Chipotle Mexican Grill Presented to Dr. Robert McNeal Department of Business Administration College of Business Administration Alabama State University In Partial Fulfillment of the Requirements for the Course MGT 462. 01 Business Policies 5:30 M W (Spring 2009) Submitted by: Helena Bryant Gianni Gilbert Chad Jenkins Juanterra Looney Adana Wilson Due: April 1, 2009 Transmittal Letter April 1, 2009 To:Dr. Bob McNeal From:Helena Bryant Gianni Gilbert Chad Jenkins Juanterra Looney Adana Wilson Subject:The Chipotle Mexican Grill Analysis We, the students of the Management 462. 1- Business Policies, are submitting our company analysis performed on Chipotle Mexican Grill. The company analysis contains information on Chipotle’s current and corporate information, stakeholder analysis, external analysis, internal analysis, and SWOT analysis. In addition, the company’s level of strategies, portfolio analysis, strategy implementation, and strategy recommendation will also be discussed. Group 5 has evaluated and contrasted Chipotle Mexican Grill with the industry and their top two competitors, Panera Bread and P. F. Chang’s China Bistro.
We have conducted research for the final results of the company analysis. Enclosed: Chipotle Mexican Grill Analysis [pic] [pic] [pic] [pic] [pic] Table of Contents Executive Summary……… ……………………………………………………………………1 Introduction…………………………………………………………………………. ………. …1 Purpose………………………………………………………………………………. …. 1 History of Chipotle Mexican Grill……………………………………………………. …2 Current Summary……………………………………………………………………….. 3 Stakeholders and the Corporate Mission…………………………………………………4 Stakeholder Impact Analysis……………………………………………………. …. …4 Mission Statement……………………………………………………………………. 5 Values and Goals……………………………………………………………………. …6 Corporate Governance…………………………………………………………………6 Ethical Climate…………………………………………………………………….. ……8 Corporate Social Responsibility……………………………………………………. …9 External Analysis ………………………………………………………………………….. …9 Description of the Industry …………………………………………………………. …9 History of the Industry…………………………………………………………………10 Economic Characteristics of the Industry………………………………………… …11 Porter’s Five Forces Model………………………………………………………… …12 Lifecycle Analysis……………………………………………………………. …….. 18 Key Factors for Competitive Success ………………………………………. …… …19 Description of Key Competitors………………………………………………………20 Company Positioning…………………………………………………………………. 21 Strategic Group Map………………………………………………………………….. 22 Attractive industry for investment……………………………………………………. 22 Prospects for Above-Average Profitability………………………………………….. 23 Summary of Opportunities and Threats…………………………………………….. 23 Internal Analysis……………………………………………………………………………… 24 Competitive Advantage ………………………………………………………. ……… 24 Generic Building Blocks………………………………………………………………. 5 Value Chain Analysis…………………………………………………………………. 28 Distinctive Competencies……………………………………………………. ………. 31 Durability of Competitive Advantage………………………………………………… 32 Competitive Strength Assessment………………………………………………….. 33 Financial Performance………………………………………………………………… 34 Summary of Strengths and Weaknesses…………………………………………… 37 SWOT Analysis………………………………………………………………………………. 38 Strategies to Pursue………………………………………………………………….. 38 Strategic Issues……………………………………………………………. …………. 39 Strategies…………………………………………………………………………………. ….. 9 Functional-level Strategies……………………………………………………….. …39 Business-level Strategies…………………………………………………………. …. 43 Strategies for Fragmented Industry …………………………………………………. 44 Strategies for the Life Cycle Stage………………………………………………….. 44 Global-Level Strategies………………………………………………………………. 45 Corporate-Level Strategies…………………………………………………………… 46 How well is the Present Strategy Working…………………………………………. 46 Portfolio Analysis…………………………………………………………………………. …47 Different Strategic Business Units…………………………………………………… 47 HP Core Competencies Matrix………………………………………………………. 7 Strategy Implementation……………………………………………………………………48 Organizational Structure …………………………………………………………….. 48 Strategic Control System…………………………………………………………….. 49 Company Programs- Motivation…………………………………………………….. 50 Corporate Culture…………………………………………………………………. …. 51 Strategic Leadership of the Company ………………………………………………52 Strategic Recommendations………………………………………………………………. 52 References. ……………………………………………………………………………………54 Appendix………………………………………………………………………………………. 59 List of Figures Figure #1- Chipotle Mexican Grill Revenue………………………………………………….. Figure #2- Chipotle Mexican Grill Operating Profit Percentage……………………………3 Figure #3- Stakeholders……………………………………………………………………….. 4 Figure #4- Porter’s Five Force Model………………………………………………… …12 Figure #5- Stages in the Life Cycle…………………………………………………………. 18 Figure #6- Key Competitors Sales…………………………………………………………… 20 Figure #7- CMG and Competitors R. O. I. C…………………………………………………. 21 Figure #8- Strategic Group Map…………………………………………………………….. 22 Figure #9- CMG and Competitors Returns on Invested Capital…………………………. 23 Figure #10- Chipotle Mexican Grill Revenue………………………………………………. 6 Figure #11- Value Chain Activities………………………………………………………….. 28 Figure #12- CMG, Competitors, and Industry Revenue…………………………………… 34 Figure #13- CMG, Competitors, and Industry Operating Profit Percentage ……………35 Figure #14- CMG, Competitors, and Industry Operating Expense Percentage………… 36 Figure #15- CMG, Competitors, and Industry Returns on Invested Capital……………. 36 Figure #16- Functional Level Strategies……………………………………………………. 39 Figure #17- Organizational Chart……………………………………………………………. 49 List of Tables Table #1- Economic Characteristic and Traits……………………………………………… 2 Table #2- Primary Role to Achieving Superior Efficiency…………………………………40 Table #3- Roles Played By Different Functions on Implementing Reliability……………41 Table #4- Functional Roles for Achieving Superior Innovation…………………………… 42 Table #5- Primary Roles in Achieving Superior Responsiveness to Customers………. 43 Appendix List Time Table Industry Data Income Statement-CMG & Competitors Balance Sheet-CMG & Competitors Most recent cmg 10-k 10 significant articles Executive Summary Chipotle Mexican Grill is a successful non-traditional sit down place for dining in the full service restaurant industry and is more focused on he fast casual segment. Through comprehensively analyzing this document, the different operations of Chipotle Mexican Grill will be provided in detail to verify its success. This paper will give a precise understanding of Chipotle Mexican Grill’s strategic functions and how they are enhanced by Porter’s Five Forces. By conducting this analysis, Chipotle’s business model will be identified through the incorporation of strategic leadership for immaculate results. After in depth research of the company, the recommendations of improvements for the company will be discussed. Introduction Purpose
The Chipotle Mexican Grill analysis is provided to summarize in-depth information on the various aspects of the company and its industry. CMG is a company that is known to be advancement in the way fast food operates. Through research Group 5 will evaluate the history and events of Chipotle Mexican Grill and its position in the full service restaurant industry. This paper will analyze the strategies implemented within the company and determine if Chipotle has a competitive advantage over its rivals. It will also analyze the financial performance of the company over a five year span, starting when Chipotle went public in 2003.
