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‘David Watson's writing is exceptionally clear.’
Sir John Templeton, author, philanthropist, Founder of the Templeton Growth Fund and John Templeton Foundation.
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John Lander, Chairman of The Serious Investor Groups network.
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Synopsis of Business Models
Different
Business Models is different from other investment books because it breaks new ground. It deploys 129 business models to empower an outside investor to analyse the internal competitive advantage of companies and sectors.
Competitive advantage
Strong competitive advantage is only achieved by having low costs and/or doing something different from the competition. This must add value to the customer, who then pays a premium price. He is glued to the company, which will earn dependable revenue streams and be in the profit zone.
Key features
· 64 company business models are scored for competitive advantage. They include moats, recurring revenues, product differentiation, bolt-on acquisitions and bargaining power.
· 65 sector business models are scored for competitive advantage. They include recession resistance, must-have products, sticky customers, toll bridges and megatrends.
· The economic cycle is the ultimate arbiter of investment success or failure.
· Other important tools are growth at a reasonable price, technical analysis, scuttlebutting, accounting for growth and investment axioms.
· Conclusion Business Models unearths the best companies to outperform in a bull or bear market, giving investors a real advantage. They can correctly evaluate a company or sector in 15 minutes and emulate Warren Buffett, who uses business models to invest in companies with strong competitive advantage.
Publisher
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First published in
Copyright Harriman House Ltd
The right of David Watson to be identified as the author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, copying, recording, or otherwise, under any circumstances. © 2004.
ISBN 1-897-59758-4
Stock market investments can go down as well as up and the past is not a guide to future performance. Securities or shares mentioned in this book are for illustration purposes only and are not a recommendation. Prices, valuations, analysis, business models and competitive advantages were at the time of writing. They are no longer up to date because prices, profit forecasts and business models continually change. What may be attractive today can be unattractive tomorrow and vice versa. Seek your own professional advice before dealing in securities. Neither the Publisher nor the Author accepts any legal responsibility for the contents of this book or for any errors, inaccuracies or omissions. The liquidity of some securities may be poor and this should be evaluated before making any investment, particularly in smaller companies.
No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author.
Contents Page
About the author v
Acknowledgements v
Foreword vii
Glossary ix
Introduction xiii
Summary of this book xiv
1. Business models: investing in companies 1
with strong competitive advantage
1. Competitors 10
2 Customers 18
3. Economics 30
4. Management 44
5. Products 56
6. Suppliers 72
2. Business models: investing in sectors 75
with strong competitive advantage
1. Competitors 80
2. Customers 84
3. Economics 89
4. Management 100
5. Products 102
6. Suppliers 116
7. Sectors to avoid 118
3. Shifting deck chairs on the Titanic 125
1. The economic cycle 126
2. The cycle of opportunity 136
4. Which sectors to buy and sell during the 139
economic cycle
5. Growth at a reasonable price 181
1. Growth statistics 182
2. Value statistics 185
3. Further considerations 187
4. Trading 189
6. Technical analysis 191
1. A useful tool to improve performance 192
2. A chartist’s view 193
7. First-hand experience of the product: 207
scuttlebutting
8. Accounting for growth 219
1. Broker forecasts 221
2. Cash flow 224
3. Dividends 227
4. Goodwill 231
5. Share options 236
9. Investment axioms 239
Conclusion 259
Appendix 263
1. Example of a company’s business model: Radstone 264
Technology
2. How Microsoft triumphed because of its business model 272
Further information 282
Index 285
Index of tables
Chapter 1. Company business models 7
Chapter 2. Sector business models 77
Chapter 4. The economic cycle of opportunity 144
Conclusion Company scoring using all six tools 260
Appendix 1. Company business model 270
Appendix 2. Company business model 279
About the author
David Watson read a bachelor’s and master’s degree in economics and finance at
Glossary
Beta
Beta measures how much a share price movement correlates with a movement in the stock market. A high beta share has a value over 1.0 and its price has historically increased or decreased more than that of the market. A low beta share has a value under 1.0 and its price has historically increased or decreased less than the market. Betas are shown in Yahoo Finance under each company’s details, as well as in REFS (Really Essential Financial Statistics).
