Henrik Oiseth, and
BUSA 499, Section One
May 13, 2009
Table of contents
Executive summary……………………………………………………………… page 2
Company profile…………………………………………………………………… page 3
Overview of the jewelry industry………………………………………………. page 4
External environment………………………………………………………… page 5
Industry analysis……………………………………………………………… page 10
Jewelry supply chain…………………………………………………………. page 16
Industry value chain, Jewelry Retail………………………………………….. page 19
Company analysis……………………………………………………………… page 24
SWOT…………………………………………………………………………… page 46
Financial ratios…………………………………………………………………… page 50
Strategies………………………………………………………………………… page 53
Preferred strategy……………………………………………………………….. page 60
EVA……………………………………………………………………………… page 62
Blue Nile balance sheet…………………………………………………………… page 63
References…………………………………………………………………………. Page 64
Blue Nile is a publicly traded company. The company was established in 1999 and is
headquartered in Seattle, WA and is one of leading online retailers of diamonds and fine jewelry.
In addition to serving the U.S. market, Blue Nile offers products to selected countries through its
Canadian and UK websites. 70% of their sales are from engagement rings and wedding bands
and they are known for being a high-end jewelry retailer. The company offers its products on its
websites without actually holding the products. Because of its unique business model, it is able
to sell its products at much lower prices than the competitors. After a thorough analysis of the
trends impacting the market, and Blue Nile in particular, we have come up with a strategy that
will maintain and improve the company’s position in the industry. By increasing its focus on
marketing, Blue Nile should be able to gain more of the market share in the online retail market.
Blue Nile has had success since its start up and received multiple awards for its user
friendly websites and business model. However, because of the fierce competition in the market
Blue Nile operates in the company needs to seek for continues improvement and take advantage
of the opportunities in the market place. The company has achieved high customer satisfaction
for its existing customers, but lack of brand recognition in the general market place for diamonds
and fine jewelry has restricted Blue Nile to perform upon its capabilities.
By increasing the exposure of the Blue Nile brand, the company can achieve a higher
customer base and increased revenues. Through increased advertising in magazines, posters and
billboards consumers will be more familiar with the Blue Nile brand and what the company has
to offer. Currently, most of its international sales come from its English speaking websites, but
by making its websites more user-friendly for international customers, the company can reach a
broader market. We recommend that the company outsource the creative advertising and creation
of a marketing campaign to BBDO. The company operates throughout the world and we believe
that Blue Nile can take advantage of their expertise and knowledge. Our estimates show that the
increased revenues will far exceed the costs of hiring BBDO. Making these changes will increase
the brand awareness and increase the value created for its shareholders.
Blue Nile was founded in 1999 and today, it is one of the largest online retailers of
diamonds. In addition to selling diamonds, it also offers platinum, gold, pearl, and sterling silver
jewelry. It is headquartered in Seattle, Washington and it operates in 25 countries, offering
products through its United States, Canada and the United Kingdom websites (Blue Nile Inc,
2009). The company is publicly traded on the Nasdaq stock exchange and has received several
rewards for its service, price and education.
Its mission is to be the best jewelry retailer in the industry, and it will achieve that by providing
high quality products at compelling values through a powerful shopping experience. The
company delivers a great customer experience, as well as providing consumers with a unique
way to buy rings and other fine jewelry. Blue Nile displays diamond inventories available with
the suppliers on its websites without actually holding them until customers place an order. The
website offers a wide range of educational materials that give the consumers the ability to handle
the entire shopping process (Investor Relations, 1999). Another alternative is to contact its call
center where customers can talk to trained diamond and jewelry consultants. Guidance will be
given on all steps in the process of buying diamonds and fine jewelry, such as selecting the
correct item, purchase, financing and payment alternatives and shipping services.
Blue Nile has a significant advantage over its competitors in the way it operates. The
strategies, distribution channels and supplier solution lower the company’s cost and create
barriers to entry. Contracts with suppliers give it the right to sell stones online at volume-pricing
discounts. These are only a few advantages that separate Blue Nile from other competing
companies, which we will analyze more in depth as we go on with our project.
The company has a partnership with Bank of America through which it offers finances
for diamond and fine jewelry purchases. It also arranges for insurance for jewelry purchased
through Jewelers Mutual Insurance Company (Blue Nile Inc Profile, 2008).
Overview of the Jewelry Retail Industry
The jewelry retail industry generates about $25 million just in the U.S on an annual basis.
This is the biggest market and as of today, the largest companies are Tiffany, Blue Nile and Zale.
In this industry, price is not the only thing that matters. A company’s profitability is from the
quality of its products and how it has been introduced to the market. That is why small
companies can compete with the larger chains. Jewelry is mainly sold in department stores and
online, but also by mass merchants.
The industry consists mostly of bridal jewelry, fashion jewelry, watches and precious stones and
metals. The only one of these that does not suffer as much under the economic conditions that
the world is in right now, is bridal jewelry. The reason for that is that the others are considered
luxury goods. Jewelry is expensive and difficult for consumers to evaluate. Therefore, customers
require good service and expertise when purchasing jewelry. People prefer to buy products from
companies that they know and trust, and not by some “new” retailer. That is why building a
brand and having a differentiated product is so important in this sector. It is much easier today to
find out about products, because most jewelry can be found online and people can make
The retail jewelry industry is highly fragmented, with the top chains covering about 25
percent of the market in the U.S. The reason for this growing market can be explained by the
increase in affluent people, fashion-conscious men and double-income households. Sales in the
industry are seasonal in nature and most of the revenue comes in the second half of the fiscal
Online jewelry sales have increased at a steady rate over the past ten years. This popular
form of retailing has made it harder for merchants to adapt and a lot of companies have moved
their operations online as well. Consumers and businesses value good designers and since
jewelry is rarely branded, the importance of product differentiation becomes a key point among
retailers (Gottlieb, 2006).
For the analysis of the external environment for the Blue Nile and the jewelry industry
we have used the PEST framework. This framework describes the factors of a macro-
environmental analysis. These four factors are; Political, Economic, Social, and Technological.
On July 29, 2003 President Bush signed Executive Order 13312; this order also called
“the Clean Diamond Trade Act” was implemented to enforce the regulations on diamond trade
set by the United Nations General Assembly (Bush, 2003). These regulations came as a result of
a meeting in Kimberley, South-Africa in 2000, where states from the diamond producing states
from Southern Africa came together to discuss ways to stop illicit trade of diamonds, and ensure
diamond trade was not funding violence. As a result of the process started at this meeting,
negotiations between governments, the international diamond industry, and civil society
organizations resulted in the creation of the Kimberley Process Certification Scheme (KPSC) in
November 2002. The KPSC document set the standards for controlling diamond production and
trade, and KPSC was put into force in 2003 when participating countries began to enforce the
rules. A result of this new resolution the share of illegal diamond trade in the global diamond
market is now only 1% compared to 15% in the 1990s (What is the Kimberley Process?, 2002).
The KPSC is also meant to provide incentives to more stable political systems in Africa
and other diamond producing countries. African countries are the major producers of rough
diamonds in the world. Botswana alone has a share of 27% of the world production volume.
Another major producer of rough diamonds is Russia. Political stability in these countries is
important for a consistent and reliable supply of rough diamonds, gold and platinum to the
jewelry industry, as these countries are the biggest suppliers. As mean to improve political
stability and development in their own region, African countries want to add more value to their
own diamonds instead of sending diamonds to other countries for processing like; grading,
cutting, and polishing (Diamonds Kimberley Process Effective, 2007).
Blue Nile is a U.S. corporation and has to follow U.S. Federal Laws and tax rules. Some
of the key U.S. Laws that affect a company like Blue Nile is:
The Sherman Act of 1890 – Makes trusts and conspiracies in restraint of trade illegal;
makes monopolies and attempts to monopolize a misdemeanor.
Calyton Act of 1914 – Outlaws discrimination in prices to different buyers; prohibits
tying contracts (which require the buyer of one product to also buy another item in the
line); makes illegal the combining of two or more competing corporations by pooling
ownership of stock.
Federal Trade Commission Act of 1914 – created the Federal Trade Commission to deal
with antitrust matters; outlaws unfair methods of competition.
Securities Act of 1933 – Companies publicly offering securities for investment dollars
must tell the public the truth about their businesses, the securities they are selling, and the
risks involved in investing.
Robinson-Patman Act of 1936 – Prohibits charging different prices to different buyers of
merchandise of like grade and quantity; requires sellers to make any supplementary
services or allowances available to all purchasers on a proportionately equal basis.
Wheeler-Lea Amendments to the FTC Act of 1938 – Broadens the Federal Commission’s
power to prohibit practices that might injure the public without affecting competition;
outlaws false and deceptive advertising.
Lanham Act of 1946 – Establishes protection for trademarks.
Celler-Kefauver Antimerger Act of 1950 – Strengthens the Clayton Act to prevent
corporate acquisitions that reduce competition.
Hart-Scott-Rodino Act of 1976 – Requires large companies to notify the government of
their intent to merge.
Consumer Credit Protection Act of 1968 – Requires that lenders fully disclose true
interest rates and all other charges to credit customers for loans and installment
Sarbanes-Oxley Act of 2002 – Mandates that the singing officers to certify accurate
financial disclosure, and that they are responsible for establishing and maintaining
internal controls to identify material information regarding the company and its
Do Not Call Law of 2003 – Protects consumers against unwanted telemarketing calls.
CAN-SPAM Act of 2003 – Protects consumers against unwanted e-mail, or spam.
(Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008)
With the increasing popularity of internet as a market place, for collecting consumer data,
and other interactions with consumers, has started to worry online users. Many online users are
unaware of how new technology collects and stores data, that such information are sold from
companies collecting it to other entities that makes use of this data. While privacy policies for
U.S. companies are few or close to none existing, the European Union has strict regulations
regarding personal information. The European Data Protection Directive states that any business
that conducts business with European organizations must comply with EU’s rules for handling
such information. The directive prohibits distribution of private information to parties not doing
enough to protect privacy. Australia is another country that has implied new laws regarding
private data. Companies are required to follow strict rules when collecting, storage, and use of
personal information. Common privacy laws are that information should be collected lawfully
and only used for its initial specified purpose, and after the information is used for its purpose it
shall be deleted. Such international and local foreign laws have to be followed to conduct
business in a global environment (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008).
Blue Nile is based out of Seattle and Washington State; this requires the company to
follow Washington State Legislative laws and King County regulations. These relates to
employment law, regulations regarding conducting business inside the state of Washington and;
State, County and, City tax laws. In the city of Seattle an “employer” means any person who has
one or more employees or the employer’s designee or any person acting in the interest of such
employer.”Marital status” is in the city of Seattle the presence or absence of a marital
relationship and includes the status of married, separated, divorced, engaged, widowed, and
single or cohabitating. This will directly affect a company regarding benefit packages it might set
up for it employees (Doing Business, 2009).
The economic climate is also often referred to as the health of a nation’s economy or the
health of the global economy. As of today, February 2009, the world economy is in a recession.
In order to improve the current situation have the federal bank lowered interest rates to increase
the money supply in the market, governments around the world are creating stimulus packages to
improve the current situation. The general opinion is that government spending and loans should
help boost the economy out of the stagnation it currently is in.
Bad debt and increasing unemployment rates are key issues in today’s situation.
Decreasing equity prices and drop in housing prices leave people uncertain about their own
wealth. In addition to uncertainty with the unstable and decreasing job market has slowed down
the biggest engine in the U.S. economy, the American consumer (Global Economic Forecast for
2009; Will Deamnd for News Outpace Supply?, 2009). The consumer confidence index
published by The Conference Board showed further decline in February 2009 to an all-time low,
the index began in 1967. The survey concludes with skepticism in the outlook of the general
economy (Consumer Confidence Survey, 2009).
The current situation gives people and businesses with good liquidity opportunities for
cheap acquisitions of stocks, real-estate, and other companies. As the downturn in the U.S.
Economy and troubled bank sector was the first signs of the recession that is current today, the
U.S. dollar decreased in value. The last couple of months have shown that people feel safer
investing in the big economies in the global environment and the U.S. dollar has again increased
Another segment of the general environment is demography. This is concerned with the
size of the population, age, gender, ethnicity and the distribution of income. Because many
companies compete in global markets, this segment is often globally analyzed (Michael A. Hitt,
R. Duane Ireland, Robert E. Hoskisson, 2009).
The world’s population continues to grow and today there are about 6.6 billion people
walking the earth. Even though birth rates are declining, the population is expected to reach over
9 billion in forty years. Most of the population growth takes place in Africa, Asia and Latin
America. Among world regions, the largest proportionate increases in share of world population
will continue to be in the Sub-Saharan Africa, which is expected to grow to be over 1 billion in
the next decade (Population Size and Growth). The biggest problem for countries that suffers
from an aging population is the need for workers. The U.S. has an advantage in the way that
immigration is high, and so is the birthrate. Asian and European countries on the other hand are
looking into overcoming these problems by making workers work longer than they were set to.
The growing population of baby boomers will eventually hurt the economy and
individuals. The reason for that is that as people get older they continue to spend money, which
will lead to an increase in the economy. When all these baby boomers are gone, governments are
going to have to step in and cope with this in a matter that does not favor the people as a whole,
or as individuals. This means that people might lose their benefits and they have to pay more
taxes. This clearly shows that age has an effect on the economy.
The demographic age groups are divided based on age. “Tweens” is considered the group
of the population aged between 8 – 14 years old. The next group is “Generation Y” born between
1979 and 1994. This group is considered to be the children of the baby boomers. This generation
group is three times larger than “Generation X” (born between 1965 and 1978). Generation Y is
characterized by their understanding of information technology and focus on luxury. Raised by
the baby boomers has increased the priority of the family for generation Y. This generation has
also grown up with everything being automated and expect things done right now (Charles W.
Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008).
Generation X is at that stage in life where they have launched their careers and started
families. Building a home and settling down is the main characteristics of this generation.
Generation X in known for being cynical consumers and they are considerable fewer than the
baby boomers and generation Y. In the next ten years generation X will enter the age 45 to 54,
the age range that is known to be the age range that is known to be the moneymaking years.
Baby boomers born between 1946 and 1964 are considered to be America’s mass market.
They are now entering the face of their life where they settle down after the kids have moved out
and started their own lives. With money saved up and all major investments done, this group is
considered to be the generation with the biggest purchasing power.
Consumers’ income and purchasing power is an important factor of the external
environment. The financial power of woman is increasing, as women are more successful in
building their own carriers. Even if the highest incomes usually are earned in the big city centers,
the costs of living are also bigger in these places. New York City has almost three times the cost
of living than Youngstown, Ohio (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008).