The company analysis will provide a number of recommendations that may increase the overall profitability and growth. History of Chipotle Mexican Grill Chipotle Mexican Grill was founded in 1993 in the city of Denver, Colorado. Chipotle is considered one of the fastest growing restaurants in the United States. It has over 800 outlets in 35 states with its primary locations in the Midwest. It was founded by Steve Ells, who is also the CEO of the corporation. Ells derived the company’s name, Chipotle, from a smoked and dried jalapeno pepper which was used to help marinate and season its ingredients.
Chipotle is known for its fresh ingredients, which consists of a variety of vegetables and meats. Steve Ells stated to Nation’s Restaurant News that in family travels across the United States and Europe, he had an opportunity to taste many different foods and to develop an appreciation for fine cuisines at an unusually young age. Steve Ells followed his longing interest of fine food by attending the Culinary Institute of America in Hyde Park, which further lead to the establishment of Chipotle Mexican Grill (Business & Company).
The company attained a philosophy that it can change the way the world thinks about fast-food. Chipotle consistently uses a high quality of raw ingredients that are organically grown with no growth enhancement for its meats. The company has developed a fancy cooking strategy that is designed to accommodate customer demands. Chipotle has an eloquent casual interior design to implement a touch of class with a “welcome” upon entering the restaurant. The company manages its operations in five regions under a single segment.
However the company did not gain full exposure until it was initially corporate in 1998. Chipotle was considerably a subsidiary to McDonald’s Corp, and its only survival entity was based upon the merging of its predecessor World’s Food Inc, (Standard & Poor’s). In 1999, McDonald’s Corporation bumped its investment from 50% to 90% ownership in Chipotle Mexican Grill (Business & Company). At the peak of the early 2000’s, Chipotle shifted its ingredients to organic serving that brought in an accelerate increase for the company. By the end of 2003, Chipotle had a 20% increase growth rate.
By the end of 2005, Chipotle had reached an impressive 500 new stores in areas that gave it a competitive advantage (Business & Company). The rapid growth of Chipotle started to become a new threat to the McDonald’s Corporation as a competitor in gaining market shares. Therefore, McDonald’s Corporation sold off its portion of its investment in Chipotle in 2006, leaving Chipotle to become independently owned and for it to be able to operate and to trade publicly in a Class A and Class B stock on its own in gaining and retaining its shares from the market.
Chipotle Mexican Grill continues to excel in the markets and now has become a competitor to its original parent McDonald’s Corp. , who once owned a percentage of the company’s shares (Standard & Poor’s). Current Summary Today, Chipotle Mexican Grill has over 800 outlets across the United States, the District of Columbia, and Toronto, Canada. The principal office is located at 1401 Wynkoop Street Suite 500 in Denver, Colorado. There are approximately 20,400 employees within the organization (Mergent Online, 2008). Chipotle uses the best quality ingredients in their burritos, salads, and tacos.
Many of Chipotle’s restaurants are located in shopping centers with a small number located in malls. Revenue from their stores was over one billion dollars in 2007. Featured in figure 1, revenue has increased tremendously throughout the years, since the company went public, and is expected to continue to grow. CMG’s sales revenue increased primarily because of the expansion of new restaurants, increased customer visits, and increased menu prices (Annual Report, 2007). Also, as shown in figure 2, CMG’s operating profit is growing each year with a high percentage showing how profitable its operations are.
Chipotle has higher sales each year and decreased their operating expenses which increased their operating profit. CMG’s operating profit has even increased to a higher profit than the whole industry through the years. Stakeholders and the Corporate Governance Stakeholder Impact Analysis Stakeholders are those persons or groups that possess an interest, claim, or stake within the company (Hill and Jones, 2008). In addition, there are two types of stakeholders which are internal and external. Stakeholders make significant donations to the company and receive endorsements from the company for its contributions.
As shown in figure 3, internal stakeholders include Chipotle’s stockholders, employees, managers, and board members (Hill & Jones, 2008). External Stakeholders consist of customers, supplier, creditors, governments, unions, local communities, and general public (Hill & Jones, 2008). For example, Nimans Ranch, Inc. is a major supplier to Chipotle. Chipotle recognizes the significances of their stakeholders needs and aims to differentiate themselves from their rivals. By doing so, the company must take into consideration the interest and concerns of its stakeholders.
Providing different but quality products and services will help increase the interest of stakeholders and in their decision making process. Chipotle has built an economic model that allows them to invest more money in food, while still producing outstanding financial results (Annual Report, 2007). In addition, Chipotle has created rewards and a way to further develop management within its establishment. Through this, they have increased the sale of their restaurants because of their programs which provides incentives for their elite managers.
