CarMax: Sales Revolution Through Innovation

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Table of Contents

Introduction
CarMax
CarMax Strengths
Challenges
Conclusion
References

Introduction

It takes genius to establish a company from scratch and to turn it into a business leader within a decade. The leadership at CarMax did just that. They founded a company based on retailing concepts adopted from other sectors and successfully built a well-respected used car dealership. The company is a good case study on what focused leadership can achieve.

This paper explores how CarMax innovated on its operation by adopting strategies used in other sectors of the economy to revolutionize the sale of used cars. This chapter focuses on the role of Human Resource, Innovation and organizational culture in organizational leadership. By looking at these three elements, it is possible to decipher CarMax’s, business strategy, its challenges, and future prospects.

CarMax

The success of CarMax brings to mind similar success by Wal-Mart, which revolutionized retail with innovative concepts. Wal-Mart sought to alter the customer experience when buying goods and therefore developed an ingenious system allowing for a very efficient inventory management system supported by a counterintuitive marketing model.

Wal-Mart went for rural markets that did not have the “superstore” experience. However, the rural areas could provide sufficient markets. CarMax entry into the used car market did not worry many of the used car dealers at the time. However, nineteen years later, CarMax boasts of pride of place among not just used car dealers, but amongst the very best companies to work for in the United States.

As one of the Forbes “100 best companies to work” for five years straight, CarMax indeed is testament to the place of ingenuity in business based on solid research and headed by focused leadership. Its innovative model warrants study to determine the place of leadership in an organization.

CarMax has over 15000 associates in over 100 stores spread throughout the United States (CarMax, 2011). Latest reports indicate that they have plans to open up at least ten more stores in the coming year. This expansion will seek to leverage on the emerging market for used cars because consumers have more confidence in buying used cars through CarMax compared to the traditional used car dealerships.

The cornerstone of CarMax business is customer service based on a robust business system. The founders of the company successfully defined a new way to sell used cars and made the experience of buying used cars much less frightful for buyers.

They removed the barriers that made people fear buying used cars such as haggling over prices, risk of getting poor quality cars with no clearly defined recourse for the buyer, insurance, financing among others. CarMax literally revolutionized the buying and selling of used cars.

In order to reduce the stress of pricing, CarMax uses fixed prices for all their cars. All the customers are sure that the price on the sticker is the price of the car. This relieves both the sales associates and the client of price related worries that come with ordinary used car buying experience.

CarMax pays a fixed commission on unit sales to the associates thereby eliminating the pressure on them to push the pricier cars. The associates can therefore concentrate on providing the customer with support to get the best car for their needs than on getting them to buy the most expensive cars in the yard. This ensures that the cars sold respond to real demand rather than being a reflection of the selling prowess of the sales associates.

CarMax also offers a wide inventory usually consisting of more than 500 cars in a single store (CarMax, 2011). This inventory surpasses the total annual sales of some dealerships. The decision to maintain this level of inventory makes it possible for the client to have variety at any CarMax store.

In addition, the outlets maintain an inventory showing the brands of cars available regionally hence if the client wants a car not present in a particular store, CarMax can arrange for its transfer to the client at a fee.

In addition, the company arranges financing and insurance making it possible for a client to walk in and leave with a car in a few short hours. They offer a five-day money back guarantee (CarMax, 2011). If within the five days after purchase of the car the client feels that the deal is not proper, the client can return the car and get back their money with no questions asked. In addition, the company offers a 30-day warranty on all cars sold.

The offers makes the company stand out because normally, used car dealers sell cars on ‘as-is’ basis. Many of them do not have a refund policy, unless mediated by regulators, and they do not provide any kind of guarantee on the cars. The employment policy of the company does not lean towards experienced used car sales people.

In fact, the company prefers to employ inexperienced persons whom it takes through a two-week training program to enable them sell the cars. They look out for presentable people who are apt to listen and are able to win the confidence of potential clients.

