Name: Ericka Jane Tagorda

Section: SFENT-1C

Subject: Innovation Management

CASE STUDY
The case discusses Beijing-based Chinese electronics company, Xiaomi Inc. (Xiaomi),
and its unconventional business model. Founded in April 2010 by Lei Jun (Jun), a serial
entrepreneur and investor, in association with his friend Bin Lin (Lin), a former Google
and Microsoft executive, Xiaomi was known to produce cheap smartphones with a nice
build quality.

Xiaomi followed a unique business model where it sold its smartphones at cheap prices
and later took advantage of the revenue streams generated by selling its software such
as apps, cloud computing, and games. The company sold its smartphones at US$ 200
or US$ 300 whereas smartphones developed by Samsung Electronics Ltd. (Samsung)
and Apple cost at least US$ 600. The company sold its smartphones online in flash
sales with razor thin margins. Since there were no retailers and distribution channels
involved, it could afford to price its high-tech smartphones lower.

The company followed an Internet-first strategy – in addition to selling its smartphones

online, it communicated with its customers through social media channels. The
company reportedly spent no money on traditional advertising. It was reported that
Xiaomi developed smartphones in limited numbers. As soon as the product went online
for sale, it was sold out within minutes. Some industry watchers termed Xiaomi as the
'Apple of China' since it elicited the same kind of crazy following that Apple did in the
West. The company also fostered an open, honest, and transparent relationship with its
customers. Xiaomi's customers, known as Mi Fans, were regularly informed about the
suppliers the company worked with, how it built its products, and what it was
developing. The Mi Fans were hugely appreciative of this and eagerly awaited the next
product launch from Xiaomi.

Xiaomi's instant success in China encouraged Jun and Lin to expand the operations to
other countries. Thus, in a bid to fuel its international expansion, Xiaomi brought in
Hugo Barra (Barra), former Google executive. By June 2014, Xiaomi had forayed into
Singapore, Taiwan, Malaysia, and Indonesia. It planned to enter other emerging
markets such as India and Brazil. Going forward, by 2015, the company had ambitious
plans to enter the North American smartphone market, which was hugely dominated by
Samsung and Apple.

Issues
The case is structured to achieve the following teaching objectives:

 Evaluate Xiaomi's unconventional and innovative online business model

 Understand the need to reinvent the business model of a company amidst rising
competition and changes in the business environment
 Understand the reasons for Xiaomi's success in China
 Identify the challenges faced by Xiaomi and explore strategies that the company might
adopt to overcome these challenges
 Examine whether Xiaomi can increase its dominance in the Chinese smartphone market
and become a leading player in the Chinese smartphone market
 Examine the strategies Xiaomi should adopt to enter and make a mark in the emerging
markets it plans to enter
 Examine the challenges Xiaomi could face in gaining a presence in the intensely
competitive US smartphone market

https://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/xiaomi-reinventing-business-
model-china-excerpts.htm

Jun and Lin had planned to launch their smartphones after a year of starting, i.e. from
2011. However, neither of them was satisfied with MIUI’s performance on other
companies’ hardware and so they decided to launch their own smartphones earlier.
Subsequently, Xiaomi roped in Zhou Guangping, who was known for the ‘Ming’ line of
phones developed by Motorola. According to Jun, Xiaomi was modeled after two
companies – Tongrentang, a 340-year-old traditional Chinese medicine company, and
Hai Di Lao, a hot pot chain. From these companies, Jun learnt not to produce a low
quality product just to reduce costs, and the significance of customer service. Some
analysts were of the view that the company generated a buzz by creating artificial
shortages for its mobile phones. Xiaomi, however, said that it was not deliberately
constraining supply to stimulate demand. Commenting on the company's strategy of
selling fewer smartphones, Huang Jiangji, vice president and co-founder of Xiaomi,
said, "There's a saying here: Don't be greedy. Greed can kill a hardware company. One
of the most pressing challenges facing Xiaomi was the issue of piracy in China. Since
there was a huge demand for Xiaomi smartphones, some counterfeiters and pirates had
swooped in to capitalize on the trend and to sell low-quality products disguised as the
Xiaomi brand. This led to Xiaomi's reputation being tarnished and customers
complaining about poor experiences with the products. Lin was working with the
Chinese government to crack down on the piracy issue. One of the most pressing
challenges facing Xiaomi was the issue of piracy in China. Since there was a huge
demand for Xiaomi smartphones, some counterfeiters and pirates had swooped in to
capitalize on the trend and to sell low-quality products disguised as the Xiaomi brand.
This led to Xiaomi's reputation being tarnished and customers complaining about poor
experiences with the products. Lin was working with the Chinese government to crack
down on the piracy issue