Case study of the De Beers Diamonds

Introduction

Few names are more famous or notorious in some circles in the diamond business than De Beers.  Few companies in any industry have cornered the global market in their space than De Beers.  Their reputation for bullying and unethical business practices is well documented.  Partnering with brutal regimes to supply their diamonds was common place for De Beers.  As market pressures have finally caught up, De Beers has had to face a number of obstacles to maintain their large share of the diamond market.  Progress has been made in parity and in providing the diamond buyer with an extensive education in the production practices of diamonds.  It is satisfying to many to see De Beer’s face strong competition and have to overcome market pressures to their standard operating practices.

External environmental analysis

P—political factors that can influence the decisions and behavior of the firm.  De Beers faced a number of global political factors over the decades as they sought to retain their market share.  They controlled a monopoly on diamonds for decades.  They would use punitive measures against other countries who stood in their way.  After Zaire decided to stop selling its industrial grade diamonds to the De Beers syndicate in 1981, De Beers flooded the market bringing down the price of the Zairian diamonds by 40%.  The supply of diamonds was influenced by political factors.  For many years, DeBeers was prohibited from conducting business in the USA due to violating the Sherman Antitrust Act.  Seven countries—Angola, Australia, Botswana, Canada, the Democratic Republic of the Congo, Russia, and South Africa—represented 88% of the value of diamond production and 96% of global production volume.  India dominated the $19 billion processing industry of diamonds. Government conflicts and restrictions played an active part.  In 1999, Namibia sought to win control of the processing industry by inserting a new law permitting the government to force miners to sell a percentage of their diamonds to local polishers instead of sending them to India.  Israel opened their first cutting and polishing factory in 2004.  Governments played an active role in influencing the decisions and behavior of De Beers.  Focused on protecting De Beers, South Africa passed the Diamond Amendment Act in 2005 establishing duties on diamond producers who exported rough diamonds out of the country. The goal was to prevent exporting diamonds to India for polishing. When the Soviet system collapsed, there was turmoil in the diamond industry as contracts which De Beers had with countries who now no longer existed.  Russian diamonds were then traded extensively on the black market and not through De Beers.  The United States penalized De Beers for having a monopoly on the diamond market.

E—the economic factors in the external environment.  One of the largest factors upon the natural diamond industry was the invention and development of synthetic diamonds.  Synthetic diamonds created in a lab were chemically identical to naturally mined diamonds.  The synthetic diamonds were dramatically lower in price than the natural diamonds which De Beers specialized in selling.  A one-carat natural pink diamond could sell for upwards of $100,000 while an identical synthetic diamond would retail for around $4,000.  Synthetic diamonds were growing rapidly and cutting into the natural diamond markets.  Nearly $50 million synthetic diamonds were sold each year with expected growth of upward to 45% by 2015 and $2 billion in sales.  Synthetic diamonds have now expanded into industrial uses and growing at a rate of 10% to 15% per year (90% were of industrial diamonds were synthetic diamonds).  An excellent market developed for synthetic diamonds in a number of critical areas: semiconductor industry; the thermal conductivity; next generation optics; and digital data storage.

S—sociocultural factors capture a society’s cultures, norms, and values.  The phrase “blood diamonds” played a key role in the public relations nightmare for the image of diamond producers.  “Blood Diamonds” was a phase developed from rebel forces overthrowing the government of Angola, the world’s third largest producer of rough diamonds.  The rebels then flooded the market with up to $1.2 billion worth of rough diamonds.  These funds then underwrote their respective armed conflicts in Sierra Leone, Liberia, and the Congo.  As news of these armed conflicts spread and word of the mistreatment of workers became well-known, customers wanted to know where their diamonds originated and if they were tainted with money from armed conflicts.

