Tencent’s Innovation Strategy

This article analyses the rise of Chinese software giant Tencent to become one of the most successful businesses in the world. A strong focus is laid on the modes of innovation strategies used by Tencent to facilitate its rapid growth.

1. Introduction

In November 1998, Tencent was founded as a software company of 5 employees by Huateng Ma, a Chinese software engineer. A few months later, Tencent introduced its first product to the market, an online chatting software called OICQ (Open ICQ), which was a copycat of the global chat software ICQ. OICQ aimed to provide an online instant messaging service to Chinese customers. The company received a trademark infringement lawsuit by ICQ in the same year and thus was forced to change the name of the instant massager to QQ. This however did not stop Tencent’s successful start in software development. By the end of 1999, QQ achieved 1 million registered users in China.

In the following years, Tencent’s development focused on introducing various new services (Tencent 2020), (Lee et al. 2016), (Iyiou, 2016), (Baidu, 2018), (Gongyi, 2013):

• 2000, introducing Mobile QQ, QQ mail, QQ Games, and qq.com
• 2004, listed in Hong Kong Exchange
• 2005, introducing QQ Space (blogging) and QQ Music
• 2011, instead of making a mobile version of its desktop instant messaging software QQ, Tencent introduced the smartphone App WeChat. In little more than a year, WeChat achieved 100 million registered users
• 2013, WeChat introduces WeChat Pay, users can link their bank account to WeChat Wallet, and send and receive money from other users
• 2014, entering the banking business by founding WeBank
• 2015, entering the entertainment sector by founding Tencent Penguin Pictures, which features entertainment programmes, movies, and tv-series
• 2016, founding of insurance platform WeSure as well as Tencent Music Entertainment Group for music streaming
• 2017, launch of WeChat Mini Programs, which enables users to use Apps without downloading and just by scanning a QR code
• 2018, more than 1 billion active WeChat users, mobile pay handles more than 1 billion daily transactions

2. Background: The Chinese Market

Before we examine the innovation strategies used by Tencent, we need to understand the economic background in China. Because the success of Tencent is due to many factors. While innovation strategies definitely play a significant role, the fact that Tencent could discover and seize opportunities during different time periods also contributed greatly to its success today. In this section, we will look at the background from three aspects: internet market, mobile phone market and government support.

The Chinese Internet Market

The internet market experienced huge growth in China from the beginning of 2000. As we can see from the following diagram, the internet users increase 16 times during the 10 years from 23 million in 2000 to 384 million in 2009. This increase implies the growing demand for online communication tools and social media in China. The launch of QICQ/QQ by Tencent in 1999 came just in time to satisfy this increase in demand. Tencent managed to gain huge popularity and a lot of registered users from this expanding of potential customer base.

The Chinese Smart Phone Market

Another decisive factor for Tencent’s success was the smart phones market in China. Between 2010 to 2016 it also experienced an enormous growth, which plays a major role in the success Tencent’s then new Software WeChat and WeChat Pay. During the beginning of the 2010s, a lot of Chinese domestic firms started producing copycat smart phones with a lot of additional features. The main advantage of domestically produced smart phones compared to popular global brands was the affordable price. As a result, a lot of Chinese consumers were able to afford to own a smart phone. WeChat was launched in early 2011, with the rapid growth of smart phone ownership, they achieved 100 million registered users in a little more than a year.

Support from Chinese Government

Tencent also profited from certain developments on the government policy side. In September 2014, the Chinese government started a mass innovation campaign. It began to directly subsidize domestic technology entrepreneurs. In the following year, the central government issued a major directive on advancing mass entrepreneurship and innovation. This led to the creation of thousands of technology incubators, entrepreneurship zones, and government-backed funds to attract private venture capital. (Kai-Fu Lee, 2018)

3. Innovation and Innovation Strategies

In the course of their rapid development over the last four decades, Chinese enterprises underwent fundamental changes in terms of how innovation is conceptualized, planned, and executed. This chapter gives an overview of these developments and sheds light on the challenges Chinese firms had to overcome.

