Strategic Management Planning for Domestic and Global Competition 14th Edition Pearce Soluti

Strategic Management Planning for Domestic and

Global Competition 14th Edition Pearce Solutions
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Teaching Note

CHIPOTLE MEXICAN GRILL, INC.”: FOOD WITH INTEGRITY

Ram Subramanian wrote this teaching note as an aid to instructors in the classroom use of the case Chipotle Mexican Grill, Inc.:
“Food with Integrity,” No. 9B13M068. This teaching note should not be used in any way that would prejudice the future use of the
case.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-06-10

CASE SYNOPSIS

Chipotle1 Mexican Grill, Inc. (CMG) was a Denver, Colorado-based chain that competed in the fast
casual segment of the restaurant industry. The chain offered a range of Mexican food items in its 1,316
restaurants, which were predominantly in the United States. Founder and current co-CEO, Steve Ells, had
emphasized not only good tasting food but also a commitment to sustainability early on in the company’s
history. The chain’s mission was “Food with Integrity,” which captured its commitment to both the
environment and people. CMG positioned itself as a differentiator, using both food quality and a
commitment to sustainability as factors that isolated the company from its competitors. However, in 2012,
the company faced a number of challenges. A competitor from a different segment of the restaurant
industry, Taco Bell, had launched a new line of menu items aimed directly at CMG. In addition, food
costs were increasing, and CMG was hard-pressed to both control input costs and find suppliers who
adhered to the company’s sustainability-based sourcing policy. In the most recent quarterly report, the
company had indicated a slowing down of same-store sales. A hedge fund investor had recently called for
shorting the company’s stock because of the impending problems. CMG’s two co-CEOs, Ells and
Montgomery F. Moran, had to decide on the best course to confront these challenges in the backdrop of a
free fall in the company’s stock price.

TEACHING OBJECTIVES

The case examines critical issues that intersect both business strategy and sustainability. Since it involves
a company operating in the restaurant business and is well-known (at least to U.S. students), there is
bound to be a strong connection between the subject matter and students. In addition, CMG is a case of a
company that has pushed sustainability in the much maligned chain restaurant business (where companies
such as McDonald’s are often the target of environmentalists). Here is a company that appears to do
“good,” and therefore there is likely to be a strong interest rooting for CMG to be successful.

1
Pronounced “chi-POAT-lay”
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The case can be used in a corporate strategy course at both the undergraduate and MBA levels. In such a
course, the case can be used to highlight and bring to centre stage the confluence of strategy and
sustainability and to show how an emphasis on sustainability can be tied to a company’s strategy. The
case is best positioned when students have been exposed to the concept of strategic positioning and the
ideas of differentiation and cost advantage.

Following are the specific teaching objectives of the case:

 Examine how a company can position itself in the competitive market space.
 Identify drivers of differentiation.
 Examine the value of using sustainability as a differentiator.
 Identify the resources that sustain a company’s competitive position.
 Understand the choices that managers have to make with respect to a company’s market position.

PREPARATION AND SUPPLEMENTARY READING

The following are the theoretical underpinnings of the case:

1. Positioning choices at the business level. Michael Porter identified three “generic” positioning
choices available to a firm when competing within an industry: cost leadership, differentiation and
focus.
2. The concept of shared value as a way to link doing social good with a company’s business strategy.

The key question that forms the case’s “centre of gravity” is sustainability as a differentiator. Does a
firm’s commitment to sustainability draw customers to its product or is sustainability an important factor
only in tandem with other key differentiators such as product quality or service quality? That’s the
question that informs the case, although it does that in the context of a firm that confronts challenges to its
strategic positioning.

