DE BEERS AND THE GLOBAL DIAMOND INDUSTRY

CASE STUDY ANALYSIS

Submitted by Group 2 Section B
A A AFTAB MANZOOR 1401062
BINIT KUMAR 1401068
GAURAV GULATI 1401074
KARUNAGARAN S 1401080
RITESH MODI 1401086
PRATEEK KUMAR 1401093
Introduction
De Beers Consolidated Mines (De Beers) had for a long time successfully managed the global
diamond industry for many decades, propping up prices at all stages of the value chain,
reducing price volatility and increasing consumer demand. Founded by Cecil Rhodes in 1880 on
the basis of monopoly, De Beers Mining Company was born. By 1888, De Beers controlled
around 95% of the worlds diamonds using its inventory to control the diamonds in the market.
In 1919 De Beers purchased Oppenheimers mines in return for stock in De Beers, and by
1929, Oppenheimers firm, the Anglo American Corporation, controlled De Beers. In the same
year, in response to the threat of Depression, Oppenheimer extended his activity up the value
chain by creating the Central Selling Organization (CSO), as a marketing branch of De Beers.
Soon the CSO became the only source in the world for rough diamonds, and thus was able to
regulate global supply in response to global demand. De Beers held the power to decide the
number of diamonds available to the global market at any given times and also persuaded the
worlds diamond miners to market virtually all of their diamonds through the CSO. The power
made it possible for De Beers to prevent price volatility and continually raise the price over time.
Refer appendix for charts and figures
Value chain of Diamond Industry
For the value chain flow chart, kindly refer to the appendix. There are different forces affecting
the value chain of the diamond industry. They are as follows. Firstly it is the barriers to entry
which are quite high in this case because of high cost, difficulty in acquiring a mine and lack of
skilled labor; bargaining power of the suppliers in this field happens to be high, thanks to firms
like Leviev and Tiffany who have emerged as new players in the industry; bargaining power of
the buyers remain low because of non availability of substitutes to diamonds and the lack of
enough firms to offer the same; substitute products are virtually zero for diamonds and even the
synthetic diamonds dont present a great threat; competition for De Beers though virtually
nonexistent at first has now gone up thanks to the entry of new players in the industry with
more customer friendly approaches.
Mechanisms adopted by De Beers
Monopoly, by gaining major market share was the key mechanism adopted by De Beers to
manage value chain. De Beers market share was 85% and it owned both mines and main
distribution system. De Beers purchased majority of raw diamonds from mines and sold them at
sights. These where sold only to sightholders that were decided by De Beers based on loyalty.
There were many restrictions on them as well. They also suppressed the competitors that tried
to get into the diamond industry. Market monopoly and anticompetitive tactics were the two
main mechanism used by De Beers to maintaintheir value chain.
One such tactic is the Israeli incident where the Israeli merchants tried to up the price by
holding diamond stock. De Beers fearing the competition flooded the market with diamonds,
sold 20% less diamonds to Israeli merchants and charged temporary surcharges at CSO, to
create sudden price fluctuation and make market more risky. Thus De Beers activities did not
favor everyone.
We have also included a SWOT analysis for De Beers, which is included in the appendix.
New Forces Limiting De Beers
But by the end of the twentieth century, however, a series of forces threatened De Beers role
and profitability. They included new competitors who sell in open markets rather than through
CSO; new technological advancement which meant artificial diamonds in the form of synthetic
diamonds; government policies which involved antitrust threats from US and European
governments as well as local job creations through cutting and polishing; and external
environmental factors which mainly comprised conflict diamonds aiding the revolutionary
groups as well as its considerable share of work force being affected by HIV/AIDS. De Beers
evidently is in a crisis of losing market share and it needs a complete revamp of its systems,
which means it is time for a dilemma.
New Strategy of De Beers
The new strategy involved creating a new monopoly extending from the mines to the retail level.
The focus shifted from controlling global supply to adding value through branding and
marketing.
Benefits of the new strategy for De Beers are plenty. It can extend its business by getting into a
new vertical sector. It can decrease inventory cost by reducing stockpile and the revenue
earned can be invested for marketing purposes and establishing a new retail chain. By adopting
a supplier of choice mode, it is on a path to improve its customer relations. New advertising
campaigns like Celebrate her, Will you marry me again? and so on are different from the
usual stereotypes on marriage and is more appealing for men to buy the same. Investments in
internet have also promoted the sales of diamonds and diamond jewelry.
The new strategy also ensures benefits for society. It has given guarantee that they will not sell
conflict diamonds. It has instituted policy of extending antiretroviral HIV/AIDS treatment to any
one on its work force. It has also supported black empowerment very openly. All these
measures have improved the public sentiments towards the same.
Comparisons
The diamond industry structure is unique in the opportunities it offers for collusion and price
maintenance. De Beers is famous for its monopolistic policies and the following comparison will
help justify the fact that diamond industry indeed is a unique one.
Let us draw a comparison with say, The Organization of the Petroleum Exporting Countries
(OPEC. The aim of OPEC is to coordinate and develop a common policy with regard to oil
production among members of the organization, maintaining stable oil prices, providing a stable
supply of oil to consumers, and benefit from the investments in the oil industry (OPEC).
OPEC members control about 2/3 of world oil reserves. Their share in the world oil makes 40%,
or nearly the half of the world oil exports. Though their market effect is significant, they have
their limitations. In short it is an influential oil cartel but not a monopoly.

Lessons to be learned
When a company is monopolistic in approach it ensures that the concerned product has no
substitutes and the market access is limited. The company has complete control over the prices.
It controls the raw materials supply and it excludes new producers. But mostly such a company
will always under estimate the emergence of new entrants in the market and may not be up for
them when they deliver the goods better. Also the Government policies will not always be
favorable.

Conclusion
On a note of conclusion, it is indeed better that De Beers is thinking out of the box and moving
away from its conventional style of monopoly. But it can do well with more CSR activities like
poverty removal, gender equality etc; by more customer friendly approaches and by diversifying
into different product lines.

APPENDIX