1) As part of your environmental analysis, please identify the various components of the Global Diamond Industry (e.g., legal, regulatory, political, cultural, technological, and economic), highlighting the main trends affecting the future of this product market (up to 2 pages);
The global diamond industry consists of three major sectors: mining, rough diamond trading, including retailing and jewelry, and industrial diamonds (The Diamond Industry, p. 1). This industry structure includes both large and well-organized organizations and small, independent diamond operations. The industry has a work force of about ten million people globally. They include both those who are directly and indirectly involved in diamonds from mining to retailing (Chang, et. al., p. 1). The few, major diamond companies lead the industry through various functions throughout the diamond value chain i.e. exploration, production, retailing, etc. (p. 2). The global diamond industry is very concentrated as to geographical diversification of the resources. Africa has about 70 percent of the world’s diamonds while Canada and Russia and Australia hold the rest of the diamond supplies (Rudnicka, p. 1). As such, the industry is difficult to categorize according to country because the diamond players expand its operations to various parts of the global value chain in various locations (p. 1).
Various components affect the industry such as the following:
Political and Legal:
Political upheavals surround diamond producing countries, especially African countries. As such, there is a trend in the industry which enables mid-tier or junior companies to participate in the lower end of the value chain. In reality, these junior companies have been enjoined by bigger companies in order for them to have a stronger hold in the industry. Hence, merger and acquisitions is common in the industry (Maduekwe, p. 7).
The antitrust agreement of De Beers, the leading diamond industry player, with the European Union has affected the monopoly in the industry in terms of supplies and prices of diamonds. The launch of the Kimberley Process Certification Scheme has also reinforced the trading of conflict free diamonds around the world (p. 8).
Economic integration and globalization allows for the easier trading of diamonds in both the manufacturing and the retail sections. However, various trade regulations, policies and economic agreements also signify the stiff and stringent policies on the global diamond transactions. The emerging economies like China and other Asian and Middle Eastern countries are also increasing the demand for diamonds.
The increased awareness and participation of the NGOs, aside from the stakeholders and national governments, requires players to be environmentally and socially conscious in their diamond production (p. 8). It also allows the serious consideration of conflict diamonds.
It allows for the use of high end and more sophisticated equipment in the higher levels of the value chain. Technology also faciliates production control, supply chain and logistics management in the industry.
Other global diamond industry trends include:
The increasing shift from monopolistic to an oligopolistic/consolidated type of industry.
An increasing effort by the diamond producing countries to be vertically integrated, hence, being more involved in the full stages of the value chain.
Technological applications enable the production of equally beautiful synthetic diamonds which will most likely divide the demand for real diamonds in the markets.
Today, the sale of rough diamond by auctions is getting to be a popular way of buying rough diamonds. It accounts for about 30% of all rough diamond sales (The Diamond Industry, p. 1).
Another major consumer trend is the increase in online purchases of diamonds (p. 1). Women are also increasing their independent purchases of diamonds.
2) Discuss the potential profitability of the diamond’s value system, indicating how and in which ways the “5 forces” have recently changed the underlying economics of the diamond industry (up to 2 pages);
In general, the global diamond industry remains highly profitable and lucrative in all aspects of the value chain. The diminishing monopoly in the industry is allowing new entrants to participate in various segments of the chain. However, the barriers are still high especially in terms of capitalizing on a diamond mining operations. There is intense competition among key players now with the discovery of new diamonds mines in other countries (Maduekwe, p. 7). Another factor which led to stiffer competition is the development of niche markets by other players such as rare, expensive gems or colored diamonds.
In the value chain segment of the diamond industry, barriers are also getting higher. For instance, the industry has traditionally required great skills and manpower in cutting and polishing but now, it also needs more investments in the advanced technology to cut and polish diamonds very elegantly. Because of new diamond sources and new players, the bargaining power of supplier has decreased as well. There is an oversupply in the market and even the leading player, De Beers, has been relegated to a weaker supplier power. With the global financial crisis, the bargaining power of buyers has increase. This is also brought about by the oversupply of diamonds and the fall in demand, hence, leaving its prices lower. Industry experts believe that there will be a shift in the bargaining power from the buyers to the suppliers as demand will pick up eventually and supplies will decrease. Hence, the bargaining power of buyers will then again be diminished.
