The Digital Transformation Playbook: Rethink Your Business for the Digital Age

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.
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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?

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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.
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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.
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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 

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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.
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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 

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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.”
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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.
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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 

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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.”
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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.

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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.
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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.
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Mark Johnson, Clayton Christensen, and Henning 
Kagermann define it in terms of four parts: customer value proposition; 

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profit formula (including revenue model, cost structure, margin model, 
and resource velocity); key resources; and key processes.
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My intent is to use the business model specifically as a predictor of 
business disruption, and for this purpose, the schema can be simpler.