De Beers Case Study Debeers

De Beers Case Study

DeBeers Strategic Marketing

Is the diamond industry structure unique in the opportunity it offers for collusion and price maintenance? Compare De Beers' market leadership with that of the Organization of Petroleum Exporting Countries (OPEC). Are there other lessons that businesses can learn from De Beers?

The diamond and oil industries are not unique in creating conditions that allow for collusion and price maintenance. High tech industries including semiconductor manufacturing, peripherals and PC production, and enterprise software industries all have shown the potential to be fertile industries for collusion and price maintenance. The use of collusion and price maintenance has also been the catalyst of government investigations into chicken industry in Africa and the United States. Collusion by Tyson Foods with its own value chain to keep the prices of their chicken below a smaller rival eventually drove the smaller competitor out of business, for example. Collusion in the food industry in Africa is pervasive, driving up the food costs sadly in nations where people are starving. De Beer's successful creation and maintenance of their diamond cartel, enforced using pricing as the commercial weapon to keep it intact, resembles the cartel of Organization of OPEC Exporting Countries (OPEC). Each of these cartels' market leadership occurs despite a relatively inelastic demand curve for the commodities they specialize in. Second, both cartels are extremely protective of their specific markets, despite each defining these markets somewhat differently. De Beers sees their segment as upper income diamond purchasers, while OPEC considers North America to be their most critical market segment. Third, both cartels see nationalism as a threat to their ability to keep their control over served markets. For OPEC, greater nationalism in the form of gas and oil conservation and the growth of hybrid and electric vehicles, in addition to the recent decision to open up the offshore oil fields that border the Eastern and Western coasts of the U.S. Fourth, both of these cartels serve as the catalyst for other nations to become aggressively nationalistic in defining their own sources of supply as it relates to the limited commodities each provides. Fifth, both cartels over time are experiencing less control over the increasing chaotic buying side of their value chains. For De Beers the rise of Wal-Mart as one of the most dominant jewellery retailers globally and their proven ability to gain supplier conformance to their pricing and product standards is the most visible aspect of how chaotic and disorganized the previously orderly and controllable retail channels had been. For OPEC, the buying side of their value chain is now tested as many North Americans completely changed their oil and gas consumption as a result of fears of escalating gasoline prices. In the context of this case study however, De Beers is finding their buyers are capitalizing on the chaos going on in distribution channels and shopping for the best price, irrespective of the branding messages of the company aimed at affluent North American consumers or their attempts to create alliances in the channels. Sixth, both cartels manipulate the supply chains and resulting supply side economics of their industries, and attempt to also define the precise and best price on their industry demand curves as well. Monopolists, who run cartels, regardless of the product, attempt to control the interactions of both demand and supply to control the intersection of these curves, thereby defining optimal pricing for profits and managing their controlled value chains. De Beers and OPEC acting as monopolists have succeeded in keeping heir respective cartels functioning due to the ability to reward or punish members of the industry-wide value chain by giving them the same prices they have which is actually a form of forced collusion. Seventh and related to the previous point, monopolies often struggle with imprecise measures of demand, and equally are challenged when demand drops or rise exceptionally fast. Instead of relying on demand generation in the form of marketing however, monopolists who run cartels attempt to manipulate demand the supply curves until a new optimal price point is reached. De Beers and OPEC both owned their entire value chains as well, so defining a new artificial and often inflated optimal price point is achieved. The new price point is used as the basis of an incentive for others to cooperate with the cartels or be financially harmed by it if they don't.

In terms of the lessons learned for other companies, the first is to not rely purely on the ability to manipulate demand and supply chains in any given industry and instead focus on building a brand that attracts new customers and keeps existing ones. There is no balance in the case study to branding; it is a secondary strategy relative to keeping the cartel in place and controlling the industry's value chain. Second, companies who contemplate creating cartels need to realize that in defining their business models as monopolistic, they create the risk of disintermediation as the Internet is making it possible for smaller competitors with more efficient value chains to replace them. Owning the natural resource and controlling the perception of supply is the core strength of any cartel, yet over time this erodes as substitute products and sources are found. Examples of how cartels in semiconductors were dismantled by competitors' value chains are a case in point. In summary, companies can learn the lesson of being market-driven, not price-driven despite the potential to monopolize the availability of natural resources in their given industries.

