De Beers:

Addressing the New Competitiveness Challenges

Name: KUAN-HAO CHEN(ZACH)

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 What are the characteristics of rough diamonds that support the creation of a

cartel?

De Beers has been considered synonymous with diamonds since its

establishment, and about two-thirds of the rough diamonds in the world come from

De Beers. I think there are three more obvious characteristics that led to the creation

of cartel and helped De Beers to evaluate and classify rough diamonds.

The quality of a diamond is usually judged by the cutting technology of the

diamond itself. A good cutting technique will allow the diamond to show

the best ability to reflect and return light. In order to pursue better light

reflection, experts also use different cutting machines to process diamonds.

The pros and cons of these capabilities are also one of the factors in the

judgment of diamond prices.

We usually judge the net weight of a gemstone in carats. The larger the carat

number of a complete diamond, the greater its overall value. After all,

diamonds with such a large carat number are very rare.

The purity of diamonds often varies depending on where they are mined.

The closer the diamond is formed deep underground; its impurities will be

less than the diamond found on the surface. Although the output may not be

as large as the diamonds on the surface, but in terms of price, it far exceeds

that of the diamonds on the surface. Therefore, the purity of diamonds is

also considered to be one of the important characteristics of creating cartel.

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 What factors create challenges to the cartel?

Cartel pursues diamonds of the highest grade or the best clarity, so the challenge

it faces now may be to divide diamonds with lower grades by other competitors.

Because lower grade diamonds are produced more and most customers can afford it,

other competitors also want to get a share. It may also be affected by the environment

or the economy. When the economy is down, customers' desire for luxury goods like

diamonds will decline, which will also lead to Cartel's development restrictions.

What was the traditional strategy of DeBeers?

De Beers’ traditional strategy is to purchase unprocessed diamonds from other

mining companies. Signed contracts with a number of mining companies to become

the exclusive purchaser, and then cut and polish the purchased rough diamonds, and

finally sell them to other wholesalers or jewelry manufacturers. This is why De Beers

almost monopolized the diamond market in the early days. In terms of marketing, De

Beers positions diamonds as heirlooms or gifts for special occasions. And combined

with the foundation of gift culture, inculcate consumers with the idea that gifts

between friends should spend money on luxury goods every once in a while.

Why did DeBeers lead a syndicate rather than invest in a more traditional

strategy?

In the early 1880s, Cecil Rhodes successfully merged most of the mining rights

in South Africa into the De Beers mine and established the De Beers United Mining

Company to manage all syndicates. By the late 1880s, because De Beers had

controlled nearly 100% of South Africa’s diamond production and 90% of the world’s

diamond production, they did not need to continue to follow traditional strategies. By

monopolizing the market, they can freely determine the output of diamonds and allow

the price of diamonds to rise rapidly. Cecil Rhodes also proposed a new idea to

redefine diamonds as a symbol of loyalty and romance.

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 Why have other diamond producers participated in the syndicate/cartel, as

opposed to selling their own output?

For small diamond producers, they do not have enough resources, so it is very

difficult for them to complete all the processes of mining, processing, and selling

diamonds by themselves. Therefore, I think it is a very wise decision to join syndicate

or cartel, which can not only effectively control costs but also save time on obtaining

diamond products. Also, because syndicate or cartel had been developed for some

time at that time, everyone had a certain degree of credibility in their operations. They

will implement the standardized rules and help each member to enter the market

smoothly. They can also adjust the price according to the global economy or market

conditions, so that all members can survive in the market. Therefore, it is more secure

for those small diamond producers to join syndicate or cartel.

Why did DeBeers vertically integrate into wholesale sales and not further?

Since De Beers founded De Beers Consolidated Mines and became the main

person in charge of a diamond mining company. Although De Beers controls more

than 90% of the market, De Beers is also facing vertical monopoly pressure.

Management no longer only cares about the grading of diamonds and the sales of

wholesalers; they now also care about the promotion to individual consumers.

Therefore, De Beers' strategy has changed from restricting supply to being close to

market demand. They now pay more attention to the development of retail stores and

have made many adjustments in brand promotion and marketing.

Why has the CTO (DTC) been critical for the DeBeers strategy?

In the past, De Beers controlled the entire diamond production process through

vertical integration. DTC has signed contracts with multiple mining companies to

purchase all rough diamonds and has arranged all the processing processes so that De

Beers only needs to focus on sales to wholesalers, which is also in line with DTC's

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 bundling sales strategy. This also allowed De Beers to control almost the entire

diamond market in the early days and achieved such brilliant achievements. However,

as the management gradually shifted the focus to the development of retail stores and

began to sell to individual consumers, DTC's sales strategy was also facing a situation

of adjustment.

Evaluate the new DeBeers strategy mentioned in the case. How does it address

the forces pressing DeBeers to change its traditions?

With the emergence of mines in Russia, Australia and Canada, competitors have

begun to compete with De Beers for the diamond market around the world. Although

De Beers could not continue to monopolize the diamond market, fortunately, they

realized the loss immediately and shifted their business strategy to the development of

retail stores and the strengthening of brand promotion. In addition, De Beers found

from the survey that diamonds are relatively unfavorable in terms of marketing

compared to other luxury goods. This also forces De Beers to cooperate with other

luxury goods industries and promote to meet market demands through some

cooperative innovations.

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