Lecture 5: Carmax

Question 1

How do you come up with ideas for innovative strategies?

Answer 1

1. Analogies (CarMax)
2. Design Thinking
3. Blue Ocean Strategy

Question 2

Where might there be economies of scale across CarMax’s operations?

Answer 2

1. CarMax has outlets which are much bigger than the norm in used car sales
2. CarMax seems intent on growing large

Question 3

What’s a key strategy of CarMax?

Answer 3

non-negotiable pricing, which means that they end up selling 3-5% above the traditional car dealers, who are prone to haggling!

Question 4

What causes increased costs in CarMax’s operations?

Answer 4

CHOICES / OUTCOMES INCREASING UNIT COSTS

1. Professional buyers (training)
2. Spend on car checks / guarantees 
3. Spend on IT
4. Better outlet locations

CHOICES / OUTCOMES DECREASING UNIT COSTS
1. Superior inventory turn – Spread fixed costs over more
cars sold
2. Outlet scale – Spread fixed costs
3. Overall company scale – IT, advertising, central overhead

Question 5

What causes reduced costs in CarMax’s operations?

Answer 5

CHOICES / OUTCOMES DECREASING UNIT COSTS
1. Superior inventory turn – Spread fixed costs over more
cars sold
2. Outlet scale – Spread fixed costs
3. Overall company scale – IT, advertising, central overhead

Question 6

How does CarMax drive value creation?

Answer 6

1. Much Improved customer experience drives up CV
2. Scale economies drive down SC
3. Data/analytics maximise volume, drives down SC

Dual value creation advantage:

HIGHER CV, LOWER SC

Question 7

What is a dual value creation advantage:?

Answer 7

HIGHER CV AND LOWER SC

Question 8

What are the routes to creating value?

Answer 8

1. Lower SC than the competition
2. Higher CV than competition
3. Lower SC and Higher CV than competition

Question 9

The Efficiency Frontier consideration

Answer 9

Are we operating on the efficiency frontier?
– Trade-off between more cost and more differentiation

Can we refine the model? Push the frontier out even further?
– Technology is often an enabler in achieving this

Question 10

How does carmax drive value capture?

Answer 10

A. Smart positioning

1. Selects late-model, low mileage cars
2. Segment dominated by new car dealers who need to make a profit so keep prices up (i.e. lower rivalry)

B. Smart pricing

1. Optimised pricing (minimizes value capture by buyers and suppliers)
2. Take advantage of inefficient ‘average pricing’

C. In-house auctions avoids giving value away to (dominant) auction firms
1. Smart versus other wholesale players

Question 11

Managers are naturally biased by

Answer 11

1. surface similarity

2. ideas getting anchored in their minds 3. justification from confirmation bias

Question 12

Analogies can be very useful:

Answer 12

1. powerful way of coming up with new business ideas/options
2. naturally accrue the potential to spot analogy-based strategies as their
   experience develops

Question 13

But analogical thinking can go wrong:

Answer 13

Big risk that management teams get seduced by the lure of an analogy- based strategy

Question 14

What’s the concept of design thinking?

Answer 14

1. A structured process for innovation
2. Design thinking involves a three-stage process inspiration, ideation, implementation
   – Highly iterative
3. INSPIRATION
4. IDEATION
5. IMPLEMENTATION

Question 15

What happens in the inspiration phase of design thinking?

Answer 15

The inspiration phase is based on a ‘thorough understanding, through direct observation, of what people want and need in their lives and what they like or dislike about the way particular products are made, packaged, marketed, sold and supported’

The direct observation of customers/potential customers is viewed as a ‘human- centered design ethos’

Implicit idea is that identify current problems or dislikes is great way to uncover innovation opportunities

Question 16

What’s the implicit idea of design thinking?

Answer 16

Identifying current problems or dislikes is great way to uncover innovation opportunities

Question 17

What happens in the ideation phase of design thinking?

Answer 17

The ideation phase involves designing a solution to address these opportunities via
– ‘Endless rounds of trial and error’ (p1)
o Enables ‘learning from each iteration’
– ‘Brainstorming and rapid prototyping’ (p3)
o Goal of prototyping is ‘to learn about strengths and weaknesses of the idea and to identify new directions that further prototypes might take’

Question 18

What is not design thinking?

Answer 18

DESIGN THINKING IS NOT

1. Incremental innovation (doing what we do now but better)
2. Creative genius: sudden breakthroughs

Question 19

What is the idea of Blue Ocean strategy?

Answer 19

Don’t think with the current limitations of the market but imagine a novel strategy with no direct competitors!

Red Ocean competition is when its harder and harder to make good returns due to increasing competition.

Blue Ocean strategy allows you to think out of the box and innovate resulting in much larger returns.

Question 20

What are the supporting ideas of Blue Ocean Strategy?

Answer 20

1. Innovative strategies rarely rely on technological innovation
2. Incumbents frequently come up with innovative strategies
3. Need to ‘break free’ from thinking in terms of existing companies and industries

Question 21

Why is the is the blue ocean strategy important?

Answer 21

Being first with the new strategy allows the pioneer to build up barriers to imitation

Question 22

Example of Blue Ocean strategy

Answer 22

1. Cirque du Soleil

kept only some elements from circus, revolutionised some others and became distinct