BUSINESS STRATEGY OF ‘DE BEERS’

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BUSINESS STRATEGY OF ‘DE BEERS’

  1. 1. Submitted by: Anisha Goyal Ashwathej Purushothaman Rishica Sen Shrey Choudhary
  2. 2.  The story of De Beers started in 1880 with English-born businessman Cecil Rhodes, who was responsible for founding the diamond business in South Africa by renting water pumps to miners before buying diamond fields of his own.  In 1888, “De Beers Consolidated Mines, Ltd.” was formed, creating a monopoly on all production and distribution of diamonds from South Africa.  After Rhodes died it was taken over and controlled by Ernest Oppenheimer. They started building exclusive contracts with suppliers and buyers.  DeBeers is one of the the world’s largest diamond mining and trading company in the world. At one time it controlled 45% of the world’s diamond production and sold over 80% of all diamonds.  DeBeers purchased over 80% of all mined diamonds, controlled most of the diamond cutting and polishing industry and was able to artificially control the supply and prices of diamonds by being able to limit the amount of diamonds in the market at any time.  Initially they followed a strategy of supply control. Apart from mining its own diamond it also bought diamonds from other producers which is termed as ‘central selling organization’ wherein controlling around 90% of the world’s diamond.  During 1930s there was a worldwide decline in diamond price which led to a campaign known as “A diamond is forever”.
  3. 3.  De Beers took control of all aspects of the world’s diamond trade in 1989.  De Beers usually sells a commodity with no close substitutes and it mainly focuses on matching the supply of diamonds with demand.  They faced a problem with their monopoly power , as with the arrival of diamonds in Siberia was a threat to the control of De Beers over the diamond supply.  In July 2000, De Beers announced that it would retreat from its 70 year practice of "supply management"—better known as "monopoly pricing" in which it controlled prices by stockpiling diamonds. The company said it would no longer stockpile diamonds to create false scarcity.  DeBeers flooded the market with an estimated $5 billion worth of rough diamonds when it was privatized in 2001. The move led to a suppression of diamond selling that lasted several years.
  4. 4.  De Beers is credited with opening up the diamond market to ordinary people.  De Beers introduced the "Diamond Is Forever" advertising campaign in 1939 and has used with great effectiveness all over the world since then.  De Beers introduced the concept of “Diamond engagement rings”.  De Beers established a diamond retailing venture with the luxury goods company of Louis Vuitton Moet Hennessy( LVMH )of France.  In 2001, De Beers introduced the branding of its diamonds with a De Beers label and marketing the De Beers brand. They did this partly so that De Beers would no more be associated with "conflict diamonds." The De beers diamonds cost about 10 to 15 percent more than comparable diamonds without the De Beers label.  DeBeers then came up with diamond branding ideas like the “Millennium Diamond” which was a limited edition diamond engraved with the year 2000.  Some of the other branding strategies they came out with were: a.) Women of the world raise your right hand: A campaign to encourage unmarried women to wear rings on their right hand. b.) Celebrate Her campaign: To encourage man to gift diamonds on non-wedding occasions.
  5. 5. Synthetic diamonds are diamonds made in a laboratory process which are very similar to diamonds found in nature but are much cheaper. The benefits of synthetic diamonds are: a.) Absolutely flawless since they are made in a lab. b.) Eco friendly production process which does not require clearing of forests or natural habitats. 1.) Product: The product is lab manufactured diamonds of up to 2 carats. These diamonds are exactly the same in chemical composition as diamonds found in nature. 2.) Price: The biggest benefit of a synthetic diamond is that it can be manufactured at a much lower price than that of natural diamonds. This was a great idea for increasing the market demand and successfully attracted lower income people. Lab made diamonds sell for less than 1/10th the price of a natural diamond. 3.) Placement: In order to spread the awareness among people about the difference between natural and synthetic they launched marketing campaign of the synthetic diamonds to certain groups of people by : a.) Putting ads in Nature magazines showing that these diamonds have been made in an environment friendly way. b.) TV and media ads showing that lower income people too can afford diamonds on their weddings. c.) Using the recession to sell cheaper synthetic diamonds.
