Making Business Decisions I: Porter’s Five Forces Analysis 1. There are several things to look at with Buyer Power: bargaining leverage, buyer volume, substitute’s available, buyer’s incentives and price sensitivity are just a few things that encourage buyers to purchase. Buyer power is high when the buyers have many choices of where and who to buy from and low when there are few choices. Broadway Cafe is located in downtown along with at least five other coffee shops. This means buyer power is high because there are substitutes and this automatically brings price sensitivity into play.
The next tool needed to look at is Supplier Power. Supplier power is the ability that suppliers have to influence things like prices, quality or availability of products. Broadway Cafe is a coffee shop and there are several options for buying supplies like cups, napkins, stir sticks, things needed to serve the coffee. There should also be supplier options to buy the coffee from unless the coffee is a specialty. Buyer switching cost would also be low if a supplier were to increase their prices and in most cases substitutes are available; therefore in this case I believe the supplier power is low.
Porter’s threat of substitutes is defined as the availability of products that the consumer can purchase instead of your product. Everywhere you look there is a new coffee house being built. People can substitute other coffee shops, convenience stores or fast food restaurants that serve coffee or other items like tea, soda and coffee from home; also, the switching cost are low for the consumer. All of this combined means the threat of substitutes is extremely high in this case. The fourth item in Porter’s model is the threat of new entrants. The threat of new entrants refers to the ability of new competition to enter the market.
Starting a coffee shop does not require economies of scale, the capital investment is low and consumer switching cost is low; all of this means the barriers to entry are low. Broadway Cafe will find that the threat of new entrants is high. The final force is rivalry among existing competitors, meaning how the other coffee shops can affect how you do business. Broadway Cafe must compete with all other coffee shops and substitution possibilities, if the coffee shop on the next block changes their prices, then there will have to be a reaction to the change to keep business or win business back.
Rivalry is high when there are a lot of competitors, when the switching cost are low and competitors have equal market share. In this case rivalry among existing competitors is high. 2. Location is an entry barrier, if there are already five coffee shops in the same downtown area, entering the area with the same business may be a deterrent to new businesses. Switching cost for consumers are extremely low in this case, most competitors’ prices are going to be really close in the same area, so it will cost little to nothing for a costumer to change coffee shops.
There are many substitutes for our product; we will have to differentiate our product from our competitors. 3. Of the three generic strategies I would chose differentiation. There are a lot of coffee shops in the area so we must make ours stand out, make it different then all the rest. I would do this by finding a niche market by offering vegan products, all green products, healthier alternatives and still offering the normal menu of a coffee shop.