These managers will provide a pipeline for future management for new restaurants in years to come (Annual Report, 2007). In 2007, Chipotle increased its revenue by 31. 9 percent to $1. 1 billion and achieve sales growth primarily due to the increase visits by customers. As a result, Chipotle is able to achieve its mission and increase shareholder value. Previously stated, the rewards, incentives, and achievements, are several benefits that stakeholders would surround their concerns regarding the financial status of the company. Mission Statement
The mission statement describes what the company does and which strategies are formulated upon its mission (Hill & Jones, 2008). Chipotle’s mission statement is “Food with Integrity”. This mission is geared toward their commitment to superior quality ingredients in the food they buy. Chipotle Mexican Grill believes that everyone should have access to better food from sustainable sources (Annual Report, 2007). This mission states that Chipotle serves food with the best quality of raw ingredients to make the experience at the restaurant more flavorful and healthy (Annual Report, 2007). Values and Goals
Chipotle began with the vision to serve fresh foods; this vision has evolved from fresh food to knowing how the food was raised (Annual Report, 2008). Chipotle believes that “fresh is not enough, anymore. ” Chipotle serves naturally raised pork and chicken and over 50% of the beef is raised naturally (Annual Report, 2007). Chipotle’s vision is to change the way people think about and eat fast food through leadership, food with integrity, culture, marketing, and internationally (Annual Report, 2007). One of Chipotle’s main goals is to find the highest quality ingredients they can. Corporate Governance
Hill and Jones define governance mechanisms as mechanisms that principals put in place to align incentives between the principals and agents, in addition to monitoring and controlling the agents. The purpose of the mechanisms is to reduce the agency problem by having the agent act in a manner that is in the best interest of the principals. Governance mechanisms can only work if the board of directors holds top-level managers accountable for having goals that are not in the best interest of stockholders. Also, the board is to question and effectively audit the financial statements provided by management.
Not only are corporate mechanisms used to align the interest between the board of directors and top-level managers, but it can be used throughout the organization. Corporate governance can align incentives between unit managers with their superiors and down the line (Hill and Jones, 2008). Board of Directors The Board of Directors is the center piece of corporate governance. Chipotle Mexican Grill’s Board of Directors consists of seven members. The chairman of the board is Steve Ells who also serves as the co-Chief Executive Officer.
The other directors are elected by stockholders and are legally the representatives of the stockholders. The board oversees the corporate strategy and ensures that the corporate management is developing strategies that are in the best interest of the stockholders. The board has the power to hire, fire, and compensate corporate employees. In addition, they are responsible for auditing the financial statements provided by management. Audit Committee The Audit Committee is a standing committee of the board of directors. The audit consists of a minimum of three board members.
The committee and its chair is appointed by the entire board of directors by way of recommendation of the Nomination and Governance committee. The Audit Committee’s purpose is to assist the board in fulfilling its responsibility of overseeing the integrity of the company’s financial statements and its internal control system. The responsibilities of the Audit Committee are as follows: engage with independent auditors, pre-approval of audit and non-audit services, review of independent and performance of independent auditors, audits by internal and independent auditors, oversight of internal control over financial reporting, and etc.
Compensation Committee The compensation committee is a standing committee of the Board of Directors for Chipotle Mexican Grill. The Committee is responsible for evaluating the Company’s management, the compensation discussion, and analysis for the annual reports. The Committee consists of only two members which are appointed by the Board members within the full Board itself according to the Governance Committee. However, there are yearly meetings conducted by the Committee to discharge the Company’s responsibilities. Those responsibilities are carried out based upon the CEO’s performance.
The Committee rewards the executive officers based upon incentives and level of compensation with the organization. Nominating and Corporate Governance Committee The Nominating and Corporate Governance committee is a standing committee of the Board of Directors. The committee consists of two Board members and they are appointed by the Board of Directors. The purpose of the committee are to identify qualified people to become Board members, to recommend director nominees at the annual meetings and recommend nominees for election to fill any board vacancy.
The committee is responsible for establishing director selection criteria, director recruitment, recommendations to the board, governance guidelines, evaluation of board, and etc. While researching information about Chipotle Mexican Grill’s corporate governance, information about corporate governance problems did not appear. It was concluded that Chipotle Mexican Grill’s Board of Directors are the main mechanism that prevented any problems. The Nominating and Corporate Governance Committee developed governance guidelines that are reviewed annually and makes recommendations to the Board about changes made to the guidelines.
This committee allows the Board to avoid potential agent problems. Ethical Climate Ethics is referred to as the “accepted principals of right or wrong that govern the conduct of a person, the members of a profession, or the actions of the organization” (Hills & Jones, 2008). Chipotle Mexican Grill’s goal is to change the way the world thinks about and eats fast food. Managers are faced with the goal of maximizing the profitability and profit growth of the company, as well as changing the culture of fast food.
During the process of achieving long-term profitability, profit growth, and attaining the overall goal of the company, employees are required to act in an ethical manner. To combat with potential problems, Chipotle has created multiple codes of conduct for its Board of Directors, CEO, CFO, President COO, and Principal AO. Directors Code of Conduct The Board of Directors is expected to set the tone by fulfilling the obligation and standards of the company and shareholders. Directors are expected to conduct themselves in a professional manner according to law and in the best interest of the company.
Through acting in good faith and with due care, directors help shape the integrity of the company. Chipotle expects its directors “will reflect these standards in their day-to-day dealings on behalf of the company” (Investor Relations). Directors are expected to promote those standards while satisfying their responsibilities. Code of Ethics for Corporate Level Managers The CEO, Steve Ells, CFO, Jack Hartung, COO, Montgomery F. Moran and AO, Rob Anderson, are responsible for maintaining the integrity of the company.
In doing so, they should “address any conflict of interest in personal and professional relationship in accordance with the highest ethical standards and promptly disclose to the company’s chief legal officer, the nature of any such conflict of interest or material transaction or relationship that reasonably could be expected to give rise to such a conflict of interest” (Investor Relations). They must provide company reports that are accurate, fair, and understandable to the Security and Exchange Committee.
