By Lin Chengyi, Affiliate Professor of Strategy at INSEAD. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2021

In June 2021, a global smartphone sales report marked an unusual tipping point. According to Counterpoint Research, Xiaomi, with a 17.1 percent share of global sales, surpassed both Apple and Samsung and became the number one smartphone brand in the world for the first time. More interestingly, Xiaomi did it without entering one of the largest smartphone markets – the United States – due to potential political and legal risks. After Huawei’s setback, Xiaomi is far from an obvious contender to take over global leadership in a market dominated by household brands such as Apple and Samsung. Yet, it happened.

Beyond smartphones, Xiaomi has achieved global supremacy in the burgeoning Internet of Things (IoT) market, as my INSEAD colleague Amitava Chattopadhyay detailed in a recent INSEAD Knowledge article and case study.

There are many reasons for Xiaomi’s unlikely rise. For example, Prof. Chattopadhyay describes how the company effectively leveraged strategic alliances to build competitive advantage in IoT. In this article, I hope to complement his and others’ insights by looking at the fundamental strategic principles that underlie Xiaomi’s highly successful approach in smartphones – a crowded arena deemed impossible to enter by many. These principles can help other companies pay closer attention to challengers like Xiaomi in their industries.

First and foremost, Xiaomi’s product strategy closely follows the value innovation principles.

Xiaomi’s phones are designed to solve the unmet need of the iPhone users. Instead of following the industry playbook and pushing incremental technology improvements, Xiaomi continues to make conscious feature choices.

For example, the first Mi phone was designed for the dissatisfied Apple customers in China. Because of the fast development of super apps, such as WeChat, Chinese consumers use their smartphones to chat, commute, shop and pay for everything. As a result, long battery life is absolutely critical. For Instagram or Weibo influencers, camera hardware and software are essential for photos, videos and livestreams. Compared to these essentials, other features (such as the gyroscope) are superfluous decorations.

Having developed a deep understanding of local needs, the Mi phone product team made serious trade-offs to replace “decorative” features with essential upgrades. Facing the ultimate smartphone brand, the first Mi have already won a cult-like following because of the value offered in the local context.

As early as 2014, Xiaomi sales surpassed both Apple and Samsung in China. By 2018, Mi phone overtook Samsung in India. Every step of the way, they stick to the value innovation principles and making value trade-offs based on the local consumer needs. When I spoke to the Xiaomi design team, they idolised Steve Jobs not because of his personality but his obsession with consumer behaviours and attention to detail. Now it seems the student has grown into a master.

Second, Xiaomi created truly differentiated products for each consumer segment.

While Apple trying to hold on to its high-end positioning and Samsung carefully playing across multiple segments by gradually “watering down” features to supply lower-end markets, Xiaomi chose the less “smart” and less efficient way. The company designed different products with specific feature trade-offs based on the needs of each segment. Xiaomi also created sub-brands in each segment: Mi (and Note) for the high end, POCO for mid-market and Redmi for low end.

For example, compared to Samsung, Redmi phones often offer better performance on key features such as battery life, processors and display while selling at a lower price.

Third, Xiaomi plays smartly across multiple digital ecosystems.

Xiaomi’s strategy differs from Apple, which orchestrated digital ecosystems through the App Store, iTunes, AppleTV, etc. Staying true to its identity as a hardware provider, Xiaomi offers devices that support multiple ecosystems in China – WeChat (Tencent), Weibo, Alibaba, etc.

In addition, Xiaomi has created a broad range of complementary products that offer multiple entry points to these ecosystems, such as electronic scooters for mobility, IoT appliances, and more. Their broad coverage helps to create an integrative and coherent consumer experience and in turn anchors their phone as the connecting point of the different ecosystems. Prof. Chattopdhyay and his co-authors coined the term “strategic coalescence” to describe how Xiaomi tapped personal networks to select high-quality partnerships, ensured mutual incentives and profitability throughout the ecosystem, and used the gains therein to enable a low-margin policy that made Xiaomi products irresistible to consumers.

Fourth, Xiaomi is everything digital in their business and organisation.

Founded a mere 11 years ago, Xiaomi understands the digital world and the digital generation. Compared to Apple and Samsung, Xiaomi was born digital and had a blank canvas to set up its product and its business.

Apple made the smartphone an essential part of our everyday lives. But Xiaomi understands that smartphone is not just another cool gadget but a central control tower of our lives.