This means that one need to make close to $300,000 in New York to have the same standard of
living as someone earning $100,000 in Youngstown. People not living in the big city centers are
often not a targeted market as they are living geographically longer apart.
American core values and culture trends are also important factors of the external
environment. Values are strongly held common beliefs and there are four basic values that have
had a strong influence on the American society, and these are; 1. Self-sufficiency, everyone
should stand on their own feet. 2. Success should be rewarded to those with education, work
hard, and play by the rules. 3. Hard work and ethics is central to starting and caring for a family.
4. No one should expect to be treated differently than anyone else.
Technological innovations are continually making the daily life to those who have access
to it easier, more efficient and effective. For technology-based companies, like Blue Nile, change
in technology is a very important factor. A firm can use new technology to separate themselves
from the competitors and create a competitive advantage. If a firm is not able to adapt to
innovative changes and implement new technologies successfully, it would risk of removing
itself from the marketplace.
Technological advances do not only create new opportunities, it could also create new
threats. With new marketplaces that make it easier to sell product and services online it is now
easier to counterfeit, for example selling unlicensed products online through auction sites. Other
treats are hacking and spoofing. Hacking that someone manages to gather sensitive information
through the use of new technology and take advantage of such information. Spoofing is the
creation of TCP/IP packets using someone else’s IP address. Through spoofing someone can
intercept information sent between two points, redirecting information from one source to the
Another issue that affects businesses is that new technology has lowered the barriers for
people to express their opinions. At the same time as new forms of using technology like
blogging enabled by Web 2.0 makes it easier firms to communicate with consumers. It also
makes it easier for consumers to create websites where they discuss and publish their own
opinions that could have a negative effect for a company.
For this analysis we have used the framework developed by Michael. E Porter. This is
later referred to as Porter’s Five Forces Model. This is a micro-environmental analysis of an
industry that consists of these five forces; 1. Supplier bargaining power, 2. Bargaining power of
buyers, 3. Threat of new entrants, 4. Treat of substitute products, 5. Competitive rivalry.
Supplier bargaining power
Methods used by suppliers to get power over companies competing in the same industry
are: reducing the quality of their products and increasing prices. This means that if a company
were unable to recover these increases in cost through its own prices, their profitability would be
reduced (Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, 2009).Today, the world’s
biggest supplier of diamonds is De Beers. Although, they do not have as big of a market share as
they used to, they are still one of the leading suppliers in the industry with nearly half of the
world’s supply by value (Diamond Trading Company, 2009). However, this does not mean that
they are the only supplier in the industry. Some companies have taken action against De Beers’
monopolistic way of doing business. Small companies have merged together, which has changed
the industry from having only one major supplier to several suppliers. Today, De Beers does not
have the bargaining power they used to, because there are several other firms competing in the
same sector. However, De Beers still control much of the pricing in the industry. The customers
of high-end jewelry are highly concentrated, which can lower the bargaining power of suppliers.
Another thing that makes suppliers have less bargaining power is that there are marginal costs of
switching to another supplier (Barmecha, 2007).The competition is increasing in this growing
industry, and therefore companies need to adapt to the market in order to survive. Supplier power
is to a certain extent weakened by the fact that mining equipment is highly specialized, and
equipment manufacturers would find it hard to find a market for their products outside the
industry. That said, individual suppliers often use technological innovations in order to
differentiate their services and increase the retailers’ reliance upon them (Blue Nile Inc Profile,
There are no large differences in the inputs of the suppliers that can put one company in a
better position than the others, except the ownership of more mining companies. For the end
user, there are differences in the diamonds that you can buy. This is also the case with the mining
companies, but since all diamonds are unique, the companies have all types of diamonds in their
mines. Diamonds differ from gold in the way that they do not have a standardized value. Each
varies by color, clarity and weight, and as a result, one diamond compared to another is not
necessarily a good substitute (Barmecha, 2007). Although, diamonds are the largest part of
jewelry sales, gold, rubies, sapphires and emeralds are other factors that drives the industry.
A few decades ago, when the big online retailers started up their businesses, the supplier
power was probably higher than it is today. It is easier to find new suppliers on a general basis in
this industry today, as long as there are diamonds to be found. Some companies have built their
business around their retailers and if some of their contracts were eliminated, their existence in
the industry would not last very long.
As mentioned, the bargaining power has shifted and it will continue to shift as new mines
come on stream. However, a large company like De Beers has been smart when thinking about
the possibilities within the industry they are competing. When combining a mining company and
a jewelry retail company, they have taken their business to another level. Instead of only selling
jewelry to other retail companies, they are also distributing jewelry themselves, which can
influence the balance of the market. This way of doing business is called forward integration
Barriers to entry
The online diamond industry is considered hard to enter. Even though the Internet has
changed the world and how businesses operate, a company still needs to have all the connections
with its suppliers and distributors that they can trust. They may have a barrier to entry on the
operational side, in terms of obtaining access to the major distributors. Since there are only a few
big companies that supply jewelry, firms need to make sure that mining companies can provide
the amount and quality that customers demand.
It takes time to build a strong brand in this industry, and a lot of money will be needed
from the time the company is launched, to the time the brand is known and accepted by the
customers. If the company is already established in the form of department stores, it will have an
advantage in the online industry if the brand has a good reputation. It is a capital-intensive
industry, where a great amount of dollars is spent before you start making any profits. Marketing,
logistics and facilities cost money, and when entering a market that is already established it is
going to be tough. However, online retailing is increasingly profitable and companies can reach a
higher amount of people.
When companies want to enter the online jewelry industry, they need to be careful when
picking their suppliers. They must be sure that the diamonds they are buying are conflict free. All
diamonds that are sold must be imported with a Kimberly Process certificate (Combating
Conflict Diamonds, 2009). This process is a joint governments, industry and civil society
initiative to stem the flow of conflict diamonds (What is the Kimberley Process?, 2002).The
industry used to be self-regulated, but that did not work. The governments have let the diamond
industry off the hook and they need do more to make sure that the industry is conflict free. In
addition, jewelers must adhere to fair trade and credit laws, but are not hindered by any trade-
specific regulations. However, they are required by the FTC (Federal Trade Commission) to
accurately advertise and describe gemstones (Gottlieb, 2006).
De Beers controls the majority of the world’s distribution of jewelry. A new online
retailer of jewelry would most likely consider using De Beers as their supplier because of their
market share, as well as name recognition. Making a brand and to be accepted by the market is
going to take a lot of time and effort. Also, when entering a new industry, especially the online
retailing industry, existing firms are going to do whatever they can to make sure that they do not
lose their market share or profitability. However, it is not easy to stop or hinder new entrants in
the online industry because it is so big. Anyone can use the Internet, which makes the industry
more accessible. Companies that have been using the Internet for some time would have to use
their knowledge and expertise to drive new entrants out of the market.
Companies may have patents and copyrights on their products, but by the time those get
approved, someone else might have stolen the idea. Some retailers actually have proprietary
agreements with the ones who design the jewelry. Most often, the agreement is that the design is
sold exclusively through the company. Some retailers also hold agreements with manufacturers
to sell products on consignment (Gottlieb, 2006).
The advantages of entering this sector can be huge profits. Especially, if a company has a
well developed strategy that can save them money, but at the same time make money. There is
money to be saved for a company that goes online, because of the unlimited use of space when
advertising for new products. Fewer people are needed in the operations and therefore overhead
costs will not be as much.
Threat of Substitutes
In Michaels Porter’s 5 forces model one of the aspects is the threat of substitutes.
Substitutes are products that are in other industries but that can be used to replace the product
within a given industry. An example of this would be drinking water instead of soda pop. They
are easily interchangeable because they both quench your thirst but different due to their taste
and contents. If the price of soda pop was to double tomorrow less people would drink soda and
they would substitute it by drinking water. Substitute products affect the products price elasticity.
A product will become more elastic as more substitutes are readily available.
The overall threat of substitutes depends on four major ideas: The first being the overall
quality of the substitute. Is this other product better and will it fulfill the needs of the consumer
better? Second is the buyer’s willingness to substitute this product. Are they brand or company
loyal? The next aspect is the most decisive when it comes to actually substituting products and
that is the relative price and performance of substitutes. Is the substitute cheaper and does it do a
better job? The final aspect is the cost of switching to a substitute. Does the consumer face
additional costs by changing products? All of these aspects play key roles is determining what
products consumers purchase and if they continue to purchase these goods.
The jewelry store industry is has many substitutes that coexist with it. Jewelry is
considered to be a luxury good therefore anything that is not a necessity and typically of
expensive taste can take the place of jewelry. When a consumer is going to spend a large amount
of money on something special or meaningful they don’t necessarily spend it on jewelry, they
have many options. Some common substitutes for jewelry would be any designer handbags and
clothes, luxury vehicles, luxury home amenities, and any other items that are not necessities and
considered luxury goods. When a consumer is deciding to spend the kind of money they would
on jewelry items they have to consider if they will get more out of something else or will the
jewelry provide what they are looking for. Typically jewelry is purchased for sentimental value
and to be a lifelong good. For a sentimental meaning there is nothing that can really replace the
meaning that comes from jewelry. Especially when it comes to engagement rings. There is no
substitute for an engagement ring. The act of giving a ring to the person you are going to marry
has been around for centuries and will never be replaced. Most people at some point in their life
will spend money on an engagement ring for their partner.
When it comes to the switching costs of changing to a substitute there are not any.
Consumers have no obligation to purchasing jewelry over other luxury goods therefore there are
no costs to the consumers. If someone is going to spend a large sum of money on an item that is
not a necessity they are going to spend it on what they please and most of the time if they can
afford it they will spend it on multiple items. Luxury goods are a privilege and do not require any
costs from switching from one substitute to another.
One of the factors that go into whether to spend the money on jewelry or on a substitute
is the price and performance of the substitute compared to the jewelry the consumer is
considering purchasing. Consumers may feel they would rather purchase a luxury vehicle for
their spouse rather than buying a diamond necklace for them. Suppose the price of these two
items is the same, then the consumer has a decision to make. Are they looking for a more
practical good that will last five years or so, or would he or she rather purchase something with
more sentimental value that will last a life time.
There are many factors that go into determining the buyer’s power in a given industry.
Some of the main factors that determine a buyer’s power are the volume, leverage, the brand
identity, and product differentiation. Each of these aspects are important factors in determining
the price of the good being sold in a given industry. In the Jewelry store industry there are many
buyers. This means the buyers do not have the ability to dictate the prices in the industry. The
power is not in the buyers it is in the suppliers. It is not like people have the ability to go out and
make a diamond engagement ring so the suppliers can charge what they want for these items.
The suppliers have all the control of the market when it comes to providing to consumers.
The buyer has the ability to dictate prices when they are in a market where there is a
small amount of buyers and a large amount of suppliers. This is not the case in the jewelry store
industry. There are many buyers in this market and many suppliers. Since the volume of buyers
is so great the supplier has the ability to dictate the prices. However, the jewelry industry
involves commodities and the price of these commodities fluctuates. Therefore, suppliers do not
totally get to determine the price. They are only able to determine the markup on their goods.
Buyers do not have much leverage or bargaining power over the suppliers. The price is often
bargained by consumers in the jewelry store industry but not enough to give the consumers
leverage over the suppliers.
The brand identity is a major factor in the determination of the price of a good. In the
jewelry store industry brand identity plays a key role in the price. Most people are willing to pay
more for name brand jewelry. Often goods will cost up to twice as much for name brand jewelry
compared to off brand jewelry. Especially when it comes to engagement rings. Men are often
more inclined to purchase designer brands for their future wives because of the sentimental value
of something with a name backing it. Brand identity plays a key role in determining the buyer’s
Product differentiation is another determining factor in the power of the buyer. With
jewelry stores offering many forms of jewelry there is a widespread differentiation which takes
away the power from the buyer and puts it in the hands of the supplier. By having different
products available, consumers have many different products to choose from. It portrays to a
larger market, therefore it makes it harder for buyers to determine the prices.
Degree of Rivalry
The degree of the rivalry within an industry is the most important aspect of Porters Five
Forces model. This is the part that determines if an industry is worth entering or if it is too
competitive and there is no chance to make a profit. Rivalry will be more intense if there is small
equally sized and no clear market leader. With one firm dominating the competition it doesn’t
leave room for small firms to enter and turn a substantial profit. The degree of product
differentiation is another decisive factor. Industries where the products are commodities create
really competitive markets. Firms have to battle with each other to get the commodities to sell,
and often commodities are limited. Along with these factors another important aspect is
switching costs for buyers. If the buyer has a high switching cost, rivalry is reduced because they
will have to pay to switch to a competitor, therefore they are more likely to stick with the
company they are currently with. The strategic objectives are also keys in the degree of rivalry. If
a firm is innovative and pushing the competition among firms is increased but, if they are simply
milking revenue it will decrease competition. The final aspect in determining the degree of
rivalry is the exit barriers. If it is easy to leave an industry then competition is reduced, but if it is
hard then firms are more apt to stay and increase to competition. All of these aspects increase
and decrease the rivalry within an industry.
The jewelry store industry is mature and highly competitive. There are many firms that
exist in the industry and no real market leader. Along with all of the major firms that exist in the
jewelry store industry there are many small firms and single shops that increase the overall
competition within the industry. The key market players within the jewelry store industry are
Blue Nile Inc., Tiffany and Co., Zales, and Signet Jewelers Limited. None of these companies
has a significant hold of the market so it creates a huge rivalry within the industry.
The jewelry store industry revolves around commodities which increases the level of
rivalry within the industry. Since the majority of jewelry involves highly priced commodities like
diamonds, gold, and silver being able to get these precious commodities at the cheapest price
possible is very important. This is the most important part of the rivalry within the jewelry store
industry. If one company is able to get diamonds for a discounted price they will be able to mark
their jewelry down and attract consumers with a cheaper price. Fluctuating commodity prices
increases the rivalry as well. Knowing when and how much to purchase of a certain commodity
can really increase a firm’s ability to set prices and do business.
Switching costs of buyers is another important aspect in determining rivalry of the
industry. Since there are no costs for a consumer to switch from one firm’s products to another it
increases the rivalry among the firms. There is nothing stopping a consumer from buying a ring
from one company and a necklace from another so firms need to be able create relationships with
customers to keep them coming back. Companies in the jewelry store industry really tend to
focus on customer service to keep customers coming back to their stores.
The objectives of the company also dictate the rivalry within an industry. If companies
feel they do not need to be innovative it takes away from the competition. Within the jewelry
store industry all the firms are always looking for new ways to attract new customers and to keep
old ones coming back. Once again, this is where customer service plays a major factor. If they
are able to keep customers happy they will continue to come back. Also by coming up with new
styles and forms of jewelry will keep customers intrigued and interested on what is new and
trendy. Being lazy and just doing what works does not work in this highly competitive market.
