MSING009 Managing High Technology Organizations Tencent Company Project Author: Tao HUA, Lu LI, Amaury LIET, Yulong WANG, Xinyi WANG, Mohammed Islam Lecturer: Keith WILLEY 1 Table of Content History ................................................................................................................................................... 3 1. Market opportunity & Founders objective ................................................................................ 3 2. History of major events of growth ............................................................................................. 3 3. Key strategy ............................................................................................................................... 4 4. Growth model theory ................................................................................................................ 4 5. Motivation of the chosen company ........................................................................................... 5 6. Theme statement ...................................................................................................................... 5 Financial analysis ................................................................................................................................... 5 Organizational Structure ..................................................................................................................... 10 1. Structural Reorganization ........................................................................................................ 10 2. Six Business Focuses ................................................................................................................ 11 3. Reasons for Reorganization ..................................................................................................... 12 The entrepreneur-­‐Mr Pony Ma ........................................................................................................... 12 The management issues ...................................................................................................................... 14 Future Prospects and Recommendations ............................................................................................ 15 1. Focusing more on Incremental Innovation over Pure Plagiarism ............................................ 15 2. Changing its management structure ....................................................................................... 15 3. Focusing more on customers loyalty ....................................................................................... 16 Conclusion ........................................................................................................................................... 16 Appendices .......................................................................................................................................... 17 Appendix1 .................................................................................................................................... 17 Appendix2 .................................................................................................................................... 17 2 History 1. Market opportunity & Founders objective Initially, the Chief Executive Officer and founder Pony Ma started his company like a certain number of other Internet start-up in China, getting his ideas from foreign companies. Every starts in 1998 when Pony Ma decided to quit his former employer in order to establish his own company. It is based on a clone of a product he previously discovered during a presentation, ICQ, which was being a huge success in western countries and yet didn’t have any Chinese equivalent. Pony Ma quickly saw the great opportunity, going by the popularity of pagers in China, and created ‘OICQ’ - standing for Open ICQ. At first, Pony Ma’s objective was pretty modest; he only intended to sell the software as a product to a telecom operator. However, the offers were too low for Pony Ma and he changed his strategy by giving up this exit and providing the software online for free. This induced a huge growth of the number of users in the following months, hitting the first million only 9 months later. OICQ quickly entered as a major player in the instant messaging market of China1. Pony Ma’s company presents a great opportunity in China given the large population. The governmental policy is highly helpful to local companies by showing a high reluctance to foreign companies. Tencent is thus able to deploy solution market-validated in western countries in a 1billion+ users market space. Some sources also pretend a potential future development of Tencent products in India, almost doubling the market size. 2. History of major events of growth The two cofounders Ma Huateng and Zhang Zhidong created Tencent Holdings Limited, most commonly known as Tencent, in 1998. Its headquarters are in Shenzhen, China and most of the users from its applications live in China (~90%). Its first and most iconic product ‘Tencent QQ’, or just ‘QQ’, an instant messaging software service, is launched the next year in 1999. After three unprofitable