TencentSKEMA Business SchoolFAN Chao, KISELEV Sergey, SOROKIN Nikita

1. Introduction

Founded in November 1998, Tencent has grown into one of China's largest and most used Internet service portal. Tencent'sdiverse services include social networks, web portals, e-commerce, and multiplayer online games. Its offerings include the well-known instant messenger Tencent QQ that had 798.2 million active users by the date of December 31th, 2012. According to the 2013 annual report of Tencent, there were 24,610 employees in the company. Tencent is the fourth-largest Internet company in the world after Google, Amazon, and Ebay, asof August 2012. In that year, its revenue even outstripped Facebook's by over $2 billion. Now Tencent is striving for global expansion by Wechat, the Chinese most popular messaging and social media app on smartphone.

2. Growth

Why select Tencent

Tencent is an investment holding company that provides a variety of services such as; internet value-added services (IVAS), e-commerce transaction services, on-line advertising andmobile and telecommunication value-added services (MVAS). The company was founded in 1998 and forms one of the largest Internet Service Portal in China (Tencent Facesheet). The main aim of this discussion is to analyze one of the companies that have shown steady growth and development as a case study. Tencent fulfils this requirement because since its establishmentit has maintained a continuous growth using its user-oriented operations and strategies. In addition, the company has shown a lot of progress by expanding its services in the United States, Hong Kong, Europe and also internationally. The second reason why Tencent was selected was the fact that the company operates through effective business models and segment that are essentialfor any entrepreneur willing to start a business.

Is it better than competitors in terms of growth?

Tencent has really achieved a high growth rate compared toother companies in China and also internationally under the samesector. The company looks forward to enhancing development by providing various innovations while introducing new brands to the market making it move a step ahead of competitors. In addition, Tencent is a knowledge creating company that works through imagination and innovation, experience and practice, and

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specifies in key areas of competence in order to achieve a higher growth rate. For example, as at December 2013, Tencent had provided internet and instant messaging services to over 480million users in China. The company provides unique and cost effective services that make it overcome its competitors like SINA Corporation and sohu.com Inc who have fewer users. In addition, Tencent Holdings provides a stiff competition mainly in instant messaging and social networking sites because it is the biggest social media company in China. Moreover, some of itsCompetitors such as SINA Corporation have never achieved substantial growth since they only operate locally and have no international recognition as compared to Tencent (Inside Tencent3).

Growth market analysis for Tencent Holdings

Tencent has shown tremendous growth in sales, profit, company expansion and customer base sectors. The growth of any business is observed through changes in marketing, operations, human resources and finance. Finance is the key indicator of anycompany growth because it signifies the amount of revenues and profits a company has achieved over a certain period of operation. At Tencent, growth had been seen on all the four sectors stated above, but the first criterion will be based on the company sales analysis (Yip). Growth in an organization can be classified as average, high, exceptional or spectacular. Normal growth occurs in businesses with a steady growth of 3 to 10 percent while high growth 10 to 20 percent. Exceptional growth occurs mostly on technology based firms and ranges between 30 to 60 percent of sales. Spectacular growth is rare because an organization must record 100 percent and above in growth.

Tencent achieves an exceptional growth because it sales are in ranges of 30-60 percent rise. From 2012, Tencent has shown high growth from quarterly earnings, CNY2.18 in 2012, CNY2.30 in 2013, and CNY2.72 in 2014. The company has increased the number of on-line users for its mobile chat application three times, a move that has seen the company’s online sales make 37 percent rise. This was a 4.0 billion Yuan (645 million U.S. Dollars) profit in the first-quarter of the year. Additionally, the company’s sales margin grew bigger by selling online games such as “League of Legends” and Legend of Yulong” that boosted the company’s revenues by 40.4 percent (approximately 13.5 billion Yuan). On the other hand, revenues

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from other non-mobile online games increased to 34 percent whilesales from e-commerce services increased by 14 percent (Yip). The company’s share index closed up 5 percent in the year 2013, 1.2 percent higher than the value set by the Hang Send Index. Its shares maintained a 10 percent rise from 2012 up to date, a growth rate that was not seen on any other company in Hong Kong.Tencent has a retain forecast in China that will see its sales reach 395 billion U.S. dollars by 2015 (BBC News Business).

