CarMax Inc.: Disrupting the Used-Car Market – Case Solution

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CarMax Inc.: Disrupting the Used-Car Market Case Answers

I. Six-Segment Analysis – Threats and Opportunities for CarMax Inc.

The automotive retail industry, to which CarMax Inc. belongs, has the potential for growth as the economic recovery, population growth, urbanization, and potentially global markets all increase demand for cars, both used and new.

However, the industry is threatened by the sociocultural shift to environmental consciousness, which, combined with the increasing cost of gas, has resulted in an increasing demand for alternative methods of transportation (See Exhibit 1 for a thorough analysis). Further, technological advancements may become a threat. (See Exhibit 4).

Online car sales could erode profits as CarMax becomes increasingly like Barnes and Noble to Amazon. Just as customers scan books in Barnes and Noble and then purchase them for cheaper on Amazon, customers can test-drive the vast selection of cars CarMax offers and then buy online at a cheaper price since online markets have lower overheads than dealerships that have to rent/buy dealer lots.

II. Industry Analysis – Five Forces Analysis and Value Net for CarMax Inc.

A Five Forces Analysis shows that the automotive retail industry is unattractive. (See Exhibit 2 for a thorough Five Forces Analysis).

The fact that CarMax Inc. is able to earn above-average returns in an unattractive industry and was the only automotive company to post profits during the 2008 economic crisis clearly reflects that CarMax has many competitive advantages.

The biggest question is whether this success is sustainable, given the availability of substitutes and the sociocultural shift that favors eco-friendly alternatives.

CarMax could potentially eliminate the threat of substitutes by exploiting potential cooperative interactions in the industry. The automotive industry could join forces to lobby for favorable legislation that would hinder the development of substitutes.

Also, as companies such as Tesla try to sell directly to consumers, CarMax could work with other retailers to lobby against direct-to-customer sales. One argument they could pose is that manufacturers cannot guarantee consumer safety.

III. Strategic Group Within Industries and Barriers to Mobility

As shown in Exhibit 3, CarMax occupies a niche in the used-car market. Dominating 2% of market share in used car sales, CarMax “sold more used cars than the next two largest competitors combined.”

Within that already very niche market, CarMax occupies the niche of used cars less than 5 years old. This niche sees the most profit margins since cars are still in good condition, thereby leaving the low-profit-margin, poor-condition used cars for its competitors.

Mobility barriers prevent other firms from entering the used-car market. One substantial mobility barrier that exists is CarMax’s reputation. CarMax entered the used-car market when there was a fragmented competitor base, dissatisfied customers, and a prevalence of mistrust.

CarMax quickly quickened the car purchase process by eliminating the finance manager, making prices non-negotiable, making credit available to qualified buyers within 10 minutes, and making it easier for customers to trade in their used cars.

Having established such a track record, CarMax has built a positive reputation, as demonstrated by its 90% approval rating in in-store satisfaction surveys. It also has established relationships with a wide network of suppliers and customers.

When copycat competitors such as AutoNation Inc. tried to enter the used-car market, they could not compete with the early-mover advantage CarMax had already established.

Further, the company is far ahead of the learning curve in terms of productivity and reconditioning. Other companies cannot drive the cost of reconditioning any lower than CarMax already has. CarMax’s early mover advantage and learning curve explain why all companies that tried to enter the market eventually left.

IV. Value Creation

Due to its large economies of scale, CarMax is able to drive down operating costs, thus creating value.

At the same time, the company does not compete solely on the basis of price since that would be a race to the bottom in an industry that is highly price competitive.

Instead, CarMax also creates value through increased benefits. Benefits include…