De Beers Case

NATURAL DIAMONDS – Industry Structure

Diamonds are one of the world’s, and specifically Africa’s, major natural resources.

An estimated US$13 billion worth of rough diamonds are produced per year, of

which approximately US$8.5 billion are from Africa (approximately 65%).

The diamond industry employs approximately ten million people around the

world, both directly and indirectly, across a wide spectrum of roles from mining to

retail.

Global diamond jewellery sales continue to grow, increasing three-fold in the

past 25 years, and are currently worth in excess of US$72 billion every year.

The diamond industry can be separated into two distinct categories: one dealing

with gem-grade diamonds and another for industrial-grade diamonds.

About 30% of diamonds are of gem quality and are distributed to experts for

cutting, polishing and jewellery manufacture.

Remaining 70% of diamonds are sold for industrial applications including cutting,

drilling, grinding and polishing in industrial applications.

Process involved

Exploration Mining Sorting Cutting & Polishing

Jewelry Mfg Retailing

Diamond Output

• Increase entry of competition• Association with conflict

diamonds• Synthetic/Cultural Diamonds

• New available markets in Europe, Middle East and Australia

• Can increase brand recognition by marketing DeBeer’s

• Owns over 40% of the rough diamond industry

• Able to influence prices when selling to manufacturers

• Owns over 50% of the US diamond market share

• High quality

• Low brand recognition among consumers

• Association with conflict diamonds

• High Production costs

Weaknesses Strengths

threatsopportunities

Individual changes in forces affecting the industry structure for natural diamonds

CHANGE IMPACT

THREAT OF SUBSTITUTES

Growing market for synthetic diamonds Focus on educating the final consumer on the CSR activities promoted by the companies

Marketing natural diamonds as an object of desire, highlighting its exclusivity

Spending on R&D to develop and supply machinery designed to distinguish man-made from natural stones.

BARGAINING POWER OF CONSUMERSIncreasing level of forward and backward integration

(retail outlets were integrating backward by investing in mines)

Supply-side driven, with little attention given to the end consumer

Changing consumer perceptionsEmerging market for synthetic diamonds

Increased focus on the demand side Changes in brand positioning, marketing strategiesDifferentiate the product by retailers and create value

on those good - in order to sell them first, more advantageously, and at better prices.

THREAT OF NEW ENTRANTSThough raw diamonds are plentiful, it is hard for a new competitor to enter into the industryDiamond industry is primarily a protected cartel. Diamond dealers and wholesalers work in a very close-knit,

vertically integrated chain which makes it hard for an outsider to penetrate.Diamond mines are very capital intensive and are often in countries with unstable political environments.

INDIVIDUAL FORCES AND THEIR IMPACTS ON INDUSTRY

CHANGE IMPACTBARGAINING POWER OF SUPPLIERS

Increasing levels of forward and backward integration (mines were integrating forward into retail)

Dependence on single supplierAntitrust regulators Blood diamonds

Change of supply focused industry to strategy that was demand-driven and brand-focused whereby profits were more important than market share

Decision making & control in the hands of the supplier

Change in the relations with sightholdersKimberley Process Certification Scheme

Detailed documentation and certification

COMPETITIVE RIVALRY WITHIN THE INDUSTRYEmergence of new diamond producers Artificial market and price manipulation

Flood the market with similar diamonds at below market prices

Hoard inventory by selling less

INDIVIDUAL FORCES AND THEIR IMPACTS ON INDUSTRY

Control tactics

• Majority of diamonds from mines sold to De Beers -> Compete with other purchasers

• Company sells them 10 times a year at ‘sights’ -> sole power to determine how many and at what price

• 125-150 ‘sightholders’ invited to CSO to purchase diamonds

Powerless, can only accept or reject Not allowed to negotiate or sell to

retailers who sell at lower prices Required to give De Beers info on

market and inventory levels De Beers has right to audit them

• Highly effective advertising Over 70% of American women own

at least one diamond Done through movies, magazines,

celebrities Shift focus on the types of diamonds

De Beers wanted to sell• ‘A Diamond is Forever’