Part II: Assume that you are the CEO of a relatively new Canadian-based, well-funded vertically integrated processor and marketer of Canadian-sourced diamonds. Using your knowledge of strategies for entering markets held by incumbent firms (Kotler, Chapter 11), briefly describe which single strategy you would choose to develop to compete against De Beers in export markets outside of Canada. You will need to justify your choice of strategy, and you can assume that your organization will remain independent and not be absorbed nor controlled by De Beers or any other global diamond competitor or trade association for the purpose of responding to this question.

Taking over the role of being the CEO of a Canadian-based diamond mining, processing and marketing firm, and the top priority would be getting to understand the specific aspects of each export market's unique needs, wants and preferences in diamonds. Visiting each of these export markets to fully comprehend the role diamonds play in the lives of the people there is critical. The specific strategy for entering markets held by incumbent firms would first focus on adaptation and customization, and second product innovation. The catalyst joining these two strategies together needs to be the development of entirely new class of diamonds through branding how exceptional the natural beauty of Canada's diamonds are due to the unique natural forces that created them. Both strategies of adaptation and customization followed by product innovation would be accomplished by creating a differentiated value chain that provided for each customer to have their diamond cut and set exactly as they wanted it. The concept of mass customization for diamonds, fulfilled to the consumer through a selective recruitment of retailers would be use globally. Customizing both the diamond cut and the setting would intentionally create very high customer expectations, and the value chain, synchronized from the mining and processing through distribution, would be constructed to meet and exceed those expectations. The concept of a Canadian diamond being a one-of-kind purchasing experience for the consumer, complete with the cut, clarity, strength and mounting defined, would be exceptional by diamond industry standards of today. Only the wealthiest diamond customers globally can afford this level of adaptation and customization to their unique tastes and preferences. In visiting each of the export markets outside Canada, I would look for innovations that could be made in value chain relationships to support this strategic direction of the company. Specifically focusing on inbound logistics of diamond within Canada, through the supply chain to each export market, to outbound logistics, all areas of the supply chain would be thoroughly evaluated for greater efficiency. With the goal of making adaptation and customization affordable for more consumers in each export market than had ever been the case in the past, I would look to turn the innovation of processes into a competitive advantage. Many companies speak of innovation from the product perspective, yet in this business, process innovation would need to be a constant in order to gain significant sales in each expert country. The reason to compete on processes over price is that the value chains in these export nations may have for decades been ignored from what diamond miners and producers need in the way of channel support and assistance. The critical requirement of expanding into export markets with an adaptation and customization strategy is to open up the opportunity for channel partners in each of these markets to also become more profitable than they may have had the opportunity to in the past. In other words, innovation through process needs to be the catalyst for adding greater profitability to channel partners first, and the entire value chain as well. This can only be accomplished by first focusing on the entire value chains' unmet needs, and given the monopolistic approaches of De Beers in this industry, channel partners and retailers will have many unmet process needs that once served could turn into a significant competitive advantage. The initial visits to each export market would need to be on a regular basis to build trust with each member of the value chain and also stabilize distribution channels first, and second, looking for innovative and creative ways to make adaptation and customization strategies successful in each market. Only by working to create these unique competitive advantages and most importantly, building trust throughout the entire value chain can a new market entrant be financially viable against cartels like De Beers in the long run.

Question 2 - Operations Management Questions for creating De Beers as a New Brand

Part I Process Map: Using the information in the case study draw a process map of the process that would be needed to put this "fair trade" operation in place, starting at the mine and ending in the jewelry store. Note any assumptions you have made.

Based on the case's contents, the following figure has been derived. It captures the processes that need to be audited on a regular basis to ensure fair trade ethics are adhered to. To ensure there is a corporate-wide level of support for fair trade practices, the office of the Chief Governance Officer (CGO) needs to be created that has oversight of operations and supply chain processes to the location level.

