Wednesday, April 12, 2017

Xiaomi: Insights on Balance between Coherence and Incoherence

The article “Severn Ways to Fail Big” and the article “The Coherence Premium” together provide me a better understanding of strategic planning. The article “Severn Ways to Fail Big” depicts a clear picture of what to avoid when making decisions to shift the long-term strategy, and the latter one talks about how to identify the capacities from inside and then match them with the outside market. I find some interesting connections between two articles which enable me to think more on how to balance between coherence and incoherence, and a vivid example also comes into my mind: Chinese smart phone producer Xiaomi.

The power of coherence means that a coherence company will focus on what it does best in making every decision across every business; however, when a company finishes its coherence test and finalize what capabilities it has, it may risk strategic incoherence. This means it can be weak in some segmented market or lose some distribution channels or any else capabilities. For example, in the article, Pfizer gave up its OTC drugs and sold out its confectionary products business as they wanted to focus more on personal health care products and thought this is the future trend. Well, the root cause behind the seven ways in where strategist always make mistakes is to have complimentary capabilities. Strategists decide to merge with another company or roll-up to consolidate many small businesses, or apply the “pseudo adjacencies”, all because they want to shift a part of their capabilities, making the incoherence become coherence. Those seven mistakes are hard to avoid, then the question would be how risky could be when a company finalizes their coherence and inherence, and how to balance them according to the future trend.

I find Xiaomi, a Chinese smart phone producer, as an interesting example. It once won the Chinese market as 17.5% of total market share by using several coherent strategies[1], for example:
·      Compete on the price and customized Android system with high performance;
·      lower the cost by using social media (as their CEO is very good at social media campaign) as the main marketing platform instead of massive off-line advertisements and celebrity endorsements;
·      Increase the profitability by providing further paid content service mainly attractive to male customers who are keen on technologies.
It is clearly here that although Xiaomi achieved its initial success through the above sample coherences, it took the risks of having a low presence in offline channels and in female customers who do not care the high performance so much.

As for now, the risks turn into the crisis. Competitors Oppo and Vivo grew at a whopping 124% and 74% year-on-year this past quarter, while shipments of Xiaomi units decreased by almost 40%.[2] Oppo and Vivo invest heavily in offline channels and the famous reality shows and also invite the most popular male celebrities to endorse their products, which can attract the targeted female groups.
Xiaomi fought back by also increasing their offline marketing spending, as we can now easily spot ads in subways, buses and malls. In the meantime, they still maintain their competitive price and features by developing different models. They also expand to other product categories such as TV box and other emerging markets such as Indian, their most profitable market with 26% of market share.

In short, the key takeaways would be to balance the coherence and incoherence by quickly reacting to the changes, starting shift from the easiest inherence and trying to find the middle ground between old and new changes. Like the ““Severn Ways to Fail Big” article said, definitely avoid being distracted and stressed by the new trends or changes, that lure the strategist to make dangerous decisions. From my point of view, I think Xiaomi is still doing well. After all, it is natural to increase marketing spending and move to adjacent markets when a company grows big. It is an on-going process and worth to be monitored further.




[1] Dunn, J. (2016, August 16). The Apple of China has hit a wall. Retrieved April 12, 2017, from http://www.businessinsider.com/xiaomi-smartphone-sales-china-market-share-2016-8
[2] Horwitz, J. (2016, August 15). Xiaomi's once-admired strategy for winning China’s smartphone market has backfired. Retrieved April 12, 2017, from https://qz.com/758955/xiaomis-once-admired-strategy-for-winning-chinas-smartphone-market-has-backfired/

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