than our current industry.
competitors.
Our data strategy is focused on how 1234567 Our data strategy is focused on how to
to create, store, and manage turn data into new value.
our data.
We use our data to manage 1234567 We manage our data as a strategic asset
day-to-day operations. we are building over time.
Our data stays in the division or 1234567 Our data is organized to be accessible by
business unit where it is generated. all divisions of the company.
We make decisions by analysis, 1234567 We make decisions through experiments
debate, and seniority. and testing wherever possible.
Our innovation projects always go 1234567 We innovate in rapid cycles, using
over time or over budget. prototypes to learn quickly.
We try to avoid failure in new 1234567 We accept failure in new ventures but
ventures at all costs. look to reduce cost and increase
learning.
Our value proposition is defined by 1234567 Our value proposition is defined by
our products and our industry. changing customer needs.
We assess new technologies by how 1234567 We assess new technologies by how
they will impact our current they could create new value for our
business. customers.
We are focused on executing and 1234567 We aim to adapt early to stay ahead of
optimizing our current business the curve of change.
model.
Organizational Agility

Our IT investments are seen as 1234567 Our IT investments are seen as strategic.
operational.
It is hard to allocate resources away 1234567 We are able to invest in new ventures
from existing lines of business. even if they compete with our current
business.
Our key performance metrics relate 1234567 Our business metrics adapt to suit
only to sustaining our existing changes in strategy and the maturity
businesses. of a line of business.
Managers are accountable and 1234567 Managers are accountable and rewarded
rewarded for immediate results on for long-term goals and new
past objectives. strategies.
We have difficulty developing new 1234567 We are able to seed and develop
ventures far from our existing new ideas that are unusual for our
business. business.
The sharing of best practices across 1234567 We are skilled at taking successful new
our organization is slow and ideas and integrating them across the
inconsistent. organization.
Our first priority is maximizing 1234567 Our first priority is creating value for
shareholder return. customers.