Definition of Basic Terms

Innovation strategy is a term that describes the developing, reviewing, and updating of an innovation policy that is consistent with a company’s mission and goals (Igartua et al. 2010). It is a set of actions that reflect a firm’s commitment to developing and marketing a new product (Li & Atuahene-Gima, 2001). The term innovation describes a new product that an organization has created for the market. Such new products may take different forms and also include upgrades or modifications of existing products that may be new to the company, the market, or the world (Myers & Marquis, 1969).

Another way of how to define innovation is that it describes a service or product which is meeting a currently need better. This means it is more effective (same level of performance at better price) and/or efficient (higher level of performance at same price) than existing products (Varadarajan 2018). Innovation does not only concern a firm’s product or service. As Xu (2014) points out, it can come in different forms and affect all parts of a company. Innovation can happen in areas such as packaging, finance, materials, logistics, or sales.

According to Gary (2005) innovation strategy is a decisive factor when it comes to the success of innovation in corporations. In shrinking or mature markets, it can be one of the few ways for corporations to achieve lasting growth (Bertrand and Orlega 2006). But while innovation is critical for a company to thrive in a competitive environment, innovation processes also face a lot of challenges and uncertainties (Guan et al. 2009).

Factors that innovation strategies must take into account

One major challenge is that innovation is often a high-risk process that requires a lot of resources. This especially poses a risk for newly established companies, who have limited organizational and financial capabilities (Eisenhardt & Schonhooven, 1990). In general, companies need a certain set of resources and assets to implement succeed with their innovation strategies. In regard to digital technologies, Nylén and Holmström (2014) identify three dimensions which innovation strategies need to take into account in order to achieve the desired outcomes: the company’s products, the digital environment, and organizational properties.

Product Development

When it comes to product, there are two main areas which are very important: user experience and value proposition. User experience means that the product must be easy for its customers to learn and convenient to use, it encourages users to engage as much as possible. At the same time, the product must bring value to its customers. It needs to consider the needs of different types of customers as well as how the service provided should be bundled. Also, how the channel owners can generate revenue from the product.

Digital Environment

Companies need to scan the digital environment in order to identify opportunities for innovation, this include: social media, new devices, operating systems, app stores, general market trends, etc.

Organizational Properties

Organizational properties focus on two major areas: skills and improvisation. Companies need to make sure that their employees are learning new skills continuously. They should also acquire new skills externally, in doing so, they will be able to have competent and innovative teams. Improvisation can bring companies creativity. Companies should give its management and team leaders certain degree of flexibility so that their creativity is maximized, but at the same time will not create waste and overlap.

Another important factor are the goals that the innovation strategy is aiming for. Multiple studies have found that depending on the steps implemented by a corporation as part of their strategy, development of innovations would show different outcomes (Guan et al. 2009).

The context of innovation and innovation strategy in China

Through a study of Chinese manufacturing companies Guan et al. (2009) found that corporations with R&D departments are more innovative than companies without R&D department. In China, Government support plays another significant role when it comes to technology innovation. As Guan et al. point out, in the 1970s Chinese authorities realized the inefficiency brought by the planned-economy system, and thus started a series of reforms. From 1980 to 2000 China’s economy model has moved from centrally planned to market-driven, which welcomed high-tech firms.

The former president of Google China Kai-Fu Lee (Fannin 2018) emphasizes that the Chinese government’s tech-centric utilitarian approach facilitated the development and adoption of technology in the Chinese society. Authorities closely monitor the effects a new technology has on society. If necessary, new technologies are regulated. At the same time, developing companies are encouraged to innovate further.

Due to the government’s re-orientation and the resulting support since the 1980s, high-tech firms today perform better than regular firms. Guan et al. (2009) also found that on average, smaller firms perform better than bigger firms due to their flexibility. In addition, new firms can move faster in innovative activities than firms with longer history.

