Xiaomi joined the highly competitive mobile industry in 2010 without ever releasing a physical device. Only a free Android-based operating system was available from the business (OS). Xiaomi, on the other hand, is one of the world’s leading handset manufacturers in only seven years, with a turnover of $15 billion. Xiaomi accelerated its development rate and became the world’s largest commercial IoT (Internet of Things) company by 2020, with sales exceeding $37 billion and over 210 million IoT products (excluding smartphones and laptops) sold in more than 90 countries.
How did Xiaomi achieve such rapid growth, and what would other businesses benefit from Xiaomi’s success?
We pursued answers through a multi-year investigation into the company, which included in-depth interviews with 12 top executives (including cofounders, chairman, CEO, president, senior VPs, and executives in charge of R&D, delivery, and marketing), as well as the founder and CEO of Smartmi, Xiaomi’s largest ecosystem partner. In addition, we analysed over 100 hours of communications and reviewed over 5,000 Xiaomi documents (from 2010 to 2020) as well as 470 external publications and data sets as part of our investigation.
We discovered that the key to Xiaomi’s success is what we call “strategic coalescence.” The Latin terms co (“together”) and alescere (“to grow”) are the origins of the term “coalesce.” As a result, strategic coalescence applies to a phase in which a company establishes close ties with demand and supply-side partners, bolsters real gains for both, and sparks rapid business development. Let’s start with an overview of Xiaomi’s strategic coalescence.
Cooperation with customers
Xiaomi broke into the first country, China, by giving away a free mobile operating system named MIUI. At the period, many strong domestic (e.g., Huawei, Lenovo) and foreign (e.g., Apple, Samsung) players were vying for market share in every tier of the market, from budget to luxury. Most Chinese smartphone manufacturers simply installed the Chinese edition of Android with little customization.
Instead of going head-to-head with Apple, Xiaomi courted tech-savvy mobile consumers by providing free apps and creating a full-fledged online forum to connect with them and learn which features they wanted and hated. This group of customers was ecstatic to receive such personal attention from a software company, and they were eager to participate and provide feedback.
Every Friday afternoon, as its tech-savvy customers were going home for the weekend, Xiaomi launched a new OS update for download. Its engineers responded to user requests as soon as they were sent, often communicating with users to jointly fix problems. Without investing resources on conventional ads, this co-development process increased Xiaomi’s brand image and likability, as well as primed a segment of potential customers for the launch of Xiaomi’s mobile.
Xiaomi positioned itself as delivering “top technology at an inexpensive price” when it launched its first phone in August 2011. It sold directly to customers from its own platform, at a profit of less than 5% — the industry’s tiniest margin. Xiaomi was able to cut out all intermediaries — the several layers of global, regional, and local wholesalers and retailers, each of whom paid a markup — thanks to its clear interaction with tech-savvy customers. Its direct-to-consumer strategy resulted in a major cost benefit — the phone’s feature-to-price ratio was much better than everything else on the market — as well as a faster time to market for Xiaomi.
Demand outstripped demand to the point that the company could only open its e-commerce portal once a week, and supplies always sell out in minutes. The frequent and near-instant sell-outs sparked social networking frenzy, exposing the company to a larger public and increasing demand.
Organizing operations to focus on the most important value proposition
Xiaomi continued to spread into other markets, including customers who were less computer oriented and those who lived in smaller towns, after establishing a foothold in the tech-savvy, value-conscious market in the top cities. All of these customers chose an in-store shopping experience because they wanted to speak with a salesperson or see a presentation.
Xiaomi developed an offline shopping system to service these potential clients, opening hundreds of stores around major metros and small towns. Unlike other mobile manufacturers, which set up shop on “telecom lane” (a street devoted to telecom stores), Xiaomi chose high-traffic areas, such as malls, where its current target customers were expected to shop.
Xiaomi selected malls where current “high value at a fair price” anchor stores might support its own placement. It also began selling separate sub-brands (Redmi for more affordable phones and Mi MIX for more specialised techies), always ensuring that each new phone’s features-to-price ratio was better than competing models.
To summarise, Xiaomi’s initial emphasis was on rapidly establishing a broad mobile user base through value-seeking consumer segments, as well as a sufficient on- and offline logistics platform, thus maintaining its promised low hardware margin. It was able to produce huge amounts as a result of this. Xiaomi increased the share of wallet of this large and increasing user base by offering higher-margin post-purchase services (commissions on music, film, and gaming purchases), which helped the company achieve profitability. Xiaomi’s subsequent IoT efforts were built on these foundations.
Taking advantage of coalescing synergies
Synergy of IoT in the Home
Xiaomi started introducing items that could be connected to and operated by its phones, using their smartphones as a “omni-remote control” (such as, TVs, air conditioners, air purifiers, smart lamps). Xiaomi found investors that could help the company rapidly grow its IoT services, in addition to producing its own devices. Since the partners’ devices were based on Xiaomi’s IoT protocol, they were simple to incorporate into Xiaomi’s in-home framework. As a result, after customers purchased their first Xiaomi IoT phone, they were more inclined to check out other Xiaomi devices. In other terms, entrants in the IoT segment found it more difficult to entice consumers away.
