Xiaomi - Strategic management PDF

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Xiaomi - Strategic management...

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Strategic Management IB9JA0 Group 4 Yuwei Du (Student ID: 2024230) Junyuwen Huang (Student ID: 2034934) Shruthi Padmanabhan (Student ID: 2087178) Shashank Tiwari (Student ID: 2089637) Ruixi Xie (Student ID: 2091731) Xiaomi Report (2,469 words)

Table of Contents 1. Introduction

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2. External Analysis: Industry and Competitive Environment

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2.1. PESTLE

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2.2. Porters Five Forces

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3. Internal Analysis: Resource Based View

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3.1. Resources and Capabilities

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3.2. VRIN Analysis

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4. Competitive Strategy

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5. Corporate Strategy

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6. Strategic Recommendations

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References

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Appendices

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1. Introduction Xiaomi, founded in April 2010, is one of the biggest multinational electronics company in China. With the total revenue of RMB205.8 billion in 2019, Xiaomi has become the world's fourth largest smartphone manufacturer and youngest company on the Fortune Global 500 list (Xiaomi Annual Report, 2019). Based on its mission, Xiaomi provides smartphones, lifestyle products and internet services at a relatively lower price and tried to maintain its net margin in hardware under 1% (Xiaomi Annual Report, 2019). In recent years, Xiaomi was trying to build an ecosystem with its “5G+AIoT” strategy while facing intensive competition in the smartphone market. This report will analyze the external and internal environment of Xiaomi , competitive strategy in the industry context, and suggest strategic recommendations for future development. 2. External Analysis: Industry and Competitive Environment The external environment will be analysed using the PESTEL Framework (Appendix I) and Porter’s 5 Forces model (Appendix II). 2.1 PESTEL By analyzing Xiaomi’s external environment using PESTEL framework , it can be concluded that following are the factors affecting Xiaomi:

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Political: Xiaomi’s faces a very high risk due to China’s strained political relationship with countries like India, America and United Kingdom.

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Economical: Current economic crisis might be a double-edged sword as customers may incline towards purchasing mid-range budget devices which will benefit a company like Xiaomi.

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Social: Smartphone users are upgrading less frequently due to higher prices and longevity of current devices (Ng, 2019).

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Technological: 5G Bandwidth technology is being rolled out across developed nations.

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Environmental: Xiaomi is committed towards recycling waste and using environmentfriendly packaging materials (Annual Report, 2019).

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Legal: In the last decade, Xiaomi has encountered quite a few patent infringement law suits in countries like U.S and India.

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2.2 Porter’s Five Forces Threat of New Entrants: Threat of new entrants in technology industry is low. Huge capital requirement and achieving the economies of scale required is a very hard task for any potential new entrant. There are also various legal obligations that a company must comply to in order to get into this industry (LawDonut, 2020). Having a widespread retail and distribution network is another important factor which is not easy to attain (Rodrigo, 2017). Bargaining Power of Buyers: Bargaining power of buyers is very high. The smartphone market is highly saturated and competitive as consumers have a huge variety of brands to choose from at every price point. However, this power can be reduced by increasing brand loyalty and cost of switching. Apple is a n example of this as their loyal customer base is hesitant to switch to other brands. (Chernev, 2020) Xiaomi has been trying to replicate this by leveraging their wide spectrum of products and developing their own ecosystem (Xiaomi, 2020) . Bargaining Powers of Suppliers: The bargaining power of suppliers is a weaker force. Xiaomi over the years has built up strong relationship with its suppliers which allows them to negotiate cost reduction (Russel, 2015). It also strategically encourages its suppliers to invest in local manufacturing base in countries like India so they can reduce tariff costs and hence, lower the price of their products (Phartiyal, 2018). Intensity of Rivalry: Intensity of Rivalry is very fierce because of renowned brands such as Samsung, Apple, Huawei and others that have rooted a strong presence in the minds of consumers. In Q3 2020, Xiaomi surpassed Apple in global market share (Appendix III) for the first time (Walker, 2020). Taking into account how the major brands have well established customer base and ecosystems, this is certainly a big achievement. Threat of Substitutes: Threat of Substitutes in smartphone industry is relatively low compared to laptops, tablets and other internet technology products. While a laptop can be potentially substituted with a tablet and vice versa, same cannot be said about smartphone. Smartphone has its own set of unique features and purposes which is hard to replicate in that form factor (Minkov, 2020).