The office of the Chief Governance Officer will be staffed with auditors who will work with De Beers Information Technologies (it) and Business Process Management (BPM) analysts, managers and directors to ensure that all processes pertaining to sourcing, procurement, manufacturing, logistics and the coordinate with Sightholders will be done in accordance with internal standards for fair trade compliance. Further, the office of the CGO needs to also have a strategic plan specifically defined for Governance, Risk and Compliance (GRC) across all suppliers, procurement specialists, new supplier development and strategic sourcing departments of De Beers. With the strategic objective of being the most transparent diamond mining, manufacturing and sourcing company in the world, De Beers will quantify the extent of their levels of adherence to internal standards of ethical conduct and process performance every ninety days in a scorecard accessible to anyone over the Internet. The scorecards published to the Internet would also provide the percentage of raw materials from free trade zones including the source of mining as well. As De Beers provides this information in the financial analyst briefings and for the analyst community, publishing it in the form of a scorecard would be useful for evaluating progress. In addition to the scorecard and quarterly reporting, De Beer's CGO performance would be audited by a third party accounting and auditing firm every year, possibly relying on Accenture or Deloitte to complete the audit.

Second, the CGO needs to have oversight rights to immediately stop any process, sourcing or procurement activity that is in violated of fair trade best practices as defined by De Beers. Oversight is critical for the CGO to be able to successfully manage compliance to the specific goals of ensuring fair trade occurs throughout every process in the supply chain over time. In addition, the CGO will also have a department that focuses entirely on ethics and arbitration with suppliers, procurement and strategic sourcing teams as well. There needs to be a grievance procedure in place so that each member of the process has the opportunity to dispute a claim of not adhering to fair trade practices in additioo0n to all these points, the CGO will have the option of immediately dismissing any supplier, subcontractor or department that does not adhere to these requirements. Immediate termination of suppliers, strategic sourcing partners and any employee who looks to gain personally from not adhering to free trade requirements of the company needs to be vigorously supported.

All of these programs under the GCO need to be stringently applied to the company if the culture of De Beers is to change and embrace the new set of moral and ethical norms necessary for them to become more ethically sound in their practices. The CEO and Board of Directors need to also sign the scorecards every quarter and commit to continually enhance and improve their levels of compliance overall. The cultural shift that has to happen in De Beers will only be possible if audits are periodic, thorough, and accomplished at each step of the process in addition to each physical location. Only then will the culture of the company change to embrace a new standard of ethical and moral performance based on fair trade.

Part II Fair Trade

Part 2: Compare the current De Beers' operations set up with the "fair trade" alternative using the five basic performance objectives: quality; speed; dependability; flexibility; and cost.

The current De Beers operations are deficient in many of the areas of fair trade, having defined their business model as a cartel. The five aspects of quality, speed, dependability, flexibility and cost however are critical for any business to have in order to survive. This section analyzes these five attributes.

First, in terms of quality, De Beers had defined a segmented product strategy based on this attribute, and in fact defined their mining operations by the quality of diamond being mined. This was done purely for the purpose of differentiating on price and attempting to control both the demand and supply curves of the diamonds themselves. While transitioning to a fair trade scenario will give De Beers less selection of mines, the ability to exert greater market leverage based on the value of their brand will begin to eventually become the new competitive advantage the company uses. Ensuring ethical and moral compliance will limit the suppliers De Beers can work with, yet will create more a more valuable brand in the long run. It is critical that De Beers accomplish the goal of becoming more transparent and therefore strengthening their brand and making it worthy of being trusted. So while the number of suppliers will diminish, the respect and reputation of the brand will increase, alleviating the need to use pricing as a competitive weapon and only determinant of market positioning.

Second, De Beers in the past had not major impetus for improving their internal processes and becoming more efficient. As a result, speed or the lack of it was dictated by the need for controlling supply and also managing pricing. As the value chain De Beers relied on became less of a competitive advantage and competing value chains emerged, the company had to increase its level of alacrity or speed. This, in conjunction with the need of resurrecting its brand by making it more transparent also forced a higher level of speed into the company's culture. Speed as it relates to fair trade compliance is a by-product of speed to attempt to continually control their own value chain despite competitive value chains gaining significant in-roads into their most coveted market, North America.