Custom «Case Study – De Beers» Essay Paper Sample

Introduction

De Beers is a British monopolistic diamond company based in South Africa, that controlled single-handedly the global supply of diamonds in the late 1990s. At that time, this company controlled 45% of the world’s diamond production and sold more than 80% of all diamonds. However, De Beers’ grip on the diamond industry weakened and by 2007 it was producing 40% of the globe’s diamonds and selling just 45%. This weakening is attributed to a variety of factors ranging from the emergence of major competitors on the market, termination of the contract by Argyles, and mining conflict diamonds which further tarnished De Beers’ image in the diamond business. In the middle of improving its blackened image, De Beers was faced with a dilemma of whether to enter the emerging synthetic diamond markets with its own synthetic diamonds or whether to stick to traditional diamonds. This paper addresses De Beers’ dilemma through an analysis of its external and internal environment, identifying its overall business strategy, and providing alternatives.

De Beers’ Strategic Issues

De Beers is in the business of mining and selling diamonds. Initially, De Beers also bought diamonds from other producers, so it was referred to as “Central Selling Organization” controlling up to 90% of the globe’s diamonds (McAdams & Reavis, 2008). After losing its reputation and grip on the diamond market due to its anti-competitive business practices and involvement in conflict diamonds mining, De Beers spent the years from 1998 to 2006 on reorganizing its customary operations and making various amends. However, as De Beers was reorganizing itself, a new rival to the natural diamond slowly began to emerge: laboratory-created or “synthetic” diamonds. They were produced at a lower cost, and could be applied not only in jewelry, but also in different industries. This meant that synthetic diamonds could not just be brushed aside as a “passing fad”.

De Beers’ History, Development and Growth

De Beers ruled the diamonds industry in the early 1990s.This market dominance enabled De Beers’ Central Selling Organization (CSO) to choose to whom to sell, how much to sell, and at what price. Apart from this monopolistic hegemony, De Beers’ growth is also attributed to the following:

• Ability to grade and guarantee the diamonds’ quality.
• Having one and only marketing branch in the CSO that could select its buyers, set non-negotiable prices, choose the quantity of the sells, and punish those who did not comply.
• Stockpiling diamonds creating the demand.

Analysis of De Beers’ Internal Environment

According to Hiriyappa (2012), the purpose of conducting an internal environment analysis is to periodically identify the specific strengths and weaknesses of a company. The internal environment analysis also aims at identifying the firm’s core competencies. An internal environment analysis of De Beers reveals the following:

Core Competencies/Strengths

De Beers boasts the following key strengths or competencies:

• Ownership of over 40% of rough diamonds industry.
• Ability to influence prices while selling to distributers.
• Ownership of over 50% of the US diamond market share.
• Producing high-quality diamonds.
• Shifting the focus of diamond marketing to customer-oriented and demand-driven.
• Large stockpile of diamonds.

Weaknesses

The factors that contributed to De Beers’ weakness were:

• Low brand recognition among the consumers.
• De Beers’ diamonds are associated with conflict diamonds.
• High production costs of diamonds.
• Involvement in blood diamonds made the company look as socially irresponsible about the way the miners lived.

Analysis of De Beers’ External Environment

Hiriyappa (2012) defines external environment as aggregation of all factors outside the organization that provide opportunities or pose threats to an organization. The analysis of De Beers’ external environment reveals the following:

Opportunities

• Exploration in Europe, Middle East and Australia creates new markets.
• Ability to increase its brand recognition through marketing De Beers diamonds as a branded luxury item.
• A demand-centered strategy that focuses on building new relationships with suppliers dubbed the “Supplier of Choice” program.
• Widening the customer base from the traditional marriage/wedding jewelry to other non-wedding segments.
• De Beers’ transformation from a public into private company.
• Reorganizing traditional operations through signing agreements with diamond mining countries to establish joint ventures.

Threats

• Increased completion in the market.
• Association with conflict diamonds.
• Entry of synthetic diamonds that are identical to the natural ones, but are much cheaper to produce.
• The subject of ethical diamonds and the appalling and pitiful working conditions of many Africans involved in the mining business.

5 Forces Analysis

Bargaining Power of Suppliers. The diamond industry is getting more and more vertical. Which was previously separate companies’ realm of covering distinct parts of the industry like mining, cutting, polishing, delivery to jewelry stores, was changed by firms like Tiffany and Aber Diamonds that purchased mines and mining firms, and bought stakes in retailer companies. Due to these changes, mines were in a position to reach the retailers without necessarily going through De Beers and were even able to negotiate better prices. Additionally, De Beers’ pool of suppliers was reducing due to collaborations between mining countries and other producers like the one between Lev Leviev Group of Companies and ALROSA. This increases the negotiating power of De Beers’ remaining suppliers.

Threats of New Entrants. This risk is relatively small, given the high costs and the required political support in the country where miners are available to work a diamond mine. De Beers’ threats come from retailers entering the mining industry or bypassing De Beers and trading directly with one another.

Bargaining Power of Buyers. There are two kinds of customers that affect De Beers’ business: retailers buying diamonds from the company and end consumers who buy diamonds from the retailers. The vertical growth in the diamond industry means that retailers buy stakes in mining companies and mines thus cutting out business mediators like De Beers. Retailers like Tiffany & Co. can, therefore, obtain and sell diamonds at reduced prices. Additionally, the consumer has the option to buy synthetic diamonds that are exactly like the natural ones, but much cheaper, more environmentally friendly, and not contaminated with “blood”.