Chapter 6: Cost Leadership

There are several different strategies one may choose to follow when trying to construct a profitable business. To some, providing the customer with the best quality service, product, etc. is the most influential factor in acquiring those repeat customers. For others, the best method to guide their business in the right direction is by way of Cost Leadership. Defined in the Barney text as a firm that "focuses on gaining advantages by reducing its economic costs below all of its competitors", cost leadership can prove to be quite lucrative in the long run if implemented correctly. While this may seem like the most practical approach, Chipotle does not agree.

As was discussed in previous weeks, Chipotle is not a company that looks to the cost leadership model to base their company. While this does not mean that the company splurges frivolously, Chipotle does not cut corners when it comes to packaging, food product costs or quality customer service workers. This is what has the restaurant at the top of the fast food restaurant totem pole,

For example, the restaurant claims that it only utilizes the best organic and GMO free products in its food items. While all food (particularly meat and produce) should be void of these somewhat harmful chemicals and fillers, it is understood that the acquisition of these items is a bit more costly that the standard types. On average. Chipotle's food cost is nearly 35% of revenue acquired each year. These product costs created a higher price point which has transferred on to the customer at the tune of 4 to 6 percent more than last year.

Ultimately, the abandonment of the cost leadership business strategy can be lucrative in some cases. Chipotle has certainly found the recipe for success with this; however, it comes with its own set of issues that are also quite costly as well.

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Chapter 5: Evaluating Firm Strengths and Weaknesses - The Resource Based View

In the previous chapters, we utilized the frameworks suggested in Chapter 3 and 4 to discuss the economical threats and opportunities that plague Chipotle in the marketplace. While these models were helpful in analysis, Chapter 5 introduces "The Resource Based View" to aid in understanding other complexities faced by management. The primary concept discussed is the "VIRO Framework". VIRO is an acronym that stands for: (1) Value, (2) Rarity, (3) Imitability and (4) Organization. Let us examine Chipotle from this standpoint by answering the following questions.

Value

Do a firm's resources and capabilities enable the firm to respond to environmental threats or opportunities? 

Chipotle's greatest value lies in it's dedication to serving organic and GMO-free products, portion size and their customizable  menu options that add value to customer service. For the majority of the company lifespan, Chipotle has been responding to the opportunities presented in the marketplace. That is primarily why the company's customer loyalty has been so high despite higher than average pricing. 

However, the Ecoli outbreak in late 2015 has caused Chipotle to somewhat operate on it's heels and be on the responding end of environmental threats. No food establishment can continue to thrive in the marketplace if consumers become ill from the consumption of its products. Additionally, Chipotle's entire business model is premised on providing "Food with Integrity" that is of a higher quality than that of the typical fast food establishments. 

Chipotle could choose to lower its standards on food but that would affect consumer decisions as the high standards are what has previously generated sales. Conversely, the company could choose to seek out other suppliers or look to produce the items for their products in some internal fashion. However, this could prove to be quite costly in the long run which could reduce profit margins across the board. As a result of the scarcity of low-cost quality food suppliers, Chipotle is operating on the defensive in this situation and is managing a threat.

Rarity

Is a resource currently controlled by only a small number of competing firms?

There is really nothing rare about Chipotle's offerings from an overall food perspective. You have restaurant chains such as Chop't who also provide GMO-free and organic menu items for a above average price for a good size portion as well. Much like Chipotle, Chop't operates only walk-up "street stores" in limited areas and builds customer loyal through high end service and food quality. Similarly, ShopHouse which is Chipotle's Asian inspired restaurant also encompasses these same characteristics. 

However, Chipotle could potentially have some strategic advantages that would set it apart from the competition internally. Not to my knowledge has Chop't had a consumer loyalty and financial setback to the magnitude of Chipotle's Ecoli scare. Therefore, it remains to be seen the type of strategic maneuvering that will be done internally to prevent this calamity and how to resolve this problem in a transparent manner so that no economic losses occur. 

Imitability

Do firms without a resource face a cost disadvantage in obtaining or developing it?'

Nothing that Chipotle current does is proprietary. Therefore, at any time a business can decide to come in and copy the same business model and take it in whatever direction they see fit and there is legally nothing that can be done about it. While this may be a costly undertaking for a startup company or company that has not been doing well fiscally in the marketplace, it can be done and the initial investment could potentially pay off exponentially going forward if Chipotle's model is followed.