years, in 2001, a large share of Tencent, 46%, is bought by the Media Company Naspers that still owns approximately a third of the company currently. Starting from this purchase, Tencent starts to make profits and grows. It is added to the Hong Kong Stock Exchange on June 2004 and listed to the added to the Hang Seng Index (HSI) in 2008. Tencent made a few tweaks in its profit sources. It originally made most of its revenue from only the adverts on its service and the monthly subscription of its premium users. Then 6 years after the creation of the product, in 2005, the use of QQ mobile became a paid service, generating an additional income. In the same period, the licensing of its penguin logo for by-products became a new source. In 2008, Tencent introduced a new way for the company to earn profits by selling virtual goods. The activity in which Tencent is involved has evolved throughout its existence. For instance, Tencent has developed its activities in games: it first started in online gaming in 2004. And then in 2007 it started to license games, leading to the own production of game from 2011. 1 Chinadaily.com.cn. (2016). [online] Available at: http://www.chinadaily.com.cn/business/200901/12/content_7388202.htm [Accessed 11 Mar. 2016]. 2 Jane Peihusn Wu, Peking University, China, (2012). [online] Available at: http://scholar.terrillfrantz.com/docs/tencent.pdf [Accessed 12 Mar. 2016]. 3 Tencent Holdings Limited, (2016). [online] Available at: http://www.tencent.com/zh 3 Recently, Tencent developed its digital presence by expanding its activities to enterprise cloud services in partnership with Apple and Twitter as well as ‘Software as a Service’ services to Small and Medium Enterprise in partnership with IBM in 2014. Currently, the majority through a large scope of services mainly knows Tencent. To name a few, ‘DidiKuaidi’ equivalent to Uber valued at $20 billion, the social network ‘Qzone’, the search engine ‘SOSO’, the web browser ‘TT’, ‘TenPay’ equivalent to Paypal, and ‘WeChat’ equivalent of Whatsapp2. 3. Key strategy Tencent adopts the “Connection” Strategy, meaning that most of its value proposition and benefits comes from the strong connection its customers have with Tencent technology. It practically involves: -For partners businesses, a solution allowing access to a large number of customers, who can be easily profiled and targeted as Tencent have cross-products information. The conversion rate is also increased as Tencent provides online payment which customers are used to. -For regular users, we aim to keep them always connected, providing value for both them and the company. Tencent aims to keep users connected by providing a wide variety of apps, software, content… -For Tencent, following this strategy enables to keep a bigger retention rate, mainly thanks to the wide range of products provided, covering a big part of customer digital life. Tencent’s market position, and strong link with customers, unlocks some opportunities that competitors cannot reach. Tencent follows this strategy and increases its digital presence by investing in a wide range of markets, such as Shopping, Food Discounts & Delivery, Transportation, Local Services, Real Estate, Health Consultation, Games, Video and Music3. 4. Growth model theory The best growth model theory to choose is the five stages of growth, because they have very important information such as resource maturity, explains that when a company is entering an early stage, they should consolidate and control all the financial gains, which we believe that Tencent is at this present stage, due to financial problems that the company is facing, so this should be the next step which Tencent should work on. However in the next stage called take off, it mentions that to avoid future problems they must ask themselves questions, such as • Do I have the quality and diversity of people needed to manage a growing company? • Do I have now, or will I have shortly, the systems in place to handle the needs of a larger, more diversified company? • Do I have the inclination and ability to delegate decision making to my managers? • Do I have enough cash and borrowing power along with the inclination to risk everything to pursue rapid growth? Also the author believes that by answering these questions, you can avoid many situations in the future. Conclusion choosing The Five Stage Of Growth as a growth model theory is a wise decision, 2 Jane Peihusn Wu, Peking University, China, (2012). [online] Available at: http://scholar.terrillfrantz.com/docs/tencent.pdf [Accessed 12 Mar. 2016]. 3 Tencent Holdings Limited, (2016). [online] Available at: http://www.tencent.com/zhcn/content/ir/fs/attachments/InvestorPresentation.pdf [Accessed 16 Mar. 2016]. 4 due to the wide variety of stages to help guide your business in the right path and making Tencent successful in the future. 