Firms are constantly trying new ways to innovate the jewelry store industry.
The exit barriers are the final determent of the degree of rivalry. Within the jewelry store
industry it is hard for firms to exit therefore creating more rivalry. Companies cannot just decide
to leave the industry and try something new.
Jewelry Supply Chain
Jewelry is something of personal ornamentation, such as rings, necklaces, bracelets and
earrings, just to mention a few. Historically, jewelry is made of precious metals and gemstones,
but may be from other materials as well. Jewelry is considered a luxury good and therefore it has
a certain value. Jewelry made from glass and chemical manufactured materials are considered
jewelry as well, but are not associated with the same value. Gemstones are stones cut and
polished for one reason, and that is personal satisfaction.
The natural gemstones are derived from minerals, while the synthetic ones are grown in
laboratories. They both look the same, but they differ in physical and chemical properties. Cubic
zirconia is a replacement for diamond, and is widely used in the production of jewelry. The
acceptance of synthetic gemstones has grown significantly since it was first introduced.
Precious metals and gemstones are valuable because of the scarcity, due to the high
demand of these natural resources. People now seek to many methods in exploration, including
sampling, drilling in the ground and satellite survey’s. The raw materials in the jewelry industry
are formed when carbon is put under extreme pressure and high temperature deep in the earth.
Some of these have also traveled some distance from their original source. It can be found at 250
miles or even greater than that. The different types of jewelry we are talking about are gold,
silver, platinum, diamonds and gemstones. Some diamond producing countries include
Botswana, Canada, Russia, South Africa, Australia, and Tanzania (World Diamonds Council,
2009). For the synthetic stones it is different. The cubic zirconia is mixed with high purity
zirconium oxide powders, which is stabilized with magnesium and calcium. The amount has to
be controlled in order to look similar to real diamonds. Three different methods can be used:
Melt growth, solution growth or high temperature and pressure growth. When growing these
types of gemstones, problems may occur. These problems arise mostly because the synthetic
gemstones are so reactive that they will not melt, or they will only melt under higher
temperatures. Another way of melting has to be used, and that is called the skull melting system
(Business Network, 2009).
Before mining can take place, there are several things that need to be done. Surveys of
the fauna, soil, vegetation, landforms and water systems in the mine path have to be conducted.
The information a company gets from these surveys provides important information that is
crucial for planning and monitoring environmental management and rehabilitation. In the end,
the mine path takes into account the current mining methods, government regulations on
environmental management and information collected by surveys. Most metals cannot be found
in concentrated form, but in something called an ore. Similar to regular rocks, some ores contain
only a fraction of metal. This means that a large amount of rock must be obtained from the
ground for it to be useable. Because of this, mines are often big and can operate in extreme
environments. Metals can be found deep under the surface. As a matter of fact, gold mines can
be more than a mile below the surface. The method of extracting metals from the surface is the
open-pit mining technique. These mines contain large holes in the ground where rock is blasted
from the sides and the bottom with explosives. All the material is then put in trucks, before the
process is repeated. Surface mines can be several miles wide and hundreds of feet deep.
Underground mining is not as common as surface mining, and it only happens when a big ore is
found or prices are so high that it can justify the expense (United States Department of Labor,
About half of the world’s diamonds and precious metals come from Africa. The largest
mining companies in the world are located in South Africa, India, Australia, Russia and Canada.
Companies including De Beers, Alrosa, Tahera Diamond, Tio Rinto and BHP Bilton are the
major players in this industry. BHP Bilton for example, is a leading miner in almost every metal
and mineral in the world, with operations stretching all the way from Mozambique to Peru.
After the mining is done, diamonds and precious metals are distributed to people that
specialize in the subject, who will sort the stones and give them a value. This is where the quality
stones are separated from the bad ones. All the good quality stones are put in different categories
based on their shape, color, quality and value, but most of the diamonds are categorized as
standard. Even though most diamonds and metals are standard, they have some distinguished
marks, which are what makes each stone unique (World Diamonds Council, 2009). Gold for
example, can be refined, but it all depends on the quality and the form of the metal. The
dominant sorting company is the Diamond Trading Center, which is located in Botswana, Africa.
Needless to say, this is where De Beers have a lot of control, which is why they funded this
Cutting and Polishing
The next step after the diamonds have been sorted is to cut and polish them. Cutting
diamonds is not for everyone. It requires a set of skills in order to have the diamond reflect light
within itself, from one facet to another, and also through the top. After it has been cut, it gets
polished and then categorized after its carat, cut, color and clarity. All stones are expressed in
carats, which is the weight. The only thing that is controlled by hand is the cutting of the stones.
To the untrained eye, the color of a diamond does not make much of a difference. However, for a
specialist, the smallest variation can make huge difference. Diamonds can be found in many
colors, but the colorless are the most popular ones. Similar to other stones, the more rare the
color is, the more valuable it is. While in earth, stones develop certain inclusions. The size,
weight, position and brightness can have an effect on the clarity of the diamond, but most of
them are too small (World Diamonds Council, 2009). Like diamonds, precious metal including
gold, silver and platinum go through the similar characteristics. For example, all jewelry is
required by law to have the carats on the product so that customers know the quality of gold
There are several places throughout the world where stones are cut. Most of the cutting
happens in Surat, Antwerp, London, New York, Tel Aviv and Amsterdam. Antwerp is where the
Gemological Institute is located, while New York is where most of the world’s rough stones are
Diamonds and precious metal are sold through registered exchanges located throughout
the world or directly to wholesalers or manufacturers. In many cases, manufacturers create
jewelry in addition to selling to retailers, but as mentioned earlier, this requires great skill, both
technically and creatively. Manufacturers use all stones and metals in creating different pieces of
jewelry. Numerous designs can be found in retailers all over the world, but the most popular one
is the solitaire, which is used for pendants, earrings and rings in particular (World Diamonds
The biggest wholesalers include Costco, Wal Mart, eBay, Target, and Amazon. The
World Federation of Diamond Bourses works as the mediator for wholesalers. It operates in 26
locations throughout the world and this is the final step before selling to retailers or wholesalers.
The biggest synthetic diamond manufacturers are The Gemesis Corporation and Apollo
Diamond. The Gemesis Corporartion is the world's premier producer of high quality, fancy color
It has been said that a diamond is a girl’s best friend. Diamonds are the expression of
human emotions and no gemstone can fight with that. The reasons for that might be because they
are rare, they are beautiful, or the fact that it is a symbol of status. Traditionally, diamonds have
been used in engagements, weddings and anniversaries, but in recent times diamonds symbolizes
independence and success. The different designs are many, and retailers across the world give
customers the opportunity to choose the product that they want (World Diamonds Council,
2009). This is also the case with precious metal, where for example gold is extremely rare.
The biggest retailers of jewelry are Tiffany & Co, Blue Nile, Zale Corporation and Signet. These
companies also operate online, which gives them an advantage over the department stores. Other
big retailers include De Beers Diamond Jewelers and Cartier, but there are many small jewelry
companies that are still making profits despite the power of companies like De Beers, Blue Nile
and Tiffany & Co.
Industry Value Chain, Jewelry Retail
Inbound and Outbound Logistics
Inbound logistics activities includes the following, receiving materials/goods from
suppliers, storing these materials/goods before these inputs are developed into finished goods
within the company. Inbound logistics also includes products sent in return or for exchange, to
the company, from the customer. Outbound logistics involves activities concerning order
processing, collections, storing, and movement of finished goods, to the company’s final
For the diamond retail industry most of the inbound and outbound logistics operations are
outsourced to independent companies that are specialized in logistics. Depending on the total
value of the shipments, retail companies decide to use different providers of logistics support.
The Brinks Company is one company that specializes in secure transportation cash or other
valuables such as jewelry. UPS, Expeditors Internationally, DHL, and FedEx are some of the
other third-party logistics companies.
Operations are the activities that are related to the production of the products. Different
customers are always looking for different products and this is where the design comes in. The
jewelry retailers create their own designs to differentiate their products from the competitors. Not
only do they create the designs that they assume the market will accept, but they also create
jewelry through customization. Customers have the ability to order the type of design they want
on their jewelry which is a feature that many companies now have taken advantage of.
Many companies have expanded horizontally by investing or expanding their business.
Companies have done that by, not only selling jewelry, but also taking it back in for repair or
modification. Doing this, companies create long-term relationships with customers and provide
excellent service. Certain licenses have to be obtained in order to trade diamonds and precious
metals. All companies that are in the jewelry retail industry are obligated to have this license.
Retailers may have agreements with designers who sell their designs through the company, as
well as manufacturers to sell merchandise on consignment.
A lot of companies train their employees and managers so that they can become more
knowledgeable and perform their duties in an effective and efficient manner. This has become a
high priority for many companies because this is valuable to customers, and the company in the
end. Training programs can also be found for buyers as well, such as training on product
Many, if not all the different jewelry retail companies use outsourcing because it makes it
easier for companies to focus on different aspects of the business, such as customer relationships.
Inventory control is a part of operations as well. Because these products are costly, companies
need to make sure that everything is in place.
Marketing and Sales
These activities are important for all companies, and they use all kinds of mediums to
attract customers. TV commercials, websites and catalogs are often made to reach out to
customers. Other ways are through email and direct mail, but those alternatives are mostly for
people who already are customers. Many companies have competitive advantages in this area
because they have an established brand and consumers recognize it. A lot of companies do not
rely on heavy marketing because their brands are well known and have been spread by word of
mouth. Diamonds, for example are not advertised a whole lot. The slogan ”Diamonds Are
Forever” actually makes sense now. This product does not need an introduction, or
advertisement. Diamonds sell themselves.
Companies have realized that assisting consumers in all aspects of a purchase is very
important. That is why online retailers and department stores have created informational
guidance when it comes to buying jewelry. Consumers who do not know a whole lot about these
types of products find it extremely helpful and educating. There are call centers that people can
contact with questions, and there are online guides that will assist consumers in purchasing
jewelry. These methods create value to customers, which is what companies want to create.
The jewelry retail industry offers many services to customers after they purchase an item
from any of their stores. Whether it is an extremely expensive necklace or a cheap ring the
proper service is provided throughout the industry. Industry players such as Tiffany’s and Blue
Nile offer tips on how to maintain the value of your jewelry. From how to clean it to how to store
it, it can all be found online. Along with just simply offering tips of how to care for jewelry,
companies also offer cleaning and maintenance in their retail shops. Customers can take the item
back to where they bought it and trained employees will repair or clean dirty or damaged jewelry
typically free of charge. If the jewelry is faulty it is replaced free of charge.
Since Jewelry can be very expensive most jewelers offer ways to finance customers
purchases. If someone is purchasing a 10 thousand dollar engagement ring and cannot pay for the
whole thing in full he can finance the ring typically through a bank that works with the jeweler.
This allows the customer to make the purchase without having the money in full.
Often times the jewelry being purchased is extremely expensive and needs to be insured.
By insuring the jewelry the customer can have it replaced if it is broken or stolen. This is a very
convenient for customers who purchase expensive jewelry often costing more than a car. It could
be very devastating to break or have an expensive piece of jewelry stolen and with the insurance
it will be replaced.
The final service offered within the jewelry retail industry is customer support.
Companies will offer phone lines that customers can call to answer questions about their jewelry.
They also have an online support that does the same thing.
The firm infrastructure is about the culture of a company, organizational structure, and
control systems. This can be viewed as the “back bone” of a company, because if this part is not
in place, the company will not last very long. A lot of planning and measuring have to be done
continually, in order for a company to stay in business. New technology is being created and
businesses have to be able to keep up with the new. One cannot start up with a plan and believe
that that is going to work for the rest of the company’s life. Plans change from day to day in this
global economy, and being able to understand and adapt to the changes being made is a must.
The importance of planning and staying on top of things cannot be stressed enough, and
therefore strategies have to be made to stay ahead of the game. You cannot be a part of a game if
you don’t understand how to play it. Companies that have the ability to predict or expect
different situations and scenarios have a greater chance of surviving in the crucial world of
business. Each and every company in the industry should be aware of opportunities and threats
from competitors in order to grow.
Human Resource Management
Human resource management is the activity involved with recruiting, hiring, developing,
training, and compensating personnel. When investing in new employees, companies should
really think twice about whom they are hiring. Not everyone is worth investing in, but the ones
that are should be taken care of and appreciated. Today, companies have policies for everything.
All individuals should have the same opportunities to get a job and no one will be discriminated.
Unfortunately, these things used to be a big problem, which is why these policies are in place.
Companies are investing substantial amounts of money to provide training for employees
and managers so they can provide excellent customer service skills and create long-term
customer relationships. Training works as an incentive for employees because it shows that the
company wants you as an employee and that they are willing to pay for further education. Other
incentives used for employees are commissions on sales in the form of money, but also vacations
and other types are used.
Usually, companies have recruiters that travel around to promote the company and recruit
new employees. Often they can be seen on campuses and job fairs. Human resource management
is commonly used in order to increase productivity. Data will be collected for managers to see,
and manual processes will decrease due to the human resource management system. This activity
can also be outsourced just like the other activities, but often people are hired for the purpose of
hiring new employees. This can be beneficial if the person has a lot of experience in the field of
hiring, because companies are more likely to get people that are a good fit and can work for a
Technological development is those activities managing information processing, research
and development of new practices that could add “knowledge” to a firm. This innovative new
“knowledge” could help improve a firm’s product or increase efficiency and effectiveness of the
production and operating processes within a firm. Such developments could be improvements to
ERP or POS systems, development of new features for online applications tools. Technology
development can also improve existing products and develop new. An example in the jewelry
industry is the new techniques for creating imitations of and “Man-made” diamonds.
Procurement involves the activities in purchasing all materials and goods needed to
produce the final goods, from raw materials, components for production, and fixed assets such as
production equipment, buildings, and office equipment. In the jewelry retail industry, depending
on company, a firm will either by goods assembled and produced by other manufactures, or the
firm will by raw material, design, and produce/assemble the product itself. Some companies
operate under a combination of these options.
Raw materials needed to produce jewelry includes; diamonds (rough or cut), precious
metals, pearls, other gemstones, and substitute products such as synthetic diamonds. Cutting and
polishing machinery is equipment needed for the production of jewelry. Some jewelry retail store
sell merchandise not associated with the company’s brand name, these products are bought ready
for sale from the manufacture. Examples of such items are finished jewelry or watches.
