DeBeers Diamond Dilemma - Admission/Application Essay Example

DeBeers Diamond Dilemma The case study reconstructs the history of the iconic diamond company DeBeers from its controversy laden past operations to its new efforts in face of surmounting challenges coming from the different sectors of the industry. The company has seen major changes in their strategy since the start of the new millennium. The following analysis helps to isolate the major factors impacting DeBeers future strategy and identifies the most pertinent problems it has to face and suggests strategic options the company can follow. DeBeers Starting off as a public company incorporated in 1988, DeBeers was the undisputed market leader in the diamond industry for more than a century (Goldschein, 2011). As far as 1990 the company was selling off 80% of the world diamond supply and enjoying the benefits of its “Diamonds are forever” campaign which had catapulted the mineral to luxury status (Epstein, 1982, p1). The company had maintained its leadership through a calculated strategy of controlling the world diamond supply; pressurizing its suppliers and undertaking a series of price fixing actions that had inflated the value of diamonds globally. While these questionably illegal activities had not won the company many fans it was true that their expertise, business mechanism and network within the diamond industry was highly effective and efficient At the turn of the century the diamond industry went through a number of changes brought upon by political, social and economic factors. These new trends successfully threatened DeBeer’s monopoly on the Diamond trade; by 2007 the company was only producing 40% of the global supply and selling off 45% (Johannesburg and Windhoek, 2004). This decrease in production and sales had followed a radical change in the direction of the company’s mode of operations. The focus now was not on market share but on the value to be made from a strong branded demand. Diamond demand had resulted in a price increase of almost 30% from 1996-2005 (McAdams & Reavis, 2008, p3) and DeBeers was determined to gain from it. Emerging trends in the Industry Among the many changes that the diamond industry has undergone in recent years, the major impact has been brought by the ones described below. The factors pose as serious challenges to DeBeers but at the same time also point towards new future opportunities if the company is responsive in a timely manner. 1. Political upheaval in Angola starting off in 1990 had included a fight to gain control of the diamond mines as the mineral could easily be harvested and smuggled out (Goreux, 2001, p6). Rebels in the country flooded the market with $1.2 billion worth of raw diamonds that would then go on to fund the war being fought. Dubbed “Blood Diamonds”, these stones were contributing directly to the human rights violations taking place there and the subsequent media coverage pushed the consumer’s sentiment against the diamond industry as a whole. Consumers increasingly became wary of accidently contributing to the war by purchasing blood diamonds and overall demand and perception of diamonds suffered as a result. An indirect effect of the media exposure was also to highlight DeBeers apathetic role in these diamond producing economies and the dire working conditions faced by the diamond workers. 2. To mitigate the harmful impact of these “conflict diamonds” and to regain the consumer trust the “Kimberly Process Certification Scheme” was adopted by the industry after three years of international negotiations to monitor its own supply and to curb the trade of wrongfully acquired diamonds (Moore, 2012, p24). The initiative was launched in 2002. And according to official statement by 2006 conflict diamonds made up less than 1% of total product in circulation (GA, 2009). Even the critics of the certification admit that despite a few structural weaknesses, it has helped in control the sale of unregulated diamonds- a first in such international schemes (Moore, 2012, p72). The Kimberly scheme is also credited with causing the change in operations of DeBeers as their proscribed activities within the affected regions were exposed and they needed the support of the international community, most importantly the US. (Andrews, 2006, p179) 3. India had been the world’s largest (and cheapest) Diamond processing country with almost half the world production being cut and polished by Indian workers. But in recent years as the global pattern of diamond consumption has shifted the focus is going back on the diamond producing communities and the lack of benefits for the workers (Hofmeester, 2013). Native governments have started to put significant pressure on the companies to shift these economy boosting activities back to the centers of diamond productions. Southern African countries like Namibia and South Africa have started to introduce laws to support these requirements. 4. Newer producers of diamond have emerged in recent years mainly Australia, Canada and Russia. These countries are producing diamonds completely independent from the DeBeer’s monopoly that once existed. Australia’s biggest mine Argyle could produce 20 and 30 million carats a year (Smith, 2012), with Canada becoming the world’s third-largest diamond-producing nation in early 2000 (McClearn, 2012). The impact on the company is the damage to its original horizontal integration approach where they could control most of the suppliers of diamonds directly or indirectly hence also controlling the overall supply (and price) of natural diamonds in the market. 