De Beers Case Study
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Background in Brief
The De Beers Group of Companies (DeBeers) was founded in 1888 by Cecil Rhides. De Beers consolidated Mines was formed in 1888 by the merger of the companies of BarneyBarnato and Cecil Rhodes, by which time the company was the sole owner of all diamond mining operations in the country.De Beers doing diamond exploration, diamond mining, diamond retail, diamond trading, and industrial diamond manufacturing. The company operates in 28 countries and mining take place in Botswana, Namibia, South Africa, and Canada ((Wekipedia). In the early 1990s, De Beers dominated diamond industry. De Beers produce 45% of world diamond, but sold 80% of world supply (Reavis, 2008).
The Organization Today
By limited supply, De beers successfully control diamond price and be the monopoly through out 20 century.De Beers products are currently available in more than 1530 authorized retail store in 29 contries. Now De Beers is no longer monoploly as before, now it supply 35%of world comsuption by volume (Betting on De Beers, 2011). In 2012, De Beers rough diamond sals fell 15% to $5.5 billion. Sales through auctions declined 12% to $356 million. De Beers ended the year with free cash follow of $ 697 million, down 15% from year earlier (Krawitz, 2013).
The company’s stated mission is:
We are driven to turn “ diamond dreams” into lasting realities. De Beers have two main objectives to achieve: to unlock full economic value to its leadership position across diamond pipeline and to make diamond reality to everyone by increasing partnership, by employee skilled and committed people and by relying on emotional value of their diamond products (Hannah Lee). Goals and Objectives
Being united with principle and action, turning diversity of people, skill, and experience (Fowler).
Shape the future
Taking new way, setting a demand target and achieving by tough decision and risk analysis.
Taking opportunity and facing challenge
Show we care
Caring about customers’ needs, environment, and society.
Think about what we do and consequences.
Listening first, then act with open mind and honesty.
De Beers have several stakeholders in product market, capital market, and organizational market. These groups described more detail in Table 1. TABLE 1: Organizational Stakeholders1
Group Demands / Attributes
-High 4C’s quality (color, cut, clarity, carat weight)
-Store of value
-Price security(for suppliers, government, unions, communities)
-Human rights (unions)
-Growth of stock price, dividends
-Increasing cash flow, profits
– Solvency and financial stability; ability to meet interest obligations. Organizational
– Stable jobs with no layoffs.
– Fair compensation and benefits packages.
– Effective communication between levels of management.
There are six segments in the general environment that affects De Beers’ strategic competitiveness and returns. These six segments are shown in detail in Table 2 below:
TABLE 2: External Environment
-Diamond products are luxury. People will not buy too many of them. – Female customers are more important than males.
-Different groups of customers have different needs and styles.
– Import/export tariffs can affect pricing and profit margins in different national markets. – Labor market regulations affect overhead, and create changes in the supply and demand of human talent. Economic
– National economic conditions impact consumer confidence and disposable income, which affect demand for De Beers’ products. -Global economic fluctuations make it difficult to forecast consumer demand. Hence, it is hard to adjust prices across countries. Socio-cultural
-“Blood diamond” has negative impacts on consumer demand. -Environment concern affects demand and mining activities.
-Workers’ health is another issue.
-Mining process safety is important.
-New technological development is like synthetic diamond.
-New technology could decrease costs or increase effectiveness. Global
– Diplomatic relationships between nations affect trade policies, mining process, distribution that impacts the costs and availability of new markets. – Wars, economic crises, and other international events can have unpredictable effects on demand and profit margins.
There are Porter’s five forces that are related to the environment of the diamond industry. The details are shown in Table 3 below: TABLE 3: Industry Factors
Bargaining Power of Suppliers:
Before De Beers changed to “supplier of choice” strategy, it built up a stockpile over supply. Therefore, at that time the bargaining power of suppliers was high. Now, with “supplier of choice” strategy, De Beers forms a partnership with firms that shares in its vision. Thus, the bargaining power of suppliers is moderate now. Bargaining Power of Buyers:
– Buyers have no power on the diamond industry since the diamond industry adopts the “supply control” strategy to control price. Threats of Entry:
The cartel such as the character of the diamond industry has created barriers to entry, making it impossible for new entrants into the industry. It is possible for mid-tier or junior companies to come on stream. Merger and acquisition may happen between mid-tier companies (Maduekwe).
Threats from Substitute Products:
Synthetic diamond could be considered as a substitute of natural diamond. However, a synthetic diamond cannot be created over one carat with current technology. In addition, Synthetic diamond has low 4C’s quality and therefore synthetic diamond cannot be used to make jewelry. Different brands could substitute for others. However, the price of diamond stays high. Consumers are mainly choosing style, design, and brand value. Overall, threats from substitute products are low.
