International Strategic Management - DeBeers - Assignment Example

International Strategic Management Table of Contents Answer 3 2. Answer2 4 3. Answer 3 5 4. Answer 4 6 5. Answer 5 7 1.PESTEL Analysis of DeBeers 7 6. Answer 6 9 1.2.FiMO Analysis 9 7. Answer 7 11 1.3.Competitive advantage: Value chain 11 8. Answer 8 13 9. Answer 9 14 1.4.SWOT ANALYSIS 14 10. Answer 10 15 1.5.Strategic Options 15 Reference List 17 1. Answer 1 DeBeers is one of the worlds leading diamond manufacturing company with their headquarters set up in Luxemburg. The company is seen to be active in diamond mining, exploration, retail and industrial diamond manufacturing (Bergenstock and Maskulka, 2001). DeBeers vision is to achieve excellence in the diamond industry. It aims to deliver consumers high quality products based on a system of high values, trust and passion. The company aims to consistently improve their diamond pipeline so that their leadership position can be maintained. Up until the late 1990’s, DeBeers continued enjoying their position as a monopoly power in te diamond industry. Later on the company was involved in a number of controversies relating to prices, antitrust behaviours and industrial diamonds. . All such issues had weakened DeBeers sales and market position. A major dilemma the company faced was in respect of the uprising threat of synthetic diamonds. To counter the issues, DeBeers altered many of their core operational strategies and tactics. Brand orientation and to become demand oriented were the new escape routes for the company. The company decided to forego their interests as remaining top sellers in the diamond industry and focus more upon earning higher profits. DeBeers began to sell diamonds from its own operations and build stronger relations with their suppliers. DeBeers realised that one of the important set backs the company faced was in respect of lack of branding. The company formulated strategies whereby it aimed to place its products as luxury items. The brand positioning attempts were accompanied with efforts to widen customer base through intensified promotions and advertisements. The company also entered into joint ventures with the governments of Botswana and Namibia to develop new diamond trading companies. Additionally to mange the threats arising out of synthetic diamonds, DeBeers formulated a number of defensive strategies. Such strategies included labelling of synthetic diamonds as “lab-created”. Many suppliers and manufacturers supported DeBeers in its attempt to distinguish natural from synthetic diamonds. DeBeers also undertook impactful consumer education programs (Excerpt from case study). 2. Answer2 DeBeers being the largest diamond producer had its objective to explore the diamond mines of South Africa. Since diamond being a rare resource of South Africa, the prices for this were quite fluctuating. Hence, DeBeers formed a Cartel in order to have control over the international diamond prices (Harris and Cai, 2002). A cartel is basically an agreement among the producers to maintain the price of such rare resource at a lower level. The company used to extract the diamond and market it in London’s diamond trading company and thus maintained its monopoly as the world’s best diamond industry. It used various strategies to attract the target customers and organized various campaigns for them. Although it suffered a huge debt in the year 2009, DeBeers was smarter enough to regain its position in the Diamond Market. It has also faced huge competition against synthetic diamond industries but maintained its brand loyalty by providing its customers with pure and genuine resources. DeBeers’s strategies were realistic and measurable as it was successful in producing 45% of the total production of rough diamonds in the world and sold around 80% of it during 1990s’ (case, p.2). The policies applied by DeBeers have proved the company’s efficiency in capturing the global market and the attention of the target customers. 3. Answer 3 DeBeers being the largest diamond producing company of South Africa had a purpose to expand its business and enjoy monopoly power capturing the entire market selling genuine diamonds. In order to earn a larger share of profits, DeBeers undertook a demand driven strategy of selling out its diamonds on demand instead of purchasing these from the open market (case, p. 6). It also undertook demand centred strategy that deals in maintaining good relationship with the suppliers. The new program that was implemented was that of the supplier of choice in order to make the company valuable to the suppliers. DeBeers undertook various strategies to create its brand loyalty. DeBeers adopted strategies for its brand positioning by attracting various types of customers for its brand of diamonds. The company also signed various contracts with Botswana and Namibian Government in order to further expand its business (case, p.11). DeBeers undertook a constant attempt in order to protect the market for natural diamonds as there emerged another competitor comprising the market for artificial diamonds (Lane Voss, 1998). It provided its customers with free of cost gems lab that offered the customers to distinguish between pure diamonds and artificial diamonds (case, p. 12). DeBeers also launched a few programs that indicated how the industry for natural diamonds was helpful for the mining communities by providing them with employment opportunities, education to their children of these mining communities and providing them with anti-HIV drugs for its foreign workers. The company acted very wisely in overcoming the threats and setting up the market for natural diamonds by drawing a huge customer base, despite facing a huge competition with that of the market for synthetic diamonds (De Waal, et al, 2014). 