The threat of substitution is generally low. Culturally, the role of diamonds has been pivotal in various civilizations around the world and the value of diamonds has been well associated with class, nobility, prestige, among others. Thus, the demand for diamond has been consistent through the years. This is even more strengthened by the various advertising strategies to create more added value and attraction to this product.
Technological innovations also pose a strong threat for the demand for real diamonds as synthetic diamonds can be made as equally stunning as the real ones. Synthetic diamonds are a serious threat to the natural diamond industry since it can damage the perceived consumer value given to this gem. It also satisfies the environmental and mining issues which real diamonds have. The breaking of the monopoly has also posed a considerable threat in terms of diamond manufacturing and jewelry retailing. For instance, the Indian, Jewish and the Chinese markets have been producing equally beautiful diamond jewelry pieces which European countries have dominated before (Chang, p. 1).
Lastly, the intensity of competition in the industry is very high. The global diamond industry is characterized by high concentration in the unorganized sector. The division in the various phases of production such as in cutting and polishing, retailing, jewelry designing is also very high.
This implies lesser profits for competing diamond companies (p. 8). Rivalry will continue to intensify if there are equally large players in the industry and the exit costs are higher due to the high capital investments in entry. Each firm will look for a way to utilize all their resources and channels in order to edge their margins. With a decreased demand, they will do their best to outwit each other. As real diamonds become oversupplied and the quality can be polished (in terms of natural versus synthetic), the customers can switch from one brand or diamond company to another.
3) Describe the traditional De Beers’ business strategy. Did De Beers have a competitive advantage? Was it sustained? Why? (up to 2 pages);
De Beers’ strategy can be very well identified as collusive. It is both a producer and a supplier of both rough and manufactured diamonds. It traditionally monopolized the global diamond industry in the past. De Beers and its subsidiaries produced almost half of the total diamond production in the world with just one fourth going outside its distribution channels (p. 1). It controlled about three-quarters of all the diamond production through DTC (or the Diamond Trading Company). The DTC categorized and evaluated about two thirds of the worldwide supply of diamonds annually. It was responsible for monopolizing rough diamonds from the De Beers Group’s mining operations. The value added service of DTC also enhanced the strategies of De Beers. It gave ample support services to its diamond customers. This consisted of the following: business planning, marketing, market research, and training. Through this, De Beers got a powerful market research and development department and the influential use of its “Forevermark” logo plus the phrase “A Diamond Is Forever.” As such, De Beers successfully controlled the diamond distribution channels (p. 1.).
It also set the prices of rough diamonds and it only catered to its selected buyers or “sightholders” These sightholders supplied the other levels of the diamond value chain such as the cutting, polishing, retailing, etc. Now, De Beers only controls about 40 percent of the market yet remain a strong competitor in the overall industry (Maduekwe, p. 8).
Its main competitive advantages rest in its monopolistic control as well as its traditional leadership and well established diamond explorations and mining operations worldwide (Chang, p. 1). It was also very active in almost all the aspects of the diamond value chain. De Beers has played a profitable role in the value enhancement process and it had a significant influence in the industry (p. 9). With the decreased market demand for diamonds, it kept its piles of diamonds which were sold during increased market demand for the stone. It effectively handled the shifts in the market prices and supplies of diamonds. It also had then the biggest Russian rough diamond supplier, ALROSA.
The quality of De Beers’ diamonds can be equaled to its glitzy advertisements which the company poured great investments into. It intended to develop a consumer need for diamonds such that they will be willing to buy it even at a high price.
The company refrained from sustaining these strategies because of certain legal mandates and due to the gradual shift in the industry trends. It has been slapped by various antitrust suits in the U.S. and in Europe. As such, it delisted from the Johannesburg Stock Exchange in 2000 and reorganized its market distribution channel from CSO (or Central Selling Organization ) to DTC (Harris & Cai, p. 172). De Beers also shifted to a non-category marketing in 2003 through its Supplier of Choice Program (p. 173). The diamond company continued to promote the stability and exclusivity of the diamonds to the public but with highlights on its own brand – Forevermark (p. 180). With these different strategies, De Beers came out strong as a key industry leader by solidifying its brand equity and taking up some cost saving measures (p. 180).
