De Beers

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THE INVISIBLE HAND, DE BEERS AND EMERGING MARKETS BUSINESS CASE

Strategic Management

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INDEX

1. What marketing and business strategy were followed by De Beers over the course of their history to be unique from competitors?

1. What were the changes in De Beers ́ strategy at the end of the 20th century (late 1900 ́s) and the drivers of that change? Assess and evaluate this strategy compared to those followed in the past.

1. Evaluate De Beers’ joint venture with LVMH.

1. What are your recommendations for De Beers?

QUESTION N.1

There is no doubt that De Beers’ was a very ambitious business. In fact, this uncontrolled ambitious played a significant role thought-out the years that affected De Beers in several ways, shift shaping the whole company.

The strategy that was developed and carried out in the late 1800’s by De Beers was simply to take full control over the diamond mines and supply of rough diamonds. With the investment of the Rothchild family and Cecil Rhode becoming Prime Minister of South Africa in 1890 allowed De Beers to have freeway on exploiting diamond mines with the support of the local government and as a result, gaining competitive edge.

The distribution of diamonds by the ‘diamond syndicate’ meant for De Beers their strong consolidation in the diamond industry as they would sell every single diamond they produced, making De Beers gain influence and become the largest source of production of rough diamonds, controlling most of the diamond supply. In this way, by preventing its customers on having bargain power, De Beers was able to control diamond prices from early on, making possible for De Beers to doubling diamond prices within a year.  

In the early 1900’s, the situation for De Beers had 360 degrees change. Ernest Oppenheimer, who was the owner of De Beers main competing mine and who in the past had several attempts on trying to get on board with the Beers, started buying shares until he became the largest shareholder of the company and elected himself as De Beers chairman. By this, De Beers and the Cullinan mine ended up merging together controlling 90% of the worlds diamond supply.

Oppenheimer dreams were grander than Rhodes’ ‘diamond syndicate’. His vision was put around under the idea that in order to increase the price of diamonds, he had to make diamonds a scarce resource. Oppenheimer also understood that it was an unachievable goal to own every single diamond mine so instead, he created the Central Selling Organization (CSO) in order to have absolute control over the distribution of diamonds. The objective was to limit the quantity of diamond in the market based on the demand and sell through one single channel, so prices could be stable and maintained. The CSO would only sell diamonds ten times a year to selected companies, defined as sight holders at a fixed price. The selected sight holders did not have the option to choose the diamonds they wanted to buy nor the price, meaning that De Beers had all the bargain power and control over the prices functioning under a cartel-like strategy.

Everything was going well until the Great Depression hit with the stock market crash on 1929. De Beers were just about to face their first big challenge. The demand for diamonds dropped drastically and made De Beers re-evaluate their strategy focusing on the importance of generating demand for the end products. Eager to turn sales around, Oppenheimer went to New York to hire a marketing firm to increase the demand of diamonds in America. What this marketing strategy did has affected our behaviour on buying diamonds ever since. By studying the consumers psyche, N.W. Ayer created the diamond as a symbol of love that became essential to the engagement process. They created the term ‘a diamond is forever’ and lead to an increase of the selling of diamonds in the Us by a 55%.

The unique thing about this campaign was that even though De Beers didn’t sell directly to end consumers, it marketed directly to them. De Beers was one of the first companies to skip the value chain and generate demand down the line.

Thanks to this great marketing strategy, De Beers became non-competitive to other luxury companies.

Concerning De Beers Value Chain, their primary activities were supported as follows:

• Inbound Logistics. With De Beers controlling 80% of the diamond supply, they could easily regulate the market demand and supply by what it is stated in the Case, stockpiling the diamonds. The main reason for this is that they would limit the quantity of diamonds in order to avoid a decrease on prices and lose control over demand and prevent losing their bargaining power.  
• Operations. De Beers operated in a very peculiar way. By the creation of the CSO, De Beers would exclusively sell diamonds ten times a year to a very selected group of companies (sight holders) for a fixed price in order for De Beers to be on top of the negotiation, maintain and gather their bargain power of the rough diamond miners and control the prices.
• Outbound Logistics. With the consolidated strategy of controlling almost the diamonds’ world production and distribution, De Beers succeeded by monopolizing the market and having nearly full control on the world’s diamond market.
• Marketing & Sales. Certainly, the Great Depression brought De Beers a great opportunity on growing as a company and this enhanced De Beers to invest very hard on Marketing by hiring N.W. Ayer. This alliance meant for De Beers the creation of a whole and unique new concept on why to buy diamonds and keep for them for a life time. The creation of the ‘a diamond is forever’ campaign made customer realize how much value diamonds would have for them as they represented eternal romance and the purest symbol of love. De Beers managed to increased sales in the US by 55% and in Japan, by 1981, 60% of all brides got a diamond ring for their engagement.
• Services. Thanks to the great marketing campaign that De Bees created, it did not only boost sales, but it also changed customers’ minds when buying a diamond. They made customers not have a single thought on reselling the diamond, as each diamond had a very strong emotional value that represented life lasting love.

De Beers supported activity are stated as follows:

• Firm Infrastructure. De Beers counted with and maintained a very rigid control of their business model. They forced their relationships with other businesses (see the case of the sight holders) in order to maintain their power. They have and exploit diamond mines worldwide (80% of control of production and supply) and created the CSO.
• Human Resources Management. As we lack information about the internal structure of the company, it is therefore essential to highlight the fact that De Beers dealt with issues concerning human rights with the way they treated their mining employees. We could also mention the fact that De Beers had very limited presence in the US due to the US regulations and laws and the several controversies that followed De Beers in the late 1900’s.
• Technology Development. Even though De Beers were pioneers on exploiting diamond mines, technological advancements were making it easier for other mining companies to find new locations of diamonds and extract more cheaply. The result meant a bigger competition for De Beers and an increase of diamond supply, which directly affected De Beers productivity.
• Procurement. As De Beers were controlling most of the diamond supply and production, purchasing was not an issue for them as they had fully control on the market. They practiced a very aggressive activity of creating new inventory and distributed their diamonds through a single channel that they created and controlled, handling very exclusive agreements with their sight holders’ partners.

De Beers did not have such big amounts of influencers during their peak period. In fact, De Beers influenced the market and the demand of diamonds by controlling the supply depending on sales and customers’ demand. However, the rose of new small mines supposed for De Beers a new way of competition and later on the ‘diamond war’ on who would have the largest share of the market.

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