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 Co169.12 USD0.00
adidas AG288.50 EUR0.00
Anheuser-Busch InBev SA/NV53.17 EUR-2.94
Coca-Cola Co48.51 USD0.00
Costco Wholesale Corp354.47 USD0.00
Danone SA56.18 EUR0.00
Exxon Mobil Corp48.84 USD0.00
FedEx Corp249.52 USD0.00
General Electric Co11.43 USD0.00
Intel Corp57.99 USD0.00
Nike Inc B137.55 USD-1.29
PepsiCo Inc140.18 USD1.15
Procter & Gamble Co132.24 USD1.72
United Parcel Service Inc Class B161.75 USD1.74
Walmart Inc146.20 USD-0.09
Wells Fargo & Co32.24 USD1.07

About Author

Mathew Hodge  is an equity analyst for Morningstar

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