SWOT Analysis Tencent Limited Holding

Introduction

In March 2010 McKinsey published an article dealing with the obsession of the Internet of the Chinese population by concluding the following statement „People in the country’s 60 largest cities spend 70 percent of their leisure time online. Seismic changes in the consumer market are likely as a result.“1 China’s Internet population increased at the end of 2012 to a total number of 564 million users compared to approximately 250 million users in 2008, according to the China Internet Network Information Center (CNNIN).

2 The main reasons for this enormous growth is strongly connected with different aspects, as for instance the general growth of Gross-Domestic-Product (GDP), lower priced computers, more affordable telecom connection fees, government support to Internet usage, and low-cost entertainment aspects. This affected, that also lower income groups started to use the Internet.3 Answering to this fast development and growth of Chinas Internet population, the Internet service industry is about to increase up to 17 percentages in 2013. In the last years, the Internet service industry achieved even annual growing rates up to 20 percentages, resulting of the booming demand.

The Internet market seems to be quite satisfied for the moment but even in the next years researches forecast an annual growth of approximately 10 percentages. This is due to the expansion of existing offers in the area of e-commerce and advertisement services.4 Observing the numbers, 148 million people have already experienced Internet shopping since 2010 and it is expected that 30 million people will additionally make use of it by the end of 2015.5 The Economist stated, “the future of e-commerce is China”.6 Besides the e-commerce and advertisement services also the application services became more and more important over the last years because of the introduction of smartphones and tablets.7

Recognizing the trends, Tencent Holdings Limited decided 20 years ago to
enter the market and finally became the largest Internet Service Portal in China. Tencent still enjoys a quasi monopoly position, which is hardly endangered due to rising competition. That is the reason why they need to think about using new opportunities and fending upcoming threats. Consequently Tencent should carry out a Strengths-, Weaknesses-, Opportunities-, Threats-Analysis (SWOT-Analysis), which includes the study of their own weaknesses and strengths in the internal dimension and the resulting opportunities and threats giving from external influences.

This paper will firstly give an overview about the internal strengths and weaknesses. Furthermore Tencent’s external environment will be analyzed and the results will be used for defining the opportunities and threats of the company Before starting with the literal SWOT-Analysis for Tencent the first Chapter gives a short explanation about SWOT-Analysis in general.

2 Definition SWOT- Analysis
As mentioned in the introduction, there are two different parts of changes in the environment, which lead to affect the performance of companies. This chapter will explain the difference between internal and external environment and their interaction. Furthermore the next part will explain the so-called SWOT-Analysis in detail.

Internal environment analysis points out strengths and weaknesses of a company that in turn, supports decision-making processes concerning the handling of upcoming threats and opportunities.8 Knowing which strengths and weaknesses the company has to face, the internal environment analysis studies aspects like assets, people or knowledge on the one hand and financial deadlines or gaps in capabilities on the other hand.9 Analyzing the internal environment is very important because it defines the capability of the company to deal with the threats and opportunities given by the external environment.

10 External environment deals with all developments on the marketplace, including political, economical, social, legal and technical conditions as well as customers, competitors, suppliers and the public. Changes in the external environment or the so-called STEEP (socialcultural, technological, ecological, economical, political/legal) force the companies in most cases to rethink their actual strategy, to make use of the emerged opportunities and to prevent occurring threats.11 As for instance using the development of a new market as opportunity or dealing with threats as new competitors or decreasing demand.12 To use opportunities means to develop a best-practice strategy. Regarding this, companies have to decide, whether it is the best opportunity to offer something in short supply, to provide something in a better way what already exists, or to create a totally new product.

13 Concerning to that, the company has to know if there exists demand, needs and wants for the product they want to provide.14 Facing threats and not trying to fend them often leads to decreasing profits or lower sales. On the one hand knowing these threats gives the opportunity to react and trying to avoid, that threats are going to influence the company’s performance.15 On the other hand firms often do not have control over the threats, which affects the company negatively like for instance new competitors are entering the marketplace. This results in giving up potential customers and thus decreasing demand.16

Bringing the internal and external environment analysis together is what you call a SWOT-Analysis. The SWOT-Analysis evaluates all strengths, weaknesses, opportunities and threats of a company, which builds the base for a strategy formulation.17 Meaning that knowing the strengths and reduce weaknesses help companies to use opportunities on the one side, On the other side to use strengths and develop strategies to avoid that weaknesses will become the target of threats. After this short definition of the SWOT-Analysis the next step will be to work out the strengths, weaknesses, opportunities and threats of the Tencent Holdings Limited. 3 SWOT-Analysis of Tencent Holdings Limited

