Strategic Management Analysis Of Tencent Company

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Group Project

Strategic Management Analysis Of Tencent Company

San Francisco State University

Group 7

Table of Contents

I. Introduction………………………………………………………3

II. External Environmental Analysis………………………………4

III. Competitors…………………………………………………….5

IV. Internal Environmental Analysis………………………………6

V. Strategic Analysis……………………………………………….8

Business Strategies

Corporate Strategies

VI. Problems Identification…………………………………………..8

VII. Recommendations……………………………………………….9

VIII. Work Cited…………………………………………………….10

IX. Appendix…………………………………………………………12

I. Introduction

Tencent Inc. is a Chinese IT and investment holding company that was founded in 1998. Its headquarters is located in Shenzhen, China. Tencent provides mass media, Internet and mobile phone value-added services including web portals (QQ.com), social networks, popular instant messenger (Tencent QQ), online games, e-commerce, and series of softwares (Lim, 2014).

Vision: To be the most respected Internet company.

Mission: To enhance people’s quality of life through Internet services.

Value: Integrity, proactiveness, collaboration, and innovation.

Tencent is one of the largest internet service providers in China, and the fifth largest one in the world after Google, Amazon, Ebay and Facebook. It possesses the largest amount of users, and serves the widest range in the internet service industry. Moreover, Tencent offers a diverse mix of services and counts both individuals and organizations as customers. Tencent is committed to make its products and services into people’s daily life by targeting diversified market segments and bringing convenience and pleasure to all of its customers. As a result, the company creates a win-win situation by orchestrating a healthy internet environment based on the platform it offers.

II. External Environmental Analysis

General environment (PESTEL model analysis) Political factors:Chinese government pays more attention to Internet laws construction; increasing regulation on Internet services and applications (information security, Internet news media, online game audit);Increasing patent protection.Technological factors: Revolutionary progress of Internet technologies and increasing Internet penetration; Rising popularity of smartphones, development of 3G network, and increasing number of Internet users offer great potential and opportunities to IT companies;The development of the third-party payment platform.Socio-cultural factors:Chinese youths tend to spend more time on playing online game. This lifestyle stimulates prosperity of online games and e-commerce; Increasing opportunities & competition in the Chinese online gaming market; a large amount of local players vs. the entry of foreign gaming companies;In past 5 years, China has over 200 million mobile Internet users which increased by 105%. It is estimated that by the end of 2011 the number of uses will reach 400 million;In Chinese market, e-mail cannot easily satisfy consumers’ needs anymore, because the fast pace of life requires more effective telecommunicate methods (ex. instant messaging applications). Opportunities: Some software have been blocked in China, this protects domestic IT companies from international competition (ex. Facebook, Twitter);Tencent can build up partnership with mobile phone manufacturers to produce professional smartphones that cater to Tencent products.Threats:Products’ life cycle has been shortened, catching up with development requires huge investment;Emerge of all kinds of new services pushes IT companies to spend more time and money on R&D.It is no longer about promotional competition. Now it is a competition about how to meet customers’ needs and wants.
Industry environment (5-Force model analysis) Threat of entry: medium-lowIn order to keep up with the pace of globalization, the government introduced policies to encourage the development of IT industry. This lowers the entry barriers. However, even though the barriers has been reduced, the customer loyalty and dependency (high switching cost) can weaken the threat of new entries. It is very difficult for consumers to change their habits and switch to other brands. Threat of substitutes: mediumTencent has a comprehensive and mature service system, as well as a large market share.Bargaining power of suppliers: low. The bargaining power of suppliers affect production cost directly. In recent years, the number of suppliers who provide internet infrastructure is growing rapidly.Because the high turnover rate of IT equipments, buyers may buy more advanced equipments at the equal or lower price.Bargaining power of buyers: low. With the improvement of people’s living standards: consumer’s purchasing power increasedvirtual consumption being recognized. Tencent launched its own virtual currency. Some users buy it in order to get personalized value-added services. Currently, few competitors can offer services as good as Tencent’s; consumers have limited choice .Rivalry among existing competitors: highTencent competes with all the large Chinese Internet service companies, including Baidu, Sina, Alibaba, and many online gaming companies. Moreover, many foreign companies are considering targeting Chinese market. Opportunities:Macro-environmentThe fastest growing industry in China;China advocates a harmonious society which need a better managed internet environment;Support from the government.Users-environmentInternet services have already blent into people’s lives; internet users need more effective and efficient online communication;Technological progress strengthens Tencent’s ability to satisfy usersThreats:Many big companies joined the competition and prepare to invest lot of money;Rapid internet improvement; there are new products coming out all the time, and Tencent need to spend a lot of money in order to catch up with the trend.Competition from foreign companies (once deregulated, can be highly competitive).

