{"id":3100,"date":"2015-12-08T15:56:01","date_gmt":"2015-12-08T20:56:01","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/from-rock-to-ring-how-de-beers-diamond-cartel-adapted-to-remain-leader\/"},"modified":"2015-12-08T15:56:01","modified_gmt":"2015-12-08T20:56:01","slug":"from-rock-to-ring-de-beers-diamond-cartel-shifts-from-managing-supply-to-driving-demand","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/from-rock-to-ring-de-beers-diamond-cartel-shifts-from-managing-supply-to-driving-demand\/","title":{"rendered":"From Rock to Ring \u2013 De Beers\u2019 Diamond Cartel Shifts from Managing Supply to Driving Demand"},"content":{"rendered":"

Business model \u2013<\/strong> mining, polishing and selling diamonds as luxury products<\/em><\/p>\n

De Beers is the largest subsidiary by assets and second largest profit center of Anglo American, headquartered in London and listed on the London stock exchange [1]. The De Beers mining consortium extracts, polishes and sells diamonds and other precious stones to major gemstone traders and jewelry houses worldwide. Its profit streams include margins generated above and beyond mining operating costs and sales of rough gemstones to traders (upstream), as well as markups generated in direct-to-consumer sales of finished jewelry (downstream).<\/p>\n

\"Diamond<\/p>\n

The business model resides on the premise that diamonds, despite little intrinsic value, are desirable due to their scarcity. This model, in effect since the last 19th century, had benefited from De Beers acting as the de facto supplier of diamonds on the global market. By the 1990s, however, De Beers only controlled about 50% of the global supply of diamonds [2], following the exploitation of kimberlite (or diamond ore) mines outside of Africa. This led to the company needing to adapt its operating model in order to remain a market leader on the global stage.<\/p>\n

Operating model \u2013 <\/strong> shift from \u2018managing supply\u2019 to \u2018driving demand\u2019<\/em><\/p>\n

In summary, by the 1990s De Beers\u2019 traditional operating model no longer effectively supported its business model, due to the loss of its global monopoly status in the diamonds industry. The company made changes to its operational strategy to protect market share and increase brand image.<\/p>\n

Pre-1990s \u2013 <\/em> De Beers\u2019 operations prior to the 1990s could be summarized as \u201cthe De Beers way or the highway\u201d. In effect, the company\u2019s marketing arm (or \u201cCentral Selling Office\u201d) handpicked customers (or \u201csightholders\u201d [3]) to bid for its chosen level of supply of diamonds at non-negotiable prices. If needed, De Beers would stockpile gemstones in its coffers to maintain high prices. Interestingly, supply levels were informed by internal research on the number of marriages worldwide [2]. Such monopolistic behavior was partially enabled by high barriers to entry, given the large capital investments involved in ore mining. This operational strategy was accompanied a long-standing marketing campaign entitled \u201ca diamond is forever\u201d, effectively pushing the \u201cDe Beers\u201d as brand ambassador for diamonds. Margin captured by De Beers resided primarily in the upstream portion of the value chain (near rough gemstone extraction).<\/p>\n

1990s \u2013<\/em> Two major disruptions called for a shift in De Beers\u2019 operating model. First, following the rise of several upstream competitors, including Alrosa, BHP Billiton and Rio Tinto, De Beers no longer controlled the lion\u2019s share of market supply [4]. Stockpiling diamonds (analogous to the Kingdom of Saudi Arabia\u2019s Aramco stockpiling barrels of oil) no longer served its purpose as well, given competitors could balance the demand at market prices. This led to declining revenues and profits, and eventually dwindling cash reserves [5]. Second, consumers increasingly associated De Beers diamonds with armed conflict and child labor, leading the long-marketed \u201cemblem of love\u201d to become \u201cblood diamond\u201d.<\/p>\n

