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
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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
3M Co181.49 USD0.00Rating
adidas AG282.75 EUR0.00
Anheuser-Busch InBev SA/NV49.00 EUR1.22Rating
Coca-Cola Co54.44 USD0.00Rating
Costco Wholesale Corp459.51 USD0.00Rating
Danone SA59.32 EUR0.00Rating
Exxon Mobil Corp55.16 USD0.00Rating
FedEx Corp255.22 USD0.00Rating
General Electric Co100.47 USD0.00Rating
Intel Corp54.26 USD0.00Rating
Nike Inc B156.42 USD-0.75Rating
PepsiCo Inc154.13 USD-0.92Rating
Procter & Gamble Co144.34 USD0.16Rating
United Parcel Service Inc Class B190.03 USD-1.52Rating
Walmart Inc144.73 USD-0.21Rating
Wells Fargo & Co46.47 USD0.41Rating

About Author

Mathew Hodge  is Morningstar's director of equity research, Australia & New Zealand.

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