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Competitive Advantage: Companies With Lower Costs Make Better Investment Opportunities

In this post I want to talk about the advantage of having lower costs for a company you are considering investing into.

A business that has the ability to sell its goods or services for less than its competitors will have a distinct competitive advantage in the marketplace.

Naturally the only way to accomplish this, and still earn a profit over the long term, is to be able to manufacture a product or provide a service at a lower cost than everyone else. This is a type of technical advantage of a company and creates a MOAT around it.

A company with a strong MOAT, or competitive advantage over competing companies, is a far better bet because it now means that others cannot easily overtake it and become the industry leaders.

This is often the case for larger companies with the resources to buy in bulk or to operate more efficiently for a lower cost.

And also for those types of businesses that can be effectively located close to both the source of their income and to their customers such as in the case of a local quarry.

And here’s a quick note you’ll want to look for companies with a cost advantage that competitors cannot replicate.

Remember that an economic MOAT should be something that’s sustainable and can not be easily duplicated.

This means that if you want your company to have a sustainable competitive advantage you must make it hard or impossible for your competitors to copy your methods.

Similarly companies can do this by developing and patenting new technology before their rivals.

So that’s why when evaluating a company you should also spend some time reading it’s quarter and annual reports, to see if they invest any money in R&D.

Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry.

Either forcing the competitor to leave the industry or at least impeding its growth. What’s more companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.

So this should give you a better understanding of a company having lower costs and how that factors into their economic MOAT. Which essentially is there unique competitive advantage which holds other companies off and keeps their profitability growing.


Comment ( 1 )

  1. Two companies. One can take $10 and make $15, another can take $10 and make $150. Which one would you invest in?

    That is what it is all about. The deployment of capital by a company is key. Return on capital per share.

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