Each individual is expected to act in good faith and with due care just as the Board of Directors. In addition, they must promote ethical behavior under his supervision. Corporate Social Responsibility According to Robbin and Coulter, when social responsibility is utilized in the workplace, there are two different groups. The first group can also be referred to as the classical group. Their responsibility to the company is to maximize its profits. This group’s participants adhere to the standard. They believe the managers primary focus should be on the interest of its stakeholders and employees.
Therefore, managers who sustain to the classical view are socially responsible for following the laws and regulations while caring for those interests of stakeholders and employees. The second view of social responsibility is the socioeconomic view. The group’s interest goes beyond making profit but to improve and protect society’s welfare. Managers who support the socioeconomic view of social responsibility look to expand their interest to external stakeholders and the public. Chipotle Mexican Grill supports the socioeconomic view of social responsibility, in their restaurants, management, and operations.
Chipotle values individuality of its company, employees, and customers. This result in management, operations and training philosophy that distinct the company from its competitors (Annual Report, 2008). External Analysis Description of the Industry An industry can be defined as a group of companies offering products or services that satisfy the same basic customer needs (Hill and Jones, 2008). Chipotle Mexican Grill is classified in the full service restaurant industry. They consider themselves in the fast casual segment. According to Hill and Jones, a sector is a closely related industry within a group.
The market segmentation is a unique group of customers within a market that is differentiated from each other on the process of their distinctive attributes and specific demands (Hill and Jones, 2008). In the fast casual segment, quick service restaurants and limited menu chains may experience weak results due to customers switch from full service to fast food (Standard & Poor’s). In accordance with Standard and Poor’s, the economic conditions of the global economy may have a negative impact on the full service dining segment throughout 2009.
Also, if there are restaurant locations in states where there are high percentage of mortgage problems and unemployment, they are very likely to have weak results. History of the Industry According to the National Restaurant Association, there were 945,000 restaurants in the United States in the year of 2007. The estimated sales growth for 2008 is for the industry to reach $558 billion dollars in sales. As time evolved, eating out has become a part of the American lifestyle. In the mid 1900’s, families spent 25 percent of their money at restaurants.
However, through the years the customers dining out percentage grew to an increase of 20 percent in moneys spent out at restaurants. More than 70 percent of the restaurants were claimed to be independent. One of the strongest areas within the market related to consumers who preferred casual dining. Casual dining gave people the opportunity to view a comprehensive menu and reasonable prices. As the industry began to mature and competition began to rise, the growth rate of the industry tended to slowdown. In most cases there were chain-owned restaurants which overtook independently owned outlets, because of their stability and low failure rate.
The fast-food industry started out as a family-run business to a giant chain restaurant, which put business out in a mass market of people. When becoming a franchise, the franchiser is responsible for land, equipment, and facilities. In most cases, the expenses are covered by the individual who is purchasing the franchise. A certain percentage of the royalties is paid out, are forward to help cover the advertising cost. After the franchisee completes this process of taking care of the franchise, the franchisee is assured of name recognition which is stated to increase high sales volume.
However, when a person is buying a franchise, the start-up cost can be very expensive as it would relate to a company who is considering being independent. A franchise restaurant has a low-risk within the market and also has a low failure-risk within the first year of start-up. With the comparison of an independent restaurant relating to a franchise, an independent restaurant is able to plan its own menus, avoid paying royalties, and run their business as the best way that they see fit. The industry continued to grow and be successful due to the women’s role in the marketplace.
Many women spent less time preparing food at home and spending more time in the workforce. Many Americans were dining out more, because consumers rather spend their money dining out, rather than staying home to cook and clean up afterwards. One main key factor to the industry success was due to its aggressive promotion for eating out, which shifted the business from food stores to dining out. According to the Business Company & Resource, the industry sales had increased eight fold over the past three decades from 42. 8 billion in 1970 to a projected 354 billion in 1999. The restaurants in the U.
S increased 66 percent within1970-1999 from 492,000 in sales to 815,000 restaurants nationwide. Most dining out places were forced to stake out a position to be distinctive from other competition because of the excess demand among consumers were growing (Business Company & Resource). By the early 2000’s, the food industry slowed down because of price wars from its competitors. However, the industry is highly competitive, but its current leader is the McDonald’s Corporation. Economic Characteristics of the Industry As of 2008, the fast-food industry is comprised of 945,000 total restaurants in the United States.
The sales growth had an increase of 22. 7% in production volume. The sector for full-service restaurants grew 33 %, while industry increased 4. 5 % in 2003. In 2007, sales of the industry reached $536. 9 billion dollars which represented a 5% increase over 2006 sales (Business Source Premier). Overall, sales in related industries such as agriculture, transportation, manufacturing, and the restaurant industry contributed about $1. 3 trillion to the U. S. economy in 2007 (Business Source Premier). In 2008, Chipotle sales increased 19. 5% to $345. 3 million, driven by a 3. % gain in comparable-store sales (sales from those restaurants open for more than a year, or comps) and contribution from the 136 new locations opened in the past 12 months (Morning Star, 2008). Economic Characteristics & Traits Market Size Large Competitive Rivalry ScopeGlobal Stage in Life Cycle Mature Growth Rate5. 2 %( five year period 2002-2006) Main CompetitorsPanera Bread, Chang China bistro Porter’s Five Force Model Porter’s Five Forces Model helps managers analyze competitive forces within the industry environment to identify the opportunities and threats. Hill & Jones, 2008) The model primarily focuses on five factors that forms competition in an industry which consists of the risk of entry by potential competitors, the intensity of rivalry among established companies within the industry, the bargaining power of buyers, the bargaining power of suppliers, and the closeness of substitutes to an industry’s products. (Hill & Jones, 2008) In the model, the stronger each force is, the more limitations established companies have on raising prices and earning profit. Hill & Jones, 2008) In addition, a strong competitive force becomes a threat because it slows down profitability. If a weak competitive force exists, to other companies, they would find it as an opportunity and gain profit. (Hill & Jones, 2008) A change amongst the Five Forces may take place throughout the time frame of an industry. As a result, managers can identify how those changes may provide new opportunities and threats. Figure 4 shows what Chipotle Mexican Grill uses to represent their competitive forces. Risk of Entry of Potential Competitors
Potential competitors are companies that are not currently competing in an industry but have the capability to do so if they choose. (Hill & Jones, 2008) Established companies already operating in an industry often attempts to discourage potential competitors from entering the industry. When more companies enter the industry it makes it difficult for existing companies to protect their share of the market and generate profits. High entry barriers may keep potential competitors out of the industry even when industry profits are high.