In addition, Xiaomi organises its business activities around digital. While the glass cube flagship stores helped establish the Apple brand, Xiaomi built its brands primarily online. The company heavily leverages social media marketing including flash sales and fan events to promote products. As a result, digital helped Xiaomi significantly reduce its costs.

Xiaomi also built a small and Agile organisation. With around 22,000 employees, Xiaomi’s total headcount is significantly smaller than the 28,000-strong Samsung IM division, leaving aside global marketing and other central functional teams of Samsung.

Finally, online shopping highlights the strength of Mi phone features.

During the pandemic, most consumers around the globe needed to shop online, and often with a limited budget. Instead of the unparalleled in-store experience so carefully crafted by Apple and the undeniable brand allure from Samsung, online value buyers are presented with the stripped-down list of features in a product comparison table. Because the value-to-price ratio is designed according to consumer needs, Xiaomi becomes the obvious winner. Glowing reviews from satisfied customers then trigger recommendation algorithms, and their sales continue to rise.

It remains to be seen how long Xiaomi can sustain its global leadership position. However, their strategy may not be easily copied by Samsung in a short period of time, which makes this likely more than just “a summer fling”.

The post Five Lessons From Xiaomi’s Path to Smartphone Supremacy first appeared on China Business Knowledge.

By David Dubois, INSEAD Associate Professor of Marketing. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2021

In developed economies such as the United States, the current era is marked by political divisions so deep that not even pandemic response can avoid being drawn in. Science-backed mitigation and prevention measures such as masking, lockdowns and vaccines have become dangerously ideological.

How did we get to the point where even doctor’s advice can inflame partisan passions? It likely has something to do with another type of division: between our local community – neighbours, friends and family that bring us a sense of safety and comfort – and the daily avalanche of social media content bringing us a flavour of the global sentiment. Taking political views as an example, it’s easy for citizen-consumers to believe they reside securely in the political mainstream when in the suburbs of a deep-red U.S. state or the blindingly blue island of Manhattan. But when they are thumbing through Facebook, Instagram and TikTok, the cognitive dissonance can make them fear for the state of the world.

As I describe in my recent paper in Social Psychological and Personality Science[1], this dissonance creates a kind of hydraulic relationship: Exposure to opposing views on social media makes people feel suddenly vulnerable and embattled. This drives them to seek comfort and safety locally, notably by expressing greater enjoyment in their family bonds. My co-authors and I were able to follow this phenomenon as it unfolded using a novel combination of social-media sentiment analysis and longitudinal surveys.

Shifting Sources of Well-being

Our paper looks at two especially tense periods in recent U.S. history: the eight weeks spanning the 2018 midterm elections, during which control of Congress was up for grabs, and three weeks during the first four months of the Covid-19 pandemic.

In both observation periods, we combined big data analytics and consumer surveys. We also tracked overall social media sentiment about President Trump (i.e. the number of negative posts about his leadership vs. positive ones) as the crisis waxed and waned. For the election, we presumed that as the moment of truth drew nearer and advance polls and predictions grew more reliable, the cognitive dissonance among both groups of partisans would diminish. In the case of Covid, we assumed the psychological stakes for partisans would vary depending on daily case counts.

At regular intervals during the observation period, we surveyed U.S. citizens on their political affiliation, as well as the state of their relationships with their kids and domestic partner on that day.

The three indicators – social media sentiment, psychological stakes and domestic contentment – formed patterns in accordance with partisanship. Family relationship bonds on a given day depended on the extent to which consumers’ political perceptions matched country-level political sentiment. Conservatives reported significantly greater domestic happiness on days when President Trump got clobbered on social media and anxieties ran high, either because of uncertainty about the election or a spike in Covid cases. Liberals exhibited the opposite pattern. They felt most warmly towards their families on high-suspense days when the social media chatter about the president was more positive.

To probe these results, we tested out several alternative explanations. For example, it could have been that social media sentiment about President Trump was just a lightning rod for the national mood of the moment – rather than a direct response to the words and actions coming from the White House. But when we looked at the 45th president’s social media activity, we saw that the level of negativity on his Twitter account was mirrored in the country’s social media sentiment the following week. In other words, the U.S. public was speaking back to Trump in his own register.

Implications for Business

At a time when both consumer well-being and local production are increasingly focal to brand targeting, knowing when consumers turn towards vs. away from their community in the face of political inconsistency has meaningful implications for marketers. The nuclear family, after all, is not the only possible source of validation for insecure partisans. They also routinely find support from like-minded brands (and their associated online communities).