3. Business Model: value proposition, value architecture, value equation.

A business is a mode of conducting business where an organization is able to gain sustainability (Rappa 21). Tencent has the best business model among all other technology based companies in the west. Most internet firms give away free thingsto customers in order to gain profits through online advertising, for example Google. There are also other firms who offer e-commerce services and get a lot of revenue in return, but low profit levels that hinder them from growing. Tencent never give away services, but it manages to attract million of users worldwide. In order to achieve effective growth and earn more profits in a business, any entrepreneur should utilize the three pillars of business model sustainability. These are value preposition, value architecture and value equation. An effectivebusiness model guides an organization oh how to offer its goods and services in order to make the customers happy and at the same time achieve the expected revenues (Osterwalder and Yves 470).

Value proposition

Value proposition is an aspect of a business model that entrepreneurs use to put value to a product or service and offerit to a potential recipient. Value cannot be limited to goods and services while value proposition not focus only on source ofrevenues, but they are pillars of a business model. Tencent has managed to maintain its value proposition by offering services that are unique and satisfied their intended users. QQ instant messaging, a service offered by Tencent has over 800 million users. This WeChat social-networking application resembles WhatsUp Application, but it has a higher number of users than any other social-networking app among all Western rivals. Value preposition from this service is achieved because Tencent asks its users to pay of value-added services, generating for the company huge sums of cash. The company puts more emphasize on Tencent project: Fan, Kiselev, Sorokin

personalities and self-expression with differentiated membershiplevels.

Tencent’s main instant messaging platform, QQ, offers totalsolution for most internet users. The company has added value tothis service because it is its most essential application that attracts generated a lot of income for the firm. In order to ensure total value proposition and meet customer demands, QQ hasessential online communication functions, such as video, voice chats, transmissions, text messaging and photo sharing. In addition, the company ensures satisfaction to its clients in thebusiness sector by providing QQ enterprise service that connectsbusiness entities, Tencent Messenger (TM), designed for office use. In order to ensure safety and privacy for QQ users, Tencentoffer free security software called QQ Doctor that protects users’ gadgets from any harm from viruses. In addition, there isa QQ Mail service that enables users send emails. Tencent’s business model has assisted the firm in covering a range of wireless services through value proposition integration.

Value architecture

The modern business landscape differs a lot with the traditional landscape due to the technological advancements and globalization. Most organizations today work hard to transform and adapt to the current business landscape in order to win the competitive advantage. Strategic innovation plays a vital role in the success and sustainability of any business in today’s global economy. Value architecture is one of the business modelpillars that define how an organization effectively manages its resources and adapts to the changes introduced by the external environment (Currie 12). Tencent Holdings redefined its value architecture and came up with a new business model that makes itstand out amongst the competitors in the social networking industry. Social networking Site’s biggest competitors, MySpace and FaceBook have tried to use various strategies in order to defeat Tencent, but their plans have never succeeded. Tencent holds a place in the social networking industry due to its outstanding customer relations, product innovation, infrastructure management, technology, market considerations, and financial aspects.

In terms of customer relationship, Tencent highly exploits customer data and internet behaviour in order to figure its maincustomers and provide them with necessary services and innovations. This move enables the company build better customerTencent project: Fan, Kiselev, Sorokin

relations and gain more users from their various referral programs. In addition, the company offers popular services that are in line with the current market focusing on customer needs, and brand creation. When it comes to product innovation, Tencentimproves its business landscape through offering services that are user sensitive. It also masters the prevailing market trendsthrough many researches it conducts online and its tough Information Technology infrastructure. In order to increase its area of specification and promote value architecture, Tencent has a larger network range that is dense and tightly-bounded that available at every corner of the world.

Value equation

Value equation is a mathematical approach that an organization uses to determine the net value from using products. The total value is achieved through incremental revenue, decrease in costs and relationship value. Figure 1 shows a representation of how an organization achieved a value equation for its products and service. From the figure, customervalue can be achieved by subtracting price from value created. In addition, market value is achieved through deducting cost from price. The total value of a product is the value created minus the cost.