Retails of jewelry are also dependent on computer hardware, other office equipment, and
buildings needed for the daily operations of its business.
Tiffany & Co
Tiffany & Co is a holding company that operates through its subsidiary companies. The
company's primary subsidiary, Tiffany and Company, is a jeweler and specialty retailer.
Tiffany’s has a wide range of offerings that includes jewelry, sterling silverware, watches china,
crystal, fragrances and accessories. Tiffany is also engaged in designing products, the
manufacturing of jewelry, and retail. Tiffany & Co is headquartered in New York City, New
York along with its original store on 5th avenue in New York City. They currently employ 8,800
people from their CEO to the employees working in the retail shops. The company recorded
revenues of $2,938.8 million in the financial year which ended January 2008, which was an
increase of 14.8% from 2007. The net profit was $303.7 million in 2008, which was an increase
of 19.6% from 2007.
Tiffany & Co has many resources that allow the company to operate as smoothly as it
does. It has tangible resources like financial, organizational, technological and physical
resources. Along with the tangible resources that add value to the company they also have
intangible resources like human, innovative, and reputational resources property.
The financial resources of Tiffany’s concern the ability of the company to "finance" its
chosen strategy. They recorded revenues of 2.938 billion dollars and a net profit of 303.7 million
dollars in 2008. They have a return on assets of over 10% and a return on equity of almost 17%.
This shows that they are able to generate internal funds and allows them to go in the financial
direction they please. They continue to increase profits each year and expand their company.
Tiffany’s is organized like a typical firm filtering down from the CEO to the president
and all the way down to the retail store employees. They utilize a standard pyramid reporting
structure. Each division has a president and vice president and filters down to lower level
management and their employees. Since Tiffany’s is a rather large company that has almost 9000
employees the monitoring of this structure is constant.
The physical resources of a firm are everything that goes into making the product For
Tiffany’s, since it is a jewelry retailer this includes the mines, the manufacturing plants, the
distribution center, and all of its retail stores. Tiffany’s gets its precious metals and gems from
various mines all over the world. The manufacturing of the jewelry is done in manufacturing
plants in the United States. Merchandise offered for sale by the Company is supplied from
Tiffany’s jewelry and silver goods manufacturing facilities in Cumberland and Cranston, Rhode
Island; Pelham and Mount Vernon, New York; the hollowware manufacturing facility in
Tiffany’s Retail Service Center and through purchases and consignments from others. All of
equipment used in the manufacturing of Tiffany’s jewelry is state-of-the art and provides the best
The main aspect of Tiffany’s physical resources is their retail stores. Tiffany’s currently
has 64 retail stores in the United States, 52 in Japan and 51 in all other countries.
Tiffany’s is able to access the raw materials needed to produce the jewelry very easily.
They utilize a variety of mines to get the raw materials necessary to produce the jewelry.
The technological resources of a company are its intellectual property such as copyrights,
patents, and trademarks. Tiffany’s allows its designers to keep the copy rights to the jewelry that
they design. So, Tiffany’s really only has its trademarks. Some of their trademarks consist of
TIFFANY, TIFFANY & CO, and TIFFANY BLUE BOX. They have also trademarked the color
they use for their jewelry boxes promptly named Tiffany Blue.
It is easy to ignore the intangible resources of a business when assessing how much a
business is worth. Most of the time people ignore the intangible resources of a company but in
fact intangible resources bring a great deal of value to a company. The intangible assets consist
of human, innovation, and reputational resources.
The second aspect on tangible assets is human resources. This is the heart of the business
meaning its where all of the skill involved with running a business is involved. Tiffany’s is full
of highly trained highly educated people with experience in running a business. They currently
employ 8,800 employees all of which have gone through extensive training. They employ 6000
in the United States and 2,800 worldwide.
Without the abilities that Tiffany’s employees provides Tiffany’s would not be what it is
today. They are able to be the industry leader due to excellent management starting at the top
with their CEO Michael Kawalski. They have a well integrate Board of Directors who span from
different companies worldwide. With their excellent top level management and their training
programs Tiffany’s will continue to run smoothly as an industry leader and continue to turn high
Being innovative is what keeps a company ahead of its competitors and set trends rather
than follow them. Tiffany’s currently employs some of the most famous jewelry designers who
continue to set the bar for jewelry fashion. They know what is going to be the next big thing and
year after year Tiffany’s sets the bar for designer jewelry.
Tiffany’s is able to do this because they have the capacity to innovate. If one of their
jewelry lines turns out to be a flop it does not affect the company as bad as it would to another
smaller jeweler. They have so many lines and styles they are able to reach out to everyone. Their
designers consist of simple silver bracelets to extremely elaborate necklaces. And with famous
designers creating these lines people are going to not just buy for the Tiffany’s name but for the
name of the designer as well.
The reputational resources are the brand recognition. This is a very important aspect to
intangible resources. By having brand recognition it gives the consumer more of an incentive to
buy. This is what makes Tiffany’s what it is. Everyone knows about the blue box and white
ribbon and what it symbolizes. Tiffany’s is well known and has an excellent reputation.
Everyone who wears jewelry wants to own Tiffany’s jewelry. Their products are high quality,
very durable, and easily recognized. Tiffany’s also makes it a point to be environmentally
conscious and refrains from purchasing conflict diamonds which adds to the value of their
The capabilities exist when all of the resources have been integrated together and achieve
specific tasks or sets of tasks. There are many functional areas that go into the capabilities of a
firm. These functional areas include: distribution, human resources, management information
systems, marketing, management, manufacturing, and research & development. Tiffany & Co is
the industry leader and utilizes its resources well to maximize the abilities of its capabilities.
Tiffany’s has an extensive distribution strategy that utilizes different distribution centers
and package handling companies. This is covered within the outbound logistics section.
By having well trained employees and excellent upper management Tiffany’s continues
to operate as one of the industry leaders.
Management information systems
The management and information system is used to control inventories and
monitor shipments. Since Tiffany’s deals with highly priced good if one shipment is lost it could
result in a substantial loss for the company. They have great relations with logistics companies to
ensure the safety of their packages. This allows the company to run smoothly and not have to
worry about the loss of their goods.
Tiffany’s marketing campaign is limited due to the fact that they are already so famous.
They do not need to advertise their deals or new products because they know that people will
always come to their stores. Marketing is more extensively covered in the marketing and sales
section of the value chain.
Tiffany’s jewelry is high quality and held to the highest standards in the industry. It is
manufactured in plant across the United States. Their jewelry is designed by many well know
designers. More on manufacturing is covered throughout the value chain.
Research and development
Tiffany’s research and development is what gets the next wave of jewelry started. They
are constantly monitoring what will be the next big thing in the jewelry industry and how to get
the goods to do so. They are always looking and trends in the fashion industry to get an idea of
what is next. Along with this they are constantly updating their information technology to keep
the company running smoothly and increasing their output and customer service.
Value Chain Analysis
The first aspect of the primary value chain is the inbound logistics. Inbound logistics is
any aspect of receiving and the warehousing of raw materials, and the distribution to
manufacturing. This aspect of the value chain is the backbone to Tiffany’s & Co. Tiffany’s & Co
have to receive their precious metals, gems, and diamonds from various mines all over the world.
Tiffany’s facilities from diamond cutting to crafting and distribution are all operated at the
highest standards within the industry. Tiffany’s also evaluates each of their venders and suppliers
and holds them to the same standards.
The precious metals mining and manufacturing follows a three step process. Step one is
the actual mining of the precious metals. The majority of the gold and silver used in their
workshops are obtained from a single mine in the United States that meets the high standards of
social and environmental responsibility. Tiffany & Co follow very strict environmental and
social obligations to ensure that the environment is safe and to ensure the credibility of the
company. The second step is that all the metals are taken to a central fabrication plant that is
dedicated to responsibly sourced metals. The third and final step in the manufacturing of
precious metals is that they are transferred to Tiffany’s various workshops or the workshops of
their manufacturing partners.
The logistics incorporated with diamonds have been and continue to be a bit of a sticky
situation. As most people know, the concept of “conflict diamonds” raises many concerns and
affects the integrity of the supply chain. To help ensure the integrity of Tiffany’s supply chain,
they created Laurelton Diamonds. Laurelton Diamonds, a wholly owned subsidiary that procures
rough diamonds and manages their world wide supply chain that sources, cuts, polishes, and
supplies finished stones to Tiffany’s. The Laurelton Diamonds supplies diamonds that come
from all across the world, they mainly come from Africa, Canada, and Russia. The first major
investment for Tiffany’s and Laurelton Diamonds was in Yellowknife, Canada in 2002 which is
12,000 square feet and houses up to 75 employees. The facilities there are equipped with state-
of-the-art, custom-designed equipment. Tiffany’s has employee development and training
programs are designed to equip the local workforce to meet Tiffany’s exact quality and
standards. Since the development of Laurelton Diamonds and the creation of the facility in
Yellowknife, they have invested and expanded into South Africa, Botswana, and Namibia.
Tiffany & Co has very high moral standards and ensures its customers that it does not
purchase conflict diamonds. To ensure this they purchase diamonds only in those countries that
are full participants of the Kimberly Process Certification Scheme (KPCS). The KPCS is an
international cooperative monitoring system that was created to eliminate the flow of “conflict
diamonds.” The KPCS requires the participating countries to tightly control the import and
export of rough diamonds. The rough diamonds can only move among the participating countries
in sealed containers with the proper documentation evidencing that the diamonds are in fact
conflict-free. Tiffany’s is able to add value to its supply chain by participating with the KPCS
and using conflict-free diamonds.
Tiffany’s purchases pieces of jewelry, precious metals, and specialty pieces from all other
the world. With the purchases costing so much the proper precautions need to be taken. Tiffany’s
has contracts set up with various logistics companies to ensure the safety of their incoming
products. They take the same precautions and use the same methods with there outbound
logistics so it is covered in the outbound logistics section.
The second aspect of the value chain is the operations. Operations are process of turning
inputs into finished products and services. For Tiffany’s this is taking the diamonds, gems, and
precious metals and turning them into the finished products that are sold in the retail stores to the
customers. As mentioned in the previous section Tiffany’s created a subsidiary company,
Laurelton Diamonds, which is where rough diamonds are cut, polished, and turned into final
products. They use state-of-the-art custom-designed equipment that is used by highly trained
employees who are held to the highest standards in the industry. The first investment by
Laurelton Diamonds was the facility in Yellowknife, Canada and then later invested in sourcing
and polishing operations in South Africa, Botswana, and Namibia. Merchandise offered for sale
by the Company is supplied from Tiffany’s jewelry and silver goods manufacturing facilities in
Cumberland and Cranston, Rhode Island; Pelham and Mount Vernon, New York; the
hollowware manufacturing facility in Tiffany’s Retail Service Center and through purchases and
consignments from others
Tiffany’s is known for their high standards and holding its suppliers to high standards as
well. They established a multidimensional Social Accountability Program that includes
comprehensive guidelines on the manufacture of the materials they use, all of it is designed to
ensure that the suppliers are held to the same industry leading standards the Tiffany’s holds itself
When the diamonds and precious metals have gone through all of the mining, cutting, and
polishing they are set into final products that are designed by their designers. Tiffany’s employs
some of the best jewelry designers in the world including; Frank Gehry, Elsa Peretti, and Paloma
Picasso. Frank Gehry is one of the most famous architect in the world and has designed many
famous buildings including Seattle’s own Experience Music Project. Elsa Peretti is an Italian
jewelry designer who designed some of Tiffany’s most popular pieces. Paloma Picasso is the
youngest daughter of Pablo Picasso and has ben designing jewelry for Tiffany’s since 2000.
After jewelry has been designed and the products are finished they are packaged and sent to
venders all across the world.
Once an order is completed and ready to be sold in the retail shops they are sent to their
central distribution center. The central distribution center is the Parsippany distribution center.
The movement of the products is covered in the logistics section.
The third step in the value chain is outbound logistics. This aspect of the value chain
involves getting the finished goods from the distribution center to the retail stores where it is
later sold to the customer. Since jewelry is very expensive the proper precautions need to be
taken to ensure the safety of the products. Tiffany’s has contracts set up with various logistics
companies that create a smooth safe transaction from their warehouses and manufacturing
facilities to their retail shops. As mention earlier the merchandise offered for sale by the
Company is supplied from Tiffany’s jewelry and silver goods manufacturing facilities in
Cumberland and Cranston, Rhode Island; Pelham and Mount Vernon, New York; the
hollowware manufacturing facility in Tiffany’s Retail Service Center and through purchases and
consignments from others.
The main company Tiffany’s utilizes is Brinks Inc. Brinks is known primarily for its
armored car services. Brinks Inc handles the majority of the jewelry shipments to the retail
stores. They move the products from Parsippany which is the central distribution center. Brinks’
takes the consolidated shipments and delivers them to the retail stores. Along with handling the
distribution to retail store Brinks also handles high-value international shipments as well. Brinks
has an employee at the Parisppany DC as well to ensure that all logistics handled by Brink goes
smoothly and efficiently.
For less valuable and smaller orders to residential addresses Tiffany’s uses other
companies like UPS for domestic deliveries and DHL Worldwide Express for international
residential shipments. Tiffany’s does a lot of via the internet and catalogues so this is where UPS
and DHL come in. Tiffany’s does not send its catalogue and internet orders from the retail stores.
They send the order directly from its distribution center.
For all of Tiffany’s international shipments they offer another service where associates
can call with the SKU and destination and can obtain the total cost of freight, taxes and duties.
This allows the customer to pay all of the charges which eliminates the need to collect any
charges from the gift’s recipient. The transportation department is works with Tiffany's IT, sales,
and customer-service and provides this information on the company's intranet.
After shipments are delivered to the retail shops Tiffany’s has to sell their products to the
customers. This includes internet sales, catalogue sales, and retail sales in the shops. As
mentioned before Tiffany’s has an efficient process of distributing the products sold from
catalogues and the internet. So this leaves all retail sales. Tiffany’s has more than 150 retail
shops serving the United States and international markets. Tiffany’s retail shops are located all
across the world in cities like London, Paris, Sydney, and Tokyo.
The Company has different channels of distribution which consist of U.S. retail,
international retail, direct marketing, and other. U.S. Retail consists of retail sales transacted in
retail shops in the United States and sales of products through business-to-business direct selling
operations in the United States. Another channel of distribution is International Retail that
consists of sales in stores and department store boutiques outside the United States and, to a
lesser extent, business-to-business, Internet and wholesale sales of products outside the United
States. The third channel of distribution is direct marketing which consists of Internet and
catalog sales of Tiffany’s products in the United States. The final channel is everything else
which is categorized as other and consists of worldwide sales of businesses operated under
trademarks or trade names other than Tiffany’s. (i.e., Little Switzerland and Iridesse). Other also
includes wholesale sales of diamonds obtained through bulk purchases that are subsequently
deemed not suitable for Tiffany's needs.
