DeBeers Diamond Dilemma - Essay Example

? DeBeers’ Diamond Dilemma Executive Summary The diamond mining and processing industry is one of the biggestglobal economic pillars and forms the back bone of a majority of companies with natural diamond deposits. For a long time, DeBeers, a South African based company has controlled about 85% of the market share of diamond production globally. This gave the company monopolistic powers to control the supply, demand and the price for this precious commodity. Significant changes in the industry saw emergence of new strong firms in Canada and Europe that posed a challenge to DeBeers’ position in the market. In view of the emerging challenges, DeBeers had to g back to the drawing board and strategize how it would remain relevant in the market, having lost its monopolistic powers and its market share reduced to 60%. The image of the company had also been tainted for engaging in non-business friendly and illegal practices when it was the market leader as it tried to wade off competition. The company had to change its strategy from a ‘buyer of a last resort’ to a more demand driven strategy that bore in mind the need for a good brand image. A good analysis of this strategy indicates that the company is still going to be a relevant contributor to the industry in the foreseeable future amid the challenges it faces. TABLE OF CONTENTS Title page 1 Executive Summary 2 Introduction 4 Body Analysis of business environment 6 Analysis of the Organization’s strategy 8 Appraisal of the strategy 10 Conclusion 10 Reference list 11 Word Count 12 DeBeers’ Diamond Dilemma Introduction Natural diamonds are formed as a result of carbon atoms beneath the surface of the earth bonding in to cubic structures due to excess heat and pressure in a very hard transparent compound. With the discovery of diamond deposits in various parts of the world in the 18th and 19th century, extraction process begun leading to the establishment of the diamond industry as one of the biggest economic sectors of most countries with diamond deposits (Hesse, R. W. 2007). Diamonds are heterogeneous minerals and were initially not considered as commodities in the market like other minerals such as copper and gold. Natural diamonds have widely been used in making jewelry and other precious and coveted ornaments. One of the countries naturally endowed with diamond deposits is South Africa. Other countries with huge deposits of diamond include Angola, Botswana, Democratic republic of Congo, Russia, Australia, and Canada. Together, the seven countries account for about 96% of global production of diamond and about 88% of the value of diamonds produced. Initially the diamond producing countries would export the rough diamond to other countries for processing (Carlson, 2005). Diamond processing involves cutting and polishing the rough diamonds into precious items. India was the most dominant diamond processing country in the beginning, while the situations has now changed since most of the producing countries now have diamond processing plants locally. DeBeers, a diamond extraction company in South Africa has for a long time been the market leader in the global diamond industry, controlling about 80% of total diamond supplies and produced about 45% of global production of diamonds. As a market leader, DeBeers could control the prices of rough diamonds globally by regulating supply. In a bid to expand its market share, the company engaged in various practices that aimed at killing any competition. So9me of the company’s practices were illegal in other jurisdictions and contributed to creation of a negative image of DeBeers on the global scene. From the early 1990s to date, the position of DeBeers as the market leader has been overtaken due to various factors that led to establishment and growth of other competitors as well as the popularity of synthetic diamonds and the shifting of the diamond market to adopt the demand-supply structure as the main price determinants. The dissolution of the Soviet Union led to emergence of Russia as a major producer of diamond, giving a significant threat to DeBeers. Synthetic diamond refers to the artificial diamond produced in laboratories. The synthetic diamond took a large share of the market because it is cheap and environmentally friendly as compared to natural diamond (Webster & Read, 2000). With all these significant changes in the diamond industry on the global scene, DeBeers was faced with a diamond dilemma as well as other financial and business challenges of having to come to terms of no more being in control of the market. DeBeers faced the dilemma of whether it would start producing its own synthetic diamonds so as to fade of competition or just to stick to production of natural diamonds in the hope that synthetic diamonds would never control a huge market share. In the wave of the changing market, the company had to restructure itself and embrace emerging competition (Read,. 2005). This included changing its marketing strategies and engaging in public relation campaigns to remain significant in the industry and to promote its brand among locals and industry stakeholders such as suppliers. Analysis of Debeers’ Business Environment, Industry Survival and Success Factors From the early 1990s both the internal and external business environment for DeBeers changed significantly. The company, having controlled the largest market share of the global market of diamonds and acted as a monopoly controlling diamond prices, had to come to terms with the new developments in the industry. Internally, DeBeers was faced with challenges of having a negative image across the industry and among most consumers. The Company had just been found to have engaged in illegal business practices by the American judiciary and was banned from operating in the US. Even though DeBeers was outside the jurisdiction of the US, the court decision contributed in tainting its global image. The company had been accused of engaging in practices that were against positive competition by engaging in unacceptable business operations. In order to fight emerging competition, DeBeers could withhold its diamond supplies and buy diamonds from other producers, usually at inflated prices so as to scare away other competitors. This way, the company could maintain its position as the market leader (Wise, R. W 2005). This unaccepted business practices contribute in tainting the image of the company. The negative image of DeBeers was further put at risk with the company’s involvement in the ‘blood diamond’ trade. Blood diamond trade involved buying diamond supplies from counties that were engaged in civil wars, and whose diamond supplies was controlled by rebels. The proceedings from the sale of diamonds were used to finance the civil wars in Zaire and Sierra Leone. DeBeers had also been accused for not doing enough to support the local community who languished in poverty despite their country being the leading supplier of natural diamonds. In the early 1990s, the internal management of DeBeers was getting wary of the negativity associated with its company and had decided to engage in public relations in a bid to raise the profile of the company. This involved advertising to show the public the positive side of the company which included the many employment opportunities it had created its contribution to