Indeed, brands are far from immune to the political polarisation in the wider culture. We know that politics has much to do with shaping, for instance, the kinds of luxury brands we indulge in. Our findings suggest that carefully monitoring the psychological gap between one’s customer base and the dominant ideological momentum – as measured by social media sentiment – is instrumental to strengthening customer relationships, creating greater intimacy and enhancing customer loyalty.

Brands that already have a passionate partisan following, e.g. Hobby Lobby (a favourite among Trump supporters) and Nike (with its controversial campaigns featuring BLM protester-athlete Colin Kaepernick), may strengthen their support base by pressing even further into the frontlines of the culture wars.

Finally, our study has lessons for businesses searching for how to best leverage customer insights found in online data. While big data has merits on its own, its true power emerges when combined with offline, more local measures, such as local consumer well-being surveys in our case. That is, bridging both kinds of data – population-wide metrics such as national social media sentiment and more ground-level data such as the family-satisfaction surveys in our experiments – enables business executives and policymakers to fully unlock customer-citizen insights. Search-engine results for a particular region or city are another indicator of what’s on people’s minds at the local level.

Scale matters when dealing with these types of data, because global and local are neither independent nor substitutable for one another. Taken together, they may tell an unpredictable or even paradoxical story. So, when it comes to online analytics approaches, the “glocal” approach seems to be the most effective.

The post How Social Media Makes for Happier Families first appeared on China Business Knowledge.

By Amitava Chattopadhyay, INSEAD Professor of Marketing & the GlaxoSmithKline Chaired Professor of Corporate Innovation; Yang Haiyang, Associate Professor, Johns Hopkins Carey Business School; and Ma Jingjing, Assistant Professor, Peking University. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2021

Xiaomi entered the competitive Chinese mobile phone market in 2010 with MIUI, an Android-based smartphone software product which it offered for free. By 2017, it had achieved global recognition as a leading smartphone manufacturer and reached US$15 billion in revenue. Today, Xiaomi is the world’s largest Internet-of-Things (IoT) firm and by the end of 2020 had revenues exceeding US$37 billion.

How did Xiaomi manage to achieve such extraordinary growth? In addition to interviews with senior executives from Xiaomi and its ecosystem partner firms, our in-depth, multi-year study involved extensive analysis of conversations, reports and datasets from 2010–2020 across all departments of the firm.

Our research revealed that Xiaomi’s approach to collaboration has been the key factor underlying its rapid growth. Since its inception, the firm has focused on creating mutually beneficial relationships with both consumers and partners. This novel, in-depth collaboration-based strategy, which we term “strategic coalescence”, conferred it a sustainable competitive advantage and shaped every significant move it has made, resulting in its spectacular growth.

Customer Collaboration and Co-creation

In 2010, the Chinese mobile phone market was saturated with well-known domestic and international brands, as well as numerous low-quality brands, competing over every price point. Xiaomi decided to avoid direct competition by offering its first software product, MIUI, for free.

To entice consumers, Xiaomi created an online community of smartphone users and encouraged tech enthusiasts to help test versions of the software and provide ideas for improvement. The feedback was integrated into free weekly software updates. This process of co-creating with end-users was unprecedented and differentiated Xiaomi from other software providers. Users not only received free software that they helped to create, but belonged to a tribe and felt like their ideas mattered. Xiaomi had successfully created a way to quickly identify and produce whatever the community wanted, culminating in user-friendly software and brand advocates who would become early adopters of Xiaomi’s smartphones.

Quality Technology Accessible To Everyone

When Xiaomi released its first phone in 2011, its product release strategy further differentiated it from the competition and established a robust foundation for future products. It launched a narrow range of smartphones, produced limited batches that were sold online (primarily through its own platform) and shipped directly to buyers. In addition to releasing new generation phones annually, Xiaomi released limited batches of upgraded phones on a weekly basis. Each phone came preinstalled with MI Community, a channel through which users were encouraged to submit feedback and vote upon the upgrades that they wanted made.

Xiaomi leveraged the strength of this community to promote and crowdfund the production of phones. Community members, grateful to be included in the development process, were kept aware about upcoming products before they were launched. Many were so excited to grab these limited devices that they eagerly paid a booking fee to pre-order the phones. Demand was so high that these limited batches would sell out within hours, often minutes, creating a sense of scarcity that fuelled further excitement and demand. This assured sales and drastically cut inventory, distribution and marketing costs. The cost savings enabled Xiaomi to sell high-end smartphones at very low margins (less than 5 percent) and capture the attention of value-conscious consumers beyond the MI Community.