Marketing and Sales
The fourth aspect of the value chain is marketing and sales. This is the identification of
customer’s needs and the generating of sales. For Tiffany’s, over the years it has done an
excellent job identifying the needs of its customers and providing the products they desire.
Tiffany’s is known for its high-priced high-quality jewelry but, they also offer lower priced
jewelry that appeals to a younger group that may not be able to afford their products. They offer
products that range from less than a hundred dollars to jewelry that is worth millions. Originally
they were all about the high priced upper echelon jewelry but recently they have began to market
to a younger less wealthy group. By marketing to lower incomes and offering cheaper products
they are able to establish brand loyalty and allow people to obtain the status of owning Tiffany’s
jewelry without paying the huge price. By marketing all aspects they are able to compete with all
competitors in the jewelry industry.
T he blue box is the most important aspect of Tiffany’s and their marketing strategies.
Tiffany’s knows the importance of the blue box and white ribbon so employees are forced to take
a class on tying the ribbon perfectly on the box so that the box is still able to lay flat. They take
this seriously because they want every Tiffany’s customer to feel important and that they are
receiving exquisite service. The blue box, blue paper, and white ribbon symbolizes refinement,
luxury, elegance, good taste, quality, and it confers status on both the person who gives it and the
person who is wearing the jewelry.
As mentioned before tiffany’s offers lower priced jewelry so they can appeal to every
income level and cover every aspect of the jewelry industry. So in efforts to increase its
consumer base Tiffany’s offers a wide-range of less expensive items with products ranging from
a less than a hundred dollars to over a million. Tiffany hopes to convince everyone that they can
afford its luxury name, even it they cannot afford the luxury price tag. Tiffany wants its
customers who buy the less expensive jewelry will remember the company and its service so the
day they can afford more they will return to Tiffany’s. They believe that small purchases can
lead to lifelong loyalty.
Tiffany’s is able to market to everyone searching for high quality jewelry even if it is not
in the high price range. Their stores are very customer friendly. Their retail stores are quite and
well decorated with extremely friendly and knowledgeable employees. Tiffany’s makes it a point
not to give off the snobbish attitudes that are often associated with luxury goods. They do not
have customers push a button to be admitted to their stores. Everyone is welcome even if they
know they are not going to make a purchase. The accessibility and inviting environment lure
customers and often creates returning customers by remembering their pleasant experience.
The fifth and final aspect of the value chain is service. Service is the support customers
receive from the company after the product or service is sold to them. Since jewelry is something
that is generally held onto for a longtime and often becomes heirlooms to a family it is important
to take care of it. Tiffany’s offers professional cleaning at all of its retail stores. All you have to
do is bring the jewelry in and professionals will clean and service the jewelry and anytime. They
recommend that after each use of the jewelry, it gets placed back in its original box and stored
On Tiffany’s website they offer tips on cleaning and maintaining their jewelry. If you do
not want to take the products into the store they tell you what to do at home. The website tells
you how to clean and maintain all aspects of the jewelry from the precious metals to the stones.
They also recommend that the prongs holding the stones in place be regularly monitored to
ensure the safety of the stone.
Tiffany’s also offers a customer service line to answer any questions or concerns about
their products. It is easy to use and can prove to be very helpful. Tiffany’s constantly monitors
the quality of their products and ensures that they are all are up to par and will not break during
usage. Depending on what happened to the jewelry Tiffany’s will replace any faulty products.
Resources and Is the Is the Is the Organization Competitive Performance
Capabilities Resource Resource Resource Consequences Implications
or or or
Capability Capability Capability
Valuable? Rare? Costly to
Brand Name Yes Yes Yes Yes Sustainable Above-
Blue Box Yes Yes Yes Yes Sustainable Above-
International Yes No No No Competitive Average
Business parity returns
Excellent Yes No No No Competitive Average
Customer parity returns
Zale Corporation is a retailer of fine jewelry in North America. It operates more than
2,200 retail locations in the U.S., Canada and Puerto Rico under names like Zales Outlets, Zales
Jewelers, People’s Jewelers, Plumb Gold, Gordon’s Jewelers and Silver & Gold Connection. In
addition, the company is also in the online retail business with websites like www.zales.com and
www.gordonsjewelers.com. (Funding Universe, n.d.)
The company is organized into three different business segments: Kiosk Jewelry, Fine
jewelry and all other. The Kiosk Jewelry runs under the names Plumb Gold and Silver & Gold
Connection. These kiosks can be mostly found in malls and they mainly target teens and other
fashion oriented customers who prefer entry-level prices. Bracelets, earrings and rings are only
some of the jewelry that this segment offers. These kiosks are strategically placed in high traffic
areas where they are visible and accessible for customers strolling the mall.
The fine jewelry segment includes Zales Outlets, Zales Jewelers and People’s Jewelers,
just to mention three brands. These companies mostly focus on fine jewelry and watches, but
they also emphasize diamonds. They target the middleclass consumer and products can be found
online as well as in stores. Zales Jewelers is the company’s brand name, and through this brand,
consumers can buy jewelry at moderate prices. Most of the jewelry sold at these stores are
designed by Zale and is offered at different price points (Datamonitor, 2008). This segment
generated about 88% of the revenue, while the remaining 12% represented sales from Kiosk’s.
Through its website, customers can get information about various stones, maintenance
advice and help on product purchases. The website also allows consumers to design their own
jewelry, such as rings and wedding bands.
The all other segment offers insurance and reinsurances facilities to credit card
customers. The credit insurance coverage gives protection to the cardholder and creditor for
losses due to a disability, unemployment, or even death of the cardholder. Zale has a connection
with Citibank USA, which provides customers with insurance and payments for insurance
products (Datamonitor, 2008).
Company Internal Analysis
Resources, capabilities and core competencies are the building blocks of competitive
advantage. Resources create capabilities within an organization and capabilities create a firm’s
core competencies, which again lead to competitive advantages.
Tangible Resources-Value Chain
Tangible resources are the fundamental blocks for all retail operations. It is important for
retailers to operate and use these as efficiently and effectively as possible in order to reach
superior performance. Zale’s financial resources, its ability to generate internal funds and its
borrowing capacity, has somewhat weakened the last couple of years. The company has a high
debt to equity ratio, which means that it uses a lot of leverage and does not have a very strong
equity position. However, since the company is well established in the industry it can push the
liability component to higher percentages without getting into trouble (Debt Ratios, n.d.). Zale’s
financial statements show that it has suffered from the financial crisis, because its numbers have
declined from previous years. Even though, 2008 was a bad year, it is still able to generate
enough capital to stay in business. From 2007 to 2008 their net income dropped from 59.25
million dollars to 10.80 million dollars (Aol, 2009). This is a significant amount, which makes
the company more “vulnerable” in the sense that the company is not generating enough money
itself, and will rely more on borrowing or from sales of stock. Through its many locations in the
United States, Canada and Puerto Rico, Zale Corporation offers a wide range of jewelry to
various customers. The headquarters is located in Irvin, Texas, where all purchases are done
through its buying offices. The majority of the company’s products are bought in finished form
from manufacturers and suppliers mainly from the U.S., but also from Asia and Italy. To
coordinate the purchasing of products, diamonds in particular, the company has established a
centralized product sourcing organization. This will benefit the company by enabling it to
operate more effectively and more efficiently. Direct sourcing has proven to enhance gross
margins and increase revenues, and with a center in Canada, production and distribution capacity
has expanded. Also, the importing of finished goods increased the ratio of sourced products,
which gives Zale an advantage when it comes to price and the latest fashion trends. It gives the
company more flexibility in purchasing certain products. Since Zale buys most of its products in
finished form, the access to raw materials is not needed as much. However, the company is
depending on its vendors to have access to raw materials in order to keep its position in the
market. Because most of the company’s purchases are U.S. dollar denominated, it is not affected
by currency fluctuations. Currency exchange contracts have been made to minimize the market
risk from currency rate exposure. Zale also made contracts on its gold to reduce the risks of
fluctuating prices. The number one supplier can affect prices and supply of diamonds, and that
company is the Diamond Trading Company. The availability of raw materials is dependent on
the political situation in the countries that produce diamonds, and on the continuation of supply
and marketing of these raw diamonds. Any interruption in the supply of diamonds can affect the
company (Zale Corp, n.d.).
Zale has a very concentrated customer base. The locations of the company’s property,
plant and equipment are limited to North America. This is a disadvantage, because Zale’s
competitors are more geographically diversified. Even though, the company has expanded its
business online, it has mostly expanded its business in North America. Competitors like Blue
Nile and Tiffany now operate in countries in Europe and Asia through a web portal, which
makes it easier to reach a broader specter of customers. By focusing mainly on regions in North
America, the company increases its risk and limits growth at the same time. (Zale Corp, n.d.).
For Zale to be competing with the biggest jewelry companies in the industry, its
technological resources need to be updated and able to store and send an enormous amount of
data. The company’s systems provide information for management operating decisions,
inventory control, monitoring profitability, sales management, expense control programs and
customer care. Some data processing systems include merchandise planning and control,
purchase order management and point-of-sale terminals. The point-of-sales terminals ensure
accurate sales and data, by having bar codes on the products. These codes are also handy when
providing inventory control monitoring. Information becomes timelier, which increases a
company’s responsiveness to all changes in consumer behavior. Also, communication between
stores and Zale’s headquarters will be more effective and efficient with higher speed of
transmission. These systems provide the company with information on a daily, monthly and
annual basis, which management can use to review and analyze activity. Zale does not deal with
its data center operations, instead it outsource these operations to a third party, so that the
company can focus on developing and improving its strategies. A continuation of upgrading its
information systems need to happen in order to improve the business and its operations, as well
as achieve future growth. As far as patents, licenses or franchises go, Zale does not have any.
The company’s trademarks and trade names, however, are necessary to sustaining its competitive
position in the jewelry industry. Stores are designed to create an environment that is attractive for
customers and make it a convenient and enjoyable shopping experience. Everything from
lighting to materials, are areas that Zale focus on. Products that are being displayed are changed
from time to time to provide variety in the stores. Connecting with consumers has a strong focus
through advertising and through stores, and the goal is to maintain this connection to further
strengthen the brand name (Zale Corp, n.d.).
Intangible Resources-Value Chain
Even though tangible resources are fundamental for a company, they alone are not
enough to reach a competitive advantage. Intangible resources are considered to be where much
of a company gets its value, because they are more difficult to copy by competitors. Intangibles
can also lead to a more sustainable competitive advantage. Firms rely more on intangible assets
than they do on tangible assets. That is because most firms find these to be the foundation for the
company’s capabilities and core competencies. The more intangible a resource is, the more
sustainable it will be.
Zale makes sure that all employees go through training so that they are knowledgeable
and reliable, as well as performing their duties fast and effectively. Training has been a high
priority for the company. It has an arrangement with the Diamond Council of America with the
intention of training key managers and sales employees to increase their knowledge in diamonds
and colored stones. The company also has a training program for buyers to develop and train
new buyers on product negotiation techniques. Through the use of technology, Zale continually
improves its customer experience. By increasing transaction speed and access to product and
customer information, the administrative responsibilities in the stores will be reduced. The
investments in its employees include the improvement of a long-term human resource vision.
This vision includes an integrated payroll and human resource management system, which is
designed to eliminate manual processes, provide data to managers, and providing online access
to employees. This is a great way for the company to improve its productivity. In addition, the
centralization and streamlining of the organization across the brands reduce costs by eliminating
redundancies and better teaming, which makes the company more effective in the long run.
Zale has a reputation of being a company that continues to have the highest standard of
ethical business conduct and social responsibility, but also a company that treats customers with
integrity and respect. The company makes every effort to encourage sustainable, stable and long-
term relationships with all its suppliers and other involved partners, based on mutual trust and
fair dealing. Among customers, it is known for its friendly customer service and extremely
dedicated employees (Zale Corp, corporate).
Zale believes that brand recognition is the key to increasing its market share. Consumers
rely on brand names to ensure quality end value when they feel that they lack the expertise to
evaluate the quality and value of jewelry purchases. Since Zale is one of the industry leaders, it
sets the standard for providing customers with innovative and creatively designed products.
The company has devoted resources to enhance the effectiveness of its marketing
function, in order to increase its market share. Customer knowledge and their behavior have
made the decision-making capabilities within the company and the messages delivered to
customers a lot better. This knowledge is used to promote the company’s key brands even more,
as well as meeting the needs of the market and the individual consumer. Zale uses different
characteristics to give all brands an individual design, style and feel. This strategy is based on the
fact that all people are different, with different preferences when it comes to purchasing jewelry.
Marketing research is one thing the company focuses on. It will continue to use television as its
most important medium, as well as targeted direct mail campaigns to promote its products and
services. This way, its strategy of making a stronger brand with long-term customer relationships
is more consistent. The goal here is to have access to enough information in order for the
marketing efforts to be effectively maximized. The large amount of information, compared with
new and developed capabilities, helps the company to translate the brand message into
meaningful direct mail communication.
Zale offers credit card programs to help customers in buying its products. This option is
for people who want to finance their purchase instead of spending cash. Almost half of its sales
come from these private label credit cards. The company has an agreement with Citibank, where
Citibank issues private label credit cards and provided customers with financing.
Zale has an innovative vision and many ideas. The problems with ideas are that not all
are realistic or manageable for the company, nor do they guarantee improvement. As I mentioned
earlier, with a more centralized and streamlined organization, operations can be improved. Zale
is looking to increase the mall business and grow the Canadian brands, because this is where the
company believes it can increase profits, as well as shareholder value. Zales Outlet has proven to
be profitable for a long period of time, which is why Zale is determined to build on this success.
Another important aspect of the company is the Internet. It will continue to improve its online
feature in order to enhance the customer experience, as well as its multi-channel execution (Zale
Global business leaders support the view that knowledge is the most important aspect of a
company’s capabilities, and might be the reason for competitive advantages (Michael A. Hitt,
R.Duane Ireland, Robert E. Hoskisson, 2009). This is also the case for Zale. It continually
provides its employees with training so that their knowledge of the industry and its core business
are maintained and developed. This knowledge helps employees in decision-making and in
meeting customer needs and demands. The motivation and retaining of employees are important
for employers, because they want their employees to perform their duties in an efficient and
Another capability that can be recognized is the strong promotion of brand-name
products. Because consumers put their trust in brand names, Zale has found that it can use its
expertise and knowledge through its marketing segment to attract consumers. Customer service
is also an area where the company spends a lot of time. In order to strengthen its brand name
even further, an important factor for Zale is to make long-term term relationships with its
customers (Zale Corp, n.d.).