4) Support your idea for a new business strategy. Suggest detailed information on how to formulate and implement strategic actions which should be taken by De Beers in order to respond to environmental trends and competitive forces identified in questions 1 and 2. Please explicitly address the following issues: a) business-level strategy (positioning, generic strategy, and value chain); b) corporate-level strategy (diversification); c) and international growth (cross-country management) (up to 4 pages).
The diamond company must also solidify its worldwide operations in its four central offices for diamond production and trading such as those in Johannesburg, South Africa and London, England (p. 1). De Beers should also strengthen its customer relationships, specifically with its “sightholders.” The loyalty and the trust these customers have shown to the company in the last decades must be translated into more effective marketing and customer management programs. They must further push their support services such as those mentioned above (like business planning, marketing, market research, and training). This can very well translate to enhanced value which will further distinguish its brand image.
De Beers must also continue its cutting measures so that its turnover will remain high. Its sales rose from $3.8 billion to $5.9 billion (Lee, p. 1). It has earned additional income from its Diamdel subsidiary, which sells rough diamonds to the secondary market. This turnover shows that De Beers’ profit was about 10 percent of its sales.
In terms of distribution, the company must turn its focus on a more efficient distribution and placement process. It must now conquer the Internet. Historically, De Beers held a strict restriction on who can buy diamonds from them. It also employed a tedious process of getting approved to buy from them. They must devise an easier and less rigid system of selling rough diamonds the same way as their online retailing for diamond jewelry.
De Beers need to face the leading online retailer of diamond jewelry, Blue Nile. It needs to rethink its buying model since this competitor is edging its way through discounted retail prices. This is due to their reduced inventory costs as compared with De Beers’ greater inventory management costs. At present, the average diamond price spent on a diamond engagement ring from their online store ranges from $5,000 to $7,500. De Beers’ diamond prices must beat this competitively. This will also beat the increased competition from discount retailers (such as Costco and Wal-Mart).
Aside from its excellent retail positioning with joint ventures with Louis Vuitton Moët Hennessy (LVMH), De Beers must also explore other partnerships and channels. Other competitors have established high end retail stores in various cities worldwide. Hence, the company must ensure that they have all these special markets covered. De Beers stores must be added in various cities across Europe, Asia, and the Middle East.
Chang, S. Y., et. al. “The Global Diamond Industry.” Chazen Web Journal of International Business. Fall 2002. Columbia Business School. Accessed on 16 April 2012
Harris, L.C., & K. Y. Cai. “Exploring market driving: A case study of DE BEERS in China.” Journal of Market Focused Management. 2003. 5(3), 171-196.
Lee, H., et. al. “De Beer Consultants.” N.d. Web. Accessed on 16 April 2012
Maduekwe, Nkiruka Chidia. The Dynamic Diamond Industry: Is It Feasible for its Players to Gain Sustainable Competitive Advantage? 2009. University of Dundee. Web. Accessed on 16 April 2012 < https://docs.google.com/viewer?a=v&q=cache:qD52f1GqCFEJ:www.dundee.ac.uk/cepmlp/gateway/files.php?file%3Dcepmlp_car14_48_216485112.pdf+global+diamond+industry+%2B+pest+analysis&hl=tl&gl=ph&pid=bl&srcid=ADGEESjjh5hIk4Be3mJi_9atmojv8-mltTU36O9-I64ILZGbwaGbMhD9UrXCkBCLGgMxFsWblJEUgryAFj0jF-IVb9r0556w85enbihyF5hje9ri6ue8HZNV9U31jE9_XSdTnC8WvAyt&sig=AHIEtbRrlgMksbTtLjBdAI7qxZqjUbbdjg>.
Rudnicka, E., et. al. “The Diamond Supply Chain.” 2010. Eighth LACCEI Latin American and Caribbean Conference for Engineering and Technology (LACCEI’2010). Accessed on 16 April 2012
The Diamond Industry. “Diamonds A to Z.” 2007. Accessed on 16 April 2012