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Big Bang Disruption: How Xiaomi Manages Catastrophic Success

Apr 3 2014, 6:26am CDT | by , in News

Big Bang Disruption: How China's Xiaomi Manages Catastrophic Success
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Big Bang Disruption: How Xiaomi Manages Catastrophic Success

In the radical new world of innovation we call “Big Bang Disruption,” the speed at which core technologies become exponentially better and cheaper with each product cycle results in new goods increasingly emerging from the recombination of off-the-shelf component parts instead of invention inside one company’s lab.

The shift from proprietary to combinatorial research and development dramatically changes the ways in which innovators design, produce, and market their products, creating new opportunities and challenges for startups and incumbents alike.

Consider the impressive results for Chinese smartphone manufacturer Xiaomi. The private company, launched in 2010, is now China’s fifth most popular smartphone brand, offering high-end Android devices using many of the same components as industry leaders.

Some of their products are manufactured by Foxconn, which also notably produces products for Apple.  Their current high-end model is the Mi3, which debuted at $330 in China, a surprisingly low price for a phone with its level of quality and features. It supports the latest version of Android, and like other leading Android devices, runs on Qualcomm’s Snapdragon processor.

Combinatorial innovation is working for Xiaomi.  In 2012, the company sold 7.2 million smartphones. In 2013, it doubled that number, selling 18.7 million handsets. The company is expanding rapidly with plans to be fully global in another two years.  Xiaomi recently hired former Googler Hugo Barra to spearhead worldwide product planning.

In this brave new ecosystem, as Xiaomi’s success highlights, the physics of innovation behave in ways that may at first seem counter-intuitive.  For example, startups become market leaders in just a few years (or less).  Winning products are often chosen more for their design, or even the culture of the provider, than for increasingly minor price and performance differences.  And new products reach market saturation before they’ve even gone into production (consider the presales of ideas on crowdfunding site Kickstarter, for example).

These aren’t just  phenomena limited to software and gaming, where the low (or often nonexistent) costs of manufacturing and distribution mean blockbuster hits can be downloaded by millions of customers in days —and lose their appeal almost as fast in the compressed product lifecycle model we call the “shark fin.”

The Shark Fin:  Market Adoption has Become Squashed and Stretched

They occur with physical products as well, particularly in today’s overheated markets for consumer electronics and entertainment.

But unlike virtual products such as software, hardware-based disruptors require careful and active management of supply and demand, optimizing sales and profits while curbing the downside risk of excess or insufficient inventory.

Again, consider Xiaomi.  Emulating the world’s top smartphone makers, the company promotes a culture of cool—their motto is “just for fans.” And it boasts a loyal customer following.  Like hipper consumer products and apparel brands, the company only sells its products online, and for the most part directly to consumers from its own website, eschewing potentially brand-diluting partnerships with distributors, retailers, and network operators.

Avoiding intermediaries helps the company establish its street cred with users and builds more robust relationships that can span multiple purchases.  But more important, the direct marketing approach gives Xiaomi better control over the timing of market entry and exit.

These are critical advantages in the smartphone market, which increasingly looks more like the hypercompetitive world of fashion than it does of computers.  As in trendy apparel, styles and tastes can be expected to change annually, perhaps even seasonally.  Barriers to entry for new innovators are also relatively low; fast followers quickly undercut innovators with close knock-offs, accelerating the rapid cycling of replacement products.

In the smartphone market, seasonality is driven not by trend-setting fashion icons but by constant improvements in price and performance for underlying technology.  The effect of such constant disruption, however, is the same.  A leader in one generation of the industry has little guarantee of leveraging that position a few years later when consumers are ready to upgrade, as many past industry giants have learned to their misfortune.

Xiaomi is turning fast-changing consumer tastes to their advantage. Earlier this month, the company began selling its Mi3 device in Singapore.  Began, and then finished, too.  Two minutes after the company started taking orders, available supply had been completely exhausted.  In China, 100,000 units sold out in less than 2 minutes   According to AsiaOne News, Xiaomi’s midrange device, the Redmi, enjoyed a similar reception in February, when two batches each sold out in less than ten minutes.

Critics accuse the company of creating artificial scarcity to drive marketing buzz and stimulate buying frenzy.  But Xiaomi’s Barra, in a recent interview with CNET, dismissed that claim.  “It astonishes me that people don’t understand some very basic things about supply chain,” Barra said. “Just consider the fact that there are a dozen companies, including a handful that are very, very big, all competing for the same components, the same production capacity … there’s no infinite supply of any of those.”

Instead, Xiaomi believes that in markets where consumer preferences are hard to predict and change rapidly, “flash sales” can help determine which products are likely to be big hits, driving future production.

And there are other reasons to get in and out of markets experiencing prolonged periods of Big Bang Disruption.  Rapid market entry and exit limits the risk of committing expensive production and marketing assets to a failing or fading product.  It also minimizes exposure to unsold inventory, whose value in the smartphone market can experience dramatic erosion in very short periods of time.

Xiaomi’s aggressive tactics encapsulate many of the rules we uncovered in our research.  For example, when new entrants are hot on your heels with better and cheaper offerings, timing is everything.  That’s especially true now that customers can leverage their social networks to choose the winning combination of components and business model, a reality highlighted by a clever ad campaign now running from another smartphone maker, HTC.

To capture these increasingly winner-take-all markets (at least for premium priced products), innovators must know exactly when to enter and when to leave.  Get in too soon and you risk offering an inferior combination that no one will buy.  Leave too late and you may find yourself stuck with inventory and committed production and distribution assets that morph quickly into liabilities.

Xiaomi’s experience highlights another rule of Big Bang Disruption:  learning to survive “catastrophic success.”  When adoption follows the shark fin model, most customers are likely to arrive all at once, and right at the beginning.   Winners go from zero to market saturation in the blink of an eye.

To capitalize on that behavior, you need the courage to believe in your own strategy.  Whatever production capacity you have ready at product launch will determine how much you can sell in the brief window when your product goes from must-have to also-ran.  If you think you’ve got a winner, you’d better have lots of inventory on hand, and ready access to partners who can rapidly scale up more production to keep customers supplied while they’re still eager—even fanatic—about buying.

And, when the party’s over, to be ready with the next disruptor.  Because if you don’t have it, it’s almost certain your competitors will.

Our new book, “Big Bang Disruption” is on sale now.  Follow us on Twitter and Facebook too for our continuing research on better and cheaper innovation.

 

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<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

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