In conclusion, Tencent has achieved certain competitive advantage in the Internet service industry. It has diversified, successful product lines, mature Internet service experience, a huge number of users, and a vast amount of user data. It also benefits from government support. However, it faces the dual pressures from domestic and potential international competitors. In order to break the ice, Tencent needs to focus on differentiation to provide products with more unique features (higher values).

III. Competitors

(for detailed information, see Appendix-table 2. competition)

Dimensions Targeted firm:Tencent first direct competitor: Alibaba second direct competitor:Baidu potentialcompetitor (if any):Facebook
Price of the product(s) or service(s) offered 1. Free service+subscription fee charged for upgrade services and additional functions;3. Advertising fee ¥10,000~480,000/day. 1. Inexpensive annual membership fee;2. Inexpensive advertising fee;3. Alipay operation fee (withdrawal/instant transfer): .1%~.5%. 1. Free search engine, mass media, map, translation, and forum functions;2. Advertising fee based on click rate. 1. Free basic services;2. Advertising fee depends on the size of audience and client budget;3. Subscription fee for upgrade services and additional functions.
Customer service 1. 24/7 customer service;2. “One-step diagnosis” function;3. Specialized service divisions;5. FAQs. 1. 24/7;2. Trading services;3. Safety & Support functions. 1. 24/7;2. Specialized service divisions;3. FAQs. 1. 24/7;2. Functional helps;3. Security and Safety;4. FAQ.
Market share (in China) Dominates IM & community: 76.5%;B2C e-commerce: Tencent 5.6%, JD.com 17.1%;Online advertising: 5% Dominates B2B (54.4%)/C2C (85%) e-commerce;Online advertising: 17.3% Dominates online research (72.3%);Online advertising: 32.2% ~0% (blocked; policy factor; has the potential to rapidly invade Chinese market once deregulated.)

In conclusion, Tencent has been dominating the Chinese IM (Instant Messaging) and social networking industry (~77% mkt share). However, while forming an B.A.T. oligopoly with Alibaba and Baidu (Chinadaily.com), it still faces a cutthroat competition from them. On the other hand, although being protected from foreign competition by the Golden Shield Project, the Great Firewall, Tencent still faces the pressure from potential international competitors (ex. FaceBook), it has to build up core competencies to prepare for future policy changes.