5. Motivation of the chosen company We wanted to choose a company that had and have a great impact to the life of a large number of people, and used really often by most people from our group. Because Tencent has become a vital part of Chinese people’s daily life. Analysing Tencent management is a great opportunity to study a young, disrupting, and extremely quickly growing company, and Tencent is the most representative hi-tech company in China. The management organisation of Tencent have needed to quickly adapt to the huge success of its products and services, thus being a challenge in the organisation. Media have reported some management issue coming from Tencent organisation, showing challenges to sort out. Despite its impressive size, Tencent still have to face fierce competition. 6. Theme statement In the following of this report, we are going to assess the management of Tencent. We will first begin by analysing the financial data of Tencent to understand its growth and what strategy is used to allocate funds, we will then move on to the management and organisational structure analysis to show the influence of the business leader's’ personality on the management and the company. Eventually we will consider future prospects and recommendations for Tencent. Financial analysis Understanding the finances of a business is absolutely paramount in any business but in the young, growth business context the risks are higher and resources in terms of staff and advisors are lower4. Tencent’s finance status can be analysed from following perspectives. General income situation from 2009-2014 can be shown in graph 1 and details seen in Appendix 15. 4 Keith Willey (2012).”Note on financial analysis for entrepreneurial businesses”.1. 5 Anon, (2016). [online] Available at: http://www.tencent.com/zh-cn/ir/reports.shtml, [Accessed 21 Mar. 2016]. 5 General income situa8on 100,000 80,000 60,000 40,000 20,000 0 2009 2010 2011 revenue 2012 2013 2014 gross profit Graph 1 Generally, profits maintain on an increasing trend. This benefits from constant investment in ecommerce, expansion of overseas network games and commercialization of Wechat. Profitability index (ROA=Profit after tax/Total assets*100%) from 2009-2014 can be demonstrated in Graph 2 and details seen in Appendix 2. ROA 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2009 2010 2011 2012 2013 2014 Graph 2 ROA in recent years is going down, indicating that Tencent’s ability of utilizing assets to generate profits is not so good. 6 The development speed of whole IT industry may slow down due to increasingly fierce market competition. Net profit margin is shown in Graph 3.Details seen in Appendix 2. Net profit margin 2009 60.00% 2014 40.00% 20.00% 2010 0.00% 2013 2011 2012 Graph 3 Net profit margin=Profit after tax/Revenue*100%reflects profitability from sales revenue. Tencent’s NPM decreased in recent years, suggesting increased costs or expenses. The cause may include rising operating costs, decreased sale prices, increased operating expenses and reduced investment returns. Accurate identification of real cause can help Tencent better judge its operation situation. Cost & Expense analysis6 Cost and expense details from 2009 to 2014 can be revealed in graph 4. 6 Tencent’s annual reports. (2016). [online] Available at:https://www.interaction-­‐ design.org/literature/book/the-­‐encyclopedia-­‐of-­‐human-­‐computer-­‐interaction-­‐2nd-­‐ed/disruptive-­‐ innovationhttp://www.tencent.com/zh-cn/ir/reports.shtml,[Accessed on 19th March 2016]. 7 Cost & Expense 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2009 2010 2011 2012 2013 2014 Cost of sales Deprecia8on Sales and distribu8on expenses Administra8on expenses Finance costs Graph 4 Except finance costs which decreased a lot in 2013, most of the other costs or expenses have gone up all the way. More detailed breakdown of cost analysis reveals that Tencent’s vigorous development of advertising business may account for obvious growth in period costs which include sales expenses, administration expenses and finance costs. And content costs, band-width costs and ad commission go up along at the same time. Cash flow analysis7 Net cash flows from three kind of activities can be shown in graph 5. 7 Tencent’s annual reports. (2016). [online] Available at:https://www.interaction-­‐ design.org/literature/book/the-­‐encyclopedia-­‐of-­‐human-­‐computer-­‐interaction-­‐2nd-­‐ed/disruptive-­‐ innovationhttp://www.tencent.com/zh-cn/ir/reports.shtml,[Accessed on 19th March 2016]. 8 Cash flow 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 -­‐5,000,000 2009 2010 2011 2012 2013 2014 -­‐10,000,000 -­‐15,000,000 -­‐20,000,000 Net cash flows from opera8ng ac8vi8es Net cash flows from inves8ng ac8vi8es Net cash flows from financing ac8vi8es Graph5 Most cash inflows of Tencent rely on operating income indicating its ability to generate profits from operating activities is fairly strong compared with the other two. Some negative cash flows from investing and financing activities mean that losses exist, Tencent needs to invest more carefully and strengthen management of financing activities. Fixed assets acquisition and foreign currency translation should be monitored in more details as well. To conclude, profitability of Tencent is challenged for: 1.Relevant profitability indices appear to be decreasing. 2.Some expense & cost items increase. 