Business model of a company
A business model describes a company’s operations, including all of its components, functions and processes, which result in costs for itself and value for the customer. Its goal is to achieve low cost and differentiate itself from the competition. This depends on having good economics, management and products, plus power over customers, competitors and suppliers, which result in strong competitive advantage.
Business model of a sector
A business model describes a sector’s competitive advantage and is derived from a set of factors or capabilities that allows consistent outperformance. This depends on having good economics, management and products plus power over customers, competitors and suppliers, which result in strong competitive advantage.
CEO
Chief Executive Officer.
Commodity product
Commodity products, such as sugar and steel, lack differentiation. Price is the single most important factor determining a purchase and competition is intense. The low-cost producer triumphs and the quality of management is crucial.
Contrarian
An investor who does the opposite of what most investors are doing at any particular time.
Dead cat bounce
A quick, moderate rise in the price of a share following a precipitous decline.
Defensive
A defensive company has inelastic demand and is recession resistant.
Differentiation
One of the two ways to achieve competitive advantage is for the company to do something different from the competition that adds value to the customer and can take place anywhere in its value chain. It is most obvious in the end product but could be in logistics, management, quality of inputs, delivery times, etc.
EPS
Earnings per share, after tax, are the amount attributable to the shareholder to pay as dividends or retained in the company.
Factors of production
The four factors of production are land, labour, capital and enterprise, and contribute to the production of a product or service.
Gearing
Debt financing, and is another word for leverage.
Goodwill
Goodwill is an intangible asset that cannot be touched or counted. It may provide a competitive advantage, such as a strong brand, reputation and expertise. Purchased goodwill is the difference between the cost of buying a company and the book value of its net assets.
Gorilla
A gorilla is a dominant company, usually a blue chip, and is typically overvalued with modest growth prospects.
He
For purposes of brevity, ‘he’ includes ‘she’.
KISS
Keep It Simple, Stupid.
Leverage
Debt financing, and is another word for gearing.
Long
Being long means investing in a share or market. The opposite is being short, as explained below.
Low-cost activities
One of the two ways of achieving competitive advantage is for the company to have low-cost activities in its value chain. Differentiation is the other way.
Low-ticket items
Low-ticket items are products or services that sell at a low price.
PER
Price earnings ratio.
Player
A player is a company in a sector.
Product
A product is not just a physical good but can also include a service.
Reach
Reach is the ability of a company or sector to operate nationally or globally.
Scalable
A scalable business can easily and quickly expand to meet increased demand.
Scuttlebutt
Scuttlebutt means assessing a product or company by testing it for yourself through empirical observation.
Short
Short means selling shares that an investor, or ‘shorter’, does not own. The expectation is that the share price will have fallen below the investor’s agreed selling price when the contract is settled. He can then buy the shares to cover the contract and make a profit.
Sticky customer
A sticky customer tends to continue to buy from a company because of factors such as habits, inertia, switching cost or lack of knowledge.
Stop loss
An order to a broker to sell when the price of a security falls to a designated level. This locks in a profit or stops further losses being incurred.
Transactional
Transactional customers are one-off, as compared to repeat customers.
TMT mania
TMT was the technology, media and telecommunications mania that ended in 2000.
Value added
Value added means that the company has combined its inputs in a way that creates demand from the customer and results in profit. It can be created anywhere in its value chain.
Value chain
The value chain is all the activities and costs of a firm in the entire production process from the initial receipt of inputs, then processing and resulting in the final output.
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Introduction
129 business models
‘Between every individual and his tomorrow a veil is drawn. There are ways by which this veil can be penetrated to some extent.’
Laurence Sloan, author of Everyman and his Common Stocks.
Mankind has three main goals in life: seeing the future, amassing wealth and living forever. They are recurring themes in novels and films, as well as in people’s private lives and thoughts. This book occupies the space of the first two of these, as it should enable an investor to see the future performance of a company and, in doing so, increase his wealth. Living forever is left to others. This book is different from other investment books because it breaks new ground by assessing the business models of companies and sectors. It provides critical tools that enable an investor to assess whether a company’s business model leads to strong competitive advantage and if it is in a sector that, in turn, also has strong competitive advantage. It casts a keen eye on the economic cycle, the ultimate arbiter of an investor’s success or failure. Other important tools are growth at a reasonable price, technical analysis, scuttlebutting, accounting for growth and investment axioms. The 129 business models are used to analyse companies and sectors. For example, a company may be in a favourable sector but has frittered away this tailwind through incompetence. Likewise, it may be superbly run and very profitable in spite of being in a dreary sector. These tools are designed to unearth the very best companies to outperform in a bull market. They should also thrive in a bear market and minimise the chance of a profit warning. Thus, the investor has a real advantage over those who lack this knowledge.
