DeBeers and the global diamond industry Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction:

Carbon is transformed into diamonds in Kimberlite pipes that is caused by volcanic activities which create high pressure and temperature. In 1870, diamond rush was developed in South Africa after the discoveries related to Kimberlite pipes. Cecil Rhodes had a monopoly of pipes that were used to drain water out of mines. Rhodes received ownership claims in his customers’gold mines. In 1880 he had created his own company,DeBeers mining company. Even at that early age Rhodes used his diamond inventory efficiently to purchase his competitorsat low prices. In addition, by 1888 DeBeers controlled 95% of the world’s diamonds.

After the death of Rhodes, DeBeers was vulnerable to a takeover. By 1929,DeBeers purchased Oppenheimer mines in return of the stocks in the company. Oppenheimer had created the Anglo American Corporation to purchase gold mines in 1919. Furthermore, Oppenheimer’s firm, Anglo American Corporation controlled DeBeers.

Due to substantial price decreases caused by the inflation in 1930, they were unable to absorb the massive demand in global production.Inresponse to this situation,Oppenheimer extended its activities inthe value chain by creating Central Selling Organization (CSO), whichacted as a marketing branch for DeBeers.

DeBeers initiated an active program of buying diamonds from the mines of competitors and bought diamonds in abundant volumes in time of surplus to maintain prices. For buying rough diamonds, CSO became the only source, thus it was able to regulate the supply in response to global demand.

Problem Statement:

“By the end of the twentieth century DeBeers was facing a number of threats and it had to choose whether to continue with itstraditional strategy or embark a new strategy.”

Analysis:

Porter’s Five Forces

Rivalry within the Industry:HIGH

Rivalry in the diamond industry is high as DeBeers has been facing threats over its business cycle except the beginning years. De Beers is able to control the rivalry in the diamond industry because it produces 80% of all diamonds produced. Due to the pressure from government and retailers breaking apart and wanting to break the monopoly of DeBeers, the company is facing stiff rivalry/competition in the market for DeBeers.

DeBeers is now pricing its jewels as per the market price rather than controlling the supply of diamonds as it did in the past. DeBeers is increasing the amount of investment in the marketing sector and it is becoming more customer focused and it is expecting to find a niche for itself in the market where it has many competitors to replace the pioneers of the diamond supply.

Threat of Substitutes:LOW

Substitutes pose low threat as the manufacturing of diamonds in labs has existed since the beginning, however ithas never had enough market to worry the market leader in the diamond industry. Over the last few years,through new advanced technologies and processes, companies are able to produce diamonds, which are almost equal to the quality of the naturally produced diamonds, how ever they are not able to grasp a big chunk of the market share.Companies like DeBeers do not consider these artificial diamond producers as a threat because people are less attracted towards the artificiality of such precious rocks. The substitute products pose less treat to companies, which are producing diamonds naturally.

Bargaining Power of Suppliers:HIGH

The bargaining power of suppliers is high.As the case study highlights, the diamond industry is becoming more vertical, which clearly indicates that companies are now performing all the processes within the company and not outsourcing any material or service.On the other hand,previously companies were operating on separate parts of the industry, however, now the companies are performing the functions of mining, polishing and cutting by themselves.

This gives dominance to the suppliers and gives them the liberty to operate separately, which they were not able to when DeBeers had a monopoly and that it controlled 80% of diamond supply globally.DeBeers and the global diamond industry Case Solution

Bargaining Power of Customers:HIGH

The power lies in the hand of the customers in the DeBeers’ case as they have lost the monopoly of supplying diamonds. DeBeers hastwo types of customers. First are the retailers and the stores, which place the jewelry of DeBeers in their outlets and franchises, whereas the second type of customers are the final users of the products, they are those who pay the price to experience the value, which the brand has to offer against the price they are paying to purchase the diamonds.

As mentioned in the case, the industry is more verticalized as compared to previous years and retailers are buying mines and mining companies. The entity of the middleman does not exist now in the diamond industry and allows retailers to get diamonds at a cheaper price, as for the end line consumers, it makes the valuable rock much more affordable..........................................

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