One thing that also can help the promotion of the brand name is the participation of the
company in a voluntary program of self-regulation to comply with the Kimberley Process
Certification Scheme, which was brought to life to eliminate conflict diamonds from the
diamond supply. A lot of customers are against conflict diamonds and therefore it is important
for Zale to show that it has taken a stand against this problem. The company can also be found
online. It believes that it can grow even further as a complement to its stores, and therefore they
have become partners with a company called GSI. This company provides e-commerce and multi
channel solutions to help with the online business (GSI). Through this partnership, Zale can
establish e-commerce capabilities to its other brands, as well as enhancing the name brand and
growing the business.
Direct importing of finished goods saves time and money. Without having to go through
several steps before Zale is in physical possession of the products it is capable of giving
customers what they want in an effective and efficient manner.
Core competencies are capabilities that serve as a source of competitive advantage for a
firm over its rivals. They distinguish a company competitively and reflect its personality
(Michael A. Hitt et al., 2009). The focus of the company is on supporting each brand’s product
offerings and marketing position with its different customer segments to distinguish the brands.
Zale does not have a whole lot of competencies besides their brand recognition. It believes that
this is an advantage it needs to work hard to maintain in order to have a competitive advantage in
the industry. The company differs from other companies in the way that it has the ability to
capitalize on merchandise trends. There is one more factor where Zale has an advantage and that
is in the online wedding market. Through a partnership with The Knot, Zale has the ability to
market its brand on TheKnot.com, which is the world’s most visited wedding site. In addition, it
will give the Zale brand a presence on The Knot TV, which is a streaming video network
(Retailing Today, 2006). These core competencies are the ones that give Zale Corporation a
competitive advantage. Whether these competencies are sustainable or not remains to see.
Today, companies continually have to change its strategies.
This is the primary tool for accomplishing internal analysis of an individual company. It
aims to address four questions a firm must evaluate about a resource or capability to determine
its competitive potential: value, rarity, costly to imitate and organized.
Resources and capabilities are considered of value when they are able to take advantage
of external opportunities and neutralize threats. In order to assess the rarity of a company’s
resources, the number of competing companies that also possess the same capabilities need to be
measured. Costly to imitate determines if a company will face a cost disadvantage in acquiring
new technology that is currently absent. A company is considered organized if their procedures
are able to support the development and utilization of their value, rarity, and imitability
Resources and Is the Is the Is the Organization Competitive
Capabilities Resource Resource Resource Implications
or or or
Capability Capability Capability
Valuable? Rare? Costly to
Brand Name Yes No Yes No
Quality Yes No Yes/No No Competitive
E-commerce Yes No No Competitive
Direct Yes No No No Competitive
Customer Service/ Yes No No No Competitive
Blue Nile Inc.
Blue Nile was founded in 1999 and is today one of the largest online retailers of
diamonds. In addition to selling diamonds, it also offers platinum, gold, pearl, and sterling silver
jewelry. It is headquartered in Seattle, Washington and offering its products to 35 countries,
through its websites in United States, Canada and the United Kingdom (Blue Nile Inc, 2009).
The company is publicly traded on the Nasdaq stock exchange and has received several awards
for its educational websites and customer service.
Blue Nile obtains its revenues from its three websites: www.bluenile.com,
www.bluenile.ca, and www.bluenile.co.uk. During the fiscal year of 2008, Blue Nile’s recorded
net sales were $295.3million.
Through its operations, Blue Nile has been able to build a well respected brand name in
the jewelry industry. Blue Nile has managed to build its brand name by empowering its
customers through an informative sales process, while also offering superb jewelry at
competitive prices. Blue Nile uses its websites to showcase the products it offers for sale. The
product range includes: rings, necklaces, bracelets, wedding bands, earrings, pendants, and
watches. The websites also offers a “build your own” feature that allows customers to build their
own jewelry, based on the customers own preferences of: style, quality, and price. To ensure
customer confidence through the purchasing process, Blue Nile provides information about
diamonds, either by a separate education section on their websites, or by specially trained
customer service personnel that answer phone inquiries from customers.
“Blue Nile objective is to maximize their revenue and profitability as well as increase
market share both domestically and internationally by offering exceptional value to its customers
through a high quality customer experience that leverages supply chain efficiencies and efficient
cost structure” (Blue Nile Inc., 2009, p. 8).
In order to successfully achieve its business objective and create a competitive advantage,
Blue Nile need build on its capabilities. Blue Niles capabilities are based on the resources Blue
Nile has available and how well it uses them.
A firm’s tangible resources are often related to the firm’s financial statements. Tangible
resources are the cornerstones for any retail business. Financial resources are one of the elements
of tangible resources. Blue Nile’s ability to generate internal funds and its borrowing capacity
has decreased based on declining sales at the end of 2008, as financial instability has caused
consumer spending on discretionary items to decline and uncertainty in the equity markets. Blue
Nile relies on funding through its operations; cash generated from sales, sale of equity, credit
facilities, and capital lease obligations. The major portion of Blue Nile’s working capital is liquid
assets and inventory, less account payable and other accrued expenses. Blue Nile has some
favorable characteristics for its working capital; Blue Nile has extended payment terms with its
suppliers and it collect payment from sales from a third party customer financing (Blue Nile Inc.,
2009). This let Blue Nile accrue interest on its cash on hand before the firm pays its vendors, a
process that improves the firm’s working capital. Blue Niles gross profit for the fiscal year of
2008 was 20.32% compared to the benchmark for the jewelry industry at 43.49% (Yahoo Inc. ,
2009). One of Blue Nile’s strategies to increase market share by providing its customers with the
best prices possible, this policy will affect gross profits since Blue Nile charges less mark-up on
its products, compared to its competitors. Fluctuations in prices of precious metals and diamonds
due to supply and demand functions will also affect gross profit. Working capital is also
dependent on seasonality, Blue Nile has experienced under its years of operations that sale are
seasonal dependent, the fourth quarter sales are normally the strongest due to increased sales
during the holiday season.
Being an e-commerce business Blue Nile’s capital needs are minimal compared to
regular “brick and mortar” businesses; the need of capital is often associated with software and
hardware needed to operate its websites, improvement to office and warehouse facilities, and
furniture and equipment. As January 4, 2009, Blue Nile’s operational facilities consist of three
independent buildings, a corporate headquarters and fulfillment center in Seattle, Washington
and one fulfillment center in Dublin, Ireland. All buildings are leased; contracts are running to
2011, certain of the leases have renewal options. The current situation is considered adequate, as
there are options for additional or substitute space if it should be needed (Blue Nile Inc., 2009).
Blue Nile’s merchandise is high quality diamonds and fine jewelry, with an especial
concentration on engagement rings and settings. Blue Nile’s e-commerce model together with
strong supplier relationships enables Blue Nile to offer diamond inventories of its suppliers
online, without having any ownership stake in the inventory. Blue Nile uses several different
jewelry polisher and manufacturer, and the company is dependent on these suppliers accessibility
of diamonds and precious metals. Blue Nile’s contracts with its suppliers are on a multiyear
basis, and have expiration dates ranging from 2009 to 2013. In addition to diamond jewelry, Blue
Nile offers a wide range of fine jewelry. Blue Nile has not entered into special long-term
agreements with suppliers of fine jewelry, but do have longstanding relationships with these
suppliers. As of today Blue Nile consider its relationship with these suppliers sufficient for the
products and quality Blue Nile want in its product portfolio.
In order to create superior customer service is Blue Nile dedicated to provide its
customers with an easier and cheaper purchasing process. Another aspect Blue Nile focus on, to
create good customer relationships, is the speed of the purchasing process. After an order is
submitted online, the diamond is shipped from the wholesaler to Blue Nile’s jewelers or other
independent third-party jewelers. Then it usually takes one day to make that diamond into a ring.
After the diamond is matched with the custom setting, the ring is shipped overnight with FedEx
or other third-party carrier, and normally is in the hands of the customer within three days (Bates,
Blue Nile also provides its customers with after sales services. Blue Nile offers its
customers, through its websites easy and convenient insurance policies for jewelry. Blue Nile
also offers financing options for its customers. One option is with CIT Bank, Salt Lake City,
Utah. CIT Bank will front the payment of purchases made on Blue Nile’s websites, while the
customers will pay CIT Bank. This option is directed to those who are not confident in online
purchases and rather would pay by check or a wire transfer for added security. The other
financing option is for customers that need help financing their purchase. For these customers
Blue Nile accommodate financing through a partnership with Bank of America for sales up to
Being an e-commerce business, Blue Nile is dependent on new technologies. Blue Nile
uses a combination of proprietary and licensed technologies. Its website design and features are
based on internal development. Administrative functions are supported by third-party
information technology systems that is licensed, activities that are supported by such systems
are: financial, inventory management, and order fulfillment. Blue Nile relies on protection based
on property law and contractual restrictions, copyrights and restrictions. As of today, Blue Nile
has filed U.S. patent applications relating to certain features of their websites. Blue Nile
understands that protection from general intellectual property laws in some cases is not efficient,
and it is still possible that third-parties can copy, recreate and otherwise use intellectual property
obtain by Blue Nile. On a international level it is important to notice that there are different laws
and regulations that is relevant for different countries Blue Nile chooses to conduct business in.
Blue Nile employees 170 people as of January 4, 2009. Blue Nile relies on the
knowledge, trust, and capabilities of these employers. Blue Nile understands the customer
service and support is key factor for success. To provide excellent customer service and support
functions, Blue Nile is dedicated to provide through its website and call center, highly trained
and knowledgeable support staff. Blue Nile’s jewelry consultants provide support to customers
throughout the entire purchasing process if so is desired by the customer. The consultants will
support the customer with; the selection of an appropriate item, the purchase of a particular item,
shipping services, and financing and payment alternatives. These customer consultants are not
paid based on commission, Blue Nile believes this is an important factor in providing excellent
customer service (Bates, 2009).
Blue Nile also emphasizes innovation of informational technology systems from internal
sources. Designs of the Blue Nile websites and different features are done in house, meaning
they are done by Blue Nile employees. Efficient and effective ERP systems and data
warehousing systems are a key factor for maintaining the Blue Nile’s profitability. Blue Nile
continuously works to improve these systems by hiring the top technical data engineers available
by providing competitive compensation packages for all its employees.
Reputation in the marketplace is a highly valued resource to gain a competitive
advantage. Blue Nile is a recognized brand name in the jewelry business, as it stands for high
quality diamonds and fine jewelry sold at very competitive prices. Blue Nile has also gained
recognition through its customer service and business model. Blue Nile has received many
rewards for its business model and website, Forbes awarded Blue Nile to its- “Forbes Favorite”
online jeweler, as one example (Forbes LLC, 2009).
Blue Nile has a good reputation with its suppliers, allowing them to offer its suppliers
inventory of diamonds on the Blue Nile’s website, without Blue Nile actually carrying these
diamonds in its own inventory holdings (Blue Nile Inc, 2009). This opportunity has been created
by long-term relationship with its suppliers. Blue Nile is providing its suppliers with information
on customer trends. This is both beneficial for Blue Nile as well as its suppliers, promoting a
more efficient and effective trade of diamonds, that promotes profitability.
Blue Nile has managed to build up a successful “just in time” order and processing
system for its diamond merchandising, without sacrificing high quality on the products it sells.
Blue Nile has been able to create superb customer service through its call center and online
education, lenient return policy and good guarantees has also promoted lasting customer
relationships. By creating brand recognition for the Blue Nile brand name and the innovative
purchasing experience provided by Blue Nile’s websites, Blue Nile focus on building a base of
loyal, returning customers. In addition to the word of mouth principle of marketing, is Blue Nile
efforts to create higher traffic to its website by on-line and off-line marketing. Blue Nile’s
marketing campaign is primarily focused on online search engines, targeted website advertising,
and direct online marketing. Blue Nile has a very lean organizational structure, with less than
200 employees, this decrease the amount of costs related to overhead. Blue Nile is dedicated to
pass much of the savings associated with low overhead costs to its customers, by offer very
competitive prices on its diamonds.
VRIO is one helpful tool for performing a internal analysis of an individual company. A
firm must evaluate its resources or capabilities to determine its competitive potential based on
four criteria: value, rarity, costly to imitate, and if it is nonsubstitutable. Resources and
capabilities are considered of value when they are able to take advantage of external
opportunities and neutralize threats. To evaluate the rarity of a company’s resources and
capabilities, the number of competitors that also possess the same resources and capabilities need
to be measured. Imitability determines if a company will face a cost disadvantage in acquiring
resources or capabilities that is currently absent. A company is considered organized if their
procedures are able to support the development and utilization of their value, rarity, and
Resource Is the Is the Is the Organization Competitive
and Resource or Resource or Resource or Consequences
Capabilities Capability Capability Capability
Valuable? Rare? Costly to
Brand name Yes No No No Competitive
Customizing Yes Yes No Yes Temporary
of diamond competitive
rings online. advantage
“Just in Yes Yes Yes/No No Temporary
High Quality Yes No Yes No Competitive
Low Cost Yes No Yes No Temporary
A scan of the internal and external environment is an important part of the strategic
planning process, Factors such as strengths or weaknesses, and opportunities and threats are the
classifications used in this analysis. It provides helpful information that matches a company’s
resources and capabilities to its competitive environment.
(http://www.quickmba.com/strategy/swot/) The primary purpose of the SWOT analysis is to
identify the positive and negative factors, so that firms can take an objective look at its business.
The analysis will be a useful tool in developing goals and marketing strategies
Blue Nile has established a well-respected consumer brand using an informative sales
process that gives its customers more power while offering a broad selection of high quality
jewelry at competitive prices. This makes it the leading online retailer in the United States. The
“Build your own” feature allows customers to customize their diamonds. Blue Nile has 60,000
stones and a global network of suppliers, which also makes the company the largest web retailer
of engagement rings as well as a specialist in selling high-end jewelry online. Blue Nile
generates about 6.3% of all online jewelry sales, which supports its leading position even further.
This leading market position gives the company greater bargaining power with suppliers.
The business model that Blue Nile currently operates is unique. It only has inventory for
its fine jewelry that it sells through its websites. The diamonds that are displayed are available
with the suppliers, but Blue Nile is not holding them. When an order is placed, the company
notifies the third party supplier who holds the inventory. The diamonds are then fixed into the
buyer’s preferences and shipped to the customer. Blue Nile receives payments from the
consumers within 5 business days, which is more than enough time to pay its suppliers.