Summary of this book
The first four chapters are the most important.
Chapter 1. Business models: investing in companies with strong competitive advantage
This chapter is the core of the book and examines 64 business models. The aim is to choose companies that have sound business models. This is achieved by having low costs and/or doing something different that adds value to the customer. The result is strong competitive advantage, leading to superior profits.
Chapter 2. Business models: investing in sectors with strong competitive advantage
Having selected companies with sound business models, the next step is to ensure that they are in attractive sectors by examining 65 business models leading to strong competitive advantage. Both the company and the sector should have the ability to mould the economic world their way rather than being under the power of others. We also examine companies and sectors that should be avoided. If a company does not have a sound business model in a sector with strong competitive advantage then it can be readily dismissed. If it does pass the test, then further consideration can be justified, as discussed in the remaining chapters.
Chapter 3. Shifting deck chairs on The Titanic
The company’s attractions are further strengthened by being in a favourable place in the economic cycle. Buying and selling at the right stage of the cycle and moving between different asset classes is a prime determinant of investment success. Ignoring the economic cycle is like pointlessly shifting deck chairs on The Titanic to obtain a better position, oblivious of the iceberg ahead.
Chapter 4. Which sectors to buy and sell during the economic cycle
Each of the sectors is scored according to its recession resistance and competitive advantage. Having identified those that offer the greatest investment opportunity, they are then assessed according to when they should be bought and sold during the economic cycle.
Chapter 5. Growth at a reasonable price
The share must offer growth at a reasonable price. Seek to invest in established companies that have a reasonable PER combined with profits growing strongly and at a sustainable rate.
Chapter 6. Technical analysis of the company and sector
The trend in the price graph is your friend, so aim to buy shares that are rising and sell those that are falling. The relative strength of the share is a proxy for technical analysis and is a very important tool.
Chapter 7. First-hand experience of the product or scuttlebutting
First-hand experience of the product or ‘scuttlebutting’ can be very useful in detecting early warning or success signs that the City has not spotted.
Chapter 8. Accounting for growth
In a world of spin and declining financial morality, it is important to understand what the financial results really mean and how to avoid companies which ‘account for growth’ in order to mislead the unwary.
Chapter 9. Investment axioms
The investment axioms, or rules, summarise a total of 1,000 years of trading experience from 35 of the greatest investment gurus. These valuable lessons should enable you to avoid pitfalls and enhance your gains.
Conclusion
This book sets out six tools to help investors choose shares that outperform. These tools are wrapped up in a simple table to rate a company’s attractiveness overall.
Summary
This methodology may seem a tall order in choosing to buy and sell shares but a familiarity with these tools is invaluable in asking the right sort of questions. For example, if you rely on a professional advisor, such as a broker, ask him the next time he recommends a share: what is the business model of the company and sector and do they have strong competitive advantage? Is this share well positioned in the economic cycle? Does it offer growth at a reasonable price? Is the share price in an up trend? Is there any accounting for growth? Do not be surprised if there is deathly silence at the other end of the phone, in which case you should go elsewhere.
A moderate grasp of this methodology should enable the private or professional investor to correctly evaluate a company in 15 minutes and dismiss the vast majority in much less time. This is how long an evaluation can take Warren Buffett, who uses business model analysis to avoid commodity businesses and invest in companies with strong competitive advantage.
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CHAPTER 1
Business models: investing in companies with strong competitive advantage
Page 1
What is a business model?
‘Competitive advantage is based not on doing what others already do well but on doing what others cannot do as well.’
John Kay, economist.
A business model describes a company’s operations, including all of its components, functions and processes, which result in costs for itself and value for the customer. Therefore, it is how the engine of the business actually works. The objective is to have low cost and high value and thus maximise profit. All attractive business models will have some magical secret or ‘pixie dust’ and the investor’s task is to find it. More importantly, it is to discover the pixie dust that others cannot see. A company’s strategy of combining the four factors of production, namely land, labour, capital and enterprise, will determine its unique business model, the superiority of which over the competition is a crucial determinant of sustainable, competitive advantage. The ability of a company to achieve this is largely determined by the competitive advantage of the sector, which is discussed in chapters 2 and 4.