Organization
Are a firm's other policies and procedures organized to support the exploitation of its valuable, rare, and costly to imitate resources?

Chipotle has an interesting management style that bridges the gap between the goals of executive management and the responsibility store level management feels to carry these operations out. Almost a decade ago, Chipotle decided to implement  a position known as "restaurateurs" in their business model. The role of these individuals is to create/train general managers for restaurant locations. While on the surface this does not seem too odd, these individuals are compensated very well for each general manager trained that sustains a world class store. Through this, these individuals who were general managers (some even kitchen staff or cashiers) at one time who also provided exemplary service can continue to indirectly make an impact on customer service at the various locations.

All too often when people are chosen for these corporate recruiting roles does the real mission of the restaurant get pushed aside for the politics of the executive team. However, these restaurateurs do an excellent job of maintaining the real mission of Chipotle due to their previous experiences at the store. Also, this position allows for those employed in this role to not be stuck in meaningless middle management positions and make a difference in the operation of the restaurant in itself.

As a result, Chipotle's organizational policies and procedures definitely are impactful in their dedication to customer loyalty and service as many of those creators of policy have started their careers at the bottom of the totem pole and incite change based upon real not theoretical need.

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Chapter 4: Evaluating Environmental Opportunities

In last week's blog, we discussed how Porter's 5 Forces could be utilized to examine the threats posed to Chipotle. However, as this framework can be applied to chronicle the shortcomings of a particular company; it can also convey how Chipotle is capitalizing on the weaknesses of other companies within the marketplace.

Threat of Entry
According to the Gaining and Sustaining Competitive Advantage text by Jay Barney, "the best way for a firm to neutralize the threat of entry is for it to erect barriers that prevent other firms from entering the industry." The primary two methods of attack for Chipotle is through building customer loyalty and product differentiation.

As was mentioned in last week's blog, Chipotle has created a cult following among it patrons making it the leader in Mexican fast food restaurants. However, Chipotle's success has been in it's elimination of previous competitors. Few other fast food restaurants allow for the customization and portion size that Chipotle brings to its customers. As a result of this factor alone, Chipotle moves to the front of the pack and has eliminated nearly all of it's competition. Additionally, the introduction of new products to the market(during inception such as burrito bowls) and variety of fillings (barbacoa, carnitas, sofritas) that cannot be found in any of the competing chains makes threat of entry by another company slim.

Furthermore, the Chipotle has increased it's customer loyalty in the wake of the Ecoli scandal. Formerly a company that allowed their food and customer service build brand loyalty, Chipotle gave the customers the ability to download a QR Code or coupon for a free entree at it's restaurants. The fast food restaurant in the past has minimally given free items. Primarily in cases where customer service was poor, incorrect item was given or sponsorship endeavor (which really is not free) did the general public receive any sort of "gift" from the chain. However, as the scandal has made the public skeptical of the chain, Chipotle has looked to increase its customer loyalty by inviting customers to have a meal "on the house" to emphasize safety and quality in their product.

While other fast food chains tend to offer a lot of promotional items and discounts, their lack of quality and product differentiation tends to limit their customer loyalty. Additionally, it should be recognized that the more free items one gives away, the less the confidence the public may have in the product itself as the product may be perceived as inadequate. Ultimately, this will also decrease customer loyalty as consumers will only want to patronize the establishment if they feel something free will be given.

Lastly, let us not forget that all discounted/free items come at a cost to the company itself. While it may be good to give free items from time to time, it must be noted that nothing is free and it reflects negatively on the bottom line when the invoices start to come in. Needless to say since Chipotle has been leading the pack in the Mexican fast food world, Taco Bell and some of the other competitors who exist in this marketplace have been faced with declining sales since the "Chipotle boom" of the last decade and are not able to undertake this financial burden.

Threat of Rivalry
Additionally, the Barney text states "The best way for any firm to neutralize the threat of rivalry within its industry is to base competition with other companies on an element other than price." As was mentioned last week, Chipotle eliminates nearly all of its competition with it's dedication to GMO-free food. Healthy living and "green" initiatives are all the rage in today's society. While Chipotle is a far stretch from healthy eating (healthy fast food seemingly appears to be an oxymoron), it does allow the customer to indulge in a safer product. This aspect of Chipotle's business model allows them to sustain a competitive advantage through innovation. While nothing is new about meat in restaurants, offering a variety of meats that are hormone free from premium cattle in fast food for a low price is innovate to say the least.