3.Losses appear in investment and financing activities. Almost all of the services that Tencent launched have competitors with similar functions in industry thus leading to high substitutability. Once rivals innovate in technology, decrease costs or adopt penetration-pricing strategy, large number of Tencent’s clients could potentially flow to its competitors. This poses great threats to Tencent’s profitability prospects. 9 Organizational Structure 1. Structural Reorganization On the 18th of May 2012, Tencent Holdings Limited (HK.00700) announced their plan of reorganizing the company structure. It wanted to transform from ‘business units’ to ‘business groups’, and set up Tencent E-commerce Holding Company (ECC). This is a great transformation for Tencent8. Six new business Groups were formed. TEG (Technology & Engineering Group) was transformed from previous Research Institute and Operational Line, led by the executive director and CEO Zhidong Zhang. SNG (Social Networking Group) was transformed from Internet Department and a part of Research Institute, led by Xiaoguang Wu who was in charge of e-commerce in recent years. CBG (Creative Business Group) was transformed from Guangzhou Research & Development Centre and Enterprise System Development, led by Xiaolong Zhang who was the leader of Wechat. MIG (Mobile Internet Group) was transformed from Wireless Department and a part of Research Institute, led by Executive Vice President Chenmin Lau. IEG (Interactive Entertainment Group) was transformed from Butler Team and previous Interactive Entertainment Department, led by Executive Vice President Yuxin Ren. OMG (Online Media Group) was transformed from previous Online Media Department, led by Executive Vice President Shengyi Lau9. The process of restructure is shown in graph 6. Graph 6 From the reorganization, we can see that Tencent would focus more on six businesses: social interaction, games, online media, wireless business, e-commerce and search engine. A comprehensive platform matrix had been built as an original model for the long-term strategic organizational structure. This platform included several fields that Tencent had invested in for a long time, and 8 Prog3.com. (2016). Tencent organizational structure adjustment: the cause of the layout of the business group of six major business areas -PROG3.COM. [online] Available at: http://prog3.com/article/1970-01-01/2805675 [Accessed 3 Mar. 2016]. 9 Anon, (2016). [online] Available at: http://www.tencent.com/en-us/at/managementteam.shtml [Accessed 5 Mar. 2016]. 10 spared enough space for future development and transformation. Six Business Focuses are explained in detail in the next section. 2. Six Business Focuses In the field of social interaction, Tencent wanted to strengthen social networks. Tencent combined instant message platform QQ and two community platforms QQ Zone and Friends Website in the new structure, and the combination would form a social networks platform that would have more economies of scale. This measure was inspired from Facebook that went to public before Tencent’s reorganization, so Tencent saw the huge potential in social networks. Tencent is the pioneer in social networks in China. It introduced QQ Zone in 2005 and until 2012, the number of active users amounted to 0.58 billion. The number for real name social network Friend Website was 0.22 billion. These two social networks made Tencent the leader in Chinese social networking websites. In fact, Tencent was accelerating its pace in developing social networks based on the open platform10. In the field of games, Tencent wanted to seize the opportunity of global online games. Tencent wanted to develop globally in this field. Tencent Games were introduced in 2002, and it developed many successful games and became the agent of some famous games like Dungeon & Fighter and Cross Fire. In 2011, it acquired majority shares of an US game company called ‘Riot Game’ that developed League of Legends. Its ambition for global business became obvious. Since 2011, Tencent had been in the first place in Chinese game market and it was the time to go global. In the field of online media, Tencent wanted to integrate all the online media platforms. Tencent had already integrated several forms of media like traditional web portals, Weibo and Video. It wanted to further expand its integrated media platform11. In the field of Wireless business, Tencent wanted to improve the Mobile Internet. Wireless business was not only the earliest platform that Tencent built, but also the earliest one that brought profit. From 2G to 3G, from mobile QQ, UCWEB to Mobile Manager, Tencent had more and more comprehensive and clear structure in terms of mobile Internet. In fact, the founder of Tencent----Pony Ma emphasized the company held an optimistic view on the prospects of mobile Internet and would try their best to develop such business12. In the field of E-commerce, Tencent wanted to push e-commerce forward, and this showed Tencent’s ambition in long-run investment in e-commerce. In the future, e-commerce companies would be more flexible when they are faced with the challenges from the market. Tencent had already invested in many B2C companies like 51Buy, and OkayBuy. In the future five years, Tencent EEC aimed to corporate with more than one million profitable B2C companies. 