Xiaomi has been a consumer electronic powerhouse for quite some time now. But what a lot of people don’t realize is, they are an IOT powerhouse. They have created an ecosystem thats interconnected. So how were they able to do that?
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How Xiaomi Became an Internet-of-Things Powerhouse
What was responsible for Xiaomi’s exponential growth and what have the other companies got to learn from Xiaomi’s success story are the questions explored in this article.
We all known Xiaomi as one of the leaders in manufacturing smartphones, but surprisingly, Xiaomi entered the aggressively competitive smartphone market without a single phone to sell. While debuting in 2010, Xiaomi’s principal offering to the world of smartphones was a free Operating System for android phones. Within seven years, Xiaomi became one of the largest smartphone manufacturers in the world making $15 billion in revenue. Learning from some interviews with some Xiaomi’s top executives, this article explores the amazing success story of Xiaomi, the winning strategies it adopted and the lessons surfacing from its example for other companies to emulate.
Squeezing itself into the crowd of aggressively competing phone makers, Xiaomi made a bold debut into the world of smartphones in 2010. During its entry, the company did not have a single phone to give the market. It was only providing a free operating system for android phones. Nevertheless, the seven years that followed its launch saw Xiaomi grow from nothing to one of the largest smartphone manufacturers in the world making $15 billion in revenue. In 2020, Xiaomi had become the world’s biggest consumer IoT (Internet of Things) firm with its revenue estimated at $37 billion. Around this time, Xiaomi was selling more than 210 million IoT devices globally in over 90 countries and the list here did not include smartphones and laptops.
The answers to the questions above were sought through a deep study spanning over several years. As part of the study, the authors conducted several long interviews with top 12 executives of Xiaomi with the list including the cofounders, chairman, CEO, president, senior VPs, and executives leading R&D, distribution, and marketing, and also the founder and CEO of Smartmi, Xiaomi’s largest ecosystem partner. The research consisted of analyzing over 100 hours of conversations and a detailed review of more than 5,000 Xiaomi documents (dated in the years 2010–2020) and 470 external reports and data sets.
The authors sum up their findings (known as the secret of Xiaomi’s growth) in the term “strategic coalescence.” Coined from their Latin root word “coalesce” – co (“together”) and alescere (“to grow”), the term strategic coalescence explains the process in which a firm closely links itself with the stakeholders in the realms of demand and supply, promote tangible benefits for all, and steer its way towards an exponential market growth. Here we understand the important components of strategic coalescence at Xiaomi.
Coalescence with buyers
Xiaomi’s first market was China which the firm served with its smartphone OS known as MIUI, which was distributed for free. During those days, a number of both domestic (e.g., Huawei, Lenovo) and global players (e.g., Apple, Samsung) fiercely competing in every level of the market from economy to premium class products. The popular route pursued by most Chinese manufacturers was simply tweaking in the Chinese version of Android on their smartphones after customizing it a bit.
Not willing to wage a head on battle with the established players in the industry, Xiaomi invented a shrewd technique of enticing the tech-savvy smartphone users by providing them free software. In this way, Xiaomi could build a huge online community to connect with. This route could also provide the company with enough insights on what the customers liked and what they did not like. The customer base developed by Xiaomi in this way fell in love with the way the technology firm satisfied their technology needs with an unmatchable attention and came willingly forward to contribute their suggestions.
Xiaomi resorted to a regular practice of releasing a new version of OS for free download every Friday afternoon as the firm’s customers would head to their homes for the weekend around this time. Xiaomi’s engineers followed up with the user suggestions immediately upon receiving them. Often they would also collaborate with the users to resolve their issues together. What is known as the co-development process helped grow Xiaomi’s likability and brand awareness. The entire mission helped Xiaomi evolve a segment of potential customers who eagerly received Xiaomi’s phones when they were launched. Thus, the company could find a massive market to its phones without spending a pie on advertisement.
While introducing the first phone in August 2011, Xiaomi was already known in the industry to be offering “quality technology at an affordable price.” The firm also took the route of direct selling to its customers on its website with a small profit margin of below 5%. During those days, this was known to be the thinnest profit margin any technology company would sell its products for. While the company had the advantage of its platform that facilitated engaging with the massive tech-savvy customer base directly, it could successfully keep out all the intermediaries that consisted of wholesalers and retailers in the national, regional and local levels, which would have claimed all their percentages of the profit in every level of the sales.