Important barriers of entry includes: economies of scale, brand loyalty, absolute cost advantages, customer switching costs, and government regulation. Economies of Scale. Economies of scale arise when the unit costs fall as a firm expands its output. Sources of economies of scale include: cost reductions gain through mass- producing a standardized output, discount on bulk purchases of raw material inputs and component parts, the advantages gained by spreading fixed production costs over a large production volume, and the cost savings associated with spreading marketing and advertising costs over a large volume of output. Hill & Jones ,2008) If these cost advantages are significant , a new company that enters the industry will experience a cost disadvantage relative to well-known companies. An example would be a mom and pop’s pizzeria trying to establish itself as a national franchise. The company will not survive because of the Pizza Hut and Dominos lower cost structure. Brand Loyalty. Brand loyalty exists when consumers have a preference for the products of established companies. Companies create brand loyalty through continuous advertising of its brand- name products and company name and patent protection of products.
Companies also achieve brand loyalty through product innovation through company research and development programs, an emphasis on high product quality, and good after-sale service. (Hill & Jones, 2008) Companies strive to achieve brand loyalty because many customers make purchases based on preference of brands. Chipotle Mexican Grill seeks to expand brand awareness using free food give a ways, innovative ads, promotion, and continuing the use of word of mouth through customers. Morningstar, 2008) In addition, brand loyalty makes it difficult for new companies to enter the market and take market shares away from established companies. Thus reduces the threat to entry by new entrants in the industry. It will be hard for the mom and pop’s pizzeria to develop a customer’s base because of brand loyalty that Dominos and Pizza Hut established Absolute Cost Advantages. For new entrants, when an existing company has established a low cost structure, it is hard for them to replicate the existing company’s cost structure.
Absolute cost advantages arise from three main sources: superior production operations and processes due to accumulated experience, patents, or secret processes; control of particular inputs required for production, such as labor, materials, equipment, or management skills, that are limited in their supply; and access to cheaper funds because existing companies represent lower risk than new entrants. (Hill & Jones, 2008) In the full service restaurant industry, the longer a company exists, the more likely the company will have an absolute cost advantage if it has achieved a low cost structure.
In addition, the absolute cost advantage will be viewed among new entrants as a threat and weaken their competitive force. Customer Switching Costs. Switching costs arise when it costs a customer time, energy, and money to switch from the products offered by one established company to the products offered by a new entrant (Hill and Jones, 2008). Chipotle Mexican Grill services in an industry where the switching cost are high. The amount of time that customers would waste on another restaurant, the money spent through gas on behalf of the distance of location and on a meal could have been well spent.
The higher the switching cost for a customer, the higher is the barrier to entry for a company attempting to enter the market. Government Regulation. According to Hill and Jones, government regulations have constituted a major entry barrier in many industries. Chipotle Mexican Grill must abide by and consider the increase in food cost due to factors beyond the company’s control such as: general economic conditions, seasonal fluctuations, weather conditions, demands, food safety concerns, generalized infectious disease, fluctuations in the U.
S. dollar, product recalls, and, government regulations. (CMG Annual Report, 2008) Like all restaurants in their industry, Chipotle must adhere to the restrictive regulations and taxation by the federal, state, and local governments. Limits to Entry Barriers. Barriers may even remain high when new firms approach the industry, but entrants continue to pursue the industry if they believe that the benefits outweigh the substantial cost of entry. Rivalry among Established Companies
The second competitive force is the intensity of rivalry among established companies within the industry. (Hill & Jones, 2008) Rivalry is referred to a competitive struggle between companies in the industry to gain market shares from each other. Chipotle competes in this struggle by having quality products, product design, advertising and promotion spending, direct selling efforts, and after- sales service and support. Because intense rivalry lowers prices and raise costs, it compresses profits out of an industry (Hill and Jones, 2008).
There are four functions that are within the industry of intense rivalry among established companies: industry competitive structure, industry demand, cost conditions, and the height of exit barriers in the industry. (Hill & Jones, 2008) Industry Competitive Structure. The competitive structure of an industry refers to the number and size distribution of companies in it (Hill and Jones, 2008). There are two different industries, fragmented and consolidated. A fragmented industry consists of large numbers of small to medium size companies.
Companies that are small in number but large in size (an oligopoly) or one company (a monopoly) would be considered a consolidated industry. In the Full service restaurant Industry, Chipotle Mexican Grill is highly competitive and fragmented (CMG Annual Report, 2008). Two competitors of CMG are: Panera Bread and PF Chang’s Restaurant. Since there are many restaurants within the industry, there are a number of factors in the way companies compete such as: taste, quality, speed of service, value and name recognition. Industry Demand. Industry demand is simply the intensity of rivalry amongst established companies in the industry.
According to Hill and Jones, “Growing demand from new customers or additional purchases by existing customers tend to moderate competition by providing greater scope for companies to compete for customers”(Hill & Jones, 2008). In addition, growing demand tends to reduce rivalry because all companies can sell more without taking market share away from other companies. Cost Condition. The cost structure of a firm in an industry is a third determinant of rivalry. Profitability is highly leveraged to sales volume, and the desire to grow volume can spark intense rivalry. Hill & Jones, 2008) Chipotle Mexican Grill has to consider pre-operating costs when opening new restaurants. Rent, wages, benefits and travel of training and operating new teams, foods, and other operating cost, are expensed as incurred prior to restaurant opening for business. (CMG Annual Report, 2008) Exit Barriers. Factors that affect exit barriers are: economics, strategic, and emotional factors that prevent companies from leaving an industry (Hill & Jones, 2008). When demand is weak, intensive competition can develop, particularly in consolidated industries with high exit barriers (Hill & Jones, 2008).