To get the most out of the case, the following are suggested readings:

1. Robert M. Grant’s Contemporary Strategy Analysis, 7th ed. (Wiley, Hoboken, New Jersey, 2010)
offers a good primer on strategic positioning with an individual chapter (Chapter 10) devoted to
“Differentiation” that identifies both supply-side and demand-side differentiation drivers.
2. Frank T. Rothaermel’s Strategic Management: Concepts and Cases, 1st ed. (McGraw-Hill, Burr
Ridge, Illinois, 2013) provides a rigorous treatment of the concept of consumer and producer surplus
and their relationship to competitive advantage in Chapter 5.
3. Michael Porter’s article, “What is Strategy” (Harvard Business Review 7.6, November-December
1996: 61-78) describes in practical terms the concept of activity systems and how these help support a
firm’s strategy.
4. Michael Porter and Mark Kramer’s article, “Strategy and Society: The Link Between Competitive
Advantage and Corporate Social Responsibility” (Harvard Business Review 84.12, December 2006:
78—92) makes a strong case for corporate social responsibility (CSR) being embedded in a firm’s
strategy for optimum effect and introduces the concept of shared value.
5. Robert G. Eccles, Kathleen Miller Perkins and George Serafeim’s article, “How to Become a
Sustainable Company” (MIT Sloan Management Review, Summer 2012: 43—50) emphasizes the
roles of leadership and commitment to becoming a sustainable organization.

In addition to these readings, the following videos are relevant to the case and can be used, depending on
class time, to stimulate discussion and engage the students:
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1. “Chipotle Story: How it All Started,” available at www.chipotle.com/en-

US/fwi/videos/videos.aspx?v=5 (5:12), features an interview with Steven Ells and also shows
operations at a typical CMG restaurant.
2. “Back to the Start,” available at http://www.chipotle.com/en-US/fwi/videos/videos.aspx?v=1 (2:20),
is the CMG TV commercial that was telecast at the 2012 Grammy Awards in the United States.

TEACHING SUGGESTIONS

The case discussion can be divided into the following four areas:

 CMG’s positioning (where sustainability as a differentiator can be introduced).

 Resources/activities to defend and support CMG’s positioning.
 Challenges to CMG’s positioning (where the value of sustainability as a differentiator can be
examined).
 Recommendations.

Since time can be a constraint (if, for example, the instructor chooses to shows both videos in class),
allotting time for each area listed above and providing the right segue between discussion areas becomes
important. Toward this, Exhibit TN-1 provides a sample board plan for a typical 75-minutes class.

DISCUSSION QUESTIONS

1. Do you think CMG is a successful company?

2. How does it compete?
3. How do CMG’s resources support the company’s competitive position?
4. What challenges does CMG face in late 2012? How should Steven Ells and Montgomery F. Moran
position CMG to respond to these challenges?
5. What would you recommend the company do?

ANALYSIS

1. Do you think CMG is a successful company?

It is a good idea to start the discussion of the case by posing this question to the class because, depending
on their academic orientation, students will isolate different measures of the company’s success. It is also
a good starter question because it is seemingly easy (and so will elicit responses), yet the answer to it will
set the stage for a discussion of more substantive issues related to the company’s strategy.

Entrepreneurially oriented students will catch on to the fact that Steven Ells seized on an opportunity
(good tasting fast food) even while those close to him pretty much discouraged him. There is a quote in
the case that indicates Ells’s faith in his idea and his stubbornness in pursuing it no matter the
discouragement (see case pp. 4—5). These students will look at the company that Ells built (1,316
restaurants, more than $2 billion in revenue, etc.) as evidence of success. Students with a finance
background will point to the stock price and argue that the company was at its highest level of success
when the stock price hit $442.40, but that its declining stock price (which attracted the interest of a short
seller) shows signs of trouble. The more environmentally conscious students will emphasize the
company’s commitment to sustainability and point to “Food with Integrity” being an integral part of
CMG’s culture as evidence of the company’s success. Noting these points on the board (to come back to
later) will help the class get started on the link between strategy and sustainability.
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2. How does it compete?

Question 1 above showed the external elements, the metrics, that indicate where CMG is today. This sets
the stage for a deep dive into CMG’s strategy and its positioning and the role these play in helping the
company compete in the restaurant industry.

