CarMax: business model and operations analysis

Carmax

Case Discussion

CarMax has enjoyed a good run of success, and at 2% it has the largest share of the heavily-fragmented used car market. The macroenvironent conditions have been kind to CarMax. All major competitive threats have fallen by the wayside, leaving CarMax as the largest player in the market, and there are no major competitive threats on the horizon. Even though there are a few other larger used car dealers, there is plenty of room for growth in this market. Furthermore, the company benefitted from the recession, which allowed it to grow as consumers traded down their new car ambitions for used car solutions. Thus, the external landscape is predominantly positive for continuing growth, as CarMax can poach existing share without worrying about the health of the used car market overall.

Looking at Porter's five forces, CarMax has pricing power over customers, because it removes many of the barriers to shopping for used cars. What it does not have is significant pricing power over sellers, who can sell to any number of used car lots. There are no major barriers to entry to this business, so if CarMax becomes too successful, that might attract the attention of significant competitors. But as yet, intensity of rivalry is minimal in this business. While there is threat of substitution from new cars, there is substantial share available to CarMax so this threat is not going to affect its ability to grow going forward.

The current corporate strategy is to compete against other used car providers by removing a lot of the haggling and uncertainty that normally accompanies the purchase of a used car. By removing risk for the consumer, CarMax wins business away from other used car lots. That reduction of risk is a key component of the value chain that differentiates the CarMax business from other used car dealers, who otherwise have the same value chain.

CarMax presently has the resources that it needs to grow. It is beginning to build a brand name; while not a household name, it has a decent presence in a number of American cities and has been in business for many years at this point. Financially, CarMax has enjoyed strong gains in both revenues and net income over the past several years, something that has allowed the company to build its balance sheet. With ample financial resources, a good management team and a growing brand, CarMax has the right assets in place to continue its growth trajectory going forward.

Recommendations

It is recommended, first and foremost, that CarMax continue with its current strategy. The company is a differentiated provider, offering both brand name and risk reduction to consumers in the used car market. This differentiation has allowed CarMax to grow rapidly over the past several years at the expense of existing players -- as the case notes, CarMax is the disruption in the market. So what they are doing is working and in broad they should continue with that strategy.