Its new operational strategy, instigated and implemented by its then-Director Gareth Penny [5], consisted of fixing its brand image, sharing the profit pie upstream, and driving retail to stimulate demand. First, De Beers ratified the \u201cKimberly Process Certification Scheme\u201d, which aimed to guarantee legal funding and working conditions used in diamond mining. This spearheaded an industry changeover that eventually spanned 75 countries and 99.8% of global rough diamond production [6], helping to increase brand equity for De Beers. Second, it adapted its upstream supply chain by splitting distribution with local mining country governments, and diminishing its reliance on stockpiling (effectively benefiting other players in the supply chain) [3]. It also relentlessly pursued cost efficiency in all operations, given increasing competitive price pressure [5]. Third, De Beers formed retail JVs with luxury brands, such as LVMH, in order to stimulate overall demand for gemstones and decrease its reliance on its own brand (first stage). That way, De Beers effectively compensated its declining margin levels upstream of the value chain by complementing it with margin downstream (near jewelry points of sale). Its brand name today benefits from more positive awareness, as evidenced by the recent marketing efforts of its internal \u201cDeBeers Diamond Jeweler\u201d line.<\/p>\n

https:\/\/www.youtube.com\/watch?v=cwL1bqKcm7E#action=share<\/a><\/p>\n

Post-1990s \u2013<\/em> De Beers\u2019 operating model effectively evolved from supply chain control to vertical integration. Financial performance in the 2000s was strong as a result, with sales turnover growing at 4% CAGR from 2001 to 2011 [7]. To this day, the company (and other subsidiaries of Anglo American) face pressure to change business practices (e.g., selection process for \u201csightholders\u201d, compliance with \u201cBlack empowerment\u201d in South Africa). However, is has successfully (re-)positioned operations to continue to play an important role on the global diamond stage.<\/p>\n

 <\/p>\n

Sources:<\/p>\n

[1] Anglo American 2014 Annual Report, http:\/\/www.angloamerican.com\/~\/media\/Files\/A\/Anglo-American-PLC-V2\/report-builder-2014\/annual-report\/aa-ar14-interactive-final.pdf<\/a><\/p>\n

[2] SlideShare presentations, \u201cDe Beers Strategy\u201d, http:\/\/www.slideshare.net\/ravindra.choudhary10\/de-beers-strategy-over-the-years<\/a><\/p>\n

[3] De Beers company website, www.debeersgroup.com\/globalsightholdersales\/en\/index.html<\/a><\/p>\n

[4] Bain & Company industry report, http:\/\/www.bain.com\/Images\/PR_BAIN_REPORT_The_global_diamond_industry.pdf<\/a><\/p>\n

[5] Bloomberg Business article, \u201cThe Issue: De Beers’ Multifaceted Strategy Shift\u201d, http:\/\/www.bloomberg.com\/bw\/stories\/2009-01-06\/the-issue-de-beers-multifaceted-strategy-shiftbusinessweek-business-news-stock-market-and-financial-advice<\/a><\/p>\n

[6] Official Kimberley Process Website, http:\/\/www.kimberleyprocess.com\/web\/kimberley-process\/kp-basics<\/a><\/p>\n

[7] Capital IQ, De Beers company statistics<\/p>\n

[8] Pictures and video: De Beers company website and YouTube channel, Daily Mail website<\/p>\n","protected":false},"excerpt":{"rendered":"

De Beers, historical leader in the diamond global oligopoly, had to shift from managing supply to stimulating demand in order to continue to win in the last two decades.<\/p>\n","protected":false},"author":594,"featured_media":3101,"comment_status":"open","ping_status":"closed","template":"","categories":[575,445,577,576,7],"class_list":["post-3100","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-de-beers","category-diamonds","category-gemstones","category-looser","category-winner"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/the-tom-challenge-tom-winners-and-losers-assignment\/","yoast_head":"\nFrom Rock to Ring \u2013 De Beers\u2019 Diamond Cartel Shifts from Managing Supply to Driving Demand - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/from-rock-to-ring-de-beers-diamond-cartel-shifts-from-managing-supply-to-driving-demand\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"From Rock to Ring \u2013 De Beers\u2019 Diamond Cartel Shifts from Managing Supply to Driving Demand - 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