5. These new diamond producers are also operating with vertical integration in mind, focusing on developing their own retail stores, brands and a customer base which can differentiate one diamond supplier from the other. This is very different from what DeBeers was doing which was basically a supply side strategy with horizontal integration of the world’s diamond supplies. And as DeBeers is attempting to revamp its image it is becoming harder to compete with the brand strengths of these new rivals who have front line contact with the consumers. 6. With the changing world economy structure and increasing wealth in the Asian giants India and China, the diamond demand patterns are bound to change as well. Estimates indicate that by 2020 the combined demand of the middle class from these two countries will be greater than diamond demand from the US (Statista, 2014) which had traditionally been the biggest market for diamond products. All the diamond firms have to be prepared to cater to this growing market which would include having an expertise on retailing, marketing, supply chain etc. In china the demand grew from 18% from 2010 to 2011 with India following behind with growth of 17% during the same period (Bain & Company, 2012, p3).For DeBeers, their new strategies will have to keep this factor in mind as they fight with their rising rivals especially on the retail front. 7. A small but significant development amidst the chaos of new players, conflict diamonds and international negotiations has been of that of Synthetic diamonds. Grown in a lab under specific conditions these diamonds are touted as being the environmentally and socially superior alternative to ‘original’ diamonds, with a much smaller price tag. Furthermore these stones are also available in various shades of color such as blue or pink (Davis, 2004); naturally colored diamonds are highly rare and the average consumer cannot afford one. The global share of synthetic diamonds is only 1% as of now but the share in leading markets like the US is significantly higher (around $50 mil) and it is growing. For the consumer these diamonds also provide a sure guarantee that they were not a part of any kind of conflict- a fact that is increasingly important to consumers after the warfare in Angola and similar countries. Aside from the jewelry market, another advantage and potential market niche for these stones is in technology hardware where industrial grade diamonds can be used as a replacement for silicon in software chips. While industrial grade diamonds have been in use for many years due to their hardness, only recent changes in the process of developing synthetic diamonds have allowed scientists to produce ‘flawless’ and homogenous stones available for more delicate tasks (Rabinovitch, 2014). So far no diamond larger than 1 carat has been produced, so this has restricted the commercial demand to some extent but does not have any consideration on the technological side. DeBeers Strategy in the new millennium In face of all of these factors the iconic company has also been shifting its mode of operations drastically and doing so in a way that will allow them to get back into the biggest markets and fight their growing rivals. After the privatization of the company in 2001 (Cowell &Swarns, 2001) one of the first acts of the new management was to restart business in the US after paying off $10 M in fines leveled against their previous anticompetitive practices. This gave them access to one of the biggest diamond markets and to start the aggressive work on their PR campaigns. DeBeers had long followed a strategy of ‘buyer of last resort’, trying to control diamond prices from the supply side (McAdams & Reavis, 2008, p8). However, with the emergence of new competitors and increasingly wary customers DeBeers also had to shift towards vertical integration and responding to the demand side. Their new management slogan was to be a “Supplier of choice”, working closely with retailers and suppliers through formal contracts and supporting marketing campaigns to distinguish the DeBeers diamonds from all others. The intention was to increase demand by 5% per year (O’Connell, 2009); and to leverage their own brand by opening up DeBeers retail stores. Some of their prominent marketing campaigns have included the “Celebrate Her” and “Millennium Diamond” initiatives along with public support for the Kimberly Process Certification Scheme”. DeBeers has also been working with government of Botswana to increase the amount of after mining activities in order to provide gainful employed in the diamond industry to the native people; showing sensitivity to the problems faced by these local communities (O’Connell, 2009). Processes such as these are guiding the company towards a more customer centric business approach and shows a concern for CSR activities. Given the history of the company and the negative reactions against it in the past few decades this seems like the most prudent course of action. The new strategy effectively competes with the new rivals on retail based sales and branding activities; going as far as to allow separate retailers to use DeBeers signature on their diamond jewelry. It also considers the changing nature of diamond supply and demand by tapping into the Indian and Chinese markets and branding their diamonds as a luxury rather than an expensive commodity (Johannesburg and Windhoek, 2004). The marketing campaigns are creating and enhancing the customer base much as the “diamonds