Tesco – Related Diversification

I feel it is redundant to mention that sheer scale of Tesco’s diversified business model – which ranges from garden sheds to pet insurance – but Tesco have expanded their marketing mix into similar interests of their generic customer base. Their latest  move is the launch of http://www.tescotechsupport.com. The site offers a range of services including how-to videos, tv and satellite installation, and product recommendations; furthermore, there are over 1000 specially trained staff at over 200 Tesco Extra stores. As their existing market becomes more and more saturated, diversification seems a sensible choice. However, according to Ansoff’s Matrix, the degree of short-term risk increases – will it be just another gimick from Tesco, who risk spreading their interests to thinly?

Beneficially, related diversification is not just a punt in a random direction – as Tesco sells an increasing amount of high-value electronic goods, there is a greater demand for specialist customer service: the product element of the marketing mix is influential enough to cause a whole new marketing plan cycle to reset. This, moreover, allows Tesco to compete with other focused, as Michael Porter would define, electrical retailers, perhaps an economy of scale? Tesco is so large that marketing strategies need to become decentralised to focus purely on their niche of the market, a strength Tesco have built upon. To encourage customer participation, and overcome the brand-trust issues of buying from a non-specialist retailer, a free quarterly magazine is available; 63% of readers felt more comfortable buying from Tesco after reading. Like how Tesco have built upon their strength – size – they have minimised their weaknesses – branding, which hinders diversification. Thus, it is likely a very effective SWOT analysis has taken place.

But there remains a degree of inevitable short-term risk: will it be a cost-effective service? The tech-support website, essentially, acts as a lost leader. No revenue is collected from user visiting the site and specialist staff means that labour costs are likely to be high, therefore the ultimate revenue collected from customers, who purchase after being advised, carries lower gross-profit margins. This may be particularly damaging for future growth: Tesco already successfully sells cheap televisions but if they were to sell big-ticket plasmas and large LCDs, their tech support service will be faced with greater demand. And that’s only if customers, who currently are displaying record-low confidence in the U.K economy, trust Tesco more than a focused retailer. Hence, despite their competitive advantage of sheer-size, niche retailers can still fight back against Tesco – David and Goliath style.

Overall, the service will work according to their aims. Yes, the service won’t mean Tesco becomes just as dominant in electricals as it does food; but to maintain effective customer-relationship marketing, as electrical sales grow at a faster pace than its core-products, the service is essential. The tech support is, furthermore, behind the companies ethos and slogan “Every little helps”.

© Joshua Blatchford author of Manifested Marketing 02/09/2010

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  1. Waitrose – Product Development « Manifested Marketing

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