4. Answer 4 The analysis proves that despite suffering a huge financial crisis during the year 2009, DeBeers performed exceptionally well during the next financial year 2010 (O’Regan and Globadian, 2010). Demand for rough diamonds rose as the company was successful in reducing the cost of this rare metal and the company’s good financial results proved to be beneficial for the stakeholders. The company could manage its sustainability by serving its customers as well as stakeholders at such lower costs. The employees of DeBeers were efficient enough to manage the risks of sustainability (O’Regan and Globadian, 2010). The main objective of the company was to concentrate on the long term interests of its stakeholders. The citizens of major diamond producing countries were considered as stakeholders of DeBeers and hence the company tried to keep up to the expectations of the stakeholders by carrying out joint ventures with Government of those countries. For example, the company merged with Botswana Government and contributed to around 30% of Botswana’s GDP and generated Botswana government’s yearly revenue (Grant and Taylor, 2004). The company’s critical success factors are its efficient work force, strong customer base, brand loyalty, powerful strategies and Cartel formation with other diamond producers that helped the company to maintain its reputation (Ma, 2000). With the company’s highly efficient work force it is expected to produce the best quality diamonds at a cheaper rate for its target customers. Since it produces diamonds at an affordable rate, it is expected that the demand for diamonds would grow in future and through cartel formation it can earn higher profits. The company DeBeers has its own group of well-trained customers who are efficient enough in managing their customer base. The company was well known for producing the purest diamonds in South Africa. It focuses on the demands of its target customers who wish to purchase pure quality diamonds at a very high price. It arranges customer orientation programs for advertising their brand to the target customers (Ma, 2000). 5. Answer 5 1.1. PESTEL Analysis of DeBeers Political Amendment of diamond laws by South African led to the establishment of new industries for cutting and polishing. According to the US Sherman Antitrust law, DeBeers was prohibited from functioning in the US diamond Market. There were further conflicts in other diamond producing countries like Sierra Leone, Liberia, Congo and Angola where DeBeers has to face legal battles (case, p. 7). Economic Factors DeBeers was successful as world’s largest production of natural diamonds and enjoyed the monopoly power in controlling the prices of these rare resources as per the customer’s requirements (case, p. 6). Social Factors A number of non-wedding social campaigns were organized for both men and women in order to increase the company’s customer base. Women are encouraged to purchase diamond ring as an expression of personal style, whereas, men are encouraged to purchase diamond ring for their lovers (case, p. 10). Technical Factors The company faced a huge competition in the market for diamond production as the other competitors producing synthetic diamonds tried to grab the customer base. Although, by facing a lot of competition the company could maintain its brand loyalty by producing pure diamonds (case, p. 11). Environmental Factors Due to establishment of Diamond Trading Company at Botswana, there was a gradual shift of industries from mining and sorting to sales and marketing which created job opportunities for local communities as well as provided education to the children of these workers (Passas and Jones, 2006). Legal Cases where filed against DeBeers in the Federal Courts of the United States as the company unlawfully enjoyed monopoly power over the supply of diamonds and applied price fixing strategies in order to earn larger profits (Ariovich, 1985). They also applied illegal advertising policies for their products (case, p. 8). 6. Answer 6 1.2. FiMO Analysis Finance Although it was seen from the study that DeBeers was running at a loss but its financial statement did not reflect any such decrease in inventory. There was a reduction in the company’s sales figures. Surprisingly, it was seen that there was an increase in total sales figures over the year, though there was a decrease in sales in some of the years. In order to regain its position in the financial market, the company was needed to hire more employees and increase the salaries of the employees so that they perform well. In the year 2009, sales figures of DeBeers was quite low but in the later phase it regained its financial status which was a result of the strategic change of the company (Ariovich, 1985). Marketing DeBeers was smart enough to use various strategic moves in order to maintain its position in the market. It organized various campaigns