Business models are not a new phenomenon. They have existed since time immemorial, whether it was the success of the
Why are business models so important?
An attractive business model (also called a franchise by some people, like Warren Buffett) is of crucial importance in choosing winners. It can only be achieved in two ways, both of which management must comprehend and sustain:
Page 2
a. Low cost
If a company has the same costs as competitors, then it will have the same profits. Superior profits will, however, be earned if costs are lower and bite less into revenues. Therefore, the strategy is to have the lowest-cost business model compared to the competition. This can be done in a variety of different ways, such as by being number one in the sector, having excellent management, a modest head office, power over suppliers, and superior raw materials, buying skills, technology and quality control. There are trade-offs, so, for example, cost savings on quality of inputs may lead to more product rejects, thus increasing overall cost. Value is added to the customer if his costs are lowered and this can be achieved through a variety of means, such as increased reliability, being easier to use and therefore needing less training, an extended free warranty or insurance, cheap financing and just-in-time delivery.
b. Different
A company should strive to do something different from the competitors in its ‘value chain’, which is all the activities and costs in the entire production process from the initial receipt of inputs, then processing and resulting in the final output. If it does the same as competitors, then customers have no reason to prefer it and it will earn the same, rather than superior, profits. The value the company captures from differentiation depends on the price charged and profit margin earned, rather than the cost borne by the customer. Thus, if a company succeeds in erecting high barriers to entry then it could charge a premium price and earn a high profit margin. However, the cost borne by the customer would be higher than if the barriers did not exist.
Companies often focus on creating differentiation in their product, but it can be done anywhere in the value chain, which encompasses competitors, customers, economics, management and suppliers. However, product differentiation is singled out because of its prime importance to the customer. It must be valuable to him, either by lowering his cost and/or increasing the utility of the product. Either way, if it offers better value it will be bought instead of the competition’s product. The differentiation must be both real and understood by the customer. For example, there could be a wonderful product but the customer may be oblivious of its benefits. There are trade-offs, so, for example, a firm may focus on improving reliability but also cut back on the length of the guarantee. Consequently, the product is better but the customer may be unaware of this and choose a substitute with a longer guarantee.
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Sources of product differentiation include advertising, customer care, management, delivery time, guarantee, quality, reliability, reputation and service. One example of a differentiated product is the BBC. It does not have irritating advertisements and has two terrestrial channels so it can readily cater for minority audiences.
Companies that do something different in their value chain are attractive investments and are contrasted with commodity products and commodity-type businesses. Commodity products, such as sugar and steel, are indistinguishable from one another and so lack differentiation. Price is the single most important factor determining a purchase and competition is intense. The low-cost producer triumphs and the quality of management is crucial. Companies can have commodity-type businesses where little value is added and price competition is paramount, such as box-shifting distributors. Such activities are unattractive and should be avoided as they have poor competitive advantage. The future belongs to those companies that have products containing less material and more thought. This combination is often difficult but it frustrates the competition and is more highly prized by customers.
The holy grail
‘When I was young I used to think that wealth and power would bring me happiness. I was right.’
Gahan Wilson, cartoonist.
Competitive advantage stems from low cost and/or differentiation. The holy grail is for the extra cost of being different to be less than the premium price charged to customers. If the extra cost is higher than the premium price, then profits will be less than those of competitors. For example, a restaurant chef may want to use top quality ingredients to produce superb food but the extra cost may exceed the higher price charged, thus leading to lower profits.
There can be trade-offs between lower costs and being different. A bar may serve cheap, unbranded drinks to lower costs but customers might reject the taste or image, thus reducing the ability of the firm to differentiate itself. Firms should concentrate on finding out what really matters to customers and satisfy those wants that cost little or nothing to provide. Thus, a software company may discover that customers really want technical support and this could be satisfied by a trouble-shooting page on the internet at minimal cost, rather than a telephone support centre.