Synergy of Design Aesthetics
To improve the relationship between Xiaomi and its consumers, the company made sure that all Xiaomi-branded IoT devices, even those made by ecosystem partners, had a consistent design aesthetic. As a result, if a customer bought another Xiaomi device, it would be more aesthetically compatible with the Xiaomi items they already had, resulting in convergence by style consistency and visual gestalt.
Synergy of Product Portfolios
The high and ever-increasing square footage expense, particularly in prime locations, is a major challenge for offline distribution. Non-smartphone items (including those from partners) could see far better profits than smartphones, rendering offline shops more financially viable. Furthermore, selling a range of items in stores drew customers that were not directly shopping for smartphones, allowing Xiaomi to market its smartphones and, more broadly, its whole collection, while also increasing cross-selling opportunities.
Additionally, a larger merchandise portfolio that included products with shorter replacement periods (such as exercise bands and smart light bulbs) resulted in increased foot traffic, which led to more unplanned sales and cross-selling opportunities in the shop.
Synergy through several channels
Xiaomi used online sales data and insights to determine which items to market offline and how to refine the product selection at the retail level in order to increase returns on its brick-and-mortar shops. Demonstrations for more experiential goods (such as vacuum cleaner robots or AI speakers) were offered in offline shops, pushing prospective buyers down the decision process where the presentation could either cement an imminent transaction or nudge the buyer into a later online purchase. From offline to internet, the latter offered additional multichannel synergy.
These four synergies came together and boosted each other’s effect. As a result, Xiaomi has been able to lure an increasing number of prospective consumers to its shops (rather than those of mobile competitors) and increase the probability of them making sales inside Xiaomi’s ecosystem. Customers frequented Xiaomi shops and purchased several goods as a result of this, resulting in accelerated acceptance of Xiaomi’s IoT devices.
Collaboration for others
Xiaomi introduced a unique mechanism for defining and forming relationships to successfully extend into categories outside of Xiaomi’s experience and bolster the four synergies. This resulted in the following benefits:
Xiaomi cofounders and top executives hand-picked partners via their personal networks. Xiaomi executives knew everything there was to know about each partner because of their intimate personal relations. They were able to determine the chances of partnership results through understanding the management team’s strengths and principles.
Xiaomi executives is well linked to every partner’s social network as a result of using personal networks.
If any partners underperformed or broke the relationship arrangement, they will suffer an immediate and direct reputational expense, making it more difficult for them to use their social network for future business ventures, which is a critical success factor in the Chinese business sense.
This social cost added to the economic reward for collaborating, increasing the chance of achievement. This cherry-picking strategy has its downside, as it restricted the amount of possible partners from which Xiaomi could choose. In the case of Xiaomi’s IoT transformation, though, the company’s executives felt the benefits outweighed the drawbacks.
Xiaomi made an investment in the partner companies but did not take ownership of them. Although the investment came with a chance, it also yielded considerable rewards.
Contact and confidence were improved as a result of the “co-owner” arrangement. Xiaomi was able to learn about each partner’s cost structure and processes, as well as take part in their strategic decisions. Since the bulk of the stock was already owned by the partners, they were inspired to create and market profitable goods.
Xiaomi gained from the gains and success of its affiliate companies as a member. Simply stated, this type of co-ownership gave both Xiaomi and its partners a win-win situation.
Xiaomi deliberately chose small and startup businesses so that working with Xiaomi would provide tremendous benefit to them.
These companies specialised in a particular commodity segment, which implied they had a better chance of making great goods. One of the most valuable benefits Xiaomi provided to its partners was “incubation”: It aided them in R&D by sending teams of its own developers in, and it supported them in identifying main vendors and negotiating contracts. In comparison to a “nobody” startup, Xiaomi’s investment and organisational presence increased brand recognition and reputation, causing vendors to be more likely to give better terms to partner companies.
Xiaomi safeguarded the consistency and price attractiveness of their finished goods by ensuring that partner companies had access to solid prototypes and using quality inputs at a fair expense.
Xiaomi was able to successfully leverage the partner network and sell an ever-expanding range of goods that were compatible with the Xiaomi brand in terms of style, aesthetics, pricing, and technology/price ratio thanks to these approaches. Xiaomi’s collaboration with investors paved the way for the company to become a major IoT powerhouse.
Xiaomi’s strategy deviates from traditional military analysis. Xiaomi is obviously an outlier, since we are always told that a company’s approach should be dependent on either cost leadership or distinction, and that it should satisfy either a few needs of a wide segment or broad needs of a narrow segment. It was able to distinguish itself on many fronts while still achieving cost leadership. It did so by forming strategic alliances with customers and partners, which erected and continually strengthened barriers to entry on both the demand and supply sides. This long-term strategic advantage propelled Xiaomi ahead at breakneck pace.