Normally, the suppliers are supposed to be paid in 60 days. Because diamonds are the company’s
revenue generator, and it keeps them in inventory for 3-4 days, its inventory turnover ratio is
higher than the competition. This model allows Blue Nile to have an advantage over its
competitors and put a competitive price on its products. The strength and benefits of this unique
business model allows it to navigate through today’s challenging conditions. For example, it
operates profitably even in a situation where sales decline as was seen at the end of 2008. This
means that the company can emerge even stronger when the economy begins to improve, while
many competitors will have gone out of business.
Blue Nile offers excellent service through the Internet and its call centers, which is
helpful for consumers in the purchasing process. Information and guidance is important to the
customer since the cost of diamonds and jewelry is significant. The company provides detailed
product information and education that permits the consumers to compare products and make
better decisions. All steps in the process of buying are provided, including the selection,
purchase, financing, and shipping services. Customers can also search the company’s website to
find the products that meets their needs through a variety of diamonds and fine jewelry. These
services enhance the purchasing experience and satisfaction, as well as increasing customer
loyalty (Datamonitor Report).
Although, declining operating margins have been a problem in the last decade, Blue Nile
are still posting strong revenue growth considering the current economic situation. Tiffany’s
recorded higher margins in the same period, which means that Blue Nile’s cost management is
poor. This gives the company a competitive disadvantage. However, there is a difference in their
reporting format. Blue Nile’s fiscal year ends in December, while Tiffany’s ends in January.
When taking these differences into consideration, Blue Nile’s financials are comparable with
Blue Nile has a concentrated supplier base. The company’s top three suppliers accounted
for about 70% of its total purchases during the 2004-2006 periods. The company relies on its
suppliers to sell and ship products in a timely manner and the failure to do so will have an
adverse effect on the company’s ability to fulfill consumer orders and harm the business. Also,
the failure to deliver quality products to consumers in a timely manner or to serve its customers
would damage Blue Nile’s reputation and brand name, and eventually harm the business.
In addition, infringement of intellectual property rights can result in high litigation costs,
diversion of personnel, or product delays. This may mean that licensing agreements have to take
place, but that might be unacceptable to the company. The company’s significant dependency on
its brand name can have a negative effect if it cannot continue to promote it. A mass of
customers are required to increase net sales, and the positioning of the Blue Nile brand is heavily
dependent on marketing and merchandising and the ability to create high quality customer
service. The concentrated supplier base makes Blue Nile vulnerable to top-line risks from
external parties and can harm the company in the future.
Blue Nile is a young company and has room for expansion and taking on new
opportunities. Since they are the online leader in jewelry retail they have a sense of
accomplishment about them but it doesn’t mean that there is no room for improvement. Blue
Nile has the ability to attack new opportunities and expand their business. The three main
opportunities Blue Nile has is international expansion, expanding product portfolio, and
increasing their online sales.
Increasing their online sales is the overall goal of the company all the time and they are
constantly competing to do so. They offer a wide range of jewelry that is constantly expanding
with a key focus on engagement rings. By offering all of their products on the internet and no
retail stores they cut down their operating costs and allows them to expand their online sales
without added cost.
One of the main opportunities Blue Nile has is getting into the foreign markets. The
economy is becoming a globalized one and they should take advantage of that especially in the
rapidly growing economies such as China, India, and Brazil. They have already made a
European website that is depicted towards Great Britain and Canada. The European website also
markets towards other countries in Europe. In order to continue expansion into other countries or
more specifically towards individual countries in Europe they make websites specifically
directed towards these markets. Specifically, India and China which have the two largest
populations in the world and they could really capitalize on these markets.
Along with the opportunity to expand to foreign markets they have the ability to expand
their product portfolio. Currently they offer just about every kind of jewelry imaginable but,
there are specific items customers could want they currently do not sell. Colored diamonds are
becoming more and more popular because they are rare and depict high status. Currently, Blue
Nile offers 90 different shades of rare colored diamonds but there is room for more. They plan on
selling over 1,000 different shades of extremely rare diamonds. They are planning on catering to
a small but expensive market. In the end it will lead to retaining existing customers and attracting
The Blue Nile Corporation has been in operation for ten years now and the threats against
the company are constantly changing as they change their business outlook. Since the jewelry
industry is intensely competitive and constantly changing, the competition for selling diamonds
and fine jewelry will continue to grow. The four main threats against Blue Nile are the intense
competition, risk of declining demand for diamonds, counterfeit goods, and hacking and
spoofing. Competition is expected to increase and most likely will result in price pressure,
reduced gross margins and loss of market share, either of which could substantially harm Blue
Nile and its operations. Other factors could result in falling customer confidence which will
affect retail prices throughout the industry. Price reductions could cause liquidation and have a
negative effect on sales. Other than industry threats and consumer confidence threats Blue Nile
has to compete with various other competitors which include:
• Independent jewelry stores
• Retail jewelry store chains, such as Tiffany’s and Zale’s
• Other online retailers that sell jewelry such as Amazon.com
• Department stores, chain stores and mass retailers, such as Nordstrom’s
• Online auction sites, such as eBay
• Catalog and television shopping retailers, such as Home Shopping Network
• Discount superstores and wholesale clubs, such as Costco and Walmart.
Each of the listed above competitors is a threat to Blue Nile because they are all
attempting to sell jewelry to the public. Each of the competitors appeals to different target
markets most of which are the same as Blue Nile’s. Blue Nile appeals to most people because
they offer a variety of prices from really low quality low price to extremely fine and expensive
jewelry. Most of its competitors do not appeal to every market but just a couple. Take Tiffany’s
for example which is the industry leader in jewelry sales, they typically appeal to the upper
income market even though they have begun to deal in the lower end market. Also look at
Walmart or Costco, they are selling lower end less expensive jewelry. Blue Nile is able to hit
both ends of the spectrum and they have products for everybody.
Along with competitors in the jewelry industry Blue Nile also faces threats from other
places. Another major threat to them is its suppliers. The suppliers have the ability to stop selling
to them and sell their products elsewhere whether it is directly to the customer or to other
competitors in the market. The suppliers have the ability to dictate where and when and to who
the products are sold to and this can change at any point. Along with the suppliers being a threat
Blue Nile also has to watch out for international competition. Since our world is getting away
from doing business only in their country and is becoming globalized they need to be aware of
international players entering the market. Some new company could easily start selling better
products for cheaper and take away from Blue Niles market share. They need to be aware of all
threats and be able to adapt to anything that is thrown their way.
Another major threat to the company is the possibility of a declining demand fro
diamonds. Its not like diamonds are a necessary good that people need to survive, it is a luxury
good that people can easily cut out of their typical spending. Since the economy we are in is
currently struggling people are cutting luxury goods out of their lives and beginning to save their
money. This hurts the demand for diamonds. Along with this the public has began to associate all
diamonds with “conflict diamonds” and feel like they are supporting terrorism in African
countries. This is not true, not all diamonds are conflict diamonds. In fact, there are various
programs that ensure diamonds do not come from conflict regions. But, this negative association
with diamonds can really hurt the demand for diamonds.
The final threat to Blue Nile is the creating and sales of counterfeit goods. Recently, Blue
Niles biggest competitor Tiffany’s settled a lawsuit with eBay the involved people were selling
counterfeit Tiffany’s goods over eBay. This really diminished Tiffany’s image and hurt their
sales. Blue Nile does not want anything like this to happen to them. It is extremely common
throughout the United States and other countries to make counterfeit luxury goods and sell them
for cheaper. Blue Nile laser engraves all of their diamonds to insure they are from the company.
This makes it much tougher for counterfeiters to sell Blue Niles products.
NILE TIF ZLC Sig
Return on total assets 0.13 0.07 0.01 0.06
Return on stockholder's equity 0.60 0.14 0.02 0.09
Operating profit margin 0.06 0.13 0.01 0.10
Net profit margin 0.04 0.08 0.01 0.06
Current ratio 0.78 0.49 0.58 0.35
Quick ratio (ACID) 3.64 0.95 1.38 0.54
Inventroy to net working captial 2.48 1.11 1.21 0.80
Debt to assets 0.78 0.49 0.58 0.35
Debt to equity 3.64 0.95 1.38 0.54
Long-term debt to equity 0.04 0.27 0.54 0.17
Times-interest-earned 850.29 12.94 1.23 13.17
Inventory turnover 15.68 1.79 2.74 2.54
Fixed-assets turnover 39.08 3.86 7.18 7.30
Total assets turnover 3.29 0.92 1.50 1.03
Average collecting period (days) 2 23 0 92
Dividend yield on common stock $ - $ 0.02 $ - $ 0.91
Price-earnings ratio 50.23 15.83 11.20 0.62
Dividend payout ratio 0.00 0.37 0.00 0.56
Blue Nile had the highest ROA for 2008. The higher the ratio is the more efficient the
company utilizes its assets. The company outperformed their competitors significantly, having a
ratio of 13%. This is mostly due to the fact that it doesn’t hold a lot of inventory. The return on
equity is even greater than the competition, having a ratio of 60%. That is about 45% greater
than Tiffany”s. It is utilizing its equity efficient and creates better return to investors in the form
of an increase in stock price, since it does not pay any dividends. Nile’s profit margins are low
compared to the competition, having a ratio of 6% compared to Tiffany’s 13%. Blue Nile’s low
margins can be explained by its low pricing of products and the fact that its fiscal year ends
earlier than Tiffany’s.
Blue Nile’s numbers for liquidity ratios for 2008 are impressive. They outperform their
competitors significantly, having a current ratio of 0.78 and a quick ratio of 3.64. These high
numbers reflect how well the company repays its short-term debt. Also, the quick ratio indicates
that the company has a lot of cash on hand.
The company has hardly any long-term debt to equity, having a ratio of 4%. Blue Nile
has the lowest long-term debt to equity ratio of its competitors. Its debt to assets is 78%, which
means they have a lot of debt obligations. However, most of its debt is current and it is able to
pay off creditors in a timely manner. Creditors need not to worry about getting paid.
Blue Nile has an inventory turnover of 15.68, which is significantly higher than the
competition. This can be explained by the company’s unique business model, where they only
keep a limited amount of inventory on hand. The number of days it takes to get paid for a
business can be very vulnerable. Blue Nile does not have to worry about that because the average
collecting period is 2 days. This is due to the payment method customers take advantage off,
such as financing through a third party.
Blue Nile’s Price/Earnings ratio is much greater than Tiffany’s and Zale, which indicate
that investors are expecting higher earnings growth in the future compared to the overall market.
Investors are paying more today in anticipation of future earnings growth. The higher the P/E
ratio, the more attractive the stocks are.
Strategic Alternatives and Implementation
After evaluating the ability of Blue Nile to compete in the jewelry industry, we have
come up with some strategies that can make the company even more successful in the future.
Currently, Blue Nile is the leading online retailer of engagement rings, wedding bands, as well as
other jewelry. Our analysis of the competitive environment shows how Blue Nile has
outperformed and is in better shape than the competition. Their ROE and ROA have been
significantly higher than Tiffany’s and Zale Corporation in the last couple of years. The firm’s
ability to meet all interest payments is far beyond the competition. Also, the long-term debt to
equity ratio is very low compared to the competitors and that is merely due to their ability to
their lack of financing through long-term debt. However, these measures are not static. We have
concluded that in order for Blue Nile to improve and grow, some changes have to be made.
Weakness: Too much cash on hand
Recommendation: Merger and acquisitions
Blue Niles income statement shows that they have an excess of cash on hand. Simply
having cash on hand that is not invested is not necessarily a bad thing especially in our current
economic state. It will allow them to stay in business if their sales are down for multiple quarters
in a row. However, they do need to do something even if it is not too drastic with this money.
Blue Nile has the opportunity to acquire other online jewelers to expand their market share.
Currently Blue Nile is has $54 million cash on hand simply just sitting in banks or in
extremely liquid assets. They are taking on no new debt and have zero long term debt. Their debt
to equity ratio and long term debt to equity ratio is 3.64 and .04 respectively. This shows that
they have the ability to take on new debt possibly through acquisitions. There are many small
online jewelers that operate and cut into their potential sales. Since they have the cash and no
debt to pay off they should acquire a few of these small retailers. Along with retailers they could
possibly buy out some of their suppliers to take better command of their supply chain. By doing
so they will eliminate the costs associated with these suppliers and shorten their supply chain.
Purchasing out a supplier seems to be not as feasible as buying out another company because the
suppliers of diamonds are in a great position and not trying to exit their position. The acquisition
of a fellow competitor seems to be more feasible.
For implementing this strategy Blue Nile should look into acquiring ice.com. Ice.com is
one of the largest and most respected online Jewelers. They have served over half a million
customers since 1999. Today, they are a respected and well known online jeweler that offers
diamond jewelry, engagement rings and fashion jewelry. They pride themselves on staying ahead
of Style and Fashion trends so that we can bring you the very latest in jewelry styles. This
company has been around since Blue Nile but is not nearly as successful. If Blue Nile were to
acquire this company they could take over more of the market share and have further insight to
the market. This will give them more control of the market and put them in greater control.
The advantage to acquiring another retailer is they will have a larger portion of the
market share especially one that has been around for the same amount of time as Blue Nile.
Ics.com already has brand recognition and would be an excellent acquisition for Blue Nile. If
Blue Nile acquires this company and it proves to be as successful as predicted they would be in
the position to purchase other companies and slowly taking over the online jewelry market. By
purchasing more companies it shows the Blue Nile is a stable company and it will create news
making their name more recognizable. Through acquisitions Blue Nile will become better known
and own a larger part of the online jewelry market share.
Acquire another company and integrate this company into the Blue Nile organization could be
difficult. Evaluation of the target company is misleading. New acquisitions could bring Blue Nile
in an economic situation it cannot control. Mergers and acquisitions could also shift managers
focus away from the company’s main operations, something that could lead to decreasing
performance for Blue Nile.
Weakness: The lack of international exposure
Recommendation: Increase exposure in foreign countries.
Currently Blue Nile is mainly operating within the United States, Canada, and the United
Kingdom. The company operates through their websites bluenile.com and bluenile.co.uk.
Several countries in Europe and Asia have access through these websites, but in order to be
successful in e-commerce, companies need to reach out to more foreign markets and Blue Nile is
lacking in this aspect. International exposure is the key for Internet stocks. The growth rates for
online advertising and e-commerce outside of the United States are significantly higher, and the
more international exposure Blue Nile has, the higher the overall growth rate will be. This
scenario is if everything else is held constant. The percentage of sales derived from outside sales
in 2008 was about 9.4 percent. This portion is small considering the possibilities Blue Nile has in
the industry. The opportunities outside of the U.S. are there, and “the fruits are hanging low”, but
it all depends on how fast the company moves. Our research has shown that the company’s
operations are underdeveloped in the foreign countries that they operate.