10 Mozur, P. (2016). Tencent to Restructure Business. [online] WSJ. Available at: http://www.wsj.com/articles/SB10001424052702303360504577411320059202482 [Accessed 6 Mar. 2016]. 11 Jiang, B. and Jiang, B. (2012). Tencent to Restructure into Six Groups - TechNode. [online] TechNode. Available at: http://technode.com/2012/05/18/rumor-tencent-to-restructure-into-6-groups/ [Accessed 7 Mar. 2016]. 12 Batterie-pour-nikon.com. (2013). Tencent then adjust the organizational structure of MIG, batterie pour nikon. [online] Available at: http://batterie-pour-nikon.com/tencent-then-adjust-theorganizational-structure-of-mig/ [Accessed 6 Mar. 2016]. 11 In the field of search engine, Tencent wanted to focus on developing search services. Through the organizational restructure, Tencent would develop search service based on the resources provided by technical platform and mobile Internet platform. Tencent had occupied 20% of the shares in wireless search market, which ranked the third in China. The combination of search services and wireless platform would help Tencent to expand the competitiveness and achieve fast growth. In addition, there was a separate small group that is called ‘ Strategic Development Department’. This group consisted of former BCG and McKinsey employees. The job of this group was to observe the whole business, provided strategic business idea for Pony, and reported the performance of each department to Pony. However, they were not involved in managing the organization. 3. Reasons for Reorganization Firstly, Pony Ma wanted to rebuild the attributes of start-up. He said, when the team became bigger, some problems would come out. Tencent wanted to respond more quickly to the market and be more passionate like what they did in the early stage of their development. Secondly, it aimed to prevent the slowdown of rapid growth of profit. Plagiarism and Monopoly were always mentioned when people talked about Tencent in that period. When a start-up became a large corporation, even Pony didn’t know how many products they were developing. Although Tencent had a wide range of businesses, most of them were lack of creation. Some of them were just plagiarism. The lack of innovation was the key problem to a high-tech company. Pony wanted to stimulate creation in the company through reorganization. Therefore, this could be the root cause for reorganizing the company. Thirdly, Tencent wanted to better conform to the trend of the development of the Internet. The future focus were social networks, online games, mobile Internet, online media, search engine, and ecommerce. It also wanted to better satisfy customer’s needs based on the new structure.. Fourthly, it aimed to improve previous Tencent e-commerce. The C2C, B2B businesses of previous ecommerce department hadn’t corporate well. They competed for resources and couldn’t form much synergy. After the reorganization, Tencent would be more focused on positioning and investing resources in e-commerce market13. The entrepreneur-Mr Pony Ma Pony Ma graduated in University of Shenzhen in 1993, his degree was Computing Science and Application. After his graduation, he worked for a Chinese telecommunication company for 11 years. In 1998, he started his own business-Tencent with his partner, Zhang Zhidong (CTO of Tencent). With his expertise and efforts, his business got on the right track. John Hamm suggested that there are four tendencies of entrepreneurs that work for leaders of business units or small companies but become Achilles’ heels for those same individuals when they try to manage a larger organizations with diverse needs, departments, priorities, and constituencies14. The 13 TechCrunch. (2016). China’s TencentTo Restructure Into Six Groups, Here’s Why. [online] Available at: http://techcrunch.com/2012/05/18/tencent-to-restructure-into-six-groups/ [Accessed 6 Mar. 2016]. 14 John Hamm. (2002). Why Entrepreneurs Don't Scale. Harvard Business Review. 80 (12), 110-5,134. 12 four are loyalty to comrades, task orientation, single-mindedness and working in isolation. These tendencies that Pony Ma used to have when he just got started his business, but from years and years, with the growth of Tencent, these are almost gone. Pony Ma is always loyal to his comrades, this is true that he and Zhang Zhidong are always good friends. However, recently, after the company has become the biggest Internet technology company in China, Zhang has decided to leave position of CTO in Tencent when they have a director meeting, Pony Ma appreciated for what Zhang has done for the company. Although Pony Ma is showing his loyalty to his old friend and comrade, they both know that the first priority is the benefit of the whole company, it is lucky for Pony that has a such great friend and colleague who considers the big picture of their own company. Because of Pony’s expertise in communication technology, he was task-orientated when the company was growing, which made him better understand what the market needed, and led to the success of his company. Later, when his company has become the biggest internet technology company in China, he realized that there was no point that he should still get involved in the development of any products, the most important role