Chapter 14: Merger and Acquisition Strategies

Merger and acquisition strategies is an extremely important part of sustaining a competitive advantage over the competition. At this time, Chipotle has remained steadfast in their solo efforts and have not merged with any corporations to further their advancement in the marketplace. At one point the Mexican food chain was joined with the largest fast food franchise in the world, McDonalds. However, in 2005 the two decided to part ways as the margin of growth was not fast enough for the fast food giant. McDonalds which is known for highly processed and inexpensive fast food felt that the mantra of "Food with Integrity" was an unnecessary expense that was hindering margins. Ultimately, the two have gone their separate ways leaving McDonalds disappointed at the big fish that got away.

Over the last few years, ShopHouse and Pizza Locale have emerged in the marketplace taking a lead from Chipotle's business model. There are limited locations of these stores across the United States. Also, the restaurant chains are ultimately owned by the same ownership group already which does not make it a true merger or acquisition. \

Chipotle: The One That Got Away From McDonalds

The Ridiculous Reason McDonalds Sold Chipotle and Missed Out on Millions of Dollars

What Ended the Short-Lived Marriage of McDonalds and Chipotle

Chapter 13: Strategic Alliances

In the textbook, Gaining and Sustaining Competitive Advantage by Jay Barney strategic alliances is the primary topic in chapter 13. "A strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services. Strategic alliances can be grouped into three broad categories: nonequity alliances, equity alliances and joint ventures."

Chipotle like many others in the fast food industry follow the product differentiation model where more emphasis is placed on creating products that are different than the status quo to generate profit in the marketplace. Therefore, Chipotle has not entered into a strategic alliance with another company due to their desire to maintain exclusivity within the organic Mexican fast food industry.

However, the company (Chipotle) did enter into a nonequity alliance with Family Farmed.org in 2011 to create a new market for sustainable farms. Chipotle which prides itself on implementing organic ingredients into its menu items, has joined forces to bring more healthful and organic produce to local communities in hopes of creating a social movement for a healthier lifestyle.

Additionally, the joining of forces between these two organizations assists in proving Chipotle with the organic produce and dairy used in its restaurants and a stable revenue stream for the farmers who produce these goods.

Strategic Partnership with Chipotle Mexican Grill

Chapter 12: Implementing Corporate Diversification

Chipotle like many companies in the same industry employ the M-Form (Multidivisional Form) Organizational Structure reviewed in chapter 12 of Barney's "Gaining and Sustaining Competitive Advantage" text. According to Barney,

In the multidivisional structure, each business in which the firm engages is managed through a division. Different firms have different names for these divisions - strategic business units (SBUs), business groups, or companies. Whatever their names, the divisions in an M-form organization are the true profit and loss centers: Profits and losses are calculated at the level of division in these firms.

This is typically the best structure for companies to follow because it allows for the segmentation of divisions to view accurately the profitability of each sector. If things were not segmented in this fashion, it would be difficult to see where financial disparities lie. Also, segmentation allows for a much easier time in governing and delegating responsibilities as the restaurant chain continues to expand.

The hierarchy of this structural system usually headed by the board of directors (please see below for specifics regarding Chipotle), Senior Executive Management Team, Business Operations (Finance, Accounting Human Resources, Legal, etc - who are responsible for facilitating activities that aid in the business system), and General Managers. While this is not the only organizational structure, this is certainly the most successful and fitting of this particular company.

At the top, the board of directors acts as an intermediary between the shareholder and executive management to ensure sounds decision are made for the company at the organizational level. The executive management team makes all of the higher level decisions regarding the direction of the company. Business Operations acts as an information acquiring and organizational entity that maintains the administrative dealings of the company. General Managers are responsible for carrying out the operational objectives set forth by upper management.

Chipotle Investor Relations

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Chapter 11: Diversification Strategies

For most companies, it is extremely important to their business plan to expand into other realms and implement some sort of diversification to grow. In the text "Gaining and Sustaining Competitive Advantage" by Jay Barney it lists three types of corporate diversification: limited diversification, related diversification and unrelated diversification.

Limited diversification is the strategy where all or most of a company's business activities fall within a single industry. Two kind of firms exist in this realm, single business firms which are firms that have more than 95 percent of their total sales in a single industry and dominant business firms that which have between 70 and 95 percent of their business within a certain industry.