Threat of Substitutes
Since there is nothing proprietary about prepared food items, the threat of duplication or substitution is high for Chipotle in the marketplace. However, the substitutes available in the marketplace are of such a substandard quality that Chipotle holds a clear advantage over its competitors and the threat is neutralized.

Also, the perceived level of product differentiation is another element that helps to eliminate the threat of substitution in the marketplace. Chipotle has always done a solid job in creating their own identity in the fast food world. As a result, customers feel a bit better about paying six dollars for an entree as the cost of quality dining comes into play.

Threat of Suppliers
Unfortunately, the suppliers still pose a threat to the prosperity of Chipotle. Since Chipotle prides itself on using hormone-free and organic items in its dishes, the farmers and ranchers who cultivate these products are in control. Recently, we see how the company hung in the balance as the Ecoli scare deterred loyal customers from purchasing. Unless Chipotle utilizes its capital to invest/purchase its own farmland and animals from which it's products are created they will have not be able to neutralize this threat.

Threat of Buyers
It seems as if Chipotle has a good handle on neutralizing the threat of buyers in the marketplace. Even in the wake of the latest scandal Chipotle is still ascending to their former position on the top of the fast food chain. This is primarily due to the perceived excellent quality of their items which has created a sense of customer loyalty. Other than the free entree code that was offered in early February 2016 ( in an attempt to bring lost customers back into the fold), Chipotle has not changed its marketing/business plan; nor has it reduced pricing.

It seems as if Chipotle thoroughly examined the Porter's Five Forces model before acting on any business decision. While one can always point to shortcomings or things that could be done differently, the current position held by Chipotle in the marketplace certainly can as an economic model for those businesses that would like to exist in their own "lane" independent of all competition.

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Chapter 3: Evaluating Environmental Threats

Another major factor in the overall strategic process of Chipotle is evaluating environmental threats. According to the text, "an environmental threat is any individual, group, or organization outside the firm that seeks to reduce the level of that firm's performance". While such factors are normal and frequently found in competition, the need to reduce the effect/eliminate these facets are needed to ensure successfulness.

Typically, Porters Five Forces is the framework employed to describe the environmental effects that dictate the organization's competitive advantage. The five forces are listed as threat of entry, threat of rivalry, threat of substitution, threat of powerful suppliers and threat of powerful buyers. Below is the application of this framework to Chipotle.

Threat of Entry
Chipotle has been so innovative in a variety of niche markets that it is hard for one competitor to enter into the marketplace and be a direct threat. There has yet to be a fast food restaurant (besides Chipotle) whose entire mission is to provide GMO and fresh ingredient food. Other establishments in the recent past have looked to increase the healthfulness of their items but none have gone so far to assert that they utilize solely organic ingredients and take no short cuts in the preparation process. Chop't is the only restaurant that comes to mind that could be anywhere close to Chipotle in their mission of "food with integrity". However, this would come with much scrutiny as Chop't (which serves customizable salads) does not use the variety of meat products as Chipotle and primarily serves raw food items thereby making it a much less daunting task in providing organic items.

Threat of Rivalry
In every marketplace there is always a threat of competition (unless you have a monopoly). For Chipotle, there are a few competitors who are looking to take over in the Mexican fast food category. Some examples that come to mind are: Moe's Southwest Grill, Lime Fiesta Kitchen and California Tortilla. Moe's and Lime are similar to Chipotle in the regard that they provide highly customizable options for all of their items. However, they do not emphasize the organic/non-organic quality of their ingredients nor does each allow for the flexible portion size.

Conversely, California Tortilla provides ample portions to patrons but definitely lacks the overall healthfulness provided by the other three options. Filled with processed cheese and pickled veggies CalTort is more of a "upscale"/more diverse Taco Bell versus a direct competitor for Chipotle.  

Lastly, none of these organizations encompass the serving/customer service style employed by Chipotle and Subway. Due to the incidents publicized in the media regarding disgruntle food workers, many people prefer to watch their food prepared directly in front of them. While this method works well, it is more expensive to hire workers who provide this method of customer service than continue with the same standard of service that is employed in the majority of fast food restaurants. Along with the higher prices Chipotle spends for its organic food, it seems unlikely that others will follow suit.

