Xiaomi managed to be included in the Fortune 500 Global Companies list despite being a young organization established in 2010. It is also one of the largest smartphone manufacturers in the world. These accomplishments come from its aggressive marketing on top of its insistent expansion and diversification of its product portfolio. The company operates as a well-rounded consumer electronics company that competes against industry incumbents like Apple, Samsung, and LG Electronics. This article analyzes its industry and competitive positions using the Five Forces Framework of Michael E. Porter.
Analyzing Xiaomi Using Porter’s Five Forces Framework: A Look Into Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
The consumer electronics industry is highly competitive. The presence of tenured companies like Apple and Samsung raises the level of competition due to their innovation, marketing efforts, and established brand names. The arrival of newer companies with emerging technological and business capabilities intensified further the competition.
It is also important to underscore the fact that the market for consumer electronic products is also becoming saturated. The specific smartphone market alone is populated by numerous players. There are also other well-rounded companies like Samsung and LG Electronics with diverse product offerings and focused-oriented companies or brands.
Innovation is at the heart of competition. The most innovative companies that can produce the most relevant products and create strong brand names or generate buzz with each product release tend to become the most popular. This is the reason why incumbents and new entrants are forced to spend on research and development and marketing.
The intensity of competitive rivalry is a strong force for Xiaomi. Competition compels it to adopt penetration pricing in most of its products and prevent it from raising prices too high. It also induces the company to target and enter niches, expand its product portfolio to capture other markets and create a product ecosystem, and utilize novel marketing tactics.
Below are the reasons that explain why the intensity of competitive rivalry is a strong force for Xiaomi:
• High Level of Firm-to-Buyer Concentration Ratio, Moderate Levels of Entry and Exist Barriers, and High Rate of Market Growth
• High Level of Research and Development, High Impact of Marketing, Moderate Degree of Differentiation Potential, and High Importance of Differentiation
2. Threat of Substitutes
Understanding substitute product for consumer electronics products is pointless. The entire product category is diverse in itself. It includes all products that use electronic components like personal computers, smartphones and tablets, other mobile devices, home appliances, peripherals and accessories, and wearable devices, among others.
The substitute for a particular class of consumer electronic devices comes from another class of consumer electronic devices. Consider personal computers as an example. The substitutes for these products are smartphones and tablets. Substitutes are also present within a specific product category such as the TV category with different TV technologies.
Nevertheless, based on the aforementioned, the threat of substitutes for Xiaomi is a weak force because it is a well-rounded consumer electronics company. It has expanded and diversified its product offerings beyond smartphones and now produces and markets personal computers, tablets, smart and wearable devices, and home appliances.
Below are the reasons that explain why the threat of substitutes is a weak force for Xiaomi:
• High Level of Product Diversification within Xiaomi Despite High Number of Possible Product Substitutes from Competitors
• High Degree of Product Diversification and Multi-Segment Targeting Despite Low Substitution Cost and High Ease of Switching
3. Threat of New Entrants
Entering the consumer electronics market can be capital-intensive. An aspiring firm needs to have substantial resources to acquire or access and utilize the technological capabilities and workforce needed to create and market compelling brands and products. The barrier to entry can be considered high but there are possible workarounds.
Companies with access to capital and other resources can enter the market with ease. Take note that the businesses of Amazon and Google were once focused on internet-related products or online-enabled services but they have also expanded into the consumer electronics market because they have the resources to do so.
Newer companies from China have proven that the barriers to entry can be negligible because there are cost-effective solutions to produce consumer electronic devices. These include manufacturing outsourcing and rebranding. Take note that Xiaomi exemplifies that it is possible to enter the market and emerge as one of the dominant players.
It is important to note that global trade and electronic commerce have also made the distribution of consumer electronic products easier. A startup can choose online-enabled channels of distribution such as an online storefront or indirect third-party online stores on top of their indirect distribution channel via third-party physical retailers.
The threat of new entrants can be a moderate to strong force for Xiaomi. This comes from the emergence of newer trends in product development, manufacturing, and business operations that allow aspiring firms and smaller companies to develop and market products without having the resources of large and established multinational companies.
Below are the reasons that explain why the threat of substitutes is a moderate to strong force for Xiaomi:
• High Availability of Cost-Efficient Solutions Despite High Capital Requirements and High Impact of Economies of Scale and Cost Leadership
• High Importance of Brand and Brand Loyalty, Moderate Level of Geographic Barriers, and Moderate Level of Distribution Barriers
4. Bargaining Power of Buyers
The customer base for the entire consumer electronics market is diverse. Some are drawn to premium and reputable brands despite their high price tags. Consider Apple and Samsung as examples. Apple uses a premium pricing strategy across all of its products. Samsung products are also more expensive than counterparts from lesser-known companies.
Branding can attract customers. Companies known for their innovative and reliable products tend to have better control over their prices despite the presence of inexpensive alternatives and substitutes. The brand reputation of some companies has even created loyal customer bases that would stick to purchasing and owning multiple products under a single brand.
However, in other segments of the market, consumers can also be sensitive to prices. This is the reason why companies like Xiaomi have succeeded in utilizing penetration pricing to gain a foothold and substantial market shares. The moderate level of product differentiation also makes it easier for consumers to choose or switch to lesser-known brands.
The bargaining power of buyers or customers is a strong force for Xiaomi. It prevents it from using high price points for most of its products while also compelling it to devise an effective and efficient marketing mix to make its products and its entire brand as appealing and accessible as possible in the presence of tough competition.
Below are the reasons that explain why the bargaining power of buyers is a strong force for Xiaomi:
• High Firm-to-Buyer Concentration Ratio, Moderate Level of Product Differentiation, and High Level of Alternative and Substitute Products
• Moderate to High Buyer Price Sensitivity, Low Buyer Switching Cost, High Availability of Market Information or Buyer Information Availability
5. Bargaining Power of Suppliers
The bargaining power of suppliers for consumer electronics companies is determined by their respective size of operation and market scope. Larger companies with high production output tend to moderate the bargaining power of their suppliers because transacting with them is profitable for organizations that are in the business of providing supplies.
It is also important to note that the number of suppliers in comparison to the number of firms can be moderate to high. This lowers the bargaining power of suppliers further because consumer electronics companies have more options to choose from. Some companies have also maximized the advantages of vertical integration and forward integration.
Nevertheless, in consideration of the aforementioned, the bargaining power of suppliers is weak to moderate force for Xiaomi. Remember that it is one of the largest consumer electronics companies in the world with a diverse product portfolio. It is also one of the largest smartphone manufacturers in the world in terms of production output and sales.
Below are the reasons that explain why the bargaining power of suppliers is a weak to moderate force for Xiaomi:
• High Supplier-to-Firm Concentration Ratio, Moderate Switching Cost for Firms, and High Switching Cost for Suppliers
• Moderate Level of Supply Differentiation, High Availability of Market Information, High Impact of Inputs on Costs and Differentiation