The instructor should direct the discussion specifically on business level positioning. If the subject is
already covered, students will make a case for CMG using the positioning strategy of differentiation (per
Porter’s terminology). The instructor should ask for evidence of this positioning strategy. Points such as
the following should emerge:

 The fast casual segment of the restaurant industry occupies a middle position in terms of price. The
full service restaurants have the highest average check, while the fast food segment has the lowest.
With an average check of $7 to $10, fast casual players are in the middle.
 Given the average check of $7 to $10, case Exhibit 1 points out that CMG’s prices (of the
representative items that can be considered proxies for the entire menu) are at the upper end, while
Qdoba’s is lower. An “encroacher” from the fast food segment (Taco Bell with its Cantina Bell menu)
is operating below the segment’s average check but nevertheless attempting to compete head-on.
 Differentiators charge a premium price for a premium (or differentiated) product. Why are consumers
willing to pay a higher price for CMG’s menu? Factors such as food quality (what Grant would term
a “demand side” differentiator) and assembly line (again, “demand side”) type of operations (which
allow consumers their choice of what to put on their menu item) are important.

This is a good time to bring up the issue of sustainability (a supply side differentiator, which can also act
on the demand side), if it doesn’t emerge organically (no pun intended!) in the discussion. The question to
drive this part of the discussion is: Is sustainability a differentiation driver for CMG?

The discussion should focus on CMG’s “Food with Integrity” mission. The relevant points here are:

 “Food with Integrity” formalizes the company’s commitment to sustainability. It was launched in
2001, when the company was about a third of its current size.
 But does the company market its “Food with Integrity” mission? In other words, do customers know
about CMG’s commitment to sustainability and hence choose it over the competition?

At this point, it is a good idea to take a short detour (particularly necessary if the case is taught in an
undergraduate class) to talk about the concept of “consumer surplus.” This is shown in Exhibit TN-2.
Consumers implicitly assign a value to a product or a service. They compare this against the product’s (or
service’s) price and the higher the imputed value, the higher the consumer surplus. Consumer surplus is
related to the notion of “willingness to pay” (WTP), a critical concept in positioning strategy. CMG
succeeded in increasing the consumer’s WTP when the market responded to its premium priced menu. If
consumers are willing to pay $9.88 for a burrito bowl with chicken or $10.34 for a steak burrito (case
Exhibit 1), their consumer surplus is presumably higher than this price. What drives this WTP? Is it the
food quality or is it CMG’s “Food with Integrity” mission? Or both?

It is probably best if the idea of consumer surplus and the Value-Price-Cost (V-P-C) equation is just
introduced in this question, because question 4 looks at these in terms of CMG’s challenges. The key
take-away for this question is for students to have a good idea of differentiation drivers and how they
work to increase consumers’ WTP.
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3. How do CMG’s resources support the company’s competitive position?

Positioning oneself as a differentiator is only one part of a firm’s strategy. It has to support and defend
that position by configuring its resources to match its positioning. A good way to get this discussion
going is to ask the students to operationalize CMG’s differentiation strategy. As a starting point, the
instructor should ask the students for major themes that underlie CMG’s differentiation positioning. The
following factors should emerge:

 Food quality.
 Assembly-line food preparation.
 The “Food with Integrity” mission.
 Unconventional marketing.

Michael Porter’s activity systems view describes how a “company’s strategic position is contained in a set
of tailored activities designed to deliver it.”2 There are two sets of activities: higher order activities, which
implement specific themes that operationalize a company’s position, and lower order activities, which
help implement higher order activities. The idea is that a firm’s activities must support and reinforce its
strategic position so that it can guard against imitation of its position. Activities that are either
inconsistent with its position or do not reinforce or strengthen it can weaken the link between strategic
position and competitive advantage.

(At this point, the instructor has one of two choices depending on the available class time: have the class
collectively develop CMG’s activity system given the four themes listed above or hand out the activity
system in Exhibit TN-3 to the class and focus on its implications instead.)

From Exhibit TN-3, it should be clear as to what activities help link each of the four higher order themes.
For example, the “Food with Integrity”/sustainability theme is implemented by local sourcing, a big push
for organic inputs, eschewing inputs from concentrated animal feeding operations (CAFOs) by instead
sourcing from open-range operations, the use of solar panels in restaurants and going in for LEED
certification for its restaurants. Similarly, activities to implement the other themes can be identified from
the exhibit.

The key here is to look at the implications of CMG’s activity system for its competitive position. For this,
the discussion must move to linkages among the activities. Porter suggests that there are three types of
linkages: the first promotes consistency among the activities, the second looks at whether activities
mutually reinforce each other and the third suggests that there are trade-offs in structuring an activity
system, and therefore a firm’s activities must optimize the firm’s resources.