The transition towards more innovation did not happen without problems. According to Lu and Etzkowitz (2008), a major challenge lied in the lack of integration between Chinese firms and research institutions. Capacities of Chinese corporations to innovate independently were low which Lu and Etzkowitz explain through a relative lack of internal technology transfer capacity in comparison with more developed nations. However, over the last years substantial progress was made. One example for the much-improved R&D capabilities is China’s High-Speed Rail (Lu and Wang 2013).

Apart from the support Chinese technology ventures receive from their government, Li and Atuahene-Gima (2010) identify another important factor for the improved capacity for local innovation. They believe that efficient innovation strategies in China also strongly depend on how firms manage external factors like dysfunctional competition. Like in other transitional economies, the Chinese market for large parts has an inadequate legal framework. For example, this results in poorly protected property right. As a result, many Chinese companies resort to opportunistic, unfair, or even unlawful practices. Among those practices are patent and copyright violations. For innovative companies in China this poses a serious risk.

According to Li and Atuahene-Gima, the result is an unpredictable market environment. In order to keep an edge, Chinese firms need to implement innovation strategies that will help them to come up with new and better products. This view is supported by Kai-Fu Lee (2018). He sees the successful Chinese high-tech corporations of today as warriors who out-witted and out-innovated their inferior local (and external) competition.

Different kinds of innovation strategies

Various names and models exist to describe different forms of innovation strategies. Miles and Snow (2003) undertook one of the first categorizations. They identified four broad strategies for innovating firms: Prospector, Defender, Analyzer and Reactor.

• Prospector organizations focus on locating and exploiting new market opportunities. They try to reach technological leadership through risk-taking in new products.
• Defenders want to maintain a stable share of the market. They want to maintain the efficiency of established products or services, while remaining flexible enough to pursue new business activities. For efficiency, they require centralization, formal procedures, and discrete functions.
• Analyzer corporations share characteristics with both prospectors and defenders. They often monitor the actions of leaders with a more cost-efficient product.
• Reactor organizations do not have a systematic strategy, design, or structure. They do not make long-term plans, because they see the environment as changing too quickly.

Another way of how to differentiate between innovation strategies with a specific focus on China is presented by Lu and Wang (2013). They identify imitative, collaborative, and independent innovation.

• Imitative innovation mainly focuses on imitating technologies, products and processes of the innovation leader. One way to achieve this is to import technologies from advanced countries and incorporate them in native products.
• Collaborative innovation aims towards research and technical cooperation relations with other enterprises, universities and research institutions. Collaborative innovation includes the long-term cooperation with strategic intents, such as strategic technology alliances, network organizations and also includes the short-term co-operation for a specific project, such as research and development contracts, and license agreement.
• Independent innovation is a process to achieve unique core technology with independent intellectual property rights and to realize the value of new products. Independent innovation includes: original innovation, integrated innovation and re-innovation after introduction and absorption.

4. Tencent’s Innovation Strategies

Evidence from the Chinese market shows that it is not uncommon for Chinese companies to go through different stages of innovation strategy. Thus, a Chinese new technology venture’s allocation of substantial resources to R&D, its developing a variety of products new to the firm, quickly imitating foreign products for sale in China, and making significant changes in existing products to improve benefits and the variety of market choices are all indications of commitment to a product innovation strategy (Li & Atuahene-Gima, 2001).

Like other Chinese firms, Tencent too underwent significant changes to their business and innovation practices, as the company developed and matured. In regard to innovation, we can differentiate roughly between three phases.

Imitative Strategy

Tencent started out as what some would call a rather typical producer of copycats (Lu & Wang 2013). However, it soon showed, that the company’s goal was not just to copy other firms’ products, but to build up on what they learned from its imitative innovation approach. Dai et al. (2011) describe this approach as an advanced imitative strategy with the aim to follow up on successful or promising developments, reach a broader user base, and continue to grow larger.