Chipotle Mexican Grill has high exit barriers for the full service industry due to shut down cost. Bargaining Power of Buyers The bargaining power of buyers refers to the capability of buyers to bargain down prices charged by suppliers in the industry or to raise the costs of companies in the industry by demanding better product quality and service. (Hill & Jones, 2008) Buyers are most powerful in the following circumstances: • When the industry that is supplying a particular product or service is composed of many small companies and the buyers are large and few in number.
These circumstances allow the buyers to dominate supplying companies (Hill and Jones, 2008). • When the buyers purchase in large quantities. In such circumstances, buyers can use their purchasing power as leverage to bargain for price reductions (Hill and Jones, 2008). • When the supply industry depends on the buyers a large percentage of its total orders (Hill and Jones, 2008). • When switching costs are low so that buyers can play off the supplying companies against each other to force down prices (Hill and Jones, 2008). When it is economically feasible for buyers to purchase an input from several companies at once so that buyers can play off one company in the industry against another (Hill and Jones, 2008) • When buyers can threaten to enter the industry and produce the product themselves and thus supply their own needs, also a tactic for forcing down industry prices (Hill and Jones, 2008). Chipotle Mexican Grill is a buyer of organic and all natural ingredients. Also, Chipotle’s supplier depends on their service for purchasing large quantities of quality ingredients at the most reasonable price available.
In the industry, Chipotle operates over 837 restaurants in 35 states (CMG Annual Report, 2008). The bargaining power positioning for Chipotle is weak because of the delivery of its suppliers to produce quality products. Bargaining Power of Suppliers The bargaining power of supplier refers to the ability of suppliers to raise input prices, or to raise the costs of the industry on other ways for example by providing poor quality or poor service. (Hill & Jones, 2008) The suppliers ability to make demand on a company depends on their power relative to that company.
Suppliers are most powerful in these situations: • The product that suppliers sell has few substitutes and is vital to the companies in an industry (Hill and Jones, 2008). • The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry, when the industry is not an important customer to the suppliers (Hill and Jones, 2008). • Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier’s products are unique or different.
In such cases, the company depends on a particular supplier and cannot play suppliers off against each other to reduce price (Hill and Jones, 2008). • Suppliers can threaten to enter their customers’ industry and use their inputs to produce products that would compete directly with those of companies already in the industry (Hill and Jones, 2008). • Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs (Hill and Jones, 2008).
Chipotle Mexican Grill is committed to serving high quality foods to its customers. Therefore, the company has developed a relationship with its supplier (CMG Annual Report, 2008). Chipotle depends on the suppliers like Niman Ranch, Inc. to process natural quality ingredients such as beef and pork (Smith, 2008). The cost associated with the failure to receive deliveries of high quality food ingredients and other supplies could harm the company’s operation (CMG Annual Report, 2008). The bargaining power positioning for Chipotle’s suppliers is strong because of its high demands.
Threat of Substitute Products The final force in Porter’s five forces model is the threat of substitute products: the products of different businesses or industries that can satisfy similar customer needs (Hill & Jones, 2008). If an industry’s products have few close substitutes, this makes the substitutes to have a weak competitive force. The companies in the industry have the opportunity to raise prices and earn additional profits (Hill & Jones, 2008). Lifecycle Analysis The industry life cycle model is a useful tool for analyzing the effects of industry evolution on competitive forces.
This identifies five sequential stages in the evolution of an industry (Hill & Jones, 2008,). The five distinct kinds of industry environment are the embryonic, growth, shakeout, mature, and decline stages. Managers are faced with the task to formulate strategies that take advantage of opportunities as they arise and counter emerging threats. Because the industry environment evolves, managers must anticipate how the strength of competitive forces will change. The embryonic stage is when an industry is just beginning to develop.
The industry must react to such factors as the unfamiliarity with the industry’s product, high prices due to the inability of a company to produce economies of scale, and poor distribution channels. Rivalry can be intense if the company does not solve these problems. This can determine a company’s growth, whether it is slow or fast. The growth stage is when growth of the industry begins to take off. This is when the industry has informed customers of the products, built distribution channels, and accomplished economies of scale.
If a company is strategically aware they may take advantage of this environment to prepare itself for the intense competition in the shakeout stage. The shakeout stage is when the growth of the industry begins to slow down. This happens because demand reaches partial saturation and there are fewer first time buyers. Some companies may be use to the rapid growth which they depend on in the past. This can result in excess capacity in which they will cut prices and enter a price war. The mature stage is when growth is at a minimum and the market is completely saturated.
In order to survive this stage a company must build brand loyalty and focus on minimizing cost to try and avoid price wars. In the declining industry, growth becomes negative which can also result in excess capacity. An industry may decline for such reasons as technological substitution, social changes, demographics, and international competition (Hill and Jones, 2008). The fast food restaurant industry is in the mature industry stage. According to Business and Company Resource Center eating out has become a very stable part of the American lifestyle.
This sector of the industry began to experience a slowdown in growth during the late 1990’s due to maturity, competition, and consolidation. This stability of chain restaurants has taken over independently owned restaurants due to low failure rates. This trend is expected to continue throughout the 2000’s. Key Factors for Competitive Success The food service industry has been very profitable from its beginning. There are always people traveling and looking for ways not to cook. This brings more demand for fast food and quick service.
As of today, one factor that helps this industry gain a competitive advantage because of convenient locations and quick food service. The cost of produce is steadily increasing in which consumers cannot afford. As a result, restaurants gain a competitive advantage by providing widespread menus at a reasonable price. According to Standard and Poor’s Resource Center, there has been very aggressive promotion and advertising towards dining out rather than going grocery shopping, which in return led the food restaurant industry to a more competitive advantage.