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3. Internal Analysis: Resource Based View 3.1 Resources and Capabilities Xiaomi’s resources and capabilities can be identified as strengths in the points discussed below (Appendix IV and Appendix V): i.

Tangible: a. Brand equity: Xiaomi’s top selling product category is its smartphones and is currently ranked as the 4th best smartphone manufacturer (Appendix III). Its market is $31.5 billion (Forbes, n.d). b. Distribution: Xiaomi distributes its products mainly through its e-Commerce platform (such as Mi.com) and offline stores. By mainly selling on e-Commerce platforms and their website, Xiaomi saves its financial resources for other uses (Xie, 2018). c. Financial resources: “In 2019, Xiaomi exceeded RMB200 billion in revenue for the first time, reaching RMB205.b billion, an increase of 17.7% year-on-year.” (Annual Report, 2019). d. Organisational structure: Xiaomi has a decentralised corporate structure allowing each business unit to maximise efficiency, boost communication in its units effectively as well as increase productivity e. Manufacturing: Xiaomi’s manufacturing is demand-driven to keep intact the production costs i.e., keeping it as low as possible. This strategy to manufacture the products has allowed the company to penetrate into other Asian markets such as India. To ensure the demand-supply relationship is unharmed, the company has built warehouses in Bangalore, India (News Desk, 2018).

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Intangible: a. Sales/marketing know-how: Xiaomi follows the ‘hunger marketing’ strategy (popular in the smartphone industry). It not only follows this specific strategy where it restricts the supply and manufacturing smartphones before the release date to create more ‘buzz’, but also sells it at half the price compared to its competitors such as Apple and Samsung (Yixin, 2015)

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b. Economies of scale: In the 2018, Xiaomi was expected to reach $2b in net profits due to its economies of scale and offering premium products to its customers (Team, 2018). c. Innovation & R&D: When creating products, Xiaomi focuses largely on delivering practical, user-central designs, as well as delivering extreme user experiences. Xiaomi concentrates largely on R&D. It was mentioned that it takes 3 months to test the product before it’s released to the market. They are also known for selling quality products at a near cost price (Xie, 2018). Xiaomi also presents itself a number of weaknesses, namely: i.

Low profit margin: It was noted that Xiaomi’s operating margin was 1.8% (Sun, 2016). Although having a low profit margin is considered a competitive advantage for the company, it limits the research and development required – compromising on the long-term growth plans the company might have.

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Decentralised corporate structure: Having a decentralised structure could lead to the company being less creative, adaptive as well as agile. The company should consider how they can scale in newer segments due to the rising change in consumer demands

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Weak brand perception: Xiaomi products are considered to be the ‘budget option’ rather than the primary option when consumers are considering purchasing a gadget.

3.2 VRIN Analysis The brand, and economies of scale provide Xiaomi with sustainable competitive advantage, while its financial resources and distribution offer a temporary competitive advantage (Appendix VI).

