To determine the attractiveness of the video game business, PEST analysis, and Porter’s five forces will be used. PEST analysis will be used to analyse the external environment of the video game business faced by Tencent and the industry. Tencent is based in China, meaning political factors in China will affect Tencent the most. In 2009, the Chinese government disallowed the purchase of online content using the mobile phone to pay causing Tencent’s virtual currency to suffer. This had caused a serious problem for Tencent as most players play for the transaction of virtual currency to real-life money. Economic factors affect all industry, including the video game business. The limited use of credit cards in China make collecting payments from online gaming difficult. Without a proper billing option, payments would difficult which preventing customers from spending. The social-culture for entertainment has been changing with more users are going online for different purposes, including gaming. There is a changing trend of customer preferences from using the computer to phone.
With the excitement from gaming, many children play non-stop causing a negative image on video gaming business. Parents especially, are becoming wary and would prohibit their children from gaming. Technological advancements could be a double-edged sword, especially for the video game business. Technology had allowed for better security software to prevent hackers, infrastructure support for online to offline (O2O) transfer of experience, payment technology for better payment solutions, big data mining to understand user behaviours and improve performance and multiple “connected” services that help the video game industry to gain and retain the customer interest. However, on the other hand, technology had also allowed the increased number of hackers as hackers learn and work around the current system.
This posed a challenge for video game business as the content, mostly online can be easily stolen. Also, Porter’s five forces are used to determine the profit potential of an industry. Strong distribution networks and good brand equity positively affects the video game. It requires huge capital to build large networks as well as building up the brand. However, there is low customer switching costs as they can just switch to other game as and when they want without incurring any loss. Despite this, most customers tend to stay at the game they spend a long time playing and building their characters. Hence, the threat of entry is low. Video games are just one of the many entertainment people have. People can easily replace video games with watching a movie, chatting with friends, outdoor activities and many more for entertainment. Hence, the threat of substitutes for the video game business is high.
Customers have low switching cost to other company games or for other entertainment products. Hence, the bargaining power of buyers for the video game business is high. There exist many suppliers hence company have low switching cost. Many supplies for the video game are online and readily available. Hence, the bargaining power of suppliers is low. The video game business is a large and concentrated industry of monopolistic competition structure. There exist many firms competing in this industry but they are roughly equal size and competitive capability. The product offerings between competitors tend to be similar but are not identical. As stated in the case, “hundreds of competitors within the first hours of going live”. Hence, rivalry among competitors for the video game business is high.
The video game business is moderately attractive. The video game business is indeed attractive as there are more and more users taking up video gaming for entertainment especially when technology had made video gaming exciting and interesting and available on most devices. However, the industry itself is very concentrated, facing steep competition from both its own and other industry with profit. For a company such as Tencent to strive in the video game business, it needs to be one the best to capture large customer base for the company to profit. What does it take to win? For Tencent to win in the video game business, Tencent can make use of the five questions:
- What are the winning aspirations for our organization?
- Where will we choose to play in the video game industry?
- In the chosen place to play, how will we win against the competitors?
- What capabilities must be in place?
- What are management systems required for the key capabilities?
Tencent aimed “to engage a large pool of casual gamers and gradually advance them to mid-core and hard-core categories”. Tencent’s ambition was to broaden its position as the world’s largest gaming company so that it could capture large enough market share and have a large brand presence in the world. Having a larger market share and brand presence is crucial for video games to strive as customers get to know games through word-of-mouth from their friends or brand recognition which comes from having a large customer base and high brand equity repetitively. As such, Tencent hopes to compete across many services related to games, product lines and categories of video games.
To compete with its competitor, Tencent made use of vertical integration, and try to do everything themselves, from the game development, payment methods to, viruses and hackers software. Tencent made use of their existing strengths such as “unified login, users’ social graphs, multi-platform marketing capabilities, infrastructure support, payment solutions and insights into user needs” and build a mobile ecosystem that provided “an expanding range of products and services” so to provide the customer with a higher experience satisfaction with the integrated services. This will help to gain market share by enlarging their targeted customer base.
Another method Tencent used to compete is acquisitions. Tencent acquired a majority stake in U.S. games producer Riot Games, which owned the League of Legends (LOL) franchise which help to generate approximately $1.5 billion in micro-transactions revenues in 2015. It also went on to acquire a 48% stake in North Carolina-based Epic Game and many more. The acquisitions can help to build or fill the gaps of Tencent missing capabilities or competencies. It also serves to preempt competitors of the same offerings. As such, acquisitions help Tencent to build a larger customer base and receive more prestige, power and pay especially from popular games such as LOL. Lastly, to continue to compete in this concentrated video game industry, Tencent must continuously innovate and produce products to keep up with changing customers preferences and trends and the possibility of imitated products.