are forever” campaign managed to do in the early 1930’s and 1940’s. As the case states DeBeers and the rest of the ‘natural’ diamond players are now increasingly worried regarding the emergence of the synthetic diamonds as a major contender in the diamond game (Davis, 2004). The company is already working with suppliers and retailers to identify and mark out the ‘fake’ laboratory grown diamonds from the natural mineral stones (Rabinovitch, 2014) and to create push marketing for consumers who are interested in the stones with the less complicated histories. Given the context, however, it can be argued that these new synthetic diamonds are not the biggest threat to DeBeers as an individual company. The gems are only slowly gaining traction in the jewelry industry with the emphasis still on the industrial functions; furthermore the kind of demographic they are targeting in the jewelry market are those who cannot afford the natural stones themselves (a natural colored diamond can cost around $100,000 while a synthetic colored will only run up to $7000). This is the consumer base without the kind of resources needed to become regular diamond consumers- this does not suggest that there shouldn’t be any proactive action against the threat but that DeBeers should also not be concentrating on only this one challenge. The industry itself is already pushing a massive push marketing strategy within the US market where synthetic diamonds are more prevalent, it is also trying to prevent the use of the term “Cultured” for these synthetic diamonds by appealing to the U.S. Federal Trade Commission as this term would possibly be attract more consumers away from the naturally mined products. Since the industry and all the players in it are equally affected about this threat and working towards controlling it; for DeBeers, at this point, strategically it is more important to concentrate on the threat of the new rivals who can possibly encroach even further on DeBeers original market base and who will be actively competing for the emerging markets. India and China specifically will not be looking for synthetic replacements to show off their wealth; the demand will be for prestigious natural diamonds as a sign of wealth and luxury (Jegarajah, 2013) ,and DeBeers can cater to their needs very effectively if it works proactively. Future options: High Awareness Branding, Co-Marketing and Product Development The company is already on the right track with its new customer centric approach and increased marketing efforts; right now the best option for them is to make their brand name the iconic name in natural diamond jewelry, not just as a supplier. Their new campaigns should be modeled separately for each region, customer segment they are targeting. DeBeers has a controversial history but there are parts of that history related with glamour and avarice and these parts should be highlighted to create a unique identity for DeBeers diamonds. Emotional branding specially for the developing markets will pair up the diamonds with feelings of richness, opulence and a high lifestyle reminiscent of the hay-days of the western glamour. Instead of letting people know that the synthetic products of products of other diamond suppliers are of lower quality the company should instead alleviate its standing and image amongst customers to get the benefits of high brand awareness and generate a loyal brand following. Co-marketing with rivals, retailers and suppliers should basically involve educating customers of the differences between synthetic and natural diamonds; keeping in mind that the customer segment attracted to synthetic diamonds will be much different than those looking for and in favor of natural diamonds. The co-marketing can also help to disperse any lingering consumer doubts relating to conflict diamonds and the effectiveness of the Kimberley Process Certification Scheme which will again provide a positive boost to the whole industry. As a side option and to prepare for any contingencies DeBeers can also continue operation on their own synthetic diamond products. The company already has the technology which is used to produce industrial grade diamonds (Bates, 2014), in the future once their own brand is strong enough (symbolizing wealth, glamour and a penchant for natural diamonds) to withstand any negative effects they can even launch a synthetic line of products positioned as a more affordable option targeted towards those who want to have the DeBeers experience but lack the resources to do that. Whichever option DeBeers chooses to follow in the future, it is certain that it can no longer go back to operating as in the ‘good old’ days and they have to maintain a firm structure that is responsive, flexible and understands the importance of customer perceptions. Bibliography McAdams, D., and Reavis, C., 2008. DeBeers’s Diamond Dilemma. MIT Sloan Management. Goldschein, E., 2011.The Incredible Story Of How De Beers Created And Lost The Most Powerful Monopoly Ever. Business Insider. Retrieved from: [Accessed 16 August 2014] Epstein, E. J., 1 1982.Have You Ever Tried to Sell a Diamond? The Atlantic, Feb 1983. . Retrieved from: [Accessed 16 August 2014] Andrews, A.E., 2006. Diamond Is Forever: De Beers, the KimberelyProcess, and the Efficacy of Public and Corporate Co-Regulatory Initiatives in Securing Regulatory Compliance Note. South Carolina Journal of International Law and Business, Volume 2, Issue 1, Fall Article 7 Goreux, L., 2001. Conflict Diamonds. 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