IV. Internal environmental analysis

Aspects Core competencies
ResourcesTangible AssetsFinancial Information: Gross Margin: 54.63% Net Profit Margin: 27.45% ROA: 17.15%, ROE: 32.8%, ROI: 24.98%EPS growth (5 years) 40.53% Gross Profit out of the total revenue comes 48.98% from VAS, 3.73% from Online Ads, 0.92% from E- Commerce Transaction66.5% of investments in subsidiaries and associates occupy the total asset.Equities: Subsidiaries*: Epic Games, Riot Games, Tencent TechnologyAssociates*: 20% shares in Dianping 15% in JD.com, 20% in Didi Dache, 28% in CJ Games Intangible AssetsCulture & Reputation:“Fanatical and cult of personality” nurtures a cut-throat culture typified by the fact that it runs two companies: QQ and WechatFinancial: Market Cap: $136bn (The Fourth largest Internet company worldwide) Others:Online Payment method*Licensed Online Contents*WeChat online infrastructure* StrengthsStrong brand influence and customer loyalty;Excellent invent capability;Stable free cash flow and excellent earning growth that lead to strong investor confidence.Tencent oversees the development of the Company’s proprietary technologies, including the basic international mobile platform, massive-scale online application systems, and foreign online games acting; focuses on R&D of software and network application systems.
CapabilitiesEstablishment of innovative online infrastructure of Wechat as “Infra Application”:Linking mobile payments process with any applications such as WeChat, Taxi application, online game, and online shopping applications.Diversified Investments and Synergy Effects:Investing in not only WeChat, but also different businesses: Snapchat, Weebly, Navinfo, Candy Crush Saga. They aim at the synergy effects which those different businesses are linked together on the same page of WeChat and all users are given the access to all applications.1300 million active users:The total current users of QQ and WeChat is 1086 million people. It is expected to be 1300 millions. Tencent hold such a huge market and is able to make them access to its subsidiaries such as online game companies. WeaknessesFocuses on too much products in the same time, hard to concentrate energy, and only earn a few incomes from each of them.Some businesses have spread to other areas with which Tencent has limited information and experience.

In conclusion, Tencent is a competitive corporation in the Chinese Internet service industry, it has relatively good enterprise resources and capabilities. However, it offers too much products at the same time that it can hardly focus its energy together to build up sustainable core competencies and achieve competitive advantages.

V. Strategic Analysis

Business strategies

Integration strategy:

– Differentiation: over 600 million active users of WeChat and 800 million QQ users worldwide, and 82% market share in China. In order to exploit the huge market, Tencent decided to focus on “Open Mobile Platform Strategy” so that it lets developers use platforms like WeChat for free and let them develop innovative applications.

– Cost leadership: Tencent added mobile payment service to the platform so that customers with the WeChat account are able to pay for any services of 0.85 billions applications. It can take an advantage of cost leadership as well by bringing all services onto one mobile platform (economies of scale). In order to strengthen WeChat as a platform, it established “WeChat Group.”

Corporate strategies

Vertical integration:

-Highly vertically integrated, internalized R&D, production, and after-sale services (Hart, Ruiz, Lai & Greene, 2009);

-Also employs taper integration – ex. outsource e-commerce operation to JD.com;

-Mainly competes in the downstream industries (copying innovative ideas in upstream industries from competitors)

Diversification:

Product diversification strategy (products include QQ, Wechat, online games, web portal, SaaS); related-constrained diver strategy (Internet services only, constrained by existing competencies and resources); limited diversification with dominant business (74.4% 2013 revenue comes from VAS business, mostly sales of avatar and virtual items in online game business.

Acquisitions, alliances, networks:

Tencent’s diversification strategy is to acquire online game companies like Riot Games and Epic Games, invest in shares of multiple companies like e-commerce, web portal, and SNS, and make an alliance with international companies as a part of global strategy like Gree and Mixi. All of these different services are integrated into a open mobile platform and available to the users of Wechat.

Global Operations

Alliance with Gree, a Japanese SNS that focuses on mobile games; share “Gree Platform” and “QQ Wireless Game Center.”

Alliance with Mixi, a Japanese SNS, provide its users with Mixi’s mobile;

In conclusion, IT industries are very competitive, easy to enter, easy to imitate, and difficult to maintain value in its services since there are many potential substitutes and entries. These trends in IT business encouraged Tencent to seek for diversification and synergy effects by relating online services with one open platform. Tencent also aggressively built up partnerships, merges, acquires and invests in diverse IT services to appeal the large number of users into the platform.