Page 4
All-weather shares not share price killers
The combination of low cost and motivated customers choosing to buy from a company, rather than a competitor, and at a premium price means it will have strong competitive advantage. This results in superior, sustainable and growing profits. The operating risk of the company will also tend to be low and the predictability of profits should be greatly enhanced. The strong control over revenues means that the share should be resilient throughout the economic cycle and, as such, will be more suitable for ‘all-weather’ not just ‘fair-weather’ stock markets. This minimises the chance of profit warnings, which are share price killers. Companies with no competitive advantage are hammered in a bear market, whereas those with strong competitive advantage tend to be de-rated much less and are quick to recover. Note that competitive advantage stems from what companies do, rather than from such ‘advantages’ as being a ‘gorilla’ (blue chip company) or having a leading market share. This is a common misconception, although these advantages could be important if the companies had a low-cost or differentiated business model.
A strong business model also means that if the share price weakens then an investor should be confident that the setback is likely to be temporary because the company is sound. He will be less worried about selling at the first whiff of a falling share price. This is because buyers will be tempted back and thus push up the low share price. It is also a buying opportunity for contrarians, who are investors that do the opposite of what most investors are doing at any particular time. Some companies have better business models than others within a sector, just as some sectors have greater competitive advantage than others. Both are subject to constant change and this can happen swiftly. The mission is to find companies with excellent business models in the best sectors, which are likely to be comprised of many profitable companies that have low costs and/or different activities that add value to the customer. However, there can be profitable companies in unattractive sectors and vice versa.
64 company business models
Sixty-four company business models are now examined in detail and, although this list is not exhaustive, it is designed to cover the main points. Six factors determine the strength of a business model that gives a company its competitive advantage, which is achieved through low cost or differentiation. These factors are: having good economics, management and products, plus power over customers, competitors and suppliers. This format is also used to analyse the Sixty-four company business models are now examined in detail and, although this list is not exhaustive, it is designed to cover the main points. Six factors determine the strength of a business model that gives a company its competitive advantage, which is achieved through low cost or differentiation. These factors are: having good economics, management and products, plus power over customers, competitors and suppliers. This format is also used to analyse the
Page 5
competitive advantage of sectors in the next chapter. A summary is provided in the table below, for ease of reference, that can be a useful checklist for investors to evaluate any company. Some companies feature several times and the aim is for candidates to score well in numerous business models, not just one or two. A worked example, Radstone Technology, illustrates this point in appendix 1. Business models, prices and valuations are in a constant state of change, given the fluctuations in the economy and unfolding events. Therefore, examples of companies and sectors given are illustrations of the points being made and are not recommendations. Indeed, it is the test of a company that its business model does change over the medium term, which is about five years. This ensures it moves to where the profit zone has shifted. Otherwise, it will become marooned in a profitless zone as competitors encroach. For example, it may be necessary to enter a new sector, as
All business models are not equal
‘Look for companies that have high returns on capital, strong balance sheets, sustainable competitive advantages and shareholder-oriented management.’
Joe Mansueto, founder of investment information provider Morningstar.
All business models are not equal, as some are more powerful than others. Consequently, the company business models table overleaf scores them on a rating of 1, being the highest, to 5, being the lowest. These ratings are inevitably subjective and some could arguably be moved up or down to an extent but a top rated business model would unlikely to be relegated to the bottom or vice versa.
Page 6
Company business models table
The Company Business Model table can be viewed on the following link
Companybuusinessmodelstable.pdf
Or on page 7 here:
http://www.harriman-house.com/businessmodels/extracts/Chapter_1.pdf
Page 9
The competitive advantage points from 1 to 5 in the table above are awarded according to the business model’s power to achieve low cost and/or differentiate itself from the competition. Above all, it is crucial for a company to be able to control its revenue streams. Consequently, those that score the maximum 1 are: moats, longterm contracts, recurring revenues, focus on competitive advantage, owning the standard, product differentiation and bargaining power over suppliers. Medium scorers include selling directly and lean manufacturing. At the bottom of the pile are those that do not have a major impact on revenue streams or have limited applicability, such as supported by a famous personality and changing sector and index. This same scoring is used for the sector table in the next chapter and includes business models to avoid.