The direct to consumer strategy adopted by Xiaomi fetched the company a significant cost saving advantage. Xiaomi saw itself selling phones that had favorable features to price ratio than those of the other leading brands. This fact gave a further boost to the speed in which Xiaomi could reach its customers. The demand for Xiaomi’s phones significantly outpaced the production that Xiaomi could open its e-commerce site on only one day per week. Most times, the stocks were sold out within minutes of opening the store. The instant sell outs that became a constant feature gave rise to some social media storms spreading the brand awareness among wider audience which triggered further demand for its offerings.
Coalescing its growth strategies around its fundamental value proposition
During the initial phase of its development, Xiaomi could land on a strong foothold in the tech-savvy and budget focused consumer segment of the top cities. Encouraged by the massive recognition it could garner in this route, Xiaomi eventually expended into other segments targeting customers who were lesser tech savvy and the populace residing in smaller cities. This customer segment was more inclined to offline purchase often requiring the assistance of a staff member with the product demonstration.
In order to serve these new customers, Xiaomi developed an offline retail infrastructure and launched hundreds of stores selling phones across their counters in major metros and small cities. While most smartphone makers preferred their store location at the areas dedicated to telecom stores, Xiaomi chose the, locations with high foot traffic such as malls where the customers would visit with the intention of shopping. Especially, Xiaomi targeted those malls that already had the presence of “high value at a reasonable price” anchor stores that could ably support its own positioning in the market.
The company also started two different sub-brands namely Redmi covering economically priced phone models and Mi MIX that catered to the needs of advanced technology seekers. In any case, Xiaomi always ensured that the features-to-price ratio of each new phone it brought out was more attractive than the other competing products.
During its initial phase of growth, Xiaomi focused on a massive smartphone customer base quickly by working closely with the value-seeking customer segments. This effort went in parallel to the development of an offline and online distribution infrastructure and always promising the lowest margin on its hardware pricing.
This strategy could help Xiaomi bag a massive volume sales. This huge and continuously growing customer base could also help Xiaomi swell its wallet further through a range of higher-margin post purchase services including music, game purchase and videos. As a result, the company could steer its forward move in a profitable way. Thus, Xiaomi had successfully built a strong foundation for its subsequent IoT endeavors.
Building up on coalescing synergies
We can say four coalescing synergies ably supported Xiaomi’s development into the IoT segment.
In-home IoT Synergy
Xiaomi featured its smartphones as an “omni-remote control” device and started offering products that could be controlled by its phones like TVs, air conditioners, air purifiers, and smart lamps. Besides developing its own products in these lines, Xiaomi also invited partners who could support the firm quickly augment the number of its IoT offerings. The products manufactured by its partners could be effortlessly integrated into Xiaomi’s in-home system since they were all built on the company’s IoT protocol. It all meant that once the customers purchased their first Xiaomi IoT product, they would be moved to look out for other products from Xiaomi. The resulting scenario made it difficult for Xiaomi’s competitors to entice the customers away in the IoT segment.
Design Aesthetics Synergy
As a further move to strengthen the bond Xiaomi enjoyed with its customers, the firm made sure that the entire range of Xiaomi-branded IoT products, including the ones offered by their ecosystem partners, featured similar aesthetic and design elements. Therefore, if a customer bought another Xiaomi product, it was possible to ensure that the product had a greater aesthetic congruence with the Xiaomi line of offerings they had already purchased, presenting synergy via design congruency.
Product Portfolio Synergy
One of the challenges that Xiaomi faced with its offline distribution endeavors was the high square footage cost. This was felt more prominently at prime locations. Non-smartphone products including the ones that were manufactured by its partner firms could fetch higher profit margins than the smartphones. Widening its portfolio of offerings sold on its physical stores also meant other advantages than making this venture financially viable. The variety available in the market could meet the needs of customers who were not particularly looking for smartphones. This platform could also provide a newer avenue to promote Xiaomi’s smartphones and give an opportunity to cross-sell the whole portfolio of its offerings. In addition, a broader product portfolio that consisted of items that had shorter replacement cycles such as fitness offerings and smart light bulbs resulted in a higher foot traffic, giving way to more unplanned purchases, further augmenting the cross-selling opportunities at its store.