Figure 1: Value Equation

Tencent generates a lot of revenues from its services that makes it get a higher total value. The company generates most ofits revenues through sales of virtual goods found in its instantTencent project: Fan, Kiselev, Sorokin

messaging and social networking business (Alicia). The sales income for Tencent come from two channels services: wireless mobile value-added service and internet value-added service. Moreover, online advertising is another marketing strategy used by the company. The values shown on table 1 are Tencent’s revenues for the year 2012 and 2013. Following the formulas stated above, the total value for each channels can be calculated and they are highlighted in red on the second last column.

Channels Service Revenue2012 ($)

Revenue2013($)

TotalValue($)

Value(%)

Internet Value-Added service

6,914,974

13,530,711

6,615,737

95.6726

Wireless mobile Value-added service

3,398,984

5,905,599

2,506,615

73.746

Online Ads 1,826,049

1,962,171

136,122 7.2175

Others 154,537 412,479 257,942 1.6

Table 1: Total Value calculation using the value equation for Tencent sales revenuesbetween 2012 and 2013 (Inside Tencent)

Tencent uses this business model to make sales from virtualitems, e-commerce and diamond memberships. Users for QQ Show, QQpet, and QQ games buy virtual items. The company uses virtual%currency, Qcoin, to allow users make online purchases. Fromtable 1, the last column shows that Tancent receives 95% of itsrevenue from Internet value-added sales, and 73% from Wirelessmobile Value-added services. Other users contribute for lessthan 10% of the company revenue.

4. Value creation: value extraction, value capture, value origination.

Value creation in an organization is divided into two sectors, value received by customers and value received by the organization. Effective management of value exchange between thefirm and the consumers assists in successful growth and development. A business model assists in value creation in an organization. Most firms have capital budgeting process that helps them evaluate their investment opportunities. In order to achieve effective value creation process towards customers, an

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organization should determine the following: the amount of cash to extract from customers, how to sell more of the excising products and services demanded by customers and how to sell new products and services in the market. The present competitive environment with many businesses fighting to win a competitive advantage, customer value has become of great importance in terms of benefiting the customer (Currie 30). Tencent has an effective value creation process that makes it win most customers in the social networking industry and achieve an exceptional growth. The company creates value in three ways; value extraction, value capture and value origination

Value extraction

Wireless Internet services have become one of the most booming businesses today. Tencent has managed to cover a wide range of wireless services that have gained a lot of demand frommany users globally. Tencent ensures value extraction by focusing on internal efficiencies through product innovations and effective infrastructure. The firms’ operations are very efficient and give no room for reluctant employees. The company makes its users more comfortable by offering one-stop services in entertainment and social networking. Tencent targets all internet users, especially the younger generation who love entertainment and social functions. The company has created value for its services through different activity configurationswith a major focus on user’s needs. Its products and services are designed to extract more cash from customers.

Value capture

Organizations capture customer’s attraction by adding valueto their products and services. Tencent understands the needs and desires of every internet user that makes the company introduce unique services that capture users’ attention. The company has partnered with the media services who always advertise their services. The following approach has made Tencent attract many famous companies both locally and internationally. In addition, the company’s resources and assetsare very crucial. The company has almost 10, 000 employees whosework is to enhance the company’s growth and innovation capabilities. Every employee has a responsibility of ensuring customers get value for their cash. Tencent has put 50% of its staff to research and development department. The high rate of value capture used by the company has made it own an outstandingreputation and brands in the country. Tencent project: Fan, Kiselev, Sorokin

Value origination

Tencent upholds the origination strategy by originating value. Most of the company’s products are more demanded by customers and they value paying for them. Tencent keeps on introducing new services to the social networking industry and irrespective of price, customers always buy them. In order to implement the aspect of value origination, Tencent has been focusing on the following factors. Firstly, the company has developed many offers that are well compelled by customers. For example, the introduction of Tencent Charity Fund attracted manyusers to offer their donations. The following factor offers initial, spontaneous and efficient growth that has been accelerated and maintained by customer retention and engagement.Secondly, the high growth rate achieved by the company through value extraction makes it capture all values making it hard for competitors to catch up. Finally, the company makes use of its strength in compelling offers to increase its productivity (Larreche 118-121).