Threat of Substitution
In the fast food industry, there is always a threat of an organization coming in and providing a similar item or type of cuisine. The same is true for Chipotle. Nothing Chipotle sells or does is proprietary; therefore, it is just a matter of time before someone steps in and claims the "Mexican" fast food market due to the Ecoli issues currently plaguing the mega chain. To help curb this, Chipotle should start a rewards program to incentivize people who frequent their restaurants. Similar to those free grocery store cards, these programs drive brand loyalty as the perks definitely make a difference in how the consumer spends their money.

Threat of Powerful Suppliers
The threat of powerful suppliers could be somewhat detrimental to the Chipotle brand. While there are several suppliers Chipotle could purchase from, the price at which they are able to acquire these "fresh ingredients" and hormone free meats is the real issue here. Typically, items that are organic or "healthy" tend to cost a great deal more than the cheaper alternatives. As a result, the suppliers truly control the successfulness of Chipotle as the price of goods is almost always transferred over to the consumer. Higher prices could result in a decrease in business as the perceived economic value would be diminished.

Threat of Powerful Buyers
As a fast food chain, powerful buyers are of little consequence to the overall successfulness of Chipotle. Even now in the midst of the Ecoli scandal, people are still flocking in droves to the locations. While the volume in the stores have decreased, Chipotle is still profitable during this time. As long as patrons continue to love the product, people will continue to purchase and Chipotle has the ability to recover from this setback.

Ultimately, these five factors could change at any time. However, Chipotle has positioned themselves to continue being at the forefront of the fast food market for years to come.

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Chapter 2: Firm Performance and Competitve Advantage

Recently, Chipotle has acquired a vast amount of bad press in the media outlets due to the outbreak of Ecoli in some of it's locations. While this has certainly left Chipotle executives and shareholders looking to pick up the pieces of the overwhelmingly popular food chain, it is certainly worth noting how Chipotle made it's rise to the top of the market was through the annihilation of its competition through economic value.

Economic value is one of the key contributors to the competitive advantage held by a particular organization. The notion that one is acquiring a good or service at a price less than what should be accepted given it's quality is something that most individuals constantly seek. As a result, Chipotle was able to enter the marketplace and completely revolutionize the arena by it's emphasis on quality and customization when others companies were relying more on gimmicks and cost saving efforts.

Fresh ingredients and meat devoid of all hormones and other "fillers" at a reasonable price was certainly the biggest selling point for Chipotle. In a society where "going green" and "eating healthy" is all the rage. Chipotle found a niche market in the fast food industry with it's dedication to bringing integrity to the food it serves. Unlike other restaurants, they state that their meats "(Animals) have received no added hormones, no antibiotics ever, and were humanely raised." Therefore, droves of patrons flock to the restaurants in hopes of being able to eat this responsibly cultivated product that seemingly fits into everyone's budget.

Additionally, there are very few other companies that exist in the same subgenres as Chipotle thereby creating a competitive advantage for Chipotle. Taco Bell the original "Mexican" fast food chain lacks the creativity, perceived healthfulness and social responsibility of Chipotle. Ultimately, their similarities end with the same product offerings. Nothing else between these two is comparable; therefore, Chipotle has all but stolen a vast majority of Taco Bell's customers and has the competitive edge. The same is also true for the few smaller chain "Mexican" restaurants such as California Tortilla, Moe's and Lime. While they all sell tacos and burritos, the others are mainly typical fast food filled with mystery meats, processed nacho cheese and unnecessary fillers.

Conversely, you have restaurants like Subway who have the same serving/customer service setup as Chipotle (where customers can customize their items). In  a marketplace, where many who consume fast food complain about the pre-constructed quality (lack of freshness) of their food Chipotle has not only allowed patrons to see their food cooking behind the counter, customers can finally successfully manipulate the portion size of each item received (for most items free of charge). The only competition in this realm for Chipotle is Subway who may construct the items in front of the customer but the cuisine is far from fresh. As a result, many individuals can feel the high economic value of Chipotle based on the quality of service and food received.

Ultimately, Chipotle since it's inception in 1993 has been striving to solidify it's position in the fast food world by emphasizing quality food and service; thereby acquiring a competitive advantage. While this advantage has all but disappeared over the last few months (due to the Ecoli scare), slowly but surely Chipotle using previously utilized tactics to move back to the top of the fast food restaurant market.

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