Gaps/weaknesses in CMG’s activity system must now be clear to the class. For example, while assembly-
line type of food preparation is linked to food quality (because customers can choose what to put on their
burrito, for example), this theme is not linked to either the “Food with Integrity”/sustainability theme nor
to its unconventional marketing. In short, this theme reinforces and supports the theme of food quality but
has no direct linkage with the other two themes. Likewise, there is at best a weak linkage between CMG’s
unconventional marketing strategy and food quality. For example, the “Cultivate” festival is basically
location-centric (if the festival is held in Chicago, it attracts potential customers from the local area and
may get local area press coverage), while the “Farm Team” loyalty program is tied more closely to
knowledge of sustainability issues rather than food quality. A good question to pose here is: Does CMG
“economize” on marketing dollars? If so, is this a trade-off to optimize activities (given the high food
costs) or is it a weakness?
2
Michael Porter, “What is Strategy,”(Harvard Business Review 7.6, November-December 1996: 73.
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It is important to transition to the challenges facing CMG at this point, but the key take-aways from this
segment should be an understanding of how a firm’s strategic positioning is implemented and the
importance of configuring activities so that they support and reinforce each other.

By posing the trade-off issue in terms of economizing on marketing, the instructor can force the students
to think of a firm’s activity system (and hence its strategy) as a set of choices that optimizes the firm’s
resources. Implicit in this thinking is the fact that all firms (Chipotle included) have limited resources that
call for significant trade-offs to be made.

4. What challenges does CMG face in late 2012? How should Steven Ells and Montgomery F.
Moran position CMG to respond to these challenges?

Taco Bell’s Cantina Bell menu is a challenge for CMG because it is pulling down customers’ WTP (the
V-P-C equation) for the product. Look at the summary assessment in case Exhibit 1: the Cantina Bell
menu is about half the price of CMG’s menu and yet Zagat concludes that all CMG has is “an edge” over
Taco Bell. Jeff Einhorn’s survey indicates that 25 per cent of CMG’s customers have already tried the
Cantina Bell menu and two-thirds indicate that they would return. If this case is taught in a U.S.
classroom, most students are likely to be amazed that Taco Bell and CMG are talked about as equals. The
perception is that Taco Bell is a place to get cheap food of poor quality while CMG is a significantly
higher quality offering, albeit at a higher price. But one could argue that Cantina Bell has changed that,
and it is now a legitimate competitor to CMG.

While Cantina Bell is pulling down the WTP, Qdoba is competing on food quality. A look at the quote
from a Qdoba franchisee reiterates this (case, p. 3). Their food is handcrafted and made fresh every day.
They don’t take short cuts (slow roasting pork for six to eight hours, for example) and they prepare food
like an artisan. And all this at a price lower than CMG’s! In short, both Taco Bell and Qdoba are putting
pressure on CMG’s ability to pass on added food and other costs to consumers in the form of higher
prices.

After a discussion of the demand side challenges (Cantina Bell and Qdoba and their effect on WTP), the
class’s attention must turn to the supply side. There are serious challenges to CMG’s ability to source
sustainable inputs, particularly given the company’s growth trajectory. Take organic inputs, for example.
In 2012, less than 1 per cent of the total agricultural area in the United States was managed organically,
and the percentage is even lower for livestock and poultry — two key inputs for CMG. The economic
downturn has slowed down the conversion of traditional farms to organic farms, although organic farms
report a higher average profitability. CMG competes with many other players for organic inputs and this
supply/demand inequality can drive up prices even more (the $18 burrito!) — increases that CMG hopes
to pass on to customers but may be hardpressed to do so given the competition (case Exhibit 2 shows that
of the three competitors, CMG has the highest food costs). While Ells believes CMG has pricing power,
his CFO is far more cautious about this. Ells talks about sourcing organic inputs as an “incremental”
revolution for CMG, but this revolution is predicated on CMG’s ability to sustain a premium price for its
product.

The class has to understand that Ells and Moran are confronting these challenges for CMG amidst a
precipitous fall in the company’s stock price. As a public company, Ells and Moran are agents of the
many stockholders who are the principals (as per agency theory). They cannot hide from what one
reporter referred to as the “big burrito in the room” (referring to Einhorn’s call for shorting the stock and
the general fall in stock price), and they have to address it.
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5. What would you recommend the company do?