Despite the self-imposed low profit margins, Xiaomi’s overall profits were thriving thanks to the high volume of sales and low overhead costs. Further, while MIUI software was free and easily accessible to consumers of any Android device, Xiaomi received a healthy commission for services purchased through MIUI (games, apps, music). This enabled Xiaomi to eventually invest in new product lines and leverage its resources to create an offline retail infrastructure and expand market reach internationally. With a strong brand and distribution system in place, it was well equipped to manufacture, market and distribute other technology-related goods and services to a wider range of consumers.

Co-creation With Partner Firms To Create Xiaomi’s Ecosystem

Xiaomi capitalised on the IoT movement by redefining MIUI and its smartphones as a core component, akin to a remote control, that could connect to and control a network of services and products within an ecosystem. Its ecosystem strategy was based on the premise that, with the benefits of seamless integration and visual harmony, the more Xiaomi IoT products consumers owned, the harder it would be for competitors to entice them away.

Xiaomi lacked the resources and expertise to quickly occupy the IoT device market and create a sustainable competitive advantage. It chose to invest in other firms that had the knowledge and resources to develop devices that complemented and added value to Xiaomi’s vision of an ecosystem. To ensure the smooth integration of partner firms into its ecosystem, Xiaomi’s founders and executives used their personal and social networks to select firms that aligned with Xiaomi’s core values. Essentially, the firms selected had to be capable of producing high quality technology at a low price, and were also required to follow Xiaomi’s quality specifications, IoT protocol and design aesthetics to ensure a consistent brand image.

In addition to financial investment and brand capital, Xiaomi offered significant value and incentives for partner firms to become its allies. Once allied, partner firms immediately benefited from Xiaomi’s global supply chain, R&D, design, manufacturing and marketing resources. Further, they were able to distribute their own branded products through Xiaomi’s online and offline global distribution channels, thus gaining access to millions of existing customers.

Xiaomi’s decision to leverage personal networks ensured the quality of its ecosystem partners – only firms with exceptional specialisation and high potential were enrolled. The larger the network of partners became, the more market capabilities the firm acquired, putting it in the prime position to quickly meet consumer demand and pre-empt competition. As a shareholder, Xiaomi benefitted from the profits its partner firms made, and received commission from products sold through its distribution channels. With this increased revenue, Xiaomi could continue to enforce a low-margin policy to ensure that consumers received higher value from Xiaomi than from any other brand.

Xiaomi’s approach to collaboration enabled it to entice and lock-in consumers, and aggressively expand its portfolio of IoT products. Today, with over 324.8 million smart devices connected to its platform (excluding smartphones and laptops), Xiaomi has established itself as the world’s leading consumer IoT platform.

The post Xiaomi’s Road to Internet-of-Things Dominance first appeared on China Business Knowledge.

By Ivana Naumovska, Assistant Professor at INSEAD. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2021

One of the ways through which human beings make sense of the world is generalisation, a cognitive shortcut that assumes members of the same group have similar characteristics. Generalisation can be helpful when it is used to size up novel situations, enabling us to anticipate and prepare for the unknown. But it can do serious harm if taken too far. Racism, religious persecution and conflict are but some of the more extreme consequences. In business, too, companies can bear the cost of prejudice.

Volkswagen’s admission in 2015 that it had for years cheated in emissions testing to make its diesel cars look environmentally friendly damaged not only its own brand and sales but also that of other German automakers. Scandalised consumers were quick to tar the likes of BMW, Mercedes-Benz and Smart with the same brush, although there was nothing to suggest that these German firms also engaged in fraud. They were simply guilty by association.

Existing research suggests that a “guilt by association” effect is the result of evaluators projecting a firm’s misconduct onto innocent firms in the same industry (i.e. generalisation). However, the specific underlying cognitive mechanism(s) remain ambiguous.

In a paper in Organization Science, Edward Zajac of the Kellogg School of Management and I show that two processes are likely at play. One is inductive generalisation, whereby evaluators extrapolate from the facts of the given case to innocent organisations with similar characteristics (e.g. industry and country of origin). The other is deductive generalisation, when evaluators’ pre-existing beliefs fuel generalisation.

The latter type of generalisation, as we show, is particularly damaging for innocent firms that fall under negative stereotypes. Left unchecked, it can leave everyone else – consumers, investors and financial markets – worse off.