Also, due to the increased role for women in the workplace, mothers and wives can save time and money by eating out to accommodate the needs of their family. Other key factors for competitive success in the fast food industry include convenience. For example, the consumers can dine in or out for meals, the low pricing, quick service, and variety in specialized menu items Description of the Key Competitors In the full service restaurant industry fast casual segment, there are numerous competitors that operate under the industry. The key competitors for Chipotle Mexican Grill are: PF Chang’s China Bistro and Panera Bread.
China Bistro also operates under the name Pei Wei Asian Diner (Pei Wei) which is a restaurant concept that consists of multiple restaurants throughout the U. S. This competitor operates and owns one Taneko Japanese Tavern restaurant. Along with 144 Pei Wei restaurants, PF Chang’s China Bistro operated and owned 172 full Bistro restaurants since Dec 30, 2007. It is located in Scottsdale, AZ and features Japanese-like foods that are organic, natural, and seasonal. Panera Bread produces a variety of made-to-order breads, sandwiches, soups, gourmet coffees and salads.
The Panera and Saint Louis Bread Company are what Panera Bread bases its food structure and sales on. These companies provide a variety of artisan breads, such as foccaccia, Asiago cheese bread, and its original sourdough bread. In addition, bagels, pastries, and breads are sold by Panera Bread Company. They have an estimate of 560 or more company-operated locations and the rest are operated by franchisees (Industry Survey, 2009). Company Positioning When analyzing the company positioning, the return on invested capital (ROIC) gives a clear visual of the strong and weak competitors within the industry.
The ROIC is best described as how a company most effectively uses its resources invested in its operations (Hill & Jones, 2008). This can be calculated as operating profit divided by total liabilities and equity. CMG continuously increased their ROIC throughout the five year span, but four out of five years it was lower than the industry ROIC. In 2002, when the company became a publicly traded company, they had a negative ROIC. However, the preceding years from 2004 to 2006 investors saw a return on their investment but it was not as great of a return as the industry.
In 2007, investors gained a considerable return on their investment, far greater than the industry’s ROIC. This was from the company’s increased growth, no long term debt, and a significant decrease in operational expenses. According to Sarah E. Lockyer, other factors that led to this growth were more customer visits, locations, and menu price increases (CMG Annual Report, 2008). Although CMG started out at a slow pace, its competitors such as Panera Bread and P. F. Chang’s Chinese Bistro had a hard time increasing their ROIC overtime which CMG eventually left them behind. Strategic Group Map
Hill and Jones defines strategic groups as groups of companies in which each company follows a business that is similar to that pursued by other companies in the group Some company’s groups have different business models than other company’s groups (Hill & Jones, 2008, p. 58). In the industry of full service restaurants there are two different strategic groups. The differences in the groups are the freshness of the products and the price incurred for customers to purchase the product. Different opportunities and threats could come across each group. Chipotle Mexican Grill, Panera Bread and Fresh Enterprises, Inc. all have similar business models. They all offer fresh ingredients to their customers. This allows them to differentiate their products from competitors and have price flexibility in the industry. In contrast of business models, Yum inc, Burger King Corp. & McDonalds Corp. have similar business models. They offer quality products but do not offer the quality of ingredients as Chipotle, Panera Bread and Fresh Enterprises, Inc. Attractive Industry for Investment Potential Competitors Due to the current economic position of the United States, it is not a wise decision to invest into the full service restaurant industry.
There are ongoing price wars among the competitors within the industry. In this case, when companies compete for prices, it has leads to the decrease in the industry overall pricing that may result to another company going out of business. Chipotle Mexican Grill is a fast growing company within the full service restaurant industry but the company has admitted that they may struggle to manage its rapid growth, especially in the challenging consumer environment (Morningstar, 2008). Prospects for Above-average Profitability
Since 2003, when Chipotle went public, the company has managed to develop business models to achieve above-average profitability. A business model is the manager’s conception of how the various strategies and capital investments made by a company should fit together to generate above-average profitability (Hill & Jones, 2008). The determinate factor to have above-average profitability is the return on invested capital (ROIC). The ROIC is the operating profit divided by the total assets. From 2003 until 2007 Chipotle’s ROIC has consistently risen to emerge as a leading competitor in their industry. In 2007 Chipotle’s ROIC was 14. 8% the fast increase from -3. 19% in 2003 when the company had its initial public offering. Chipotle’s return on invested capital has risen every year thus allowing the company to become more profitable than in previous years. This has allowed the company to have above-average profitability. During 2003 to 2006 Panera Bread and P. F. Chang’s Chinese Bistro profitability has been higher than Chipotle. However, in 2007 Panera Bread’s ROIC of 12. 78% and P. F. Chang’s ROIC of 8. 20% compared to Chipotle 14. 98% ROIC shows that Chipotle still has surpassed its competitors to achieve above-average profitability.
Summary of Opportunities and Threats Opportunities Chipotle Mexican Grill is a rapidly growing company that is expanding into more markets, cities, and countries. According to CMG 2007 Annual Report, Chipotle opened 125 new restaurants during the year and planned to open 137 new restaurants in 2008. An opportunity for Chipotle would be to develop a children’s menu. Obesity in America’s children has significantly grown. Therefore, the menu would be marketed as a leader to healthier food alternative for children, compared to their competitors. Another opportunity that Chipotle can create is through the company’s website.
Chipotle can offer customer discounts for those who order online. Through this, they have enhanced a pre-existing service that will increase their output and revenue. In addition, it will help decrease in store waiting time. Threats The economic condition of the nation is a major threat for Chipotle. Currently, Chipotle’s home country is dealing with a recession that has decreased consumer spending. It has impacted not only Chipotle but its industry. Consumers may not be willing to pay the premium price for their products; this could ultimately affect the company profit.
As a result, the economic condition of the country has slowed the expansion of the company. Expansion into new markets presents an increase of risk because of unfamiliarity with those areas (CMG Annual Report, 2008). CMG’s Annual Report states that new markets may be unsuccessful because of different competitive conditions, consumer taste, and spending patterns of the market. In addition, they may have difficulty finding reliable suppliers that can meet their standards of ingredients. Finally, instances of E. coli, mad cow disease, or other food-borne illnesses could affect the company’s sales (CMG Annual Report, 2008).
