Why Cost Matters for Competitive Advantage

Cost advantages allow businesses such as Wal-Mart, Coca-Cola and Nike to offer lower prices to secure greater volumes or extract higher margins than competitors

Mathew Hodge 18 October, 2017 | 9:55AM Preston Caldwell

Wal-Mart store

Cost is one of Morningstar’s five sources of competitive advantage, allowing a firm to produce a good or service at a lower cost than its rivals. It is typically underpinned by scale, proximity to customers, or access to low-cost raw materials, cheaper financing and research and development. It may also come from proximity, which manifests as a transport cost advantage or from access to low-cost raw materials. It allows businesses to offer lower prices to secure greater volumes and/or extract higher margins than competitors. Lower costs, like prohibitive switching costs for customers, can often to boost firms' dominance in an industry.

Cost is the second most common source of competitive advantage - known as a company's economic moat, after intangible assets, and appears in all sectors, particularly communication services, consumer defensive, and financial services. Cost advantage by itself is uncommon; rather, it typically exists in combination with another source of advantage.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
3M Co160.27 USD0.00
adidas AG279.50 EUR0.00
Anheuser-Busch InBev SA/NV45.06 EUR0.63
Coca-Cola Co48.72 USD0.00
Costco Wholesale Corp342.58 USD0.00
Danone SA54.56 EUR0.00
Exxon Mobil Corp34.64 USD0.00
FedEx Corp250.17 USD0.00
General Electric Co6.11 USD0.00
Intel Corp49.94 USD0.00
Nike Inc B124.23 USD-0.42
PepsiCo Inc133.55 USD1.50
Procter & Gamble Co137.62 USD0.51
United Parcel Service Inc Class B166.12 USD3.56
Walmart Inc137.27 USD0.42
Wells Fargo & Co23.64 USD1.37

About Author

Mathew Hodge  is an equity analyst for Morningstar

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