Sample Walkthrough: The Local Coffee Shop Example
When you walk into a local café, you’re not just seeing a place to grab coffee—you’re observing a real-world ecosystem of competition, power dynamics, and strategic choices. This is where theory meets reality. In this chapter, we’ll walk through a full five forces analysis of a small, independent coffee shop using a real-world example.
You don’t need to be a corporate strategist to see how each force shapes business decisions. By the end of this walkthrough, you’ll understand how to break down any small business using Porter’s Five Forces—step by step, with visuals, explanations, and clear reasoning.
This is your first deep dive into how to apply the framework. Think of it as a template you can reuse for any startup, retail store, or service provider.
Step 1: Define the Industry and Scope
Before we begin, we must define the market we’re analyzing. For this example, we’re focusing on a single independent coffee shop in a mid-sized city—let’s call it “Brew & Co.” It serves specialty coffee, pastries, and offers free Wi-Fi. It’s not part of any chain, and it’s not a drive-thru. It’s a neighborhood staple.
So what’s the industry? Local specialty coffee retail. This includes independent cafés, small roasteries, and boutique coffee stands that compete on quality, atmosphere, and customer loyalty.
Here’s what this scope rules out: mass-market chains like Starbucks or Dunkin’, fast-food coffee, or delivery-only apps. We’re focusing on neighborhood-level competition, where local identity matters.
Step 2: Analyze Each of the Five Forces
1. Competitive Rivalry (Existing Competitors)
At Brew & Co., there are three direct competitors within a 10-minute walk: two other independent cafés and a small bakery with coffee.
What makes rivalry intense here?
- Similar quality and pricing: All serve specialty beans and charge $4–$5 for a latte.
- Overlapping customer base: Local residents and remote workers use all three.
- High visibility and foot traffic: All are located on the same pedestrian-friendly street.
- Low switching costs: Customers can easily try a different café each day.
Because the market is saturated with similar offerings, customers are price-sensitive and quick to switch. This means rivalry is high.
2. Threat of New Entrants
How easy is it for another coffee shop to open nearby?
Let’s examine the barriers:
- High startup costs: A quality espresso machine, lease on a prime spot, and staff training cost $30,000+.
- Brand loyalty: Customers already trust Brew & Co. and the other two cafés.
- Location scarcity: Prime retail spaces in this area are scarce and expensive.
- Time to build reputation: It takes months to develop a loyal customer base.
While there’s room for one or two more cafés, the combination of cost, location, and customer habits creates a moderate** threat.
Small business case study tip: In tight urban areas, new entrants are rare unless someone offers a unique twist—like a plant-based menu or a unique ambiance.
3. Bargaining Power of Suppliers
Brew & Co. sources its beans from a regional roaster, and the roaster serves other cafés in the area.
Why is supplier power moderate?
- Multiple suppliers exist: There are three roasters within 30 miles.
- High substitution: Brew & Co. could switch roasters without major cost or quality loss.
- But—brand dependency: Brew & Co. has built its identity around a specific single-origin bean from one roaster.
- Volume is low: Brew & Co. buys only 20 lbs per week, so it doesn’t have major leverage.
So while suppliers are not monopolistic, the shop is somewhat locked in by brand reputation. This creates a moderate** influence.
4. Bargaining Power of Buyers
Who are the buyers? Local residents, remote workers, students, and tourists.
Buyer power is moderate to high for these reasons:
- Price sensitivity: Many customers compare prices across shops.
- High availability of alternatives: If Brew & Co. raises prices, customers go elsewhere.
- Low loyalty: Customers come and go based on convenience, mood, or promotions.
- But—local loyalty exists: Regulars return, but they’re a small portion of total sales.
Because there are so many choices, buyers can easily switch. However, Brew & Co. has built some loyalty through its cozy space and community events.
This is a classic moderate** power balance—buyers can influence, but not dominate.
5. Threat of Substitutes
What are the alternatives to buying a coffee at a café?
- Home brewing: A Keurig or French press costs less and is quick.
- Hot chocolate or tea: Non-coffee drinks serve the same need.