3.2 Internal Environment Analysis

As mentioned in the Introduction the Internet Industry in China is booming. To cover all possible marketplaces in the Internet Tencent offers a broad range of products and services. Besides the most popular service, the instant Messenger called QQ including numerous added services, Tencent provides online media, (wireless) internet value added services, interactive entertainment services, especially in the online-gaming sector, e-commerce platforms and services as well as online advertisement services.18 Tencent also follows latest trends, as for instance launching a mobile application of a messaging service and added games and a mobile payment system, because of the latest development of using smartphones and tablets instead of personal computers.

19 Tencent is one of the oldest Internet corporations in China and with its QQ platform the company reached 798,2 million user accounts by the end of 2012.20 As a result, Tencent influenced the communication world in China fundamentally. Another strengths lies definitely in the broad product and service offer of Tencent and the way in which they create synergies. The company offers seven main business lines, starting from instant messaging to online advertisement services. Besides just offering free services, Tencent tries to bind their users to the company’s value-added and paid services, in order to make profit.21 The strategy aims to offer the Internet population the possibility to use a wide variety of services in one company.

Furthermore Tencent could gain a lot of experiences and knowledge over the past 20 years as one of the first providers in the Internet service sector, which significantly strengthened the company’s research and development abilities. Despite having already the mature technology in the market, half of the employees of Tencent belong to the Research and Development department, to ensure Tencent’s current market leading position and sustain this competitive advantage. Additionally to that the Tencent Research institute, which is China’s first Internet institute with the main goals in research and development of core technology on the Internet, supports the corporation in being innovative

.22 Another strength of Tencent is their workforce as Tencent sees them as the “most precious asset and emphasized on the training of employees” by using different Training Systems.23 Moreover Tencent Holdings Limited is the third largest Internet operator in the world and the largest listed company in China.24 Benefitting from many advantages due to the companiescompany’s size there are also weaknesses the company has to face. In the following part the internal environment focuses on revealing the weaknesses of Tencent.

Regarding the large variety of the product range Tencent,Tencent faces the fear of cannibalization because it creates a competitive situation in between their products. An example can be giving by the different instant messaging services WeChat and QQ or TM and RTX, which serve the same purpose. Besides that QQ mobile messenger gets more and more the look of WeChat, which makes it even more competitive and leads to higher confusion for the consumers.25 Moreover Tencent greatest weakness is being not really innovative rather than being a “copy cat”. This occurs with the fact, that Tencent copied a lot from successful western companies. QQ for example is a copy of the Israeli invention ICQ and SOSO, the search engine of Tencent uses especially Google as a model.

To conclude the internal environment analysis, one can summarize, that Tencent is a highly developed company with a lot of market power due to their long existence. On the opposite Tencent can notcannot convince with real innovative power. To get an idea what influences TencentsTencent’s decision externally the next step will be to analyze the current market situation of the Internet market in China.

3.1 External Environment Analysis

Tencent operates in a highly challenging and rapidly changing environment. To get an idea what external impacts Tencent has to face it is important to know, what external factors the Chinese Internet market is about. As already mentioned China, faces a fast growing market in e-commerce because of the increasing number of Internet shoppers. The government noticed the importance of this growing market as well and plans to “upgrade the technological capabilities of e-commerce”.27 Another importance opportunity lies in using the governmental support, which is communicated in the 12th five-year plan and includes the support for the “new-generation IT” and additionally the advance of the information networks, mobile communication and the Internet.28 China is nowadays the largest Internet market in the world, which implicates that it is also one of the most competitive markets in the world.

In addition to the high development of the Internet scene many companies entered the market in the last years, which leads to a highly competitive situation in general. Chinas Internet population is still growing but the annual growing ratio halved already from 20 percentages in the last years to 10 percentages as forecasted. Besides that, more and more startups enter the markets, which results sooner or later in a fully satisfied market and a loss in profit and market share.

As an example for the highly competitive market, the image below shows the current competition situation on the search engine market in China.There are already eight providers only for search engines on the market including international companies like Yahoo and Google. The low market share of these international companies underlines the fact, that there are still restrictions from the government concerning the fully market entry of these companies.