in order to promote its production of natural diamonds and one such campaign was “Celebrating Her’ which was mainly for the male customers to attract them for purchasing diamond for their loved ones. For a longer period of time DeBeers enjoyed monopoly power over the global diamond industry by producing innovative designs and attracting a huge customer base (case, p. 10). Their aim was to focus on those customers who were willing to pay a very high price for their products. DeBeers was successful in positioning itself worldwide despite facing the threats from its competitors (Zhou, Wang and Yin, 2014). Operations Through Cartel formation, DeBeers gained competitive advantage that greatly affected its operational motives. Since it had a strong hold on the diamond market, initially by vertically integrating their supply chain DeBeers continued to make profits both at wholesaler as well as retailer level. It suffered from legal troubles due to its involvement in stockpiling diamonds. Though there was a possibility that DeBeers would suffer from a huge loss, they could overcome the situation through their vertical monopoly power (Kritchanchai and Somboonwiwat, 2011). 7. Answer 7 1.3. Competitive advantage: Value chain (Source: Case, p. 2-16) Primary activities Inbound logistics DeBeers depends upon the strong relations established with suppliers and joint ventures with the governments of diverse nations such as Botswana and Namibia to procure diamonds. Operations DeBeers depends on their self owned operational systems and avoids purchasing diamonds from the open market. Operations are effectively carried out when suppliers are wholly or partly owned by the company. Outbound logistics The company sells it products worldwide and therefore has established strong commercial agreements with distributors and marketing institutions across the globe. The outbound logistics are maintained through setting up of strategic business hubs at different locations. It has also established strategic contracts with leading jewellers across the globe for selling their products, apart from establishing their own retail chains. Marketing and sales DeBeers gives much importance to brand image and positioning. Accordingly it actively participates in promotional activities and generating consumer awareness regarding their products. Services After sale polishing services, immediate grievance handling of clients and consumers and jewellery designing are some of the services provided by the company apart form direct retailing and selling. DeBeers value chain has been developed in a manner such that it provides adequate competitive advantages. The company ensures that products are procured from suppliers and manufacturers on a timely basis so that consumers and clients are provided with merchandise within lead time. Support received from the company’s dedicated team of employees and vendors facilitate in meeting the objectives of the firm. DeBeers also ensures that diamonds are cut, polished and designed efficiently alongside of ensuring that value and quality of the diamonds (Kritchanchai and Somboonwiwat, 2011). The company has established a number of strategic sub units across different markets of operations to better meet the needs of the consumers and to facilitate effective marketing and sales related efforts. In order to provide high quality products and to manage the supply chain effectively, the company relies upon their state of the art technology. DeBeers invests heavily upon the procurement of advances technologies which facilitate diamond mining and cutting in a cost effective manner. Additionally the company tries to achieve differentiation through integrated promotional activities. Since DeBeers gives much importance to their brand image and positioning, it indulges in integrating marketing communications processes which involve providing consumer awareness and publicize their value for money products and services (De Waal, et al., 2014). 8. Answer 8 DeBeers adopted unique strategies in order to remain powerful in the market. Being the largest diamond producer, they enjoyed monopoly power which was later on changed from horizontal monopoly to its vertical form in order to select suppliers of their choice. Its human resource wing was gradually improving itself by raising the salaries of past employees and hiring new employees in order to create better employment opportunities. The threat of newly emerging competitors provoked them to maintain their customer base through various marketing strategies. They organized various campaigns in order to attract the target customers and encourage them to purchase their products. The company tries to maintain its brand loyalty by providing quality products to its customers. Its new strategy excludes stock piling, and the funds that were collected through stock piling are utilized for advertising and organizing campaigns. The company’s vertical integration allowed them to grab the supply chain. The study says that even today, DeBeers are engaged in anti-Competitive practices that has some negative impacts as the prices rise. Further, it was evaluated that the mining tactics of the company polluted the environment by releasing heavy metal pollutants and other toxins (Spar, 2006). 