The major competition is between the established brands, like De Beers and Tiffany & Co. Consumers pay more attention to style, design, and brand name. The barriers to exit are costly. Inventory of diamond jewelry, supply chain and retail stores are significantly valuable. Loyalty of and relationship with employees and partners are important. Therefore, internal competition is severe.
De Beers’ top competitors are Tiffany & Co., BHP Billiton, and Lev Leviev. These companies are competing with De Beers in regard to service, quality, design, mining stage, and other aspects. The details are included in the table 4 below. Several other diamond manufacturers are also producing high quality diamonds, such as Rio Tinto, US Kela Capital Inc., and so on and so forth. TABLE 4: Competitor Analysis
Tiffany & Co.
Tiffany & Co. is renowned for its luxury goods.
Tiffany markets itself as an arbiter of taste and style.
BHP began to diversify offshore in a variety of projects
Lev Leviev is moving beyond the ancient game of one-upmanship-and beyond the dirty business of diamond (Goldman, 2003).
Tiffany provides high quality and exquisite products.
Tiffany focuses heavily on customer service. Each store is staffed with knowledgeable professionals to deliver excellent service. It adopts centralized control strategies to ensure the best standard of diamonds (Tiffany&Co, n.d.). BHP explores high quality diamonds. For example, BHP owns 80% Ekati diamond mine, which is the world’s largest high quality diamond mine in North Canada. It has become one of the most efficient and sophisticated diamond manufacturers in the world, and has developed and built the most modern and efficient polish factories. State-of-art technology (Rapaport, 2001).
Tiffany&Co. will continually:
-Expand its stores globally.
-Enhance customer awareness.
BHP will remain on exploring high quality rough diamonds.
Different from De beers’ blood diamond. Lev Leviev focuses on legal right on Angola’s diamond industry. Capabilities
Supply from high quality diamond
BHP has high-level technology on mining with control of damage to the environment. Lev Leviec Group has an exclusive right to all Angola’s diamond production and is a major worldwide manufacturer of polish diamond and jewelry. General Notes
Tiffany& Co. distributes physical stores followed by its online stores, B2B, It is the world’s largest mining company. BHP is mining in 25 countries around the world. Lev Leviev takes significant business away from De Beers in Russia and Angola.
Analysis of Dynamics of External Forces
Due to severe internal competition, De beers and its competitors have potential to gain first-mover advantages while developing a new technology of making synthetic diamond that could be used on jewelry. Between De Beers and BHP Billiton, BHP Billiton could take advantage of cost saving, safe and environmentally friendly mining operations with the government. Among Tiffany & Co., Lev Leviev, and De Beers, on the one hand, Tiffany & Co. and Lev Leviev can capture market shares if they successfully expand their market and build customer loyalty. On the other hand, De Beers could earn more profits if it is able to sell its product over their target with their new strategy.
De Beers have diamond mines in Botswana, Namibia, South Africa, and Canada. Those mines, rough diamond, and machinery are resources. The patents, trademarks and copyrights are resources that De Beers creates over the years. Partnership, diamond-trading companies (DTCs), manufacturing and retailing are also De Beers’ tangible resources. In 2012, De Beers Group has total sales of $6,074 million, free cash flow of $697 million and third-party debt of $722 million (De Beers Group , 2013). Intangible
The intangible resources of De Beers include employees, skilled professionals, technology innovation, reputation, ideas, design, and perceptions of product quality and durability.
In 2012, De Beers recovered 1,560,000 carats in Canada, 20,216,000 carats in Botswana, 1,667,000 carats in Namibia, and 4,432,000 carats in South Africa (De Beers Group , 2013). De Beers takes advantage of a centralized quality control system to ensure its diamonds are of high quality. (2) Pricing control
At De Beers’ monopoly stage, by stockpiling excess supply, De Beers has successful controlled the market price in a stable high level. After De Beers adopted the “suppliers of choice” strategy, it still can sell products at a high price. (3) Management
De Beers chooses suppliers who share its vision. By enhancing partnership, De Beers can acquire high quality products and share information. (4) Human resources management
De Beers enhances its relationship with employees, skilled professionals, managers, and other stakeholders to build trust, loyalty, and improve effectiveness and efficiency. Core Competencies
The core competencies exist for De Beers when it has a strong relationship with its partners. Partners are valuable and rare since they have ongoing businesses for providing high quality diamond. It is impossible or very costly for competitors to destroy their strong relationship. De Beers shares information and experience with its partners that allow their day-to-day operations to be more efficient and effective.