However, to truly win, Tencent need a system to fully support and measure if their strategy is working. Structures to support its core capabilities are needed and specific measures to determine the effectiveness of the strategy. Tencent has the right executive team to do the job. All that is left is to come up with the system. c) How well was Tencent positioned in 2017? Tencent in 2017 has a very strong position in the video game business, offering various popular games as seen in exhibit 6. Of these games, one of them is the LOL that topped the global rankings and the other is Honour of Kings which helped Tencent topped the industry for smartphone games. As seen, the video games offered by Tencent stand a larger part in the customers’ minds relative to their competitors due to the different popular offerings. Their brand presence can be supported by the rising advertising revenues, up 61% in the second quarter of 2017.
Also, Tencent is the largest online games provider in China with a wide range of game types. This means Tencent had captured a large market share in China for the video game industry. This make Tencent a strong company with large customers base, making other company view Tencent as a strong competitor in the video game business. This can be supported by the increasing sales and operating profits with online game subscriptions accounted for 46.6% of revenues, almost half the total revenues. What was its strategy for getting there? What resources did Tencent employ to enter the business? Some of the corporate strategies such as vertical integration and acquisitions are discussed in (b). For business strategy, Tencent had used broad differentiation strategy. They have a large competitive scope, offering a wide range of games, both developed in-house and licensed from third parties and at the same time develop different unique game features and services as well as products that help complement the games such as the virtual reality headset.
Tencent believes that participating at all levels in the industry with a wide range of games for all users was “very effective in attracting new gamers, retaining existing gamers and encouraging them to recommend games they [were] playing to their friends.” It also diversified risk in a hit-driven industry. Also by having unique features will helps to increase value, and customers will be willing to pay a higher price for similar offerings. Better services such as payment options will improve the game business. All these combined to help Tencent gain competitive advantage in the competitive video game business as they will be able to offer greater value with the wide varieties of products to compete with their competitors. Using the VRIO framework, taking a resource based view, the resources that Tencent had employed to help it gain superior firm performance to enter the video game business are skilled team with required knowledge, Tenpay, wide range of games, brand equity, QQ Security Doctor and QQ Portal. The VRIO analysis is found in Appendix A. Tencent has a very skilled team of executive with all the required knowledge to enter the video game business. In the areas they are in-charge of, they all have either prior experiences or studied subjects related to the field. No doubt, without a good team, Tencent’s gaming business would not had flourished.
The team is valuable to the company but they are not rare as anyone with such experiences are available in the market, just expensive to hire these individuals. As such the team is a resource that allow Tencent to enter the video game business but not a sustainable competitive advantage to the company. With the invention of Tenpay, it could be used to collect bills from online activities which use to be difficult due to the limited use of credit cards in China and high reliance of other payment platforms. This is especially essential for Tencent in the video game business as all transactions made from gaming are mostly online. With their own payment system, they can also work with their customers closely to make it an easy and convenience transactions.
To create an efficient payment system is not rare but having the company create their own is indeed rare. Most company use third-party payment system as they do not have the capabilities to make it. Hence, Tenpay has a sustainable competitive advantage in the video game industry. Tencent offers a wide range of games, both developed in-house and licensed from third parties. Combining it with their game portal, QQ Portal, their customers get to access all these varieties of game in a single platform. Without the game and the portal, Tencent would not be able to enter the video game business, hence it is valuable. However, they are not rare and easy to imitate. They might had help Tencent to enter the video game business but are not sustainable as their core competencies. Brand equity of a company are built overtime with a lot of capital invested.
Gamers look at brand when choosing to play games. As such, without such presence, no one will know the existence of the game nor will there even be anyone to trying to play it. As such, brand equity is valuable for Tencent to enter the video game business. It is also rare and costly to imitate as not everyone have such high brand equity and reputations. Thus, it serves as a sustainable competitive advantage for Tencent. Lastly, QQ Security Doctor, Tencent own viruses and hacker software is indeed an asset as gamers tend to check for security clearance from a game in case of their personal data being hacked. However, it is not rare or costly to imitate as they are basically just software that are easily copied and break through by others.
