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For decades, the five-forces model of competition has dominated the thinking about strategy. But it describes competition among traditional "pipeline" businesses, which succeed by optimizing the activities in their value chains--most of which they own or control. "Platform" businesses that bring together consumers and producers, as Uber, Alibaba, and Airbnb do, require a different approach to strategy. The critical asset of a platform is external--the community of members. The focus shifts from controlling resources to orchestrating them, and firms win by facilitating more external interactions and creating "network effects" that increase the value provided to all participants. In this new world, competition can emerge from seemingly unrelated industries and even from within the platform itself. The authors, three platform strategists, walk executives through the choices they must make when building platforms, outlining the different metrics needed to manage them. Businesses that fail to learn the new rules will struggle, they argue. When a platform enters the marketplace of a pure pipeline business, the platform nearly always wins. That's exactly what happened when the iPhone came on the scene in 2007. By 2015, it accounted for 92% of global profits in mobile phones, while most of the giants that once ruled the industry made no profit at all.

Two-sided networks, or platforms, often enjoy significantly greater returns at scale than traditional value chains. Despite these advantages, many companies struggle to develop these platforms in a sustainable way. This largely stems from an assumption that products with network effects will operate in the same way as traditional products, leading managers to make highly flawed decisions. In this article, the authors draw on recent theoretical work to guide executives negotiating the challenges of two-sided networks, touching on how to develop a pricing scheme, how to manage "winner take all" dynamics, and how to address the threat of envelopment by an adjacent platform. There are no easy answers, but thinking through the challenges presented in this piece will give you the tools you need to move forward with confidence.

To maximize information exchange among employees, don't reward individual performance.