The figures below are the world’s annual volume share and sales share of diamonds between ALROSA and De Beers (AWDC, 2013). ALROSA has been the leader in production volume since 2009, and it turned out 34.4 million carats in 2012, which was 27% of total production in the world. De Beers contributed 22% of the world’s production in the same year, ranking top 2. From 2006-2009, De Beers is Top 1 in production volume instead of ALROSA. However, De Beers is Top one in rough diamond sale all the time from 2006-2012. In 2012, ALROSA contributed 30% of world total sale, while De Beers is 37%. We can see the production volume of De Beers is decreasing, but De Beers’ profits margin is on the increase. It is resulted from De Beers’ new strategy “suppliers of choice”.
Business Level Strategy
De Beers’ business level strategy is focused differentiation. Its business focuses on diamond products and differentiated by high quality, brand, design, and service. De Beers has changed from “managing supply” to “driven demand”. Corporate Level Strategy
De Beers’ corporate level strategy is backward vertical integration. De Beers has built a strong partnership with a few suppliers for providing high quality rough diamond and exchange information. In addition, De Beers has excellent diamond – trading companies (DTCs) for its marketing. International Strategy
De Beers is using a global strategy. Its diamonds are standardized with high 4C qualities. For De Beers’ jewelry, there are several series of product lines with similar designs and standards.
In De Beers’ value chain, there are several joint ventures, including Debswana, DTCB, Namdeb, NDTC, Debmarine Namibia, and De Beers Diamond Jewellers.
The organization has the following strengths:
Financial:De Beers acquires significant tangible assets, including diamond mines in Botswana, Namibia, South Africa, and Canada. It supplies 35% of world comsuption by volume (Betting on De Beers, 2011). De Beers has large cash reserves, a steady decrease of inventory, and financial products through derivative options trading. Managerial: The sales and marketing – diamond trading companies (DTC) that comprises a number of companies within De Beers is the marketing arm of De beers. It purchases, sorts, values and markets rough diamonds mined by De Beers. The DTC’s primary sales outlet is in London, approximately two thirds by value of the world’s annual supply of rough diamond. De Beers has implemented a strategy that would mitigate a potential decrease in sales. This strategy includes: decreasing inventory of diamonds to free up capital to spend on marketing and R&D; decreasing numbers of wholesalers that De Beers would deal with; branded luxury items more than rings (Cadieux, 2005).
The organization has the following weaknesses (you could also put this into a table with weaknesses): Logistical: The HIV/AIDS epidemic in Africa strongly affects De Beers’ workers, and thus the performance of De Beers. Currently, HIV/ AIDS has affected over African employees in 3000 De Beers. This is a challenge that De Beers faces in improving lost-time-injury frequent rate (Hannah Lee).
Marketing: One challenge that De Beers and the industry are confronted with is synthetic diamonds. Laboratory diamond producers focus on costs, the environment, and political advantages rather than natural diamond. The costs of synthetic diamonds are significantly lower than natural ones. In regard to the environmental, synthetic diamonds will not destroy the environment like the mining process. In addition to the costs and environmental protection, synthetic diamonds emphasize on political advantages, and customers will not take risk of buying “blood diamond” (Reavis, 2008) (Reavis, 2008).
The environment presents the following opportunities:
Foreign markets: Although De Beers has built up a strong brand presence among high-income demographics in Europe and North America, it still has limited the markets where there are a growing number of rich consumers. Countries like China and India have large populations with significant high-income consumer demographics. These markets have significant potentials for De Beers. If De Beers can successfully market its products and build loyalty with those groups, then it will put entry barriers for competitors. Product line expansion: De Beers’ mining processes take place in Botswana, Namibia, South Africa, and Canada. However, except for those four countries, Australia, the Democratic Republic of the Congo, and Russia are other large diamond supply countries. De Beers can expand its product line to those countries. Threats
The environment presents the following threats:
New competition: Although the barriers of diamond industry are very high, there are still some companies entering and diversifying its products through providing different designs, services, and quality to compete with our products. For example, both Tiffany & Co. and Lev Leviev are already famous with their diamond products. Environmental concerns: Even though De Beers continually spends money on control pollution, the mining process still brings harm to the environment. In this case, synthetic diamonds take advantage of environmental protection to compete with us. However, the current technology cannot make a synthetic diamond over one carat. Therefore, synthetic diamond is not a big issue here. In addition, changes in government policies may affect our supply chain activities.
Owns 40% of rough diamond industry (Hannah Lee).
Owns over 50% of the U.S. diamond market share
Able to influence prices when selling to manufacturers
Over 20,000 employees around the world (MBASkool.com)
Tie-up relationship with business partners
Acquisition of small business to increase brand position and reach
Low brand recognition by consumers
Strong competition from other bands means limited market share growth High production cost
Increase entry of competition
Offer premium diamond jewelry, which includes various products through 50 exclusive stores globally. De Beers is known for its association with international celebrities as brand ambassadors. Excellent branding and marketing team make it a top-of-mind brand. Trend changes quickly, and high R&D costs.