5. Expertise (fr. 'métier'), core competences, dynamic capabilities.

Expertise

Presently, Tencent is providing value-added Internet, mobile andtelecom services and online advertising under the strategic goalof providing users with "one-stop online lifestyle services". Tencent’s leading Internet platforms in China – QQ (QQ Instant Messenger), WeChat, QQ.com, QQ Games, Qzone, 3g.QQ.com, SoSo, PaiPai and Tenpay – have brought together China's largest Internet community, to meet the various needs ofInternet users including communication, information, entertainment, e-commerce and others.

Core competences

Based on Tencent’s QQIM, it develops a huge scope of online service both on PC platform and mobile. Right now, QQIM has morethan 800 million users, which means almost all of Chinese peoplewho have computer and Internet install this messager. As I see, the core competence of Tencent is the huge amount of users. WhenTencent launches any new service or software, it will public on QQIM. So Tencent doesn’t need to try lots of ways to attract people’s attentions from zero, but from millions of users. Another strategy of Tencent is to link every service and product

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by QQ account. By doing this, people usually get discount because they are already the users of Tencent. This is truly effectual for Tencent to keep people to stay, even attract the users from other companies.

Dynamic capabilities

The Tencent by opening platform path has enhanced the enterprise's dynamic capability to maintain a sustainable competitive advantage. Tencent depends on its strong users groupto create a well competitive product service platform in order to fulfill users’ diverse needs. Tencent’s leap-type developmentmode is classic dynamic capabilities. Such flexible dynamic developing strategy can help enterprise make quick reflections to deal with market variation and market shares. With the dynamic capabilities, Tencent has been the best one in the industry and established an unshakable position now.

6. Market and growth granularity

Social networking in China is considered a mature industry because it gives high revenues to the Chinese Stock Index. The main reason for the high growth on this industry is the fact that firms have varying degrees of exposure to various segments that achieve different growth rates. Wireless service business achieves a faster growth than a fixed line business. Moreover, these firms experience different levels of exposure to fat-growing economies outside China. Tencent has managed to create agood market for its Social Networking Services and achieve a desirable growth granularity. The company has a very strong database that outperformed its competitors on shareholder value and top-line growth between 2012 and January 2014 (BBC News Business).

Tencent has adopted a granular view of its market through offering a comprehensive range of services. Its first step in Instant Messaging app in China created an advantage in the social network market over other firms offering social networking services. Tencent’s adoption of granular view of growth has made it the monopoly of the Chinese Instant Messagingmarket. In addition, the company has managed to achieve a large user base that increases its chances of achieve a faster growingmarket segment.

On the other hand, Tencent has been on the first lane in the fight for market share gains. The company has recorded an

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organic growth through tremendous gains on the Chinese share market. It competes of various market segments including wireless internet, Instant Messaging and e-commerce. The companyrecorded the highest shareholder total return from in June 2013 of 7.8 percent, and it has continued to fight for its position in the share market (The Economist). Tencent has not yet implemented the mergers and acquisition (M&A) strategy. It has concentrated more on improving its market segments by gaining its shares in order to receive high dividends that might be utilized in promoting growth. Tencent’s connection between capacity of value creation and portfolio momentum is high because the company’s organic growth is achieved through creation of market growth strategies like the introduction of new services. Tancent has achieved organic growth in China by having the largest number of uses as shown in figure 2 below (Tencent Factsheet 2).

Figure 2: Tencent’s Active Instant Messaging User Accounts as at June 2013 (TencentFactsheet)

In conclusion, Tencent Holdings has upheld high growth ratein the Social Networking Industry effective business models, value creation and market growth granularity. The company offersits customer’s one-stop services emphasizing on customer personalities, and self expressions, and offering different membership levels to all Chinese users. It also focuses on user needs and values while following the social media marketing trends. The following case analysis acts as good basis for individual entrepreneurs to understand how to promote growth in their forms. Tencent’s business models, value creation

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strategies and market growth and sustainability would play a major role in understanding the concept of maintaining growth ina business.

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