Related diversification is when less that 70 percent of revenue comes from a single industry and the different businesses share some links and attributes. Unrelated diversification is when less than 70 percent of a firm's revenue comes from a single business and there are few links or attributes shared between businesses.

Chipotle as a company certainly encompasses the limited diversification strategy. The fast food chain that has reinvented and raised the standard on quick eats pretty much stays within the confines of the empire they have created. While most can certainly agree with the old mantra of "if it ain't broke, don't fix it", for Chipotle to grow it needs to create other avenues in which they can thrive.

In 2011, they capitalized on this notion and created ShopHouse. An Asian inspired Chipotle with organic ingredients, ShopHouse currently has four locations across the United States. While they have a long road ahead before they are able to reach the successes of the flagship brand/restaurant of Chipotle, ShopHouse is making progress one customer at a time.

Utilizing the information provided in the text, these two businesses are reflective of the limited corporate diversification model because they are both in the same fast food industry and for the most part rely on the same distributors and suppliers to do business. Although the type of food being offered is different, more or less everything else is the same or is constructed in a similar fashion.

Shop House

Five Reasons Why ShopHouse, the Asian Chipotle, Will be the Next Big Thing

Chipotle's ShopHouse Expansion

Chapter 10: Vertical Integration Strategies

Vertical integration is the process by which a company is responsible for producing all of the components that make up the end product which is eventually sold in the marketplace. A good example of a company that practices vertical integration is Apple. Apple which is responsible for some of the most popular technological products on the market (iPad, iPhone, iWatch) has become very successful adopting this model where they manufacture the pieces that comprise these items and sell the end product. However, Apple does not assemble these items.

Although the idea to vertical integrate may work for Apple, it does not seem as if this strategy would be ultimately lucrative for an restaurant such as Chipotle. Restaurants are continually patronized due to their excellent customer service and fare. Understandably, one cannot manufacture service; therefore, Chipotle is a bad candidate for this approach. However, one can produce food items that can be fashioned into the ingredients needed to service the restaurant's menu. Let us explore the lucrativeness of this possibility.

For Chipotle to take over the daunting task of manufacturing the products that go into making their entrees, they would need to manage and service several ranches/chicken farms, dairies, and several thousands of acres of farmland to keep up with demand. Also, they would need to acquire several warehouses or refrigerated storage facilities to keep the products cool until ready for transportation. Additionally, Chipotle would have to spend more money on transportation and logistics costs to get the products from the manufacturing site to the restaurants.

The extra costs listed above would be associated with a majority of restaurants that would attempt to vertically integrate their companies. However, Chipotle would have even more of an added expense as they are wholly devoted to GMO and hormone free/organic meats and produce. So the extra care and resources needed to produce items up to those specifications is even more of an expense that would be leveraged against the financial success/profits of the restaurant in itself, potentially resulting in a loss of money due to issues such as food spoilage and other issues associated with organic farming.

While vertical integration worked for Apple, that is not the accurate for all manufacturers of high ticket items. General Motors, one of the largest auto manufacturers in the world operated in a fashion that is the reverse of Apple in the assembly department as they were only responsible for the manufacturing and creative process of the vehicle. If they were to take on the responsibility of manufacturing the parts as well, it could increase the operational cost beyond the limits of profitability. Other companies in the region would relish the opportunity to partner with these mega companies so as they can have a steady revenue stream.

Ultimately, vertical integration works for some as a strategic process. There's no definitive indicator as to the type of company that should try to adopt this approach.

Chipotle Mexican Grill - Expansion and Growth Strategies

Owning your Supply Chain - Lessons from Chipotle Grill's Antibiotic-Free Beef Dilemma

There Aren't Enough "Naturally Raised" Cows to Meet Chipotle's Demand 

Chapter 9: Tacit Collusion: Coooperation to Reduce Competition

One of the primary focuses since the beginning of the course has been competition. What company's in competition with another? How to drive competition? Who's the biggest competitor? Are all questions that were used to guide discussions regarding our company position within their respective industries. However, chapter 9 in Barney's text leads the discussion in a completely different direction with the tacit collusion concept.

Described in the textbook as an act when

...firms in an industry agree to coordinate their strategic choices to reduce competition in an industry. In the extreme, collusion occurs when firms coordinate their output and pricing decisions. In some circumstances, such collusion can lead to economic profits. As suggested earlier in this chapter, explicit collusion exists when competition-reducing decisions are coordinated directly, through direct communication and negotiation. This kind of collusion is illegal in most developed economies. Tacit collusion exists when these decisions are not coordinated through direct communication and negotiation, but coordination develops nevertheless.