In their article, Porter and Kramer contend that “the prevailing approaches to CSR are so fragmented and
so disconnected from business and strategy so as to obscure many of the greatest opportunities for
companies to benefit society.”3 They go on to make the point that a proactive approach to CSR (strategic
CSR) can be a source of competitive advantage by creating shared value. In looking at making
recommendations for CMG, the instructor must first get the class to look at sustainability and its role at
CMG. It is clear that sustainability is not a tangential issue for CMG but one that is at the core of the
company, and they are indeed creating shared value by linking a sustainable supply chain with their
customers.

Is there value in CMG deliberately underplaying its sustainability orientation in its marketing? Isn’t
sustainability the best defensible differentiator for CMG given the advent of Cantina Bell and the
presence of Qdoba?

Going back to CMG’s activity system, it is clear that, while the company’s unconventional marketing
provides a link (some would argue that it is at best a weak link because it is either local or involves a
small segment of the target market) to “Food with Integrity,” it doesn’t offer an explicit link either to food
quality or to the relationship between sustainable sourcing and food quality. Should they provide this link
with explicit marketing? The instructor can take a vote at this point to gauge the class’s take on this and
set the stage for a discussion (if time permits) of the role of marketing to firm strategy.

Clearly, CMG faces supply side challenges in maintaining its sources of sustainable inputs. Should CMG
face this incrementally (as Ells suggests)? Or should CMG be proactive in forming strategic alliances
with organic food suppliers (perhaps in partnership with a larger chain such as Whole Foods, given
CMG’s relative small size)? Again, class time will likely decide the duration of this discussion.

CASE-LEVEL TAKE-AWAYS

A company’s embrace of sustainability should come from the top leadership (as suggested in the Eccles
article), and the CMG case clearly indicates that Ells leads the way here.

Sustainable sourcing practices can act as a differentiator, but perhaps only in tandem with other
differentiators. At this point in time, in the United States and most likely elsewhere, sustainability has a
tenuous link with a customer’s WTP, but CMG is a good example of a company that is facing this
challenge head-on.

CSR (of which sustainability is a core component) works when it is an integral part of a firm’s strategy,
and CMG’s “Food with Integrity” mission illustrates how shared value is created when this link is
present.

WHAT HAPPENED

As of April 2013, CMG had not announced a menu price increase. For the first quarter of fiscal 2013,
CMG reported 1 per cent same-store sales increases and restaurant level operating margins of 26.3 per
cent (a decrease of 110 basis points over the corresponding period of 2012). It also announced the
opening of 48 new restaurants in the quarter.

3
Michael Porter and Mark Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social
Responsibility,” Harvard Business Review 84.12, December 2006: 80.
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EXHIBIT TN-1: BOARD PLAN SUMMARY

Discussion Chunks Key Prompts

I. CMG’s Positioning  Effect on consumer surplus
(15 minutes)  Differentiation (quality, sustainability)
Video: Steve Ells (5:12)  Evidence? (Price?)
II. How does CMG defend its positioning?  Activity system
(20 minutes)  Weak links?
Video — Back to the Start (2:20)  Trade-offs?
III. Challenges to positioning  Cantina Bell’s pricing (WTP)
(20 minutes)  Qdoba’s fresh ingredients (WTP)
 Food costs, shortages?
 Pricing power limits?
 Stock price (Einhorn)
IV. Recommendations  Push sustainability?
(15 minutes)  Increase marketing?
 Shared value creation
 Others?
V. Wrap Up (Case-level take-aways)  Importance of positioning
(5 minutes)  Is sustainability a differentiator?
 Linking sustainability and strategy
Source: Created by author.

EXHIBIT TN-2: VALUE-PRICE-COST RELATIONSHIP

Source: Adapted from Frank T. Rothaermel, Strategic Management: Concepts and Cases, 1st ed., McGraw-Hill, Burr
Ridge, Illinois, 2013, page 116.
Strategic Management Planning for Domestic and Global Competition 14th Edition Pearce Soluti

Page 9 8B13M068

EXHIBIT TN-3: CMG ACTIVITY SYSTEM

Source: Created by author.

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