Selling cars is one-half of the operations of the company. CarMax buys cars in order to resell them. It buys them either from individuals or in bulk from organizations getting rid of their fleets. It makes an offer for a car in as little as 30 minutes and the offer stands for up to seven days, allowing prospective sellers to weigh their options.

This is similar to their stress free shopping policy it extends to buyers. The organizational culture does not support pressure tactics in any of its operations. There is however disquiet that it offers lower prices than a seller can get from other buyers.

In this case, the benefit they offer is that it is less stressful to deal with CarMax even when they are offering a lower price for the car than most other sellers are. For people who value that, CarMax is a good business partner.

The current head of CarMax is Thomas J. Folliard who has been in charge of the company since 2006 (CarMax, 2011). He is a long-term employee of the company who has worked in various departments since its inception in 1993. Folliard has a motivational leadership style crucial for a sales driven entity.

His appointment as CEO shows that the company recognizes the value of transition planning and has a robust system to allow for internal development of talent (Burns, 1979). It also shows that the company appreciates that the business is innovative hence; it requires someone familiar with its organizational history and steeped in its organizational culture to run it profitably. This increases consumer and investor confidence.

CarMax Strengths

CarMax has some definite advantages in used car dealership segment. Among these, there is the national presence of the company, the strong brand image, its reputation for superior customer focus and its well-optimized business model that matches inventory with demand.

A national presence is an asset for the company because it increases the visibility of the company. Its nationwide operations make it work as though it were one large store, at least regionally. A client can get whatever car required provided it is available in one CarMax store within the region (CarMax, 2011).

This increases sales volumes and makes inventory management much easier than for individual dealerships. In addition, the size of the operations makes it easier to analyze demand trends, which influences how the company acquires new stock.

It is clear from previous analysis that the optimization of the CarMax business model covers all fronts. In particular, maintaining the critical balance between inventory and demand ensures it has healthy turnover ratios. This limits the quantity of dead stock and increases the ability of the company to respond to shifts in consumer demand at short notice.

Other elements that demonstrate this balance is the ability of the company to provide guarantees to its customers. Guarantees on products only come with a clear understanding of how the products move and the proper management of their quality. Offering guarantees without a strong quality and inventory management system, a business unit risks collapsing based on the possible costs associated with returned stock.

CarMax is a strong brand. Apart from originating a very innovative business concept, it has also managed to provide services at a level that has given it positive visibility. The accolades that contributing to the company’s strong brand image includes the recognition by Forbes magazine as “America’s Most Admired Company in Automotive Retailing” and in addition, the company has consistently been on Fortunes list of “100 Best Companies to Work For” since 2005.

This is good publicity, which speaks of the brand strength of the company and which, also enhances the brand image. Its unrivalled business system guarantees its place in the used car segment of the automotive retail industry.

Without doubt, CarMax is a customer-oriented organization. Its business system does not focus on the bottom line only but focuses on the customer experience while dealing with it. This is probably its greatest strength and its key selling point because a satisfied customer shares their experience with other people, who become potential customers.

CarMax seems to offer everything that conventional used car dealers fail to offer, except the cars. They understand that they are not just selling cars, but are providing an experience for their clients. This is revolutionary.

Unlike profit-focused, commissions-chasing conventional car salespersons, CarMax sales associates come out as trustworthy, well trained, and presentable. They have the requisite training in the business system that they form part of and in addition, they work in an environment that stresses customer satisfaction.

Challenges

The most serious challenge that CarMax has is getting good quality cars to put on sale. In as much as the core business of the company is the selling of used cars, the quality of used cars bought by the company present a serious risk to the business both in terms of customer satisfaction and in terms of cost. The company cannot lax in any way when it comes to inspecting the cars bought for resale. Poor quality cars may lead to high refurbishment costs and eventually high resale prices, which may out-price the market.

The company risks turning its employees into robots acting in specific ways because of the high level of optimization so far achieved. While this works perfectly for innovative business models, it also brings about the risk of aversion to innovation. In the long term, it can kill the business because the entity must continually evolve (Murthy, 2007).

