Smart companies know poor profits don’t result from failing to differentiate, but from failing to establish permanent barriers to entry. If you can excite customers by the quality of the experience you provide, they will erect their own barriers to insulate you from your competitors. But since you can’t keep competitors out forever, maximize profits by being smart, being nice and playing fair

With luxury cars, as Mercedes once dominated Europe, Cadillac dominated the United States and both were very profitable. Although luxury cars have not become a commodity, when Lexus and Acura entered, Cadillac and Mercedes suffered profit erosion.

Cadillac and Mercedes did not experience pressure on margins, but experienced significant profit declines because of the loss of market share brought about by the inability to establish barriers to new entrants.

Smart companies don’t engage in price wars. Coca-Cola and Pepsi have depressed their earnings by a century of battles to damage each other rather than increase their bottom lines.

Nice companies would never engage in price-fixing but realize that they can try to increase profitability by either lowering prices in an effort to gain market share, or maintain prices where they are and hope that their competitors adopt the same policy.

If Ford suspects General Motors is planning to offer rebates to gain market share, Ford could immediately announce that they will match whatever rebate GM offers. General Motors now knows that rebates will not gain market share.

To maintain margins during pricing challenges, immediately react to your competitor’s price intentions and simultaneously suggest a willingness to jointly maintain higher prices.

Nice companies often exhibit cooperative efforts that are synonymous with wise management. You’re not operating illegally if market conditions cause you to raise, lower, or maintain prices and it’s not illegal to operate profitably.

The need for computer hardware and software companies, as well as all suppliers and vendors to work together to create optimal systems for their end customers is obvious. Find ways to increase the size of the pie, cooperation de-emphasizes focus on how you can increase the size of your piece placing emphasis on win-win propositions.

Play fairly or, as happened with Nintendo…be defeated in the end. In the 1980s, Nintendo owned 95 percent of the gaming business in Japan and 90 percent in North America. Their market capitalization was higher than Sony or Nissan.

Nintendo always moved slowly with new technologies and constantly squeezed the profits of the entire industry, irritating game designers, manufacturers and retailers.

When Sega introduced technology that game designers and retailers loved they were happy to flee from Nintendo’s dominance. Nintendo instantly went from the industry’s leading player to being one among many.

Sustainable competitive advantage seldom results from competing like Coke and Pepsi, eroding profits for both. Ford putting GM on notice of matching rebates may prevent a downward spiral for both and, in effect, presents a cooperative alternative.

If Nintendo had been willing to share more of the profits with game designers and retailers, it may have been able to maintain its dominant position much longer. Compete successfully, be smart, be nice and play fair.

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