The Chinese Penalty

Our study examined firms that used reverse mergers (RMs) to publicly trade in US financial markets from 2001 to 2016, focusing on the spillover impact experienced by innocent Chinese firms as a result of misconduct allegations against a fellow RM company. We showed the spillovers were shaped by anti-Chinese sentiment. Such negative sentiment has recently spiked in the US; assaults, harassment and even shootings targeting Asian-Americans have festered as Covid-19, first discovered in China, swept the country.

RMs are controversial in themselves because they are seen as shortcuts to public listings, whereby private company merges with a listed empty shell, thus going public quickly and inexpensively. To study the guilt by association phenomenon in corporate misconduct, we used the US Securities and Exchange Commission (SEC) database to identify all RM firms that were subject to enforcement actions between 2006 (after the SEC imposed new RM-related regulations) and 2016.

We identified 491 firms that faced at least one SEC enforcement action. Of these, 282 were from the US, 126 were from China, and 83 were from other countries. We calculated a three-day cumulative abnormal return (CAR) – around the date the alleged misconduct was announced – for all non-accused RM firms to examine how an accusation against an RM firm affected innocent peers’ stock market valuations.

The results show that innocent RM firms experienced, on average, a significant negative CAR of -0.175 percent. This suggests the spillover effect of inductive generalisation, where one bad apple spoils the entire barrel in the eyes of investors.

What’s more disturbing is the finding that innocent Chinese RM firms experienced a significantly greater devaluation (-0.272 percent) compared to non-Chinese RM firms (-0.149 percent), irrespective of the offending firm’s country of origin. We term this the recipient effect.

When the offending firm was Chinese, the spillover to innocent RM firms was only -0.026 percent. But when the offending firm was non-Chinese, it rose to -0.224 percent. We call this the transmission effect. These results point to investors engaging in deductive generalisation underpinned by entrenched negative stereotypes of Chinese firms, even though most of the alleged wrongdoers were American.

That’s not all. Further analysis show that even Chinese firms that had gone public via the more orthodox route of initial public offerings, rather than reverse mergers, suffered negative spillover (-0.456 percent) from RM-related malfeasance, whether the offender was Chinese or not. It would seem that the only “crime” of these firms was being Chinese.

Media Impact

We also studied the impact of the US media – a shaper of public perception. We collected 8,079 articles with the word “China” or “Chinese” in the title published in major US newspapers between 2006 and 2016. We also identified 753 media reports on RMs in the same period, of which 133 mentioned purported poor accounting practices by Chinese RM firms.

In general, we found that the US media discussed reverse mergers in ways that expressed prejudice, with Chinese RMs disproportionally portrayed as wrongdoers and described in terms of their nationality rather than business characteristics. This, despite evidence that Chinese RMs exhibited higher financial reporting quality than US and other foreign RM firms.

For each accusation event we then counted the total number of positive and negative China-related articles published one day prior. Our analysis shows that media coverage that was on balance negative towards China and Chinese businesses amplified the spillover effects outlined above. Specifically, when an RM firm was accused of wrongdoing at a time when there was more anti-China media coverage, innocent Chinese RM firms experienced even more negative spillover. When the offending firm was Chinese, anti-China sentiments increased the salience of the firm’s “Chinese-ness” while decreasing the salience of its “RM-ness”, thus reducing the negative spillover to all other RM firms.

Finally, we found no difference in terms of spillover experienced by innocent US RM firms and non-Chinese foreign RM firms. Taken together, these results show that Chinese stereotyping was driving the spillover, rather than the “home bias” in capital markets that can hobble foreign firms.

All Too Human

We believe our study is one of the first to address financial markets’ possible susceptibility to national prejudice. Our results provide systematic evidence of generalisation and discrimination in US markets, despite potential economic consequences. Investors, after all, are only human.

The associated economic and social costs could be large. The US stock market dwarfs those of even its closest competitors, presenting a potential gold mine for capital-hunting companies such as Chinese e-commerce giants Alibaba and Pinduoduo. But in 2019, Chinese IPOs in the US more than halved in valuation compared to the 2018 tally, in tandem with rising anti-China political rhetoric in Washington.

While the IPOs rebounded in 2020 amid global market exuberance, new legislation that could delist Chinese companies if they did not submit audited accounts to American regulators – something that is banned by Beijing – could stem the inflow again. The flight from New York could be a lost opportunity for both US investors and Chinese firms, even as bourses in Europe, Hong Kong and China benefit.

“Hate has no place in America” , said US President Joe Biden last month when he signed into law a bill that aims to fight rising anti-Asian hate crimes. Financial market players should pay heed.

The post When American Firms Misbehave, Chinese Companies Pay the Price first appeared on China Business Knowledge.