Association with conflict diamonds
Preference of people choosing gold over diamond, make it a premium product for occasions Government policies and taxes affect segments
SWOT fit with strategy
The SWOT analysis identifies the needs for De Beers to change strategies in order to take competitive advantages. De Beers has successful markets in the U.S., but De Beers needs to expand its market in other areas especially in Asia and India. It should continually tie up with its partners for providing high quality products and exchanging market information. De Beers can consider spending more money on R&D for synthetic diamond technology or mining technology. In addition, employee health conditions are an important issue in South Africa.
ANALYSIS OF ALTERNATIVES
There are alternatives for De Beers:
1. Increase brand awareness by advertising.
2. Open more authorized retail stores in China and India
3. Take new mining process in a new country of Australia, the Democratic Republic of the Congo, and Russia by acquisitions or mergers.
4. R&D on synthetic diamond as our new business.
Criteria for Analysis of Alternatives
A) Impact on revenues and cash flow.
B) Impact on operational expenses and profit margins.
C) Impact on brand identity.
D) Impact on corporate culture.
Evaluation of Alternatives
The above alternatives are evaluated according to the listed criteria in Table 6 below: Table 6: Table of Alternatives to Criteria
Alternative 1: Advertising
Expansion of retailing
Expansion of mining
Low growth in the current well-known market, e.g. the U.S.
High growth in a new market, e.g. China
Low growth in the current well-known market, e.g. the U.S.
High growth in a new market, e.g. China
Higher cash out flows in a short term.
Increase revenue by more inputs.
Modest expense, modest margins.
High profits margins.
Profits margin is unknown.
Low diversified, may introduce Chinese style products.
Quickly introduce corporate culture in the new market.
Quickly introduce corporate culture in the new market.
Quick if succeed
No if failed.
The recommendation for De Beers in a short term is a combination of advertising and opening new retail stores in China and India. When a new retail store is open, advertising is a good method to introduce our brand, such as “A diamond is forever.” India and China are very large countries with a large population. A huge population indicates they are very large markets. We should take steps carefully to take up the market share. Therefore, it is better to open few retail stores first to study customer needs. In china, for example, De Beers can choose five high-level consumption cities including Peking, Shanghai, Hong Kong, Macao, and Chongqing as its first batch. In terms of the advertisement types, it could use TV ads, Magazines, and endorsements. Long Term
Depending on short-term performance, the long-term strategy is based on the successful short-term strategy that De Beers is well-known and our market share is growing. Then De Beers should consider opening another 20 retail stores in high-income cities in China. After learning local customers’ needs, De Beers is able to produce customized jewelry for the Chinese market by investing in R&D. The services will improve and be customized for local customers.
-Prepare documents for exportation.
-Find and sign contracts concerning locations for retail stores.
-Begin magazine ads
-Open retail stores in Beijing, Shanghai, Hong Kong, Macao, and Chongqing.
-Continually invest in R&D to satisfy local customer needs and provide customized service.
-Begin TV ads
-Open ten more retail stores
-Begin R&D on producing Chinese cultural products
-Open ten more retail stores. (It depends on whether De Beers’ market is already balanced or some condition may change.)
-Exhibition and reservation for Chinese style products.
-Change our strategies to make them fit to the local market.
Rationale for Action Plan
China is a large market where diamonds are not balanced. China will account for an estimated 29% of the global growth of rough diamond market through 2023. The value of the diamond market will be about $5 billion in 2023 (AWDC, 2013). India is an underdeveloped diamond market that offers significant potential growth as GDP. The middle class population estimated an increase from 16% to 46%. The market value will be approximately $5 billion in 2023 (AWDC, 2013). New Structure and Control Systems Needed
To work effectively, De Beers should have skilled professional groups to study and analyze the Chinese market. De Beers also needs to found excellent marketing companies in China and India to advise brand and take up market share. De Beers may face other competitors in the Chinese and Indian market, like Tiffany & Co. or other competitors from Japan, Russia, and Australia. It is important for De Beers to identify their future objectives, current strategy, and capabilities. A quick response information system is needed for De Beers to know what competitors are doing, their product lines and activities. Criteria to Evaluate Success of Implementation
The following will be employed to evaluate the success of the selected alternatives: Gains in the Market Share: The peak seasons are the New Year, Golden Week, Chinese Valentine’s day in China, and the weeding season and Diwali festival in India. The share of polished diamonds sold in jewelry to Chinese customers grew from 3% in 2003 to 13% in 2013 of global demand. Gains in Profitability: from 2003 to 2013, the average price of China’s polished diamond jumped by 32% with average carats per piece rising from 0.18 to 0.25. The value of sales in 2013 is over RMB 8,000 million.
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