Our recommendation is to increase the number of countries that they offer their services
to. Countries such as Brazil, India and China are attractive because of their large populations.
Considering that they are operating online they have the ability to enter foreign markets with few
implications. In order to build closer relationships with customers outside of the U.S. the
company can take their websites one step further and customize their websites to the country in
which they operate. This means that they will translate the already existing websites into the
different languages spoken so that customers with limited English skills also can take advantage
of the products and services that Blue Nile has to offer. We know from experience that a lot of
people don’t know English or are more comfortable with their native tongue, which is why a
translation would seem like a good idea. Our generation is mostly exposed to the English
language due to globalization. However, the former generations, especially our grandparents,
have not been exposed as much. Customers would feel more comfortable and secure when the
website is translated into their own language. This strategy would be outsourced to qualified
external parties in the respective countries, and the responsibilities would be to keep the website
up to date, as well as taking care of customer issues and requests.
The importance of customizing websites will attract more customers globally and
enhance their shopping experience. If potential customers have any questions regarding products
or other services they will have no problems or fears when contacting a customer service
representative. Blue Nile also has the benefit from the growing e-commerce and the increasing
Internet use around the world. The costs of expanding online are low and its online structure is
easily scalable to foreign markets. The company has a competitive advantage over retail stores,
because the operating expenses are much lower and inventory management is better. This is due
to the fact that it does not hold a lot of inventory on hand.
Being an exporter of fine jewelry and diamonds, Blue Nile would be vulnerable to
fluctuations in exchange rates if Blue Nile was to sell its products in countries’ local currency. If
the US Dollar were to increase in value compared to the local country’s currency Blue Nile’s
overseas profit would decrease, and the other way around. When selling its products overseas in
local currency Blue Nile needs to be prepared for constant change in exchange rates.
Weakness: Concentrated Supplier Base
Recommendation: Implement new contracts with more suppliers.
Currently Blue Nile has a concentrated supplier base. The company’s top three suppliers
accounted for approximately 21%, 21% and 25% of the company’s total purchases in the fiscal
year 2007, 2006 and 2005 respectively (Data Monitor). A concentrates supplier base makes Blue
Nile prone to top-line risks from external parties (Data Monitor). By having such a large percent
of purchases come from one supplier it really puts pressure on the company because they rely so
heavily on one supplier. It puts an emphasis on creating a good relationship with the supplier and
any trouble with this supplier could result in major losses of Blue Nile. Too heavily relying on
select suppliers gives the suppliers the advantage of dictating their prices. Since Blue Nile’s
business plans relies on providing discounted prices this will cut into their profit margin.
Create new contracts with other suppliers to spread out the reliance on each company.
Blue Nile has a unique relationship with its suppliers. The suppliers allow Blue Nile to purchase
its diamonds after the customer has made its order. This allows Blue Nile to limit its operating
costs because it does not have to have excess inventory on hand. The suppliers upload real time
inventory on Blue Niles website which allows customers to choose from a large selection of
diamonds without Blue Nile having to have it directly in its inventory. Blue Nile needs to create
new contracts with these suppliers and spread out the distribution among suppliers. This will
keep Blue Nile from relying too heavily on one supplier. They could possibly create long term
contracts with suppliers with fixed prices so the suppliers will not have the ability to raise prices
Evenly distributing the reliance among suppliers will limit the risk of Blue Nile. This will allow
Blue Nile to continue to have the ability to sell their high quality products at cheaper prices than
their competitors without being prone to top-line risks for external parties. If Blue Nile is able to
create long term contracts with its main suppliers with fixed prices it will lower the risk of
having to rely on external parties.
If Blue Nile chooses to implement this strategy, it has to keep in mind that its existing suppliers
might not accept this move. The suppliers will most likely feel degraded and will not wish to
continue to work with Blue Nile in the future.
Weakness: Lack of brand recognition in the marketplace.
Recommendation: Increase the use of marketing to attract more customers.
Blue Nile’s marketing strategy is to increase brand recognition and build loyal customers.
Although, customers that know about Blue Nile have proven to be loyal, it has not fully taken
advantage of the opportunities of a well-developed marketing campaign. Other companies such
as Tiffany’s and Zale are more exposed in the marketplace through television, magazines and
other media, which gives them an advantage when it comes to brand exposure. Tiffany’s “Blue
Box” is a perfect example of how consumers associate products with companies. Another
company that we have not talked much about, but who is one of Blue Nile’s competitors, is Kay
Jewelers. Their slogan: “Every kiss begins with Kay” has been seen and exposed to millions of
people. Their way of advertising is totally different from Blue Nile where word of mouth and
returning customers are the main ways of making money. Pop-up advertisements and such are
also common ways of attracting customers, but these alone are not effective.
Blue Nile can be accessed by millions of people through their websites, but our research
has found that few actually know about their existence. It is great that they focus so much on the
customer experience and building long-term relationships, but for future growth one cannot
simply rely on those two things. To keep up with the present, and even stay ahead of the
competition, Blue Nile has to come up with new strategies. When searching online for jewelry
and diamonds in particular, the company has done well in establishing their address in the
different search engines. However, even though these things have taken the company to where
they are today, there is a need for developing and increasing the customer base.
Our recommendation is to invest more in advertising in order to attract more customers
and receive more publicity. The company is already known for their customer service and high
quality products, but with a more aggressive marketing strategy still focusing on the customer
experience, the company will increase its revenues and establish an even stronger brand in the
industry. Online advertising is already present, but this feature can also be enhanced. Emails
about sales, new offers and new products should be sent out to existing customers if this was
something that they approved when they first purchased a product.
The target audience for Blue Nile is men between 25-35 years old. Therefore, magazines
such as FHM, Maxim, Fortune, Men’s Health, Men’s Fitness, GQ, are the types that this group
seem to read. Another option to increase the brand awareness could be TV commercials.
Although, this is a costly option, the amount of men in this age who will be aware of the
company will significantly increase. Till now, we have only mentioned the company’s target
group, but the truth of the matter is that women are a part of the customer base as well.
Increasing advertising in magazines such as Cosmopolitan, People, Elle, Vogue, Allure, Better
Homes and Gardens, and O, will make female consumers more aware of the company. Another
way of increasing the customer base is through customer referrals. Whenever a returning
customer refers Blue Nile to a friend and this leads to a buy, the customer who referred Blue Nile
gets a discount on their next purchase.
Increasing the marketing segment of Blue Nile will increase consumer awareness and
grow a larger customer base. Billboards and such representing a slogan or things that Blue Nile
do best will work as a bait for people that do not know about the company. This is where BBDO
comes in. Blue Nile will benefit from BBDO’s expertise and familiarity with the different
cultures in which they operate. First, Blue Nile should try this strategy in the U.S., and if proven
successful take on other countries as well. Our generation is more used to shopping online,
because we grew up with the technology. The next generations are going to have it the same
way, and therefore online retailing becomes even more valuable. The shopping experience is
easy and user-friendly, which makes this type of business have an advantage over the regular
retailers. One current slogan that we found was: “Smarter ways of buying a diamond”. A
suggestion for an alternative slogan could be: “The special question for the special girl deserves
a special ring! Build yours at Blue Nile.” The company has an advantage in the sense that U.S.
customers outside of Washington State are exempt from sales tax. For purchases that amount to
thousands of dollars, this means significant savings. Our research found that when men or
women shop for jewelry, they often go online first to see if they can find products that they like.
If more people knew about the features of Blue Nile, then they would have more visitors on their
websites and that is what they can achieve if they increase their brand recognition.
Recommendation 1a: Create an exclusive Blue Nile collection.
The company should hire an outside designer to create an exclusive collection of jewelry.
Blue Nile will not be the first company to do so. Tiffany’s and Kay Jewelers have had numerous
designers create products for them in order to attract more customers. 70 percent of Blue Nile’s
sales are from engagement rings. This means that the company should increase other jewelry
sales without affecting the engagement rings sale. In order to do so, the company should look to
hire the famous jeweler Theo Fennel. Theo Fennel is one of the leading designers of today. His
jewelry is distinctive and inspirational and the unique style can be recognized instantly. He
combines modern designs with classical tradition, which gives an elegant and stylish collection.
He is extremely popular among the celebrities and has clients like Elton John and the Beckhams.
The experience of an outsider with a proven record of accomplishments is just the push
Blue Nile needs. When promoting their products and brand name with a famous jewelry designer
that has worked with celebrities many times before, informed consumers will recognize the
company. In addition to increasing other jewelry sales this way, consumers will also experience
the simplicity and the wide range of services that Blue Nile offers on its websites. The company
will achieve hype around the brand, and if implemented correctly, they will notice an increase in
sales and popularity.
Improving the Blue Nile brand has its risks. As much as marketing is a great tool for
enhancing customer awareness, it can also be extremely costly. This is something that it
currently does not spend much money on, which means that net income will be affected in the
beginning. The “campaign” also may not meet expectations in the form of an increased customer
base as well as increased revenues. Since Blue Nile is known to sell high-end jewelry, this
approach could dilute the Blue Nile brand name, and customers would no longer associate the
company with fine jewelry.
The strategy Blue Nile should implement first is increased brand recognition of the Blue
Nile brand name. Based on our valuation of the different strategies, this is the strategy that will
give the highest returns to Blue Nile’s shareholders. Since this is a segment they do not have
much experience in, the smartest thing would be to outsource this strategy.
The company that we found to be the best fit for Blue Nile is BBDO Worldwide. It has
have offices all over the world, is represented in 79 countries worldwide and is the forth-largest
global advertising agency. This year the agency won the most awards, including “Best of Show”,
in the New York ADDY Awards. It’s the largest advertising competition in the world. By hiring
this company we expect operating costs to increase from 14% to 19% of total annual revenue.
Currently Blue Nile has a market share of 6.3% of online sales of diamonds and fine
jewelry. With an increase in marketing we believe that the company will increase its market
share to 6.9% in the first year and to 7.6% the second year. The goal with this strategy is to have
a market share of 10% by the end of the fifth year.
Based on consumer confidence indexes and the general economic environment, consumer
spending is supposed to rebound with a slight increase. Online sales are also expected to grow by
10% annually, which is based on current trends. As a percentage of total retail sales, online sales
increased to 3.2% from 2.7% in 2007, and accounted for 3.4% of sales in the third quarter of
2008. This is a clear indication of the growing e-commerce market. As a conservative estimate,
we project that total online sales will increase by 1% in year one and 5% in year two.
Below is an estimated income statement forecasted for two years, the marked columns
represent our projections of the effect of the implementation of the new advertising campaign.
Blue Nile, Consolidated Statement of
(in thousands and US Dollars) Year end 2010 Year end 2009 Jan-09 30-Dec-07 31-Dec-06
377,36 312,81 326,29 297,92 295,32 319,26
Net sales 0 0 0 0 9 4 251,587
300,69 249,25 259,99 237,39 235,33 200,73
Cost of sales 2 6 8 2 3 254,060 4
Gross profit 76,668 63,554 66,292 60,528 59,996 65,204 3
Selling, general and administrative expenses 50,579 43,726 43,734 41,645 44,005 42,792 6
Operating income 26,090 19,828 22,559 18,884 15,991 22,412 7
Other income, net:
Interest income, net 3,748 3,107 3,240 2,959 1,420 3,760 3
Other income, net 403 334 348 318 445 415 0
Total other income, net 4,151 3,441 3,589 3,277 1,865 4,175 3
Income before income taxes 30,240 23,268 26,148 22,161 17,856 26,587 0
Income tax expense 9,706 8,046 8,392 7,663 6,226 9,128 6
Net income 20,534 15,223 17,755 14,498 11,630 17,459 4
Basic net income per share $1.38 $1.02 $1.19 $0.97 $0.78 $1.10 $0.79
Diluted net income per share $1.32 $0.98 $1.15 $0.94 $0.75 $1.04 $0.76
A critical concept of evaluating performance of a business is economic value added. In
difference to accounting profits, economic value added account for all resources used to create
income for the company and its shareholders. Economic value added includes the cost of debt
and equity in calculating how a company is retrieving its costs and creating profit. The benefit
with calculating economic value added of a company is that it also account for the expected
return in the market a company operates in and the general financial markets.
We have calculated the economic value added for Blue Nile’s operations as2009 based
on our assumptions of implementing a strategy that will increased focus on the use of marketing
to maintain growth. We have also calculated the value of Blue Nile ten years from now, based on
Damodaran’s model for EVA and FCF (Damodaran). Besides from the company inputs of
growth rate, increased cost financed by increased use of working capital, we have made some
assumptions of the general market trends. We have forecasted that the long-term bond rate would
be 4.07%, the market risk premium to be 5.01% (based on DJUSSR Index growth of 7.02% less
the risk free rate of 2.01%, and a cost of borrowing money to be 9.50%.
Economic value added after first year of implementation
Less WACC 11,690
Firm valuation after ten years in present value
PV of EVA $2,546,845
plus Capital Invested 89,665
plus PV of Chg Capital in Yr 10 (3,983)
Firm value $2,632,527
(All number in thousands)
Blue Nile, Consolidated Balance Sheets
Cash and cash equivalents 54,451 122,793
Trade accounts receivable 984 2,452
Other accounts receivable 725 1,124
Inventories 18,834 20,906
Deferred income taxes 670 799
Prepaids and other current assets 1,069 1,072
Total current assets 76,733 149,146
Property and equipment, net 7,558 7,601
Intangible assets, net 271 286
Deferred income taxes 5,014 3,489
Other assets 89 64
Total assets 89,665 160,586
Liabilities and Stockholders' equity
Accounts payable 62,291 85,866
Accrued liabilities 6,607 9,549
Current portion of long-term financing obligation 41 38
Current portion of deferred rent 205 238
Total current liabilites 69,144 95,691
Long-term financing obligation, less current portion 839 880
Deferred rent, less current portion 374 538
Preferred stock, $0.001 par value; 5,000 shares authorized,
none issued and outstanding
Common stock, $0.001 par value; 300,000 shares
authorized; 19,659 shares and 19,513 shares issued,
respectively; 14,493 shares and 15,973 shares outstanding,
respectively 20 20
Additional paid-in capital 144,913 134,207
Deferred compensation -3
Accumulated other comprehensive income 17 75
Retained earnings 36,199 24,569
Treasury stock, at cost; 5,166 and 3,540 shares
outstanding, respectively -161,841 -95,391
Total stockholders' equity 19308 63477
Total liabilities and stockholders' equity 89,665 160,586
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