  6. 6. 4.) Promotions: The target customers were young people about to get married and lower income people. For a lot of people a 1 carat natural diamond would be out of reach yet everyone wants a diamond as an engagement ring. A synthetic diamond would be a great way to reach this market. Ads in wedding magazines was the great way to start the promotion of wedding rings manufactured using synthetic diamonds
  7. 7.  Named after Michael E. Porter, this model identifies and analyses 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths.  Frequently used to identify an industry's structure in order to determine corporate strategy, Porter's model can be applied to any segment of the economy to search for profitability and attractiveness.  The forces also describe the pressure on a business and where power lies in a business situation. It describes what businesses’ strengths are and what weaknesses are. It describes the threats it faces from competitors, collaborators like vendors etc.
  8. 8.  This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.  In the past, De Beers solved oversupply problems by collecting and storing them to be sold when deemed appropriate by them. This meant enormous power of the supplier over the industry.  Later De Beers started focusing more on repositioning itself as the supplier of choice and not the only supplier.  They also gave importance to vertical integration, by moving to value-added retailing and partnerships with premium fashion brands such as Louis Vuitton.
  9. 9.  This is driven by the number of buyers, the importance of each individual buyer in business, the cost to them of switching from your products and services to those of someone else, and so on.  Consumers had no control over the diamond industry, its pricing and supply. With an economic downturn in the industry, there was reduction in demand which lead to an oversupply problem and reduced prices.  To address this, major companies including De Beers reduced mining operations and turned the industry back to its higher demand-lower supply model.  Consumer’s power is non-existent in Diamond industry.
  10. 10.  If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it.  Before the breakup of the De Beers monopoly, it was virtually impossible for new entrants to jump into the industry. With forced change in business practices, stronger implementation of laws and discovery of diamonds in areas outside of the De Beers scope of control, competition has now increased in the market.
  11. 11.  This is driven by ability of customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.  The price of diamonds are not a true indicator of their value or supply. But it is all in the perceptions of the consumers.  With the invention of synthetic diamonds, consumers will began to challenge the diamond as a rare natural item and in some places they may overtake the sale of natural diamonds. Initially De Beers were against the idea of Synthetic diamonds but later they also started manufacturing synthetic diamonds in order to attract more consumers.  De Beers has a division called Element Six, which has been producing laboratory-grown diamonds. Element Six makes synthetic diamonds for a host of applications including precision machining, electronics and even bearings. In 2013 Element Six opened the world’s largest and most sophisticated synthetic diamond research and development facility in order to develop innovative methods for manufacturing of synthetic diamonds.
  12. 12. There are still limited players in the diamond industry, but the increased presence of different companies led to more competition in the market. Major Worldwide competitors of De Beers are: a.) Alrosa- It is a Russian state-owned diamond company, partakes in exploration, mining, manufacture, and sale of diamonds. Alrosa produces nearly 100% of Russia’s rough diamonds and more than 20% of the world’s rough diamonds, making it the second largest producer, second only to DeBeers b.) Rio Tinto- It is a major Australian diamond mining company. The company accounts for 9% of world production of diamonds and 12% of exploration spending. c.) BHP Billiton- It is another Australian diamond mining firm and accounts for 6% of the world production for diamonds. d.) Aber- It is a Canadian diamond company. Like DeBeers, Aber is involved in multiple parts of the value chain, with production, polishing and jewellery retail activities e.) Leviev- It is a Russian diamond company, is the largest cutter and polisher of diamonds in the world. It also owns mines and even designs jewellery in-house. Leviev used to be a direct buyer of DeBeers rough diamonds. Now the company provides stones for itself as well to other cutters, polishers, and manufacturers worldwide. Leviev competes with DeBeers, and has taken business away from DeBeers in Angola and Russia.

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