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4. Competitive strategy The mission of Xiaomi is to “relentlessly build amazing products with honest prices”, clarifying its competitive strategy to be the best-cost provider (hybrid strategy). To maintain the advantage, Xiaomi implements two tactics: keeping the low product prices and establishing the sustainable innovation ecosystem. 4.1 Keeping the low product prices Getting the market: When it first entered the market, Xiaomi priced the products at extremely low prices, less than half the price of Apple’s products. The buying power of the smartphone industry in China was quite low at the time, making the price given by Xiaomi attractive, that the company was leading the industry soon (Fangqi, 2015). Build brand image: The low-price strategy is used to the present day - Xiaomi is a brand, not only for those who cannot afford expensive smartphones, but also those, especially young groups, who are traitorous and pursue a new lifestyle with low cost (Fangqi, 2015). In order to emphasize the brand image, the company puts consumers benefits first. Xiaomi also pledges that “the overall net profit margin of Xiaomi’s hardware business will never exceed 5%” and “if the net margin exceeds 5.0%, we will return the excess above 5.0% to our users” (Annual report, 2019). 4.2 Establishing the sustainable innovation ecosystem IoT and lifestyle products: Xiaomi started to build the IoT platform and ecosystem in 2013, not only including smartphones, but also related and lifestyle products. The market share of Xiaomi’s IoT products business exceeded that of Apple and Amazon in 2017 (Hongyu, 2019). Xiaomi’s IoT products are a complete range with low prices, making it achieve a leading position in the industry compared to its rivals who only focus on a single product in the vertical field or products with high prices (Yao et al., 2019). In order to increase efficiency and make things ordered, Xiaomi established a sub brand “Mijia”, in charge of allocating resources, incorporating ecological chain products and managing the ecological order (Xin et al., 2020). 5G+AioT: Combining big data, cloud platform and the AI technology, the IoT development is getting more comprehensive in Xiaomi. It’s now aiming to provide consumers with a more convenient user experience by making the “Xiaomi Empire” customized and getting the household

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products to reach the same level of price-quality ratio as Xiaomi’s other products (Xin et al., 2020). Xiaomi community: Xiaomi successfully built a community where consumers and the brand followers can discuss, give comments and even give ideas to or participate in the corporation’s technological upgrading (Yao et al., 2019). Xiaomi not only established an approachable brand image, but also got access to the data of consumer behavior and captured the new trends of the products. As shown in Appendix VII, the competitive advantages of Xiaomi are enhancing the brand image maintenance and is supported by different activities at the same time. 5. Corporate Strategy Portfolio: Xiaomi’s portfolio consists of three businesses: smartphones, IoT and lifestyle products, and internet services (Appendix VIII). As blockbuster products of Xiaomi, smartphones take up a large global market share and keeps expanding (Appendix IX). Meanwhile, IoT and lifestyle products and internet services are still developing but show a high potential to grow th. In 2019, revenue from IoT and lifestyle products segment was RMB62.1 billion, an increase of 41.7% year-over-year, while revenue from internet services reached RMB19.8 billion, an increase of 24.4% year-over-year (Xiaomi Ltd., 2020). The BCG Matrix (Appendix X) can hence be drawn out in relation to Appendix IX, Appendix XI, and the Annual Report. Relativeness: Xiaomi invested in products closely related to mobile phones, which is viewed as the start of its ecosystem (Cao et al., 2020). Most of Xiaomi’s businesses are electronic products, so Xiaomi can easily transfer knowledge among different businesses, generating synergies to improve overall and individual performance. Xiaomi’s IoT software platform “Xiaomi Vela” works as a hub to link smartphones and other smart devices, so customers can control these devices by their smartphones, enabling Xiaomi to lock customers in its ecosystem. The number of connected IoT devices (excluding smartphones and laptops) on Xiaomi’s IoT platform reached 213.2 million as of September 30, 2019, representing year-over-year growth of 62.0% (CIW, 2019). Growth: The key to Xiaomi’s rapid growth is strategic alliances with other companies and Xiaomi’s ecosystem. Xiaomi forged a partnership with more than 400 companies, including

