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 Co202.81 USD0.00Rating
adidas AG295.20 EUR0.00
Anheuser-Busch InBev SA/NV64.62 EUR0.09Rating
Coca-Cola Co56.16 USD0.00Rating
Costco Wholesale Corp381.83 USD0.00Rating
Danone SA59.37 EUR0.00Rating
Exxon Mobil Corp62.17 USD0.00Rating
FedEx Corp296.09 USD0.00Rating
General Electric Co13.69 USD0.00Rating
Intel Corp57.85 USD0.00Rating
Nike Inc B130.51 USD-1.08Rating
PepsiCo Inc147.35 USD-0.23Rating
Procter & Gamble Co134.65 USD-0.16Rating
United Parcel Service Inc Class B202.30 USD-0.44Rating
Walmart Inc140.34 USD-0.29Rating
Wells Fargo & Co45.47 USD-0.46Rating

About Author

Mathew Hodge  is an equity analyst for Morningstar

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