You may not be familiar with Xiaomi, but you likely will be soon enough. Xiaomi is a Chinese smartphone maker. It sold its first smartphone in 2011 and is already the third biggest player in the market. It also holds the distinction of being the most valuable tech start up going — yes, even more valuable than Uber. (See here and here for more.)
How did they get so big so fast? Mostly by being cheap. Their phones offer a level of value that, say, Apple cannot touch. A new iPhone without a contract with a carrier (i.e., without a subsidy) will set you back at least $600. If you want more storage and a bigger screen, that creeps up to near a thousand dollars. Xiaomi’s phones top out around $500 and they have offerings under $150.
So how does Xiaomi manage to offer so much for so little? That is the topic of a TechCrunch article (This Is How Xiaomi Keeps The Cost Of Its Smartphones So Low, Jan 19). Now part of their success is due to their distribution strategy. In China it sells only on-line. Hence, it can cut retailers or carriers out of the equation. But that is not the only factor. How they mange their product line and purchasing (and consequently their supply chain) also makes a difference.
[Hugo] Barra [the company’s VP of International] explained that Xiaomi is able to make price concessions thanks to the combination of a small portfolio and longer average selling time per device.
Importantly, Xiaomi continues to sell older devices (and tweaked versions of them) at reduced prices even after it releases newer models.
“A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts. The Mi2 and Mi2s are essentially the same device, for example,” Barra explained. “The Mi2/Mi2s were on sale for 26 months. The Redmi 1 was first launched in September 2013, and we just announced the Redmi 2 this month, that’s 16 months later.”
That long product life results in favorable terms from their suppliers. As suppliers lower prices, Xiaomi passes on some of the savings. At the end of it all, you have some pretty inexpensive phones.
Why do I like this story? Because it demonstrates the relationship between strategy and operations. To carve out a position in the market, Xiaomi necessarily has to enter at the low end. China is not as wealthy as the US or Europe and it (or any firm) would be hard pressed to be hipper than Apple from the get go. Hence, it needs to find a way to compete on cost. That leads to a different focus on innovation. Xiaomi effectively has ceded to Apple and Samsung the job of figuring out new features etc and instead focused on taking cost out of the product. Stretching out the product life cycle becomes an obvious lever.