Internal Analysis The internal analysis indentifies the strengths and weaknesses of the company. The analysis of company’s internal environment gives managers the information they need to choose the business model and strategies that will enable their company to attain and sustain a competitive advantage (Hill & Jones, 2008). Competitive Advantage A company that has a competitive advantage over its rivals will achieve above average profitability greater than the profitability of its companies in the industry. Hill & Jones, 2008) Through the proper and efficient usage of the company’s resources and capabilities, the company will have created distinctive competencies. Chipotle is a leader in fast-casual dining, the fastest-growing segment of the full service restaurant industry. (Morningstar, 2008) The brand has been embraced by Mexican food enthusiasts in Colorado, Texas, and California and has proven to be very popular in Ohio, Minnesota, and Illinois. (Morningstar, 2008) Even though the competition is ever increasing, Morningstar believes Chipotle will remain the leader in this category. Morningstar, 2008) Chipotle has created innovated ways to service their customers while maintaining quality satisfaction. Generic Building Blocks There are four generic building blocks that lead to competitive advantages and distinctive competencies for CMG. These factors include: superior efficiency, quality, innovation, and customer responsiveness. In turn, they allow a company to: differentiate its product offering, create greater perceived customer value, and lower its cost structure (Hill & Jones, 2008). Efficiency Efficiency is based on the outputs and inputs of a company’s products or services.
The fewer the inputs required to produce a given output, the more efficient a company is. Inputs are basic factors of production such as management, labor, land, capital and technological know-how. Outputs are the products that the business produces (Hill and Jones, 2008). Chipotle Mexican Grill’s efficiencies have helped the company attract and maintain most of their consumers. Although CMG’s advertising costs such as print, outdoor, transits, and radio ads, were low; CMG became more efficient in lowering their cost structure when they reduced operating expenses by 2007.
They also advertise when publications wrote about the company and its business. CMG’s efficiency also derives from satisfying the customers’ needs and desires while improving their method of operations. Some beneficial factors used to enhance qualities of the company’s efficiency are: accommodating a variety of organic Mexican Style foods, and the ability to fax orders so that people on the go could pick up their lunch faster. In addition, CMG decided to add the capability to order online using the moniker “DSL” or “Don’t Stand in Line” concept.
This concept operates closely with faxed-in orders where those who have placed their orders online may skip to the front of the line to pay for their already-prepared food. CMG is constantly being innovative by implementing their mission statement, “Food with Integrity,” in what they do on a day to day basis by moving towards all natural ingredients. Currently, CMG has began putting into effect the everything should be natural concept through raising, on a vegetable diet, all natural chicken without antibiotics, beef and pork in addition to organic dairy products such as sour cream and cheese. Profitability
Companies profitability depends on efficient operations, the ability to provide fast service, and effective marketing (Hill and Jones, 2008). According to Morning Star, restaurant-level margins improved from 10. 7% in 2002 to 22. 3% in 2007. This was largely driven by efficient labor and leverage of fixed expenses, but decreased to 21. 5% in 2008. Coupled with selling, general, and administrative expense deleverage, operating margins fell to 9. 3% in 2008 from 10% in 2007. Here is just a brief overview of the increase CMG has over the last three years of operation. In 2006, they accumulated $822. M in revenues, 2007, $1085. 80M, and 2008, $1332. 00M. Quality Quality products are goods and services that are reliable in the sense that they do the job they were designed for and do it well (Hill and Jones, 2008). This increases customers perceived value of the product; however, they are also differentiated by various attributes that customers perceive to have higher value. A product is said to have superior quality when the attributes of a specific product has greater value compared to the same attributes in rival products. First, a high quality product increases value in the eyes of customers.
The second impact is high quality on competitive advantage. These result from greater efficiency and lower unit costs associated with reliable products. CMG uses high quality ingredients so that their customers can have better tasting foods. They purchase from suppliers who understand their brand. Through quality ingredients and increasingly high revenues, CMG views quality as having excellence. They use their best products which leads them to have a brand loyalty with existing customers. They also have differentiated themselves with innovation, which in the customers believe that their food taste better than its rivals.
Innovation Innovation refers to the act of creating new products or processes. Product innovation is the development of a new process for producing products; delivering products to customers creates value by creating new products and enhances versions of pre-existing products to increase the company’s pricing options. Process innovation is the development of a new process for producing products and delivering them to customers. Process innovation often allows a company to create more value by lowering production costs. Uniqueness of new precuts can allow a company to differentiate itself from its rivals (Hill and Jones, 2008).
CMG has innovation through their fast-casual operation. Chipotle has a fresh Mexican menu which includes burritos, burrito bols, tacos, and salads. Since customers can choose from four different meats, two types of beans, and an array of extras, there is a plethora of organic foods to provide more than 65,000 choices. Responsiveness to Customers Achieving innovation, excellence, and quality innovation is integral customer responsiveness (Hill and Jones). By satisfying and identifying the customers’ needs, a company can be more responsive than its competitors. Customers will see that the company is responsive to their needs.
Through their product differentiation customers will place more value on their products, thus creating a competitive advantage. An imperative contributor to CMG’s success was the importance of their culture being highly emphasized. CMG believes that the key factor to success is due to the ability to persuade customers that their food is made with excellence. Therefore, higher prices are set to accommodate higher-quality ingredients. By producing healthier foods the customer would find the prices more worthy to be paid. Customers tend to pay prices that are similar to some of their competitors. Value chain analysis
The value chain is the idea that a company is a chain of activities that transforms inputs into outputs which customers value (Hill & Jones, 2008). The process consists of primary activities and support activities which help add value to a product. The primary activities deal with the design, creation, and delivery of the product. The activities that take place are: the research and development, production, marketing and sales, and customer service. These support activities allows the primary activities to take place are: material management, human resources, information systems, and company infrastructure (Hill & Jones, 2008).
Research and Development Research and Development (R & D) pertains to th