of him becomes how to better manage the company in order to reach their strategic goals. For example, in the development of Wechat, he entirely delegated his power to Mr Xiaolong Zhang who is called ‘the father of WeChat’. As a result, WeChat becomes a star product under Tencent’s brand. From this, it is true that Pony is no more task-orientated, at the meantime; he is considering how to integrate all the products in order to achieve a corporate advantage for his company. Task orientation is always the reason that some entrepreneurs cannot adapt when their company has reached certain degree of growth. Moreover, as John Hamm suggested that a leader’s devotion to a single issue can also damage a growing organization. However, this never happened on Pony’s company, because he knows that as an CEO of a large company there are too many things he should concern about. There is no point to waste most of time to deal with only one issue, he need to consider about the big picture for his company. The last thing is about working in isolation. Pony Ma knows it is not possible that he can build this huge empire with only his hands, he need to work with other people, and the results are always better than the one he work alone. Therefore, he understands he needs to delegate some works to his management teams and employees. It is a good move for a large company, however, in Tencent case, it may hurt the benefit of the whole company in certain degree. Pony Ma’s leadership style is also a spotlight. He seems to be a relationship-orientated leader. By keeping a positive relationship with his business partners, employees and also his friends within the industry. For example, he is known by his technology skills, sometimes, he helps some friends in the business industry field by helping them solving technical problems, this helps him gain a good reputation in their business field. Everyone likes Pony, which also increased the reputation of Tencent. Moreover, in Chinese New Year period, he is always rewarding his employees with high-priced presents. It is a way to motivate his employees; while his employees also think they have a kind boss and feel luck about working in Tencent. However, within his personality, there is also a point that causes huge problems in his business. He is very agreeable, as a leader in a company, this trait may hurt the benefits of his company, also leads to the tough attitude of his management team towards him. Overall, we can see that Pony Ma has transformed himself from an entrepreneur to an good executive role in his company. In addition, he has adapted transformational leadership style where a leader works with his employees to identify the needed change, creating a version to guide the change through inspiration, and executing the change. 13 The management issues There are a few issues within the management level, which may hurt the whole wellness of the company. Tencent’s management style is delegation. Pony Ma delegates his power to every department managers. It is true that managing such a huge organization needs delegation. In Tencent’s situation, it also requires delegation. However, delegation causes problems for Tencent. For example, each department is operating on their own products, such as QQ (online chatting software) and Wechat(message software), both department share the customer data and other resources. However, because of delegation, both departments want to occupy these resources in order to better perform in their competition. Therefore, it leads to conflicts between departments. In the worst case, it may lead to a cutthroat competition between departments; it will be hard for Pony Ma to solve the issue if it happens in reality. However, some outside people claim that Pony Ma allows the conflicts between departments for a purpose. It is true that competition may bring better motivation for departments, but in Tencent case, it is going to become a rat race that will be a serious problem for Pony Ma to manage the consequences later. Another issue is about the attitude of management towards Pony Ma. Because of too much delegation to the management, it seems that Pony Ma has lost the control of the company. For example, one department wanted to use more resources to expand their market in order to gain a higher market share. Pony Ma thought it would be not effective considering for the whole company, and he suggested them not to do it. While the department manager insisted to do so, however, Pony Ma didn’t stop him, and then the result was disappointing. It is good that Pony Ma trusted this department manager, although they had different opinions. However, the high degree of delegation and the negative attitude that this manager had towards Pony Ma may lead to a failure in company’s daily operation, and the benefit of the whole company. Later, the department manager may do their job in the way they like, and become an isolated department that is not contributing their effort to the whole company. The soft management style of Pony is because of high degree of his agreeableness personality. It is good to be a kind people, people should be kind in their daily life, however, business is business, for the purpose of profit