Through examination, it is observed that Chipotle really has no competition in their industry. As discussed in other posts, Chipotle is leading the way in revolutionizing the upscale fast food industry with innovative menu items, organic ingredients and trendy appeal to millennials. Therefore, the tacit collusion referenced in the text is not present in the strategic planning of Chipotle's business operations.

However, it should noted that Chipotle is the exception and not the rule. Overall, the fast food industry is full of collusion within the leading companies. The US fast food industry generated about $190 billion in revenue last year. While places like Chipotle, Chop't and Panera Bread are starting to gain great strides in the marketplace due to their devotion to "healthfulness" of their products; the average burger and fry restaurants are striking back.

Fast food over the two decades have transitioned from "fun time fare" to food for those who have limited access to healthier options. Places like Detroit which tote a high poverty and unemployment rate among its residents, live in a "food desert" where people mainly rely on these inexpensive fast food restaurants and convenience stores for meals as access to supermarkets are not simply attainable. Therefore, those lower end fast food chains (McDonald's, Burger King, Wendy's, Checkers) have acquired prominent placement in these communities to grow revenue.

While these is only so much diversification that can take place in this industry, it seems as if the major four companies engaged in some form of tacit collusion in their business strategies in the latter part of 2015 and early 2016 by unveiling their $5.00 meals. Similar to the dollar menu concept that emerged a decade ago, it seems as these companies now look to entice customers with affordable/cheap multi item meals that include a drink and dessert to contest the progress of companies like Chipotle in the marketplace.

Through this collusion, the willingness customers have for wanting to purchase higher end fast food items could potentially diminish thereby eliminating the Panera Breads and Chipotle of the world. Certainly, the higher end fast food would still continue do business in the same marketplace but its revenue would be hampered as the cheaper places would be seen as the go to for many individuals for its price point. For those who did not buy into the marketing schemes, an overall reduction in the purchase of fast food would be likely as the overall marketplace would be devalued.

Chapter 8: Flexibility: Real Options Analysis Under Risk and Uncertainty

All aspects of business (similar to life) are filled with risk and uncertainty. The very actions associated with business in and of itself is quite risky to say the least. A company creates and initiates a business model and course of action to provide to the public that may or may not be profitable. While all hope to thrive in the marketplace, a certain level of flexibility must be present to assist in the re-organization, re-thinking or re-tooling of the product or service to acquire the profits truly desired. 

The textbook "Gaining and Sustaining Competitive Advantage" by Barney cites, 

Flexibility can take numerous forms in an uncertain strategic investment, including the option to defer, the option to grow, the option to shut down and restart, the option to abandon, and the option to expand. There often exist trade-offs between retaining these options and other business strategies. For example, a manufacturing plant designed to implement a low-cost leadership strategy may be very different than a plant designed to maximize flexibility. Thus flexibility should only be a strategic objective for a firm when it is likely to be valuable, that is, under conditions of high uncertainty.

Recently since Chipotle's Ecoli scare, the Mexican restaurant chain had to definitely maintain a great deal of flexibility within the company maintain its customer base and profits. When the first few illnesses occurred, Chipotle alerted the public, temporarily closed those locations, and pulled the alleged affected meat from the stores. While this was thought to potentially remedy the problem, this was not the case as another outbreak occurred in another location. Seemingly, after much analysis, investigation and deliberation the company asserted its flexibility and closed all of its locations (whether affected or not) on February 8, 2016. 

For one of the leading fast food restaurants to opt to lose profits across the country for a day in order to get in front of this continual problem exhibited a great deal of flexibility. All of the major fast food chains have experienced Ecoli or other food product related illnesses in their history. However, there has been no documented restaurant shutdown for an entire chain in United States history. If so, it was not of the magnitude of Chipotle.   

Seemingly, the shutdown and action taken by Chipotle was well received by consumers as revenue has begun to rise once again for the fast food chain. Analyzing the risk associated with this action was integral in the retention of customers who may have abandoned the chain as a whole due to safety concerns and has certainly paid off. 

Chipotle Announces Mass Shutdown for One-Day Food-Safety Conference

43 Washington and Oregon Chipotle restaurants closed after E. Coli outbreak

CHIPOTLE: A FOCUS ON FOOD SAFETY