VI. Problems identification

Copying/lack of innovation: A former CEO and President of SINA.com, Wang Zhidong, said, “Pony Ma is a notorious king of copying.” Jack Ma of Alibaba Group stated, “the problem in Tencent is no innovation; all things are copies.” As of 2009, the company held 400 patents.

Three “low”s consumer group(Figures 5) : Most of the customers come from “low age, low income level, and low education level,” which means Tencent can hardly position itself as a high-end company. Low purchasing power of users limited the development of Tencent’s high-quality products.

VII. Recommendations

Strategy alternative 1

Independent innovation (R&D):

technological purchase (pulls down the technological threshold);

technological cooperation (to seek improvement in technological capabilities & fully utilize available technological platform, catching up with trends & keep sustainable market competitiveness)+joint development;

technological leader (independent R&D; develop internal technological innovation after accumulating knowledge and technological capabilities through cooperation).

*build up innovative brand image (instead of the ‘king of copying’ reputation it has now).

Feasibility:

Tencent’s established brand power and abundant capital ensures the possibility of substantial R&D inputs;

Resource integration: mature management skills & experience;

Network management: lots of technological cooperation opportunities due to the past network managements.

Broad brand awareness makes it easy to market and promote innovations and build up a innovative brand image.

Strategy alternative 2

Remodel the business of Tencent:

To expand its market, Tencent should come up with initiatives targeting different consumer groups to include seniors, middle/high income, and highly educated consumers.

To solve the “low age” problem: simplify its products or debut an integrated course to educate high age consumers.

To solve the “low income” problem: target customers with different income levels that introduce a series of free products and then charge the appropriate fees according to the marketing research. However, Tencent can offer paid services based on its free product that differentiate its consumers between who pay for it and who do not pay.

To solve the “Low education level” problem: create some applications that it is widely used in high education level consumers group like online translator.

Feasibility:

Employing technician to improve Tencent’s existing products in order to make its products can face to more consumer groups.

Publicizing its new concept to target market.

VIII. Works Cited

1:Annual Report. (2013). Retrieved from Tencent Holdings Limited website: http://www.tencent.com/en-us/content/ir/rp/2013/attachments/201302.pdf

2: Tencent Holdings on the Forbes Global 2000 List. (n.d.). Retrieved 2014, from http://www.forbes.com/companies/tencent-holdings/

3: Lunden, I. (2014, March 11). If WhatsApp Is Worth $19B, Then WeChat’s Worth “At Least $60B” Says CLSA | TechCrunch. Retrieved 2014, from http://techcrunch.com/2014/03/11/if-whatsapp-is-worth-19b-then-wechats-worth-at-least-60b-says-clsa/

4: Tencent – Products & Services – Mobile & Telecommunications Value-added Services. (n.d.). Retrieved 2013, from http://www.tencent.com/en-us/ps/mtservices.shtml

5: Tencent Holdings Ltd, 700:HKG financials – FT.com. (n.d.). Retrieved 2014, from http://markets.ft.com/research/Markets/Tearsheets/Financials?s=700:HKG

6: Clover, C. (2014, March 19). Financial Times | Error | Akamai Error. Retrieved 2014, from http://www.ft.com/intl/cms/s/2/56a160aa-a86f-11e3-a946-00144feab7de.html#axzz35Ngs225b

7: Horwitz, J. (2014, January 2). Tencent tips in $100 million investment for Chinese taxi app. Retrieved 2014, from http://www.techinasia.com/tencent-tips-100-million-funding-chinas-leading-taxihailing-app-wechat-integration/

8: Tencent – About Tencent – Management Team. (n.d.). Retrieved 2014, from http://www.tencent.com/en-us/at/managementteam.shtml

9: Tencent’s five forces model analysis. Retrieved 2014, from

http://wenku.baidu.com/view/62dbe62b2f60ddccda38a096.html?re=view

10: Lim, S. J. (2014). Tencent, chatting its way to the apex. Shares Investment : Facts &