maximization, Pony Ma should change his attitude in order to have a better control of the management, regulating them to do their job for the same goal of an organization. Due to the industry sector that Tencent is in, Pony Ma encourages the department managers and all the employees to have a creative thought. Everyone who has a new idea can set up a new team and start to develop the idea into an actual product. It is reasonable, organizations need creative thought in order to adapt the external trends and survive within the industry. Therefore, some department managers become crazy about innovation in order to survive in the company. When they come up a new thing in mind, they apply it in their products without any market research and reasons. It leads to a situation of no clear strategic direction about the organization’s future development. Tencent has a broad range of products, there are too many products that the employees don’t even know or count. As mentioned before, there is too much delegation to the management people. When the new product comes to the market, it doesn’t fit the strategic goal of this organization. Pony Ma seems to be annoyed about this problem as well, from these 18 years, although the company has been growing so fast, but what’s next then? Pony and his management team have no idea about this vital problem currently. It is obvious that the delegation has become a serious problem for Tencent. Pony Ma and his management team should both think about it and fix this problem caused by delegation. After all, as a large company, the first priority of the company should be increase the welfare for their shareholders. Some internal issues may have an effect on their business performance, and hurt the company reputation as well, which will lead to serious damage on their shareholders. 14 Future Prospects and Recommendations In this part, three main recommendations for Tencent will be specific in its problems of plagiarism, management structure and product quality. 1. Focusing more on Incremental Innovation over Pure Plagiarism Pony Ma emphasises the innovation through formulating a series of motivation policies. However, products of Tencent are always criticised to imitate other existing products or services. The initial strategy of Tencent was the adoption of foreign technological products and services to the Chinese market. Learning experience from advanced and existing technology can be justified as an effective strategy employed by Tencent. Few products or services can intrinsically be regarded as an invention or disruptive innovation. The more important thing for a company is to promote the technology to achieve a disruptive impact that is facilitated by an effective business model15. In terms of Tencent, it offers products and services that are originally learned from the Western success but also needs to continuously add incrementally innovative improvements to their offerings rather than merely being a copycat. It can assist Tencent to change its brand image of plagiarism and satisfy customers’ needs. One of the successful social networking services of Tencent is WeChat. The idea of Wechat that originally resembled American WhatsApp actually differentiates itself from merely being an instant messaging service. It also incorporates functions of social networking and new media channel, and additionally, there are other functions within this app. Because there are more functions within WeChat, therefore, it is much more popular than WhatsApp, even non-Chinese people are using it instead of WhatsApp, especially in Australia. This can also be employed to Tencent’s other products and services. Moreover, Tencent currently is one of the largest Internet companies in China. It is more difficult and riskier for Tencent to conduct the disruptive innovation itself considering its enormous organisational structure and bureaucracy. Therefore, it will be suitable for Tencent to focus on incremental innovation rather than pure plagiarism, so that they can gain a second mover advantage for their products and then win the competition with other similar products. In addition, Tencent can also acquire small innovative companies in a more strategic way in order to obtain more resources for innovation. This movement can also change the image of Tencent’s Plagiarism. 2. Changing its management structure After 2012, Tencent reorganised its corporate to the multidivisional structure. Gutterman16 argued that multidivisional structure may cause communication problems between division managers and corporate managers, particularly for high hierarchical organisations. In the case of Tencent, because of its large organisational size, Tencent inevitably encounter the issue of hierarchy and bureaucracy. Therefore, it will be difficult for the corporate manager, Pony, in this case, to detect problems in each division timely and control their performance. Pony cannot make the right decision of efficiently and strategically allocating capital and resources to each division. Additionally, this structure can also give rise to the benign competition among divisions. Therefore, Tencent should expand the role and responsibility of its Strategic Development Group to assist Pony Ma to manage each division, which means delegating Pony’s management power to this 15 Christensen, C.M., 2016. Disruptive Innovation. Interaction Design Foundation. [online] Available at:https://www.interaction-design.org/literature/book/the-encyclopedia-of-human-computer-interaction-2nd-ed/disruptiveinnovation [Accessed on 12th March 2016]. 