T—technological factors to create new processes and products.  The greatest technological development in the diamond industry was the creation of synthetic diamonds.  Lab grown diamonds had been around since 1955 and it had been a very laborious process using high pressure high temperature.  It usually took 4 days to grow a 2.5 carat diamond.  Technology grew and by 1996 a patent had been award for a chemical vapor deposition process for producing flawless diamonds.  These synthetic diamonds also came in colors which truly cut into the natural diamond market. Due to the development in laboratory technology, synthetic diamonds were able to be used for industrial purposes.  Purposes such as use in semiconductors, thermal conductivity, next-generation optics, and digital data storage.  All of these technological factors truly had an adverse impact about the financial growth of De Beers.

E—Ecological factors.  Natural diamonds were damaging to the environment to extract.  It required several hundred tons of earth for each carat of natural diamonds.  Diamond extractions caused destruction to fish habitats, land-based wildlife habitats, and caused caribou and grizzly bears to flee.  The machines to operate the extraction of natural diamonds used diesel fuel which added to the production of greenhouse gases.

L—legal environment and regulations.  In 2004 De Beers pleaded guilty to charges of price-fixing of industrial diamonds and agreed to pay $10 million fine.  The next year, De Beers agreed to settle a class action suit for monopolizing the international diamond business for $250 million.

Porter’s Five forces—Threat of entry; power of suppliers; power of buyers; threat of substitutes; rivalry among existing competitors. The entry of synthetic diamonds into the market has had a profound impact upon natural diamond industry leader De Beers.  Suppliers of synthetic diamonds in the US has grown dramatically and cutting into the natural diamond market.  US synthetic diamond producers such as Adia Diamonds, Gemesis, Apollo, Chatham, and Life Gem.  Due to changes in the natural diamond market, De Beers signed an agreement with the Botswana government to establish the Diamond Trading Company Botswana and with the Namibian government to form Namdeb.  Resulting from the deal, Botswana moved up the value chain from mining and sorting to sales and marketing (taking London’s place).  De Beers was reorganizing to better compete with the synthetic diamond market.  The threat of a substitute diamond in the form of synthetics diamonds was very real.  De Beers spent money on educating the public and working with the Federal Trade Commission in determining the terminology.  A rivalry among existing competitors was the emergence of Russia after the fall of the Soviet Union.  Alrosa began to take the market share from DeBeers after their Soviet contracts became void.  Diamonds began to be cut in Russia instead of India.  Australia’s diamond mind terminated their contract with DeBeers causing a major upheaval.  Australia’s Argyle mine sold 42 million carats directly to polishers.  Canada then became a threat to DeBeers.  The majority of the country’s natural diamond production fell outside of DeBeers control.

Internal analysis

VRIO framework–Due to De Beer’s focus on vertical integration through acquisitions and their alliances, their dominance in the natural diamond production and supply chain was valuable; rare (extent of their knowledge & global alliances); costly to imitate; and organized to capture value (global structure of smart infrastructure). Their expertise was built through acquisitions of small companies and mines throughout the world  Their most valuable asset could be described as their global partnerships.

Current business level & corporate level strategies

Firm’s performance

Profit ratios

The volume and value of natural diamonds has grown tremendously since 2002.  The value has grown from $7.3 billion to $12.7 billion in just three years.

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The USA has always provided the largest market for customers and retail buyers of the natural diamonds.

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The changes De Beers made in partnering with Botswana and Nambia have proven very successful. The value of Botswana has exploded.  Price has also worked in DeBeers favor as it has grown through 2005.

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Making the diagnosis

De Beers would be wise to continue to educate the public on the origination of their natural diamonds and how natural diamonds are much more precious than synthetic.  They own this unique niche and if they decided to enter the synthetic diamond market, it would hurt their branding.  They would be wise to continue to develop a vertical integration of the diamond market and cut into the Indian polishing market.  As they see their main competitors in Australia and Canada, they can seek to growth their markets in Botswana and Nabia.  Continue to emphasize they are not producing “blood diamonds” and showing customers the origination is key.

 

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