9. Answer 9 1.4. SWOT ANALYSIS Strengths DeBeers is the largest diamond producing giant in South Africa. It enjoys monopoly power by having a huge customer base and keeping in pace with its brand loyalty. DeBeers maintains a global network through its subsidiary Diamond Trading Company which has a capability of supplying 35% to 40% of rough diamonds (case, p. 11). The company has extensive bargaining power through which it sets the price of diamonds (Bernstein, 1992). Weakness The company suffered from a huge debt which turned out to be $1.26 billion in 2011 (Bernstein, 1992). Due to these high debt obligations, it was difficult for DeBeers to pay both the principal and the interest. The company had to spare a certain portion of its cash flows as principal and interest which reduces company’s ability to reduce additional cash flows. Opportunities It is expected that the demand for diamonds is expected to increase in developing countries like China and India, hence it is expected that DeBeers would have a great opportunity for its diamond business to expand. With its innovative production and strong customer base, it has high opportunity throughout the global market. The brand is currently available in 348 stores and it is further expected to increase over developing countries like China, Hong Kong and Japan (Le Billon, 2006). Threats Despite meeting customer demand for genuine diamonds, new competitors are emerging in the market that are producing synthetic diamonds and trying to grab the market with their innovative production. The world’s third largest diamond producer Angola gave a huge competition to DeBeers and the company had to suffer huge financial loss (case, p. 7). 10. Answer 10 1.5. Strategic Options In order to increase the company’s business, DeBeers carried out various strategic moves for further growth of the company. It maximized the price received from rough diamonds which increased by an average of 27% in 2010 compared to that of 2009 (Claasen and Roloff, 2012). The company had the monopoly to control the price of this rare metal according to customer’s needs and demands. The company adopted the strategy to invest in those mines which generate superior returns (Le Billon, 2006). DeBeers monopolized over the diamond market and controlled the diamond prices. Its successful marketing strategy could manipulate consumer demand. It advertised its product as a symbol of love and beauty in order to invite the target customer base for purchasing quality diamonds from them. It also tried to control the international market through its monopoly power (case, p. 10). The company used various strategies in order to have its dominance over the diamond trade and one such initiative taken by the company was that formation of Cartel with other diamond producers and finally it took over the market by purchasing and stockpiling the diamonds produced by other producers. Thus, the main motive of DeBeers was capturing a larger market share and earning a higher profit (Claasen and Roloff, 2012). Reference List Ariovich, G., 1985. The economics of diamond price movements. Managerial and Decision Economics, 6(4), pp. 234-240. Bergenstock, D. J. and Maskulka, J. M., 2001. The de beers story: are diamonds forever?. Business Horizons, 44(3), pp. 37-44. Bernstein, L., 1992. Opting out of the legal system: Extralegal contractual relations in the diamond industry. The Journal of Legal Studies, pp. 115-157. Claasen, C. and Roloff, J., 2012. The link between responsibility and legitimacy: the case of De Beers in Namibia. Journal of business ethics, 107(3), pp. 379-398. De Waal, A., Orij, R., Rosman, J. and Zevenbergen, M., 2014. Applicability of the high-performance organization framework in the diamond industry value chain. Journal of Strategy and Management, 7(1), pp. 30-48. Grant, J. A. and Taylor, I., 2004. Global governance and conflict diamonds: the Kimberley Process and the quest for clean gems. The Round Table, 93(375), pp. 385-401. Harris, L. C. and Cai, K. Y., 2002. Exploring market driving: a case study of De Beers in China. Journal of market-focused management, 5(3), pp. 171-196. Kritchanchai, D. and Somboonwiwat, T., 2011. Virtual Network for Diamond Supply Chain in Thailand. Operations and Supply Chain Management: An International Journal, 4(1), 55-64. Lane Voss, B., 1998. The diamond business gets rough. Journal of Business Strategy, 19(4), pp. 36-43. Le Billon, P., 2006. Fatal transactions: Conflict diamonds and the anti terrorist consumer. Antipode, 38(4), pp. 778-801. Ma, H., 2000. Competitive advantage and firm performance. Competitiveness Review: An International Business Journal, 10(2), pp. 15-32. ORegan, N. and Ghobadian, A., 2010. Risking the ire of investors in pursuit of long-term value: An interview with Cynthia Carroll, the CEO of Anglo American plc. Journal of Strategy and Management, 3(4), pp. 393-401. Passas, N. and Jones, K., 2006. Commodities and terrorist financing: Focus on diamonds. European Journal on Criminal Policy and Research, 12(1), pp. 1-33. Spar, D L., 2006. Markets: Continuity and Change in the International Diamond Market. The Journal of Economic Perspectives, 20(3), pp. 195-208 Zhou, Q., Wang, S. and Yin, Z., 2014. On the Data Mining Technology Applied to Active Marketing Model of International Luxury Marketing Strategy in China—An Empirical Analysis. TELKOMNIKA Indonesian Journal of Electrical Engineering, 12(2), pp. 1618-1624. Read More