- Energy drinks or soda: A quick caffeine fix without the ritual.
- Grab-and-go coffee from gas stations or convenience stores.
These substitutes are low-cost and easily accessible. Many customers will choose a cheaper or faster option if the café is crowded or overpriced.
So, the threat of substitutes is high. This is one of the biggest risks Brew & Co. faces—especially during peak hours when customers may choose the speed of a drive-thru over a line at the café.
Step 3: Summarize in a Five Forces Table
Now that we’ve analyzed each force, here’s a clean summary for your reference:
| Force | Analysis | Impact on Profitability |
|---|---|---|
| Competitive Rivalry | High – many similar cafés, low switching costs | Reduces profitability due to price pressure |
| Threat of New Entrants | Moderate – high startup costs, limited space | Stable, but expansion is possible |
| Bargaining Power of Suppliers | Moderate – multiple roasters, brand loyalty | Stable, but supplier shifts could affect quality |
| Bargaining Power of Buyers | Moderate to high – price-sensitive, many options | High – forces price discipline |
| Threat of Substitutes | High – home brewing, tea, energy drinks, fast food | Significantly reduces demand if prices rise |
This table is your go-to tool for any five forces beginner example. Use it to compare industries, test assumptions, or prepare for a presentation.
Step 4: Visualize the Analysis
Now, let’s draw it.
Imagine a circle with five arrows pointing inward:
- Top: Threat of New Entrants – moderate
- Left: Competitive Rivalry – high
- Right: Buyer Power – moderate to high
- Bottom-left: Supplier Power – moderate
- Bottom-right: Substitute Products – high
The business is at the center. The longer the arrow, the stronger the force.
For Brew & Co., the strongest forces are rivalry and substitutes—both pulling down margins. Buyer power adds pressure. Supplier and new entrant threats are more controlled.
This diagram is your visual proof that even seemingly simple businesses face complex strategic challenges.
What This Means for Brew & Co.
Looking at the full picture:
- Survival depends on differentiation—offering something unique: a community space, local art, or a signature drink.
- Price wars are dangerous—because buyers are sensitive, even a 50-cent increase could cost customers.
- Long-term, Brew & Co. must protect its brand identity. If it becomes just another coffee shop, it’ll be outcompeted.
This isn’t about winning the market. It’s about surviving in it—by understanding the forces at play.
That’s what makes this small business case study so valuable. It shows how even modest operations are shaped by powerful structural forces.
You can apply this same logic to a bookstore, a repair shop, or a local gym. The model doesn’t change—only the details.
Frequently Asked Questions
Why is Competitive Rivalry high in a local coffee shop?
Because customers see little difference between cafés in terms of quality, location, and pricing. They can switch easily, which forces shops to compete on service, ambiance, or loyalty—making rivalry intense.
How can a small business reduce buyer power?
Build strong customer relationships—offer loyalty programs, host events, and create a unique atmosphere. When customers feel emotionally connected, they’re less likely to switch based on price alone.
Can the threat of substitutes be ignored?
No. Even if your product is unique, substitutes like home brewing or energy drinks can attract customers who are looking for a quick caffeine fix. Always consider alternatives that meet the same need.
Is the five forces coffee shop example useful for online businesses?
Absolutely. The same forces apply. For example, a small online boutique faces rivalry from other e-commerce sites, buyer power through comparison shopping, and substitutes like fast fashion or second-hand markets. The framework remains relevant.
How do I know if a force is high, moderate, or low?
Ask: “Does this factor significantly influence pricing, profits, or strategy?” If yes, it’s likely high. If it has a small or indirect impact, it’s low. Use the checklist from the workbook: look at availability of alternatives, switching costs, and concentration of players.
Should I use colors in my five forces diagram?
Yes. Use red for high, yellow for moderate, and green for low. This makes your analysis instantly readable. You can also add icons—like a shop for rivalry, a lock for barriers, or a cup for substitutes.
Remember: this is not about perfection. It’s about clarity and insight. Every small business case study you complete makes you a better analyst.
Keep practicing. The more you analyze, the more you’ll see the hidden forces shaping every market.
