CARMAX RESEARCH PAPER Case Solution

Functional Level Strategy

The explicit functional level strategies include the enhancement of the company’s operations by applying geographical expansion strategy along with opening of various auto superstores. Moreover, in order to carry out the desired task the company needs to train and hire many employees and also to retain its old employees. The implicit functional strategies for CarMax should be based on performing digital media and social media marketing campaigns in order to entice local customers in creating communication and interaction with the company. The exhibit 1 shows the growth in new car sales in the United States for the year 2012. Therefore, CarMax should invest heavily on new car selling business as currently it has very limited market share in the particular market.

Industry Analysis

General Information

CarMax is the largest retailer for used cars in the United States while operating in two different segments which include CarMax Sales Operations and CarMax Auto Finance (CAF). The former segment consists of auto merchandising and providing service operations to its customer, whereas, the latter segment consists of providing finance through CarMax superstores. The company is a pioneer in providing the used car buying and selling services in the country by opening its first store in the year 1993. As per 2013, the total revenues of the company were $11 billion while the company sold more than 780,000 vehicles. The highest percentage of vehicles sold amongst the total sales included 448,000 retail used vehicles, while 325,000 vehicles were sold through wholesale at auction (CarMax, 2013).

Porter’s Five Forces Model

Threat of New Entrants

Since the auto retail industry is capital intensive and requires high start-up cost, therefore, the barriers to entry are high. The auto retail companies have large well-appointed showrooms along with contracts with manufacturers in order to sell their used cars. Since the size of showrooms and quality vehicles present at the retail allows companies to differentiate and stand-out from the rest of the crowd. These companies have to serve nationwide which requires a huge supply chain network which cannot be fulfilled by a small competitor.

Threat of Substitute

The substitutes for large auto retailers of used cars include new vehicles manufacturers and consumer-to-consumer (C2C) sales of used vehicles. Tesla Motors uses the strategy of direct selling through internet and also through dealers which makes a unique combination to sell its electric vehicles. Through eBay Motors and Craigslist, customers are well aware of the used vehicles due to internet. The threat of a substitute is moderate.

Bargaining Power of Buyers

There has been an increased bargaining power of buyers due to the easier availability of information and prices for used cars through different websites which include Edmunds.com, Kelley Blue Book, along with other companies. Since low price offers are available on the internet and easily be compared, therefore, there is a threat of low profit margins for dealers and retailers. Moreover, buyers have various options to choose from variety of companies, independent dealers, and independent individuals.

Bargaining Power of Suppliers

The suppliers in the particular industry are suppliers of vehicles, salespeople, technicians, and advisors. The labors who are employed by the retailers include salespeople and advisors as they have low negotiation power since no specific qualification and skills are required for the particular occupation. However, mechanics have higher negotiation power because they are often certified and are working in dealers’ service center. Therefore, the overall bargaining power of supplier is moderate.

Competitive Rivalry

The US used car industry is highly competitive as there is a presence of 17,800 franchised dealership in the country for both new and used cars. Moreover, apart from that there are independent used car dealers with an approximately 37,900 dealers as of 2012, while there are millions of private individuals who want to sell their cars on personal level. According to a research, the total number of used cars sold in the US were approximately 38 million for the year 2012, in which 13 million of those cars were late-models between 0-6 years old, while 21 million for 0-10 years old (CarMax, 2013). However, there are few companies which are operating in the national scale which include AutoNation, Penske Automotive Group, Group 1 Automotive, CarMax, and few others.

SWOT Analysis

Strengths

According to the annual report of CarMax in 2013, the income of CarMax Auto Finance had increased by 14% to $300 million, while the loan portfolio of the company had also increased to $6 billion until the end of 2013. Furthermore, the net earnings per share also increased by 5% to $1.87 or $434 million (CarMax, 2013). The core competitive advantage of CarMax is based upon providing exceptional customer service through continuous improvement. Since CarMax is the largest retailer of the used car in the United States, therefore, the company selects the right vehicles and reconditions them in order to meet the company’s high standards. Net sales and operating revenues have been increasing in an ascending order from the past five years, while a change in the increase of sales about 10% in 2013. CarMax has been named by Fortune magazine as ‘100 best companies to work for’. The company has a business model of hassle-free car buying or selling………………………

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