16 Gutterman A.S., 2008. Disadvantages of Multidivisional Structures. Growth-Oriented Entrepreneurship. [online] Available at:http://alangutterman.typepad.com/emergingcompanies/2008/03/disadvantages-o.html [Accessed on 13th March 2016]. 15 group, this group is no longer a consultancy role within the company, instead they become the main management team. This team should be only responsible for Pony Ma to bridge the gap between Pony Ma and each division manager so that the communication issue can be improved. Considering that this department is also responsible for the strategic development, it can regulate the development of each division to fit the company’s overall long-term strategic goal; therefore, it can reduce the potential damage caused by the corporate manager losing his control. Therefore, this group can solve the problem about the Pony’s weak management style, and reunite all the departments to fight for the same strategic goal of Tencent, and more importantly, regulate all the heads of department in order to prevent any negative behaviour which may cause damages to the benefit of the whole organization (e.g. rat race within different departments). 3. Focusing more on customers loyalty Tencent currently provides a large miner of products and services; therefore, the main advantage of Tencent is its empire size within the business field. It is possible that its position may be taken by a new player which has roughly the same size of the organization while also provide better products and services. It is true that expansion of its product line is a good strategy for Tencent to maintain its market position. However, the customer loyalty is also about how quality those products and services Tencent offered are. However, in Tencent’s situation, they don’t pay enough attention on the quality of their products that causes lots of problems for customers. For example, there is a problem in Tencent QQ that the QQ account is easily get hacked and threaten users’ privacy. Enormous products portfolio can cause the problem of cannibalisation and furthermore a less quality product will aggravate this issue. In fact, although Tencent is a successful company, lots of customers have complained about the services and products, but Tencent just ignore the feedbacks, it damage the image of this organization which may lead to a huge loss for their future profits. Therefore, Tencent should start to realise this important issue. In order to maintain customer loyalty, Tencent should reinvest their profits into its technology upgrade rather than merely expanding its product line so that it can improve its reputation and public relations. Therefore, the strategic direction that Tencent should focus on is no longer about expanding their empire; instead, they should focus on building a more positive relationship with customers by improving their products and services within their existing business fields. Otherwise, once there is a better player in the field, customers will easily turn their back to the competitor. Conclusion This report has analysed the business of Tencent in aspects of its financial performance, organisational structure and management. Currently, Tencent encounters the fierce competition in the industry and the problem of lavish spending. That has already caused the threat to its profitability. Additionally, there are lot of issues within Pony Ma’s leadership style and Tencent’s chaotic management. In order to improve these problems, Tencent should focus on three main aspects of its business. First, Tencent should keep conducting incremental innovation in existing successful products and services and strategically acquire small innovative companies to obtain more ability of innovation. Secondly, Tencent should expand and fully utilise the role and responsibility of Strategy Development Department to reduce the risk of Pony Ma losing the control. Finally, Tencent should improve its product quality to advance its reputation. Under the trend that the technology changes rapidly, the next step for Tencent to keep the innovation in its business model to response the market timely can be another subject of our further study. 16 Appendices Appendix1 Profit 2009 Revenue 2010 2011 2012 2013 2014 12,439 19,646 28,496 43,893 60,437 78,932 Gross profit 8,550 13,325 18,567 25,686 32,659 48,059 Operating profit 6,020 9,838 12,253 15,479 19,194 30,542 Profit after tax 5,221 8,115 10,224 12,785 15,563 23,888 Controlling interest profit 4,516 7,215 9,095 23,810 11,263 15,502 Appendix2 Profitability 2009 2010 2011 2012 2013 2014 Profit after tax 5,221 8,115 10,224 12,785 15,563 23,888 Total assets 17,505 35,830 56,804 75,255 107,235 176,425 ROA 29.83% 22.65% 18.00% 16.99% 14.51% 13.54% Revenue 12,439 78,932 19,646 28,496 43,893 60,437 Net profit margin 41.97% 41.31% 35.88% 29.13% 25.75% 30.26% 17
