Tencent

SKEMA Business School

FAN 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's diverse 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, as
of 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 and
mobile 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 establishment
it 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
essential for 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 to other companies in China
and also internationally under the same sector. 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 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 480
million 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 its
Competitors such as SINA Corporation have never achieved substantial growth since they only
operate locally and have no international recognition as compared to Tencent (Inside Tencent 3).
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 any company 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

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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 from
other non-mobile online games increased to 34 percent while sales 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 things to 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 effective business 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 offer it to a potential recipient. Value cannot be limited to goods and
services while value proposition not focus only on source of revenues, 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 personalities and self-expression with differentiated membership levels.
Tencent’s main instant messaging platform, QQ, offers total solution for most internet
users. The company has added value to this 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 has essential online communication functions, such as video, voice
chats, transmissions, text messaging and photo sharing. In addition, the company ensures
satisfaction to its clients in the business sector by providing QQ enterprise service that connects
business entities, Tencent Messenger (TM), designed for office use. In order to ensure safety and
privacy for QQ users, Tencent offer free security software called QQ Doctor that protects users’
gadgets from any harm from viruses. In addition, there is a QQ Mail service that enables users

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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 model pillars 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 it stand 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 main customers and provide them with necessary services and
innovations. This move enables the company build better customer 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, Tencent improves its business landscape through offering services that are
user sensitive. It also masters the prevailing market trends through 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, customer value 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.

Tencent project: Fan, Kiselev, Sorokin

 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 of its revenues through sales of virtual goods found in its
instant 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 Revenue Revenue Total Value

2012 ($) 2013 ($) Value ($) (%)
Internet Value-Added service 6,914,974 13,530,711 6,615,737 95.6726
Wireless mobile Value-added 3,398,984 5,905,599 2,506,615 73.746
service
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 revenues between
2012 and 2013 (Inside Tencent)
Tencent uses this business model to make sales from virtual items, e-commerce and
diamond memberships. Users for QQ Show, QQ pet, and QQ games buy virtual items. The
company uses virtual %currency, Qcoin, to allow users make online purchases. From table 1, the
last column shows that Tancent receives 95% of its revenue from Internet value-added sales, and
73% from Wireless mobile Value-added services. Other users contribute for less than 10% of the
company revenue.
4. Value creation: value extraction, value capture, value origination.

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 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 the
firm 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 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
from many 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 configurations with 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 value to 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 assets are very crucial. The company has almost 10, 000 employees
whose work 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 outstanding reputation and brands in the country.
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 many
users 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 (Larréché 118-121).

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 5. Expertise (fr. 'métier'), core competences, dynamic capabilities.
Expertise
Presently, Tencent is providing value-added Internet, mobile and telecom services and online
advertising under the strategic goal of 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 of Internet 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 more than 800 million users, which means almost all of Chinese
people who have computer and Internet install this messager. As I see, the core competence of
Tencent is the huge amount of users. When Tencent 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
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 group to
create a well competitive product service platform in order to fulfill users’ diverse needs.
Tencent’s leap-type development mode 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 a good 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 Messaging market.
In addition, the company has managed to achieve a large user base that increases its chances of
achieve a faster growing market segment.
On the other hand, Tencent has been on the first lane in the fight for market share gains.
The company has recorded an organic growth through tremendous gains on the Chinese share
market. It competes of various market segments including wireless internet, Instant Messaging

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and e-commerce. The company recorded 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 (Tencent
Factsheet)
In conclusion, Tencent Holdings has upheld high growth rate in the Social Networking
Industry effective business models, value creation and market growth granularity. The company
offers its 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 strategies and market growth and
sustainability would play a major role in understanding the concept of maintaining growth in a
business.

Tencent project: Fan, Kiselev, Sorokin

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