DE BEERS: INTERNAL ANALYSIS

Resources Relationships with foreign governments Knowledge about the diamond industry Strong brand image

Capabilities Ability to secure access to natural resources and position in the cartel Ability to create product differentiation strategies to exploit market segments Ability to stabilize prices

Core Competencies Effective mutually beneficial relationships with foreign governments for maintaining the cartel Expertise in the diamond industry Established brand image and trust from suppliers and customers

Rich financial pool Research & Development Diamond technology (DiamondSure and DiamondView) Ability to initiate market (firstmover incentive) Ability to effectively market its product (Right hand ring campaign and A Diamond is Forever)

De Beers has been a highly successful and eective controller of the diamond market, having developed a unique purchasing and marketing cartel that has inuenced prices in the market virtually undisturbed for almost a century. De Beers was formed as a group of producers whose goal was to fix prices, control supply, and limit competition. And this is exactly what De Beers has done historically with the trade of diamonds. Researchers have found that diamonds have little intrinsic value and their price depends almost entirely on their scarcity.1 With this knowledge about the true worth of diamonds, the DeBeers Company strategically monopolized the industry and promoted rarity as justification for the gems' exorbitant prices. De Beers success owes a great deal to the effectiveness of their approach to partnership, as well as the sound management and strategic foresight of their host governments. De Beers struck deals with various dictators who had allowed them a free run in exchange for hefty profits. It was also believed that De Beers had hired mercenaries to hunt down any suspected smugglers. De Beers also used to mop up diamonds that had leaked from the system in order to prevent their proliferation in the market and threaten its monopoly.2 De Beers spent heavily on promoting diamonds to end customers through their advertising campaigns. Most of these campaigns were for the bridal category such as diamonds for engagement, wedding and anniversaries and were targeted at men who usually bought diamond rings and other jewelry for their beloved. Realizing that the non-bridal category of diamond jewelry also had an immense potential, De Beers launched an advertising campaign in May 2003 which targeted independent and influential women. The campaign was backed by extensive print, television, online and other forms of promotions.

1 2

A Diamond Is Forever, Or Is It?: www.associatedcontent.com A Cartels Response to Cheating: An Empirical Investigation of the De Beers Diamond Empire. Taylor, Larry W. Southern Economic Journal, July 1, 2006

These innovative campaigns each targeted a clearly defined target market with differentiated aspirational concepts. They were aimed at creating an altogether new category of diamond rings by altering the design characteristics. A focused differentiation strategy aimed at product extension was used in promoting each unique concept. It also brought among women the attitudinal change which the campaigns aimed to bring among women, about the way they perceive themselves and want the world to perceive them.

DE BEERS: THE STRATEGIES

Strategies that have been used
1. Strategic Alliances Controlled around 90 percent of the share in the worlds rough diamond market until the early 1990s Hired mercenaries to hunt down any suspected smugglers Reduced supply when it feared that there was relative abundance of diamonds Bought out rough stones from others and created a large stockpile 2. Relationships with Foreign Governments Forged effective mutually beneficial relationships with foreign governments 3. Distribution through Central Selling Organization (CSO) Conceived the idea of the central marketing arm called Central Selling Organization (CSO) Sent invitations and gave boxes containing diamonds to select sightholders for visiting sights every 5 weeks 4. Ingenious Marketing Campaigns Spent heavily on promoting diamonds to end customers through their advertising campaigns (focused - Dominant presence in the rough diamond segment -Security of its dominant position in the cartel

Outcome

Impact

-Prevented the proliferation in the market of whoever would threaten its monopoly -Controlled the supply side

-Holding on to its monopoly became easy

-Price of diamonds are kept high

-Access to natural resources in a secure and stable environment

-Maintain the cartel -Control the supply side

-Controlled the supply side -Enforced market discipline since clients are not allowed to sell diamonds in their uncut form

- Stabilize prices -Maintain the cartel

-Indirectly influenced the retail sales of diamonds -Influenced the market on their

-Increase in sales

differentiation strategy)

perception about diamonds being an inseparable part of courtship and marriage

5. Technology Development and Implementation Supplied its machines DiamondSure and DiamondView to the gemological labs around the world to distinguish natural diamonds from synthetic ones -Created clear product differentiation and consumer preference -Formation of brand image

Cecil Rhodes was one of the rst businessmen to rent out pumping equipment and soon realized that he had tapped a vast market potential. Strategic Alliances Rhodes reinvested the initial proceeds from equipment rental in acquiring claims. By 1880, he held a large enough share of diamond claims to justify a separate company purely concerned with managing the mines: thus DeBeers Mining Company was created. By 1887, the company was the sole owner of South African diamond mines. Concurrently, Cecil Rhodes took control of the distribution channels through The Diamond Syndicate, an alliance of merchants in Kimberly who abided to Rhodes terms of business, recognizing that their own interests and DeBeers were compatible in that both aimed for high prices and a notion of scarcity.

