When you go after competitors, does it more resemble a gladiator war, or a David-versus-Goliath battle? The answer will likely determine your profitability. As a company and as an investor.

After they achieve some success, most companies fall into a success formula constantly trying to improve execution. And if the market is growing quickly, this can work out okay. But eventually, competitors figure out how to copy your formula and as growth slows, many will catch you. Just think about how easily long-distance companies caught the monopolist AT&T after deregulation. Or how quickly many competitors have been able to match Dell's supply chain costs in PCs. Or how quickly dollar retailers, and even chains like Target, have been able to match the low prices at Wal-Mart.

These competitors end up in a gladiator war. They swing their price cuts, extended terms and other promotional weapons, leaving each other very bloody as they battle for sales and market share. Often, one or more competitors end up dead like the old AT&T or Compaq or Circuit City. These gladiator wars are not a good thing for investors, because resources are chewed up in all the fighting, leaving no gains for higher dividends, nor any stock price appreciation. Like we have seen at Wal-Mart and Dell.

The old story of David and Goliath gives us a different approach. Instead of going 'toe-to-toe' in battle, David came at the fight from a different direction adopting his sling to throw stones while he remained safely out of Goliath's reach. After enough peppering, he wore down the giant and eventually popped him in the head.

And that's how much smarter people compete.

When everyone was keen on retail stores to rent DVDs, Netflix avoided the gladiator war with Blockbuster by using mail delivery.

While United, American, Continental, Delta, etc. fought each other toe-to-toe for customers in the hub-and-spoke airline wars (none making any money, by the way), Southwest ferried people cheaply between smaller airports on direct flights. Southwest has made more money than all the 'major' airlines combined.

While Hertz, Avis, National, Thrifty, etc. spent billions competing for rental car customers at airports, Enterprise went into the local communities with small offices, and now has twice their revenues and much higher profitability.

When the Internet popularity started growing in the 1990s, Netscape traded axe hits with Microsoft and was destroyed. Another browser pioneer Spyglass transitioned from PCs to avoid Microsoft, and started making browsers for mobile phones, TVs and other devices, creating billions for investors.

While GM, Ford and Chrysler were in a grinding battle for auto customers, spending billions on new models and sales programmes, Honda brought to market small motorcycles and very practical, reliable small cars. Honda is now very profitable in several major markets while the old gladiators struggle to survive.

As an investor, we should avoid buying stocks of companies and management teams which allow themselves to be dragged into gladiator wars. No matter what promises they make to succeed, their success is uncertain and will be costly to obtain. What's worse, they can win the gladiator war only to find themselves facing David after they are exhausted and their resources are spent! Here are some examples:

Research in Motion (RIM) became embroiled in battles with traditional cell phone manufacturers like Nokia and Ericsson, and now is late to the smartphone app market. And it comes with dwindling resources.

Motorola fought the gladiator war, trying to keep Razr phones competitive, only to completely miss its early lead in smartphones. Now, it has limited resources to develop its android smartphone line.

Is it smart for Google to take on a gladiator war in social media against Facebook, when it doesn't seem to have any special tool for the battle? What will this cost, while it simultaneously fights Apple in android wars and Microsoft for Chrome sales?

On the other hand, it's smart to invest in companies that enter growth markets, but have a new approach to drive customer conversion. For example, Zip Car rents autos by the hour for urban users. Most cars are very high mileage, which appeals to customers, but they are also pretty inexpensive to buy. Their approach doesn't take on the traditional car rental company, but is growing quite handily.

This same logic applies to internal company investments as well. Far too often, the corporate resource allocation process is designed to fight a gladiator war. Constantly spending to do more of the same. Projects become overfunded to fight battles considered a 'necessity,' while new projects are unfunded despite having the opportunity for much higher rates of return.

In 2000, Apple could have chosen to keep pouring money into the Mac. Instead, it radically cut spending, reduced Mac platforms and started looking for new markets where it could bring in new solutions. Consequently, iPods, iTunes, iPhones, iPads and iCloud are now driving growth for the company all new approaches that avoided gladiator battles with old market competitors. And it's very profitable growth. Apple has enough cash on hand to buy every phone maker, except Samsung; or Apple could buy Dell, if it wanted to. Currently, Apple's market cap is worth more than Microsoft and Intel combined.

If you want to make more money, it's best to avoid gladiator wars. They are great spectator events, but terrible places to be a participant. Instead, set your organisation to find new ways of competing and invest where you are doing what competitors are not. That will earn the greatest rate of return.

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