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.
Chipotle's Greatest Strength is now its Greatest Weakness Too
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