Image : China Search Engine Market Share in August 201330

Even if governmental regulations already have relaxed a bit, Chinese Internet sector faces still a lot of restrictions. Chinas Internet companies benefit by this, because many foreign websites are still blocked and they are not exposed to powerful competitors like Facebook. This in consequence creates the possibility to develop and strengthen own applications. On the other hand it could become a threat as soon as the government decides to abolish this restrictions. Chinese Internet companies then have to face the full international competition against global players as for example Google.31 After giving this overview about the external and internal environment the next chapter will use this information by concluding recommendations about Tencent’s future strategy.

3.3 SWOT-Analysis and Recommendations

Tencent entered the Internet market in many different dimensions and accordingly places their product and service offering. Due to the previous analysis, there are especially three main product categories where Tencent should use their opportunities in further expansion. Firstly, Tencent should, due to the growth-intensive market segment, expand their e-commerce offer by developing for instance their website Papai.com. To even attract more possible Internet shoppers, they also should expand their online advertisement services. Thus, they can make use of synergies they already created through their broad offers, by linking their advertisements services with the shopping sites they own. This second measure, leads to the creation of new potential profit zones.

Thirdly, Tencent should not only focus on expanding existing offers but also develop new products, as for instance in the sector of cloud computing. By doing so, they can fully exhausting governmental support. Taking into consideration, that the market will be opened up in the long-term, Tencent should emphasis their innovation process on new products and services for the national and also international market. This should not be very difficult to accomplish, since Tencent disposes of a highly experienced workforce in Research and Development. This in consequence will enable the company to expand international and compete with other global players. If Tencent wants to keep their position as the third largest Internet company in the world they have to continue growing their business. Considering the slower growing Internet population in China, Tencent needs to go international to keep their growing position.

Tencent did this by investing in foreign companies as for instance in the case of FAB.3233 This expansion should be continued in order to gain international market share and increase their portfolio in other Internet based services, as well as to improve their overall operational capability. Another possibility to do so is by expanding through strategic alliances... By building strategic business partnerships within China and gaining market share in several sectors Tencent is also able to fend the threat of market entry by international Internet companies in turn. Tencent furthermore has got a highly influence on the communication world in China as one of the oldest Internet company and built already a lot of barriers for international companies.

Taking the messenger service QQ as an example for the mostly used messenger in China it enjoys a very high customer liability. Consequently Tencent could prevent loosing their position in China because although of the feared abolishment of several governmental restrictions concerning the entry of international companies. Additionally Tencent should try to avoid that QQ gets more and more the look of WeChat. As already explained, this could tempt users to change to competitors because of confusion. In this case, Tencent should favor cannibalization by offering differentiated products of the same purpose, to avoid losing costumers to competitors. The image below shows a summery of the named points and what the SWOT-Analysis and recommendations for the Tencent Holdings Limited contain.

Image 2: SWOTs of Tencent Holdings Limited34

4 Conclusion

Internet business in China is still one of the fastest growing industries in the world and Tencent used and uses this opportunity a lot in expanding existing products, launching new services and developing better solutions for the internet population in general. These actions are supported by the try of going more and more international. Even though the external environment analysis showed that the Internet market is influenced by many factors, which co-determines the performance of Tencent an all the other Internet companies. To reach the best performance they could get, Tencent has to use its strengths and to improve its weaknesses to make the best out of every trend, meaning using opportunities and fending threats.

To summarize what the work pointed out in the previous chapter, Tencent shouldTencent should expand their e-commerce and their online advertisement services. Moreover there is a big opportunity to create national and international strategic businesses trough the investments or the development of own innovations, which should be easily possible due to he strong research and development activity of Tencent. Additionally to that, Tencent already is the third largest Internet company worldwide, which makes it easier for them to enter international markets and gaining new customers all around the world.

Regarding the governmental aspects, Tencent needs to use the supports given by the government and stress the development of new systems. Furthermore Tencent should definitely try to further build their market entry barriers. As a conclusion, the SWOT-Analysis of Tencent Holdings Limited showed, that the company is rightly positioned at the top in the world´s largest Internet market, due their numerous strengths. But in times of liberalization, globalization and an almost satisfied domestic market, Tencent has to fight against the identified threats in the upcoming years.

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SWOT Analysis Tencent Limited Holding. (2016, Aug 13). Retrieved from https://phdessay.com/swot-analysis-tencent-limited-holding/

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