As noted above, a company should have multiple business models and be scoring well throughout to be highly-rated, as this strengthens their overall competitive advantage. For example, Radstone Technology has erected barriers to entry, put a moat around its business and does not have intense competition. JVC owns the VHS industry standard and is also a brand. Diageo is five times bigger than the number two gorilla in beverages, SABMiller, and thus dominates the sector, owns the customer and has some of the best brands in the world. Microsoft owns the standard, it piggybacks on the work and growth of others and is a brand.
1. Competitors
‘I read the annual report of the company I’m looking at and I read the annual reports of competitors – that is the main source of material.’
Warren Buffett, CEO of
Companies with sound business models will be able to compete. This section examines some ways that this can be achieved and is also a guide to analysing the threat from competitors.
1a. Barriers to entry and exit: competitive advantage rated 2
A company’s business model is attractive if it has erected high barriers to entry. An example is Microsoft which has largely locked out the competition by owning the industry standard in computer operating systems with its Windows product.
The barrier stops new companies entering the market, which would otherwise increase capacity and put pressure on prices. Avoid companies that seek to diversify into sectors where such barriers exist, as it is likely to be an uphill
Page 10
struggle. There are many forms of barriers to entry. A classic barrier is the pyramid, where companies have cheap and cheerful products at the base and high margin products at the top. The base is protected by a firewall of low prices and brands to stop competition from attacking it and working their way up the pyramid to the top where the pot of gold lies. Japanese car makers penetrated such a barrier in Western markets by starting with building British motorbikes and cars under licence and steadily moving up the value chain to compete in the luxury market with brands like Lexus. Sheer size can be an important barrier, such as in steel and mining which need large economies of scale to operate efficiently. Life insurance companies and banks need national coverage with the attendant branches and marketing organisation. The cost of complying with the formidable regulations is significant with HSBC, for example, having to contend with over 350 bodies worldwide. Establishing a brand name may be very difficult in a crowded market where consumers are reassured by an existing brand they trust.
Licences are effective in stopping new entrants. For instance, the number of black cabs in
The barriers to entry may be low, on the other hand, but the reaction of existing players may still be effective in preventing new entrants from establishing a foothold, for example, by threatening a price war. The existing players may dominate the available distribution channels, such as in newspapers, with the likes of John Menzies and WHSmith. Another illustration is the restriction on the location of dispensing pharmacies near doctors’ surgeries, where the demand for fulfilling subscriptions is high. A new entrant is locked out by being unable to obtain a site. There are low barriers to entry in telecommunications, thanks to the regulator, and a myriad of both large and small resellers provide ferocious competition. Providing office plants has low barriers to entry but Rentokil Initial has been adept at winning new customers before some of the competition was even aware of the opportunity.
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Conversely, an attractive company should have low exit barriers so it can easily leave the sector should the need arise. For example, a struggling holiday operator can easily leave that sector and cut its losses. By contrast, heavy industry, such as aluminium, coal or nuclear power, may face crippling exit costs and it may be cheaper to carry on. This creates a profitless zone for all players.
1b. Being number one or two in the sector: competitive advantage rated 2
‘We are watching the dinosaurs die but we don’t know what will take their place.’
Lester Thurow, MIT economist.
Being number one or two in the sector implies that the company has achieved competitive advantage to reach this position, examples being BP and Royal Bank of
The problem with a gorilla is what to do next. Its big disadvantage is its very size, because it may not be able to grow by much more than that of the overall market.
The recourse is often to grow via acquisitions, but studies have shown they generally destroy shareholder value. Blue chip companies’ shares tend to be overpriced and bought because they are well known. Although they seem to offer the allure of stability, they can fall dramatically from grace, like British Energy, ICI, Invensys, Marks & Spencer, Railtrack and Royal & Sun Alliance, and are no
Page 12
panacea for protecting your wealth. Further, once they are troubled, they are like an oil tanker and take considerable time and money to turn around, with no guarantee of success. High exceptional costs can be expected during such restructurings and these destroy shareholders’ wealth.
A gorilla can dominate the market by setting prices and standards, launching new products and controlling the entrance and exit of competitors. A second division player may be weak and takes what crumbs it can from the table if it lacks strong competitive advantage. It may have to accept the ruling price set by the gorilla if it is unable to lower its price to gain new customers, either for fear of retaliation by the gorilla or because production constraints inhibit increasing output. Examples of well-known companies that are gorillas include Microsoft, Vodafone, HSBC, Sony and