To optimize the profits ensuing from its physical stores, Xiaomi gained some valuable insights from the online sales data. The analytics could help figure out which were the right products to sell offline and how to land on the perfect product mix on its physical stores. Offline stores also gave room to provide product demonstrations to its customers that could promote the sales of more experiential products like AI speakers and vacuum cleaner robots. Such demonstrations could promote immediate purchases and also nudge the customers to purchase online on a convenient date later. The latter advantage meant augmenting the multi-channel strategy from offline to online.
The four synergies discussed above effectively coalesced together and the result was amplified by each of their impact on the whole system. As a result, Xiaomi could succeed in attracting a larger number of potential customers to throng at its stores when compared to those of its competitors’ stores. The whole mission brought increased the likelihood of purchasing within the ecosystem Xiaomi had thoughtfully evolved. This trend further fueled the sale of Xiaomi’s IoT products, as the customers visiting the Xiaomi stores for different reasons ended up buying multiple items.
Coalescence with partners
For the sake of expanding into product categories that fell outside Xiaomi’s expertise and also to fuel all the four synergies discussed above, Xiaomi innovated a unique process for locating and developing partnerships, which in turn meant some valuable advantages for the company.
The Xiaomi cofounders and the company’s top executives selected the partners through their personal social networks. The intimate personal connections the executives enjoyed with their connections helped them have a strong understanding about the knowledge and capabilities of each of their partners. This fact accounted for Xiaomi to assess the likelihood of the collaboration’s success.
Xiaomi’s executives were also very well connected with the social networks of each of their partners. In cases where the partners performed poorly or violated the terms of partnership, there were immediate repercussions seen in the social network which made it nearly impossible for the partners to do so. In this way, the social network facilitated getting the best out of Xiaomi’s partnerships especially in the context of doing business in China. The social cost also complemented the financial incentive for partnering with Xiaomi, which bolstered the possibilities of successful collaborations. However, there were drawbacks to this cherry-picking approach Xiaomi resorted to. This strategy limited the number of potential partners Xiaomi could bank on. Looking from the company’s IoT transformation, the company’s executives went by the conviction that the pros far outweighed the cons.
Though Xiaomi came forward to invest in its partner firms, it was far from acquiring controlling shares. This kind of investment involved significant amount of risks, however, there were some wonderful advantages too. The “co-owner” model of partnership helped increase the communication and trust. Xiaomi could readily access the information about the partners’ operations and cost structure in addition to participating in their business decisions. Since the partners retained majority of shares, they were fueled by enough motivation to develop and sell products that sold well. In the capacity of a shareholder, Xiaomi immensely gained from the growth of its partner companies and the income they generated. To put it in simple words, the model of co-ownership facilitated a win-win result for Xiaomi as well as its partners.
Xiaomi had its own reasons to select small or startups to partner with because partnering with Xiaomi provided value to them. Most of these firms usually focused on a single product category and this kind of focus meant they were more likely to produce successful products. A very important benefit Xiaomi conferred on its partners canb e described as “incubation”. Xiaomi assisted its partners with research and development deputing its own engineers and also supported its partners in locating the key suppliers and negotiating contracts. The ideas and resources Xiaomi had invested and its involvement with the operations fetched a strong brand awareness and prestige. The result was the suppliers came readily forward to supply on favorable terms to its partners. By ensuring that the partner firms had easy access to successful designs and quality resources at favorable prices, Xiaomi ensured the quality and cost advantage of the final products.
With these thoughtful approaches, Xiaomi could manage its entire partner network enjoying an enviable ability to expand its portfolio of products that were very well in consistency with the Xiaomi brand in terms of quality, design, technology and price. The way Xiaomi conceived the coalescence with its partners laid one another foundation for the company to find its indisputable place as the global leader of the IoT segment.
The route adopted by Xiaomi significantly differs from the conventional methods of strategic thinking. Often we are taught that a firm’s strategy must be built on either cost leadership or differentiation and that it must target meeting either the few needs of a broad segment or the broader needs of a narrow segment, Xiaomi’s out of the hat strategies meant a clear outliner. Xiaomi could successfully differentiate on multiple frontiers at the same achieving cost leadership. Xiaomi could make this phenomenal achievement possible through strategic coalescence, thoughtfully connecting with its consumers and partners. This could bring about building and further fortifying the barriers for its competitors to invade its frontiers both in the demand and supply sides. As a result, Xiaomi achieved a sustainable competitive advantage that catapulted its growth at an exponential speed.
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