Porter’s Differentiation Strategy

The Broadway Cafe is at a turning point. This coffee shop is over fifty years old and has been under the same management the entire time. This has worked fine for many years but now its age and lack of innovation are catching up with it. The company has never utilized technology to make the company better. It does not even own a computer. Now under new management, the time is right to bring the Cafe into the modern age. Approach is going to be the key for the Cafe is it has a lot of catching up to do with some of its competitors.

Despite how long this company has been in existence, its failure to keep up with modern innovation has seriously crippled its ability to be competitive. However, the company has the ability to bring itself out of the five year problem it has been in to become a leader in the local coffee industry again. Competitive Advantage Broadway Cafe has only a loosely based competitive advantage in the coffee shop market. This can be seen in Michael Porter’s Five Forces analysis of the competitive market place. The Cafe does not have much control over customer buying power.

With so much ability for substitutes the price for various products must be kept near market rate. Coffee is not something many buy in bulk so reliance on a few customers is out of the question. This means quantity of customers is very important. To our advantage are our unique products and the lack of buyer price sensitivity. For the most part customers are not going to drive to the other side of town to save $0. 50 on coffee. The specialty items on the menu are unique but do not necessarily require very specific ingredients.

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This allows for great bargaining power for supplies. If a disagreement arises with the supplier another can be found quickly without much cost differentiation. This is a big advantage as it allows the Cafe to be resistant to supplier market fluctuations. Unfortunately in the coffee shop industry there are many different avenues customers can get quality coffee. The exception is the unique products but they may not be enough to draw customers from across town to come to the Cafe.

There is seemly coffee on every corner in grocery stores, convenience stores, and even in kiosks on street corners. This creates a very high elasticity on the demand for coffee. Another problem is the ease of new competitors to entering the market. For the most part it does not cost much to open a coffee shop or coffee stand. There are only a few regulations imposed on the government and most of them are health codes. With such a high elasticity, prices cannot be adjusted to bump out the new competition.

There are few sunk costs as all the supplies could be sold to other coffee shops. The problem new entries will have is economies of scale. Larger coffee shops such as Starbucks can spread its costs around over a wide area and not feel the burden on big costs. Smaller shops have nothing to spread the costs around and therefore bear the brunt of all costs. Rivalries can become an issue if a coffee shop feels a new entry is located in such a way that it takes away customers. The elasticity of coffee and the fact that customers rarely buy in bulk means each customer is precious.

Consequently, coffee shops may do whatever it takes to get more customers in the store. The Broadway Cafe should implement Porter’s Differentiation Strategy in moving the company into modern times. In many ways, the Cafe already has the advantage of differentiation to its competitors with the family recipes of baked goods and soups. Even if these are lost with the grandfather, it has embedded the notion of uniqueness to its customers. Unfortunately, up until this time, this strategy had not been pushed to its full potential.

What has hindered this strategy before has been a lack of innovation in product development and with marketing. Most of the menu items have not changed much in fifty years. Those loyal customers enjoy how they can rely on their favorite menu item to be there each day. However, after over fifty years, attrition becomes a concern and new items must be made to attract newer, younger customers. Having new management at the Cafe provides the perfect opportunity and excuse to innovate on new ideas.

The other problem has been marketing. The prior owner seemed more concerned with the daily operation of the company instead of the pursuit of new customers. He did offer coupons to customers but its tracking system was a pen and paper. Consequently, evaluating the effectiveness of the coupons cannot be measured accurately. He also had no web presence in an age where a web presence can make or break small companies. Even a coffee shop needs a place on the Internet where people can go to find them.

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