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

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.”
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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.
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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.
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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.

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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, 

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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.