Best Advertising slogan of the 20th century

Symbol of romance, love and commitment

Campaign used to convince people not to sell or buy used diamonds

SUPPLY DEMAND

Monopolistic Control

• In 1970’s, Israeli merchants hoarded diamonds -> shortage -> rising prices

• De Beers concerned -> loss of control of supply in the market

• Forced Israelis to sell their inventories Charged temporary surcharges at

CSO -> price fluctuations Allocated 20% less diamonds to

Israelis Banned Israeli sightholders from

sights• Israelis ended up selling their stocks

and following De Beers orders

• Zaire was not satisfied with CSO’s sales conditions

• Decided to sell on the industrial diamond free market

• De Beers responded by flooding the market with similar diamonds at below market prices

• Zaire came back to De Beers to ask for readmission into the cartel

• De Beers accepted and offered even worse terms

ISRAELI INCIDENT ZAIRE INCIDENT

Reasons for Environment change• Antitrust Violations

In 1994, US Dept. of Justice charged De Beers and GE for conspiring to fix prices

Any De Beer’s employee entering the US were supposed to be arrested -> conducted business through intermediaries

In 2004, De Beers plead guilty and paid a $10M fine -> allowed to operate in US

• Losing its grip on the market Collapse of the Soviet Union -> weakening

partnership Huge Argyle mines in Australia broke off from the

cartel Discovery of new mines in Canada Increasing popularity of synthetic diamonds

• Market Share fell from 85% to 65%

Aftermath

• Stopped trying to control markets and focused on using its marketing and brand strength– Spent $180M on marketing in 2004

• Partnered with Louis Vuitton to open retail outlets

• In 2003, earned sales of $5.5B and income of $676M

Transformation

MONOPOLYMining

Rough diamond distribution

DEMAND DRIVENMarket driven

prices

MARKET SHAREDown

80 % -- 40 %

PROFITS INCREASED

Change in the environment

Entry of other players

Industrial Diamonds - Facts

• Uses Machining & Cutting tools Thermal dissipaters Optical devices Electronic devices Field emission display devices Electrochemical sensors Micromechanical devices & sensors

• Types HPHT CVD

• Price differential Natural - $7.00 to $25.00 per carat Industrial - $1.00 to $4.00 per carat

• Industry Growth

1940 1950 1960 1970 1980 1990 20000

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Million Carats per year (Synthetic)Million Carats per year (Natural)

De Beer’s Strategy

Enter the Synthetic Industrial diamond

Industry

Inorganic Growth Model

US Company & sales under a

different brand name

Reasons• Industry growth prospects & huge market• Sitting on a huge pile of cash after decades of monopoly• US is the biggest market for industrial diamonds• Adding flexibility by building expertise & knowhow in case it wants to shift to

making commercial synthetic diamonds in the future• Different brand name – so as not to cannibalize its natural diamonds marketing

programme

Why not commercial synthetic diamonds ?

• Market leader in its segment of commercial natural diamonds• Loses its half-century old strategic positioning of ‘Diamonds

are forever’ which appeals to romantics• There will always be rich people – hence demand for natural

diamond – now that it has shifted to demand based pricing• Strategic advantage – Ownership of large share of mines and

control of rough diamond distribution network• Cannibalization of natural diamonds

Standard Oil

• Predominantly American integrated oil producing, refining, transporting and marketing company.

• Established in 1870 in Ohio• John D. Rockefeller was the founder, chairman & major

shareholder• Largest oil refiner in the world• As it grew exponentially and engaged in business strategies,

tactics and practices that were lawful but drove many small businesses under

• By 1890 it controlled 88% of the refined oil flows in the US

• US Department of Justice sued Standard under the Sherman Antitrust Act, 1890 arguing that Standard used its dominant position in the refining industry to, Abuse of control of pipelines Secret railroad rates and instances of discrimination Discrimination in classification & rules of shipment Discrimination in the treatment of private tank cars Unfair methods of competition

• By 1911, amidst a public outcry, the Supreme Court of the United States ruled that Standard Oil must be dissolved and split into 34 independent companies Jersey Standard -> Exxon Socony -> Mobil

Thanks