It may lead to loss of employees who no longer feel challenged and consequently, a pool of staff unsupportive to change will emerge. This means that the company must remain vigilant during promotions to ensure that the people who hold supervisory roles are supportive of change and accommodative to new ideas (Murthy, 2007). The way to ensure long-term success is to retain the most innovative people in the ranks since the CarMax business model is inherently innovative.

One of the things that may erode the brand image because of unresolved poor customer experiences is class action against the company. As a used car dealership, there is possibility that some of the cars that pass through CarMax have certain defects that the company cannot detect or solve.

If these defects are not declared in advance, a recourse action established in advance, the result can be a pool of unsatisfied customers. If they come together to sue the company, the corresponding publicity may lead to erosion of the brand’s image and subsequently loss of market share.

In light of the mission of CarMax which is ‘To provide our customers great quality cars at great prices with exceptional customer service’, CarMax must do everything in its power to ensure that the challenges it faces does not weaken its efforts to achieve the mission.

CarMax must ensure that its quality control procedures work perfectly because it is the business’ lifeline. Ignoring quality in the business processes will effectively derail the organization’s mission. On the second issue of innovation, the company stands on a foundation of innovation. Its business processes are very innovative and therefore it requires innovative people throughout the system to maintain and improve it.

The risk of class action threatens to rob the company of its brand image. In this case, the company must ensure that it communicates as clearly as possible to all its clientele on the possible defects in the cars it sells and all other business terms to reduce the risk of lawsuits. In the case that they come about, the business must handle them as amicably as possible to ensure it retains the confidence of present and future clients.

CarMax needs to devote its attention to some three areas that are likely to influence its leadership position in the automotive retail sector. They include mainstreaming innovative practices, strengthening quality control and maintaining the obvious strength it possesses in customer service.

The underlying aspect in the organization culture of CarMax is innovation. The business model is innovative blending aspects that other businesses such as Wal-Mart demonstrated. It amalgamated careful research in testing and establishing the model as viable. Its implementation was also very innovative, ensuring that all the stores offered the same standard of service.

If the company loses this innovative edge because of highly streamlined operational process, it risks losing this aspect of its organizational culture (Murthy, 2007). This recommendation requires the alignment of the HR policies of the company towards innovation.

The second recommendation is that in light of the focus on quality that the company works with, there are risks associated with deteriorating quality standards. Quality standards keep changing towards a more stringent stance by both regulators and by market forces.

The company must remain on the forefront of developing acceptable quality standards in all its operations to ensure that it remains reliable as a provider of quality products and services. A possible approach towards ensuring that quality standards remain high is adapting the kaizen practices popularized by Toyota that among other things, stresses on continuous quality improvement.

The third recommendation is that the company must do everything in its power to ensure that it maintains a good public image at all times. The Harvard Business School ( 2005) encourages every organization to leverage on the key aspects of growth to take advantage of the strategic position provided by its sources of competitive advantage.

With growth, there is always the risk of suits and claims of dissatisfaction among customers. The process used in handling complaints must have the robustness required. As the company expands, a proportional expansion of its services must be part of the company’s policy.

Conclusion

The CarMax case shows that despite the success of an organization at any point, there is always a clear need to maintain an innovative edge in business practices to maintain competitive advantage. The role of innovation comes out very clearly in the case of CarMax that now boasts the pride of place in the automobile retail sector.

The challenges identified prove that despite success, it is very risky for a business to slacken because it may lead to a loss of competitive advantage. CarMax has a good standing now. It has no assurance that things will always be like that. It should achieve greater heights in its business if the management remains focused on the company’s vision.

References

Burns, J. M. (1979). Leadership. New York, NY: Harper & Row.

CarMax. (2011). Carmax. Web.

Harvard Business School. (2005). Strategy: Create and Implement the Best Strategy for Your Business. Boston, MA: Harvard Business Press.

Murthy, C. S. (2007). Change Management. Mumbai: Himalaya Publishing House.

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