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Siemens and Philips, and announced a strategic cooperation with IKEA, Leading Ideal, and All Seasons Hotel (Cao et al., 2020). In addition, Xiaomi builds its ecosystem through investments in potential startups. Of all the products Xiaomi released under its brand, only smartphones, smart TV, smart TV set-top box and network router are designed and developed by Xiaomi, and the rest is produced by Xiaomi’s Ecosystem Companies (Yuan, 2017). These companies are under the control of Xiaomi’s unified quality, with the help of Xiaomi’s supplier channels and credit endorsements, they can produce products at a lower cost in the initial stage, and mass sales through Xiaomi’s channels, enabling companies in the Xiaomi Ecological Chain to Lower selling prices grab the market (Wang, 2020). These companies produce ecosystem products surrounding smartphones, ranging from smart devices to MIJIA household appliances (Appendix XII). Scope: Though seemingly difficult to track, Xiaomi’s businesses could be seen as being expanded both vertically and horizontally (Appendix XIII) (Yuan, 2017). Xiaomi’s ecosystem can be regarded as horizontal integration. As for vertical integration, Xiaomi provides cloud storage service, internet services, and entertainment, which can be regarded as the backward integration strategy. In the early stages, Xiaomi only developed online distributions, but recently it has also developed offline shops, which can be regarded as a forward integration strategy. 6. Strategic Recommendations Maintain advantages in AIoT field: Xiaomi should continue its R&D in smartphone-related products to develop its ecosystem in AIoT and to keep the dominance over the new smart living era (Xiaomi Annual Report, 2019). By inventing appliances which can connect devices with the internet and can be operated remotely, Xiaomi not only provides its consumers with more convenience, but also attracts its smartphone users to other products, such as lifestyle products and internet services (Cao et al, 2020). However, Xiaomi has to control its cost to maintain its price advantage as the price of Xiaomi products grows with increasing R&D funds. Focus on developing countries: The international strategy of Xiaomi should focus on the developing countries in the future which have a large population with the need for high cost-toperformance products commodities due to the lower income-level (Tabassum and Ahmed, 2020). In these countries, the price of Xiaomi can be a significant advantage compared to other brands.

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Xiaomi was less attractive in developed countries (ETTelecom, 2018). The large demand can make the business profitable - Xiaomi can gain the market share as no local brands in these countries will intensify the competition. Furthermore, the price of warehouse rent and labour in less developed countries are lower – can cooperate with local manufacturers or establish its own plants in countries they are exporting to (Tabassum and Ahmed, 2020), therefore effectively controling the export cost compared to transporting products from China. Utilize offline store and user co-creation: Xiaomi needs to build brick-and-mortar stores to allow consumers to experience its products (Rahela and Shehbaz, 2020). Although online could reduce operating costs (Michael, 2014), consumers perception of risk and uncertainty also increase because electronic products are complex. Offline stores with professional employees can provide customers with guidance and enhance before and after sales services. Users can also be a great resource for Xiaomi to acquire inspiration for innovation (Li et al., 2019). Xiaomi used to create communities for Mi fans to discuss its brands (Liu et al, 2020). As social media is wildly used, it can be an effective channel for Xiaomi to manage the consumer community and co-create with customers (Pee et al, 2020). Through communications with users, Xiaomi can learn how to improve their products and increase the user stickiness (Kuo et al, 2018).

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Dong, J. and Zhang, Y., 2015. When Customers Become Fans. [online] MIT Sloan Management Review. Available at: [Accessed 27 November 2020]. Dudovskiy, J., 2018. Xiaomi CSR: Lack Of Information And CSR Activities - ResearchMethodology. [online] Research-Methodology. Available at: [Accessed 1 December 2020]. Forbes. n.d. Xiaomi. [online] Available at: [Accessed 27 November 2020]. FRPT- Telecom Snapshot, 2018. Xiaomi challenges Apple, Samsung for top spot in pre-owned smartphone market. FRPT- Telecom Snapshot. p17-19. 3p Gasiorowski, E., 2016. How The Internet Of Things Will Change Our Lives. [online] ISO. Available at: [Accessed 1 December 2020].

Geddes, T., 2020. UK-China Relations: From Gold To Dust. [online] Thediplomat.com. Available at: [Accessed 1 December 2020]. Hong-Yu, L. & Xing-Heng, N. 2019. Xiaomi profit model innovation research (in Chinese). Journal of Lanzhou University of Finance and Economics, 35 (3): 108-116. I01.appmifile.com. 2018. Annual Report. [online] Available at: [Accessed 1 December 2020]. IDC, 2020. Samsung Reclaims The Top Spot As Smartphone Market Performs Better Than Expected With 353.6 Million Device Shipments In 3Q20, According To IDC. [online] IDC: The premier global market intelligence company. Available at: [Accessed 1 December 2020].

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IDC., 2020. Worldwide Smartphone Market Suffers Its Largest Year-Over-Year Decline In Q1 2020 ...