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Management article
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Reference no. R0610F
Published by: Harvard Business Publishing
Originally published in: "Harvard Business Review", 2006
Revision date: 17-Dec-2024

Abstract

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.

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Abstract

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.

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