Figures, Retrieved from

http://search.proquest.com/docview/1530201250?accountid=13802

11: Gittleson, K. (2014, March 18). BBC News – Tencent and Alibaba battle for internet dominance in China. Retrieved 2014, from http://www.bbc.com/news/business-26540666

12: CHINA 2.0. (2010). Retrieved from Stanford University website: http://iis-db.stanford.edu/evnts/5936/Tencent_Taobao_Baidu_Clark_and_Liu.pdf

13: Sabrina. (2014, May 1). Baidu, Alibaba and Tencent Financial Statements — China Internet Watch. Retrieved 2014, from http://www.chinainternetwatch.com/7276/a-glimpse-at-chinese-internet-giants-2013-financial-statements/

14: Qiang, X. (2011, February 18). Retrieved 2014, from http://www.chinadaily.com.cn/business/2011-02/18/content_12042514.htm

IX. Appendix

Online Games QQ Games, CJ Games, Riot Games, Epic Games, “Candy Crush Saga” provided from a developer,
SNS Qzone, Tencent Pengyou,
Web Portal Soso.com, qq.com, Sohu, Dianping
Instant Messenger Wechat, QQ
Ecommerce PaiPai.com, JD.com, Tenpay,
Others NavInfo (map-making service), WeShow (video-making service)QQ.com (ebook)QQ Login, QQ Mail list

Table 1. Tencent’s products

Dimensions Targeted firm:Tencent first direct competitor: Alibaba second direct competitor:Baidu potentialcompetitor (if any):Facebook
Price of the product(s) or service(s) offered 1. QQ, WeChat, Qzone, some online games, basic cloud computing: Free;2. Upgrade services, additional functions: subscription fee (ex. QQ membership fee=¥10/mon, WeChat stickers=¥6/set, Tenpay withdrawal fee .25%~.5%);3. Advertising fee ¥10,000~480,000/day. 1. Alibaba Supplier membership: individual=¥2300/yr, enterprise=¥2800/yr;2. Taobao (C2C) seller subscription fee: ¥0-98/mon;3. Alipay operation fee (withdrawal/instant transfer): .1%~.5%. 1. Search engine, mass media, map, translation, forum, etc.: free;2. Advertising fee: ¥5000/year+service fee+billing based on click rate. 1. Social network page, some online gaming: free;2. Advertising fee: depends on the size of audience and client budget (models: cost per click/cost per thousand impressions);3. Subscription fee for upgrade services and additional functions (games, apps).
Customer service 1. 24/7 customer service;2. “One-step diagnosis” function;3. Columns categorized by product types;4. 4 special divisions: online gaming service, account service, service provisioning, and Tenpay service;5. FAQs. 1. 24/7;2. Trading services: Account management (My Alibaba), Trademanager, and Trade alert;3. Safety & Support: complaint; help center (self-service+special topics); contact us; safety & security center; policies & rules. 1. 24/7;2. 4 special divisions: complaint & report, account safety, financial services, feedback & suggestion;3. FAQs. 1. 24/72. Functional helps3. Security and Safety4. FAQ
Market share (in China) Dominates IM & community: 76.5%;B2C e-commerce: Tencent 5.6%, JD.com 17.1%;Online advertising: 5% Dominates B2B (54.4%)/C2C (85%) e-commerce;Online advertising: 17.3% Dominates online research (72.3%);Online advertising: 32.2% ~0% (blocked; policy factor; has the potential to rapidly invade Chinese market once deregulated.)

Table 2. Competition

*Tencent Hodingd, Ltd, and Alibaba Holding Group, Ltd, taking up 70 percent of the total market value of all listed Internet companies in China

Figure 1. Baidu-Alibaba-Tencent Sales Revenues in 2012-2013

Figure 2. Internet companies market cap

Figure 3. Revenue in Q1 2013 shares within operator basket

Figures 4. The forecast of China PC Online Games Market

Figures 5. Tencent’s Consumer group distribution




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