In order to win more registered users, QQ branded itself as the online communication tool for young people and students. Each user could have their own personized avatar and there were also different kinds of membership. It won a lot of popularity among teenagers. Even though back then in 2000, personal computers were still not popular in most Chinese household, a lot of people surfed in internet cafes, QQ managed to achieve 10 million registered users in that year. (Iyiou 2016)

Collaborative Innovation

Tencent actively cooperates with universities to establish joint laboratories, for example Tsinghua University, Peking University, Singapore Nanyang Technological University. Through collaborative research, Tencent has achieved many innovative results, such as query and subscription system based on spatial location awareness, real-time route recommendation system, etc. The company plans to focus even stronger in collaborative innovation in the future. (tencent.com)

Independent Innovation

WeChat Mini Program are programs which can be disseminated in WeChat, users do not need to download these programs separately, by using the QR-scanning function in WeChat users can open these programs and use them. Companies and individuals can develop their own mini programs, in 2018, WeChat Mini Programs already coveres more than 200 subdivided industries including retail, metro, public transport, healthcare, etc. (people.cn, 2018).

Business Diversification

Given the rapid market change in China, corporations have to adapt quickly. Tencent moved from computer-based messaging to online games and then to mobile messaging. Through diversification the company was able to tap into different markets and reap the benefits. Founder Huateng Ma understood that Tencent could not solely count on QQ to sustain the growth of the company. It also had to come with products to penetrate the internet market (Dai et al. 2011).

However, this requires a good timing of actions and in general presupposes corporate agility. This is the reason why a a lot of innovation in Chinese firms is driven from the bottom up (Tse 2015). Tencent facilitates innovation by young and relatively independent teams. These teams are animated to try out and come up with new solutions (Birkinshaw et al. 2018). This however requires robust structures and expertise. That is why Tencent brought in executives with experience abroad, including company president Martin Lau, who worked at McKinsey and Goldman Sachs (Tse 2015).

Micro-Innovation Strategy

To mitigate risks, Tencent implemented the concept of micro-innovation. This refers to the methodology of adapting, modifying, or customizing existing inventions such as products and business models. Micro-innovation is not about revolutionary invention of business models or technology but rather customer experience oriented tweaks on existing products.

According to Lee et al. (2016), micro-innovation at Tencent has three main characteristics:

• It is subtle and adaptive. Products are developed based on previous versions or other similar products. As a result, degrees of innovation are incremental rather than radical
• The cycle of micro-innovation is short and the process is repetitive. Firms are required to ceaselessly iterate each step to produce the best outcomes and each new version must be short in order to obtain feedback from users and improve products almost instantly.
• Micro-innovation requires a significant amount of interaction between a product and its users

The development of Tencent’s most used App WeChat shows the concept of micro-innovation in action. From being a clone of WhatsApp, the Software was turned into a multipurpose tool. Users can use it for messaging, voice and video calls. Through the implementation of official accounts that users can subscribe to, WeChat established its own ecosystem. Since 2014, users can link their bank accounts with their WeChat account. The app became widely accepted in many shopping malls and supermarkets in China. People just need to scan QR codes to pay and receive money. Due to the low barrier of entry and easy-to-use, lots of vendors also adopted WeChat Pay, such as tax drivers, famers who sell self-produced products in markets, etc. WeChat has blurred the line which divides people’s online and offline life.

5. Conclusion

When the company was founded, Tencent definitely belonged to the imitator group when it came to innovation. It is obvious that the QQ instant messenger was a clone of ICQ in its early development. But the founders quickly realized that by just through relying on imitative innovation their chances to succeed in the highly competitive Chinese market would vanish soon. As a consequence, Tencent has done a lot to come up with innovations that add value to their product.

In terms of innovation strategies used, the company’s approach changed to what Miles and Snow (2003) describe as a prospector. Its focus shifted from simply copying products and imitative innovation to locating and exploiting new market opportunities. Independent innovation (Lu & Wang 2013) became increasingly more important for the company’s success. Through introducing the concept of micro-innovation (Lee et al. 2016) Tencent was able to keep an edge over its competitors while at the same time managed to reduce risks.

The willingness and capability to implement these innovation strategies played a big role in the company’s success. Another major aspect was that Tencent’s leadership understood when it was the right time to implement those strategies.

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