education and in the fight against HIV/AIDS which was very prevalent in the South African nation. Such advertising and promotions came before the release of the movie, blood diamond, which would give further details of the role that the diamond industry played in the civil wars in countries such as Sierra Leon and Zaire where there were huge numbers of casualties and displaced people as well as recruitment of childe fighters. At the same time that DeBeers was concerned with clearing its image through public relation campaigns, the external business environment was undergoing significant changes. These changes threatened the company’s position in the global diamond market. The dissolution of the Soviet Union led to emergence of Russia with the support of Leviev from Israel, as a worth competitor of DeBeers. This led to the end of business between the Soviet Union and DeBeers. The company also received a major blow when Argyle Diamond Mine, an Australian company ended its relationship with DeBeers and embarked on selling its own diamonds after experiencing success. DeBeers received its biggest threat when Canada emerged as one of the biggest producers of diamond. There were also significant shifts in the value chain of global diamonds (Yarnell, 2004). This was due to the local demand for diamond processing in most of producing countries so as to enable the countries to keep the value of the diamonds as opposed to exporting it outside. This led to growth of homegrown processing companies in Russia, Australia and Canada, giving significant challenges to DeBeers. With all these challenges, DeBeers’ market share dropped from 85% to 65% and its stockpile for diamonds had doubled from $2.5 to $5 billion. By 1998, the share price for DeBeers had fallen down by 30%. In order to survive in the industry and remain successful, DeBeers had to strategies and change its strategies in line with the industry changes. Survival and success factors depended on how the company could cope with the industry alongside its efforts to clear its image in the industry (Hesse, 2007). With the market changing to a more demand based supply, there was need for the company to build good relationships with suppliers and middlemen in the industry so as to ensure continued success. The situation of DeBeers can be explained by the theory of markets. Due to market integration that led to other firms gaining significant market shares, t6he diamond industry shifted from a monopoly to perfect competition where prices would no longer be determined by one company, but by market forces of demand and supply. The diamond industry can be said to have experienced horizontal market integration. Analysis of the Organization strategy Due to the market changes, DeBeers had to change its strategy in order to remain relevant in the industry. The company had to develop a demand driven strategy that also encompassed good brand values. This included promoting the company’s image and profile among suppliers and strengthening its marketing networks. The image of the company would be promoted through public relation campaigns while marketing networks would be strengthened by cutting down its list of sight holders and remaining with a few reputable sight holders who are more market savvy. In order to analyze if such a strategy would guarantee success to the company, it is important to examine the SWOT analysis of the company under these conditions. This would help us determine the strengths, weaknesses, opportunities and threats for DeBeers as it enters in to the unpredictable future for the first time in its history. To begin with the Strengths, DeBeers has been in the industry for a very long time. This gives it an upper hand when it comes to industry information including contacts with relevant people including suppliers and better markets. The other strength is the financial aspect. Having been in control of the industry for a very long time, DeBeers has amassed huge financial benefits as compared to its emerging competitors. This should make it easier for the company to move ahead with its strategic operations. One of the most visible weaknesses of the company is the fact that it has a negative image in the industry having had bad relationships with many of the people across the industry. In order to be successful, the company heals the wounds and clears its name among industry stakeholders. The Opportunities available to the company include the increase in demand for diamond, the significant changes in legislation in South Africa to allow for local processing, the willingness of other South African Countries such as Namibia and Botswana to work with South Africa among others (Hesse, 2007). However the company faces a couple of threats including the increase in popularity of synthetic diamond which provides consumers with a relatively cheaper and environmentally friendly alternative, and the growth of other companies in Canada and Europe as big diamond suppliers. The other threat is the fact that the company is banned from having business operations in the US. Over the recent years, the United States of America has risen to become one of the biggest markets for diamond with about 46% demand for global diamond. DeBeers is likely to lose out from this ready market. Critical Appraisal of the Strategy The business environment in the diamond industry has changed drastically for the DeBeers, which was once enjoying monopolistic powers on the global scene. This has called for a critical response from the company in order for it to remain relevant in the industry amid growing competition from both new and emerging diamond producers and synthetic diamond manufactures. The shift in value demands has also brought significant changes in the industry. This forced the company to move from a ‘buyer of last resort’ strategy to a more demand driven and brand focused strategy. The future of the company in the industry has been under great speculation amid these challenges with questions raised regarding the strategy adopted by the company. Given the unique circumstances that the company has found itself in, it is worth examining and analyzing the future prospects of the once leader of global diamond production. While looking at what the future holds for DeBeers, it is necessary to take the unique business environment of the company in to consideration as well as the analysis of the strategy adopted by the company. Conclusion With all these factors in mind, the company is likely to be successful if it mobilizes its strengths and seizes the opportunities to overcome its weaknesses and threats. So far, the company is moving in the right direction by embarking on a public relations campaign and strengthening its market networks through engaging with market savvy sight holders. References Hesse, R. W. 2007. Jewelry making through history. New York: Greenwood Publishing Group. Carlson, R. W. 2005. The Mantle and the Core. Amsterdam: Elsevier. Read, P. G. 2005. Gemology. Butterworth-Heinemann. Webster, R; Read, P. G. 2000. Gems: Their Sources, descriptions and Identification (5th Edition). Great Britain, Butterworth-Heinemann. Wise, R. W. 2005. Secrets of the Gem Trade, The Connoisseur’s Guide to Precious Gemstones. Brunswick House Press. Yarnell, A. 2004. The many facets of man-made diamonds. Chemical and Engineering News. 85 (5): 26-31. Word Count: 2009 Read More