Relationships with Foreign Governments This model is based on the convergence of two compatible aims: First, De Beers need for long term access to natural resources in a secure and stable environment. Second, the governments need to generate reliable revenues from natural resources to invest in its people. This model is particularly important in diamond mining given the long lead times before investment in a mine returns a profit and the fact that the life of a diamond mine is typically measured in decades rather than years. By ensuring stable and hefty revenues to the national governments in the southern African countries, it ensured that its position was secure. When discoveries were made in Congo and Angola, De Beers bought out the mines and entered into an agreement with the Belgian government, to prevent their flooding into the market. According to this agreement, the entire stock of rough stones would be brought over by De Beers but Antwerp would remain the cutting center. De Beers also entered into negotiations with the Soviet government and reached an agreement which ensured that virtually all the diamonds produced there would be routed through the CSO. The production in Soviet Union represented about 2030 percent of the worlds production at that time. Forging effective mutually beneficial partnerships enabled the transformation of natural resources into shared and lasting national wealth between De Beers and the foreign government. Distribution through Central Selling Organization (CSO) Over time, new discoveries of diamond reserves in Australia, Siberia, and Western Africa became known and eroded the companys monopoly position in diamond supply. Harry Oppenheimer, the chairman of De Beers Group and leader of Anglo American, quickly realized the threat this implied and focused his eorts on maintaining power in distribution through the

Central Selling Organization (CSO), the companys marketing arm. Outside contracts were practically made impossible by an exclusivity requirement that each supplier was forced to sign with the CSO. Packages of diamonds are bought and sold at sights, held every five weeks, on a take-itor-leave-it basis. De Beers sets the price of its boxes in advance and determines the quality and quantity each sightholder receives. Price and quantity are nonnegotiable. The attempt to haggle over quantity and price of the oered package could well lead to the sightholder not being invited again. Over 80 per cent of the worlds diamonds were traded through the CSO in its early days.3 Ingenious Marketing Campaigns One of DeBeers main roles is to maintain the notion that diamonds are a scarce commodity. This they do by means of advertising and by purchasing excess supplies when that is needed to avoid price decreases: as a matter of principle, prices are never lowered by DeBeers. Diamonds are used to symbolize eternity and love, being often seen adorning engagement rings and sometimes wedding rings as well. A Diamond is Forever With their 1948 slogan, A diamond is forever, De Beers has convinced many consumers that diamonds are rare, priceless, and deep symbols of love and devotion. The goal behind the marketing campaign was to ensure that women kept their diamonds literally forever. The goal was to prevent a secondary market for diamonds by persuading women that diamonds should be untouched by another woman to really have any meaning. This allowed De Beers to maintain control of the diamond trade at wholesale level and retailers to sell diamonds at a high
3

The Issue: De Beers' Multifaceted Strategy Shift: http://www.businessweek.com

price without competition from secondary markets. They touted engagement and wedding rings, anniversary necklaces, and anything of value that a woman could want. It was this marketing campaign that made diamond wedding and engagement rings so popular, and pushed diamonds to become the number one coveted gem by women. By relying on consumers' emotions, they have reinforced the notion of eternal love by instilling the concept that diamonds have an eternal sentimental value. For women, this ad symbolized her mate's undeniable love for her. Men, on the other hand, saw this ad as a means to show their wealth on their mates' fingers. Though different in gender approach, the overall sentiment was that if the love is meant to last, then a diamond ring is a definite necessity. Right Hand Campaign In order to maintain the notion of luxury and sentimental rarity, DeBeers sought to create a new campaign that would ensure that diamonds were absolute representations of status. In 2003, they announced the "Women of the World Raise Your Right Hand" ad that targeted the evolved, affluent, fashion savvy woman who has probably been married at some point, previously received diamond jewelry, and needs no ones permission to indulge herself. Unlike the previously mentioned ad, this one does not focus on the marital unit or the need for the women to depend on the man for symbols of affection. This campaign speaks to the liberated woman who is capable of desiring and affording her own piece of status. This assertive ring also speaks to the woman who does not yet want to get married. Overall, the myth surrounding the rarity of the diamond is what has driven to unimaginable levels of success. With strategic marketing tactics, the DeBeers and Oppenheimer family have monopolized the diamond industry by selling the fantasy. Technology Development and Implementation

The increasing production of diamond synthetics prompted De Beers to make available to the trade its two state-of-the-art synthetic and simulant diamond detection devices, through a new distribution agreement with GIA Instruments U.K., a division of the Gemological Institute of America.4 At no charge, the company is supplying gem labs with sophisticated machines designed to help distinguish man-made from mined stones. DiamondSure The first device, DiamondSure, is a rapid, easy to use, screening instrument which aids in the identification of synthetics by measuring the way that light is absorbed in a diamond. The diamond under test may pass, if it is natural, or refer for further tests if the stone needs to be looked at in more detail. It refers all simulants, synthetics and around 2% of natural diamonds. The categories of natural diamonds that are referred by DiamondSure are susceptible to a colour treatment and therefore are filtered out for further examination.5 DiamondView DiamondView is a significantly more sophisticated instrument. Referred synthetics and natural diamonds may be identified using DiamondView. With limited training, a user can make a decision within a few minutes on whether a diamond is natural or synthetic by viewing an image on the screen. It generates a surface fluorescence image of the object using intense shortwave ultraviolet lamps. Typically synthetics will show distinct geometric patterns from the characteristic growth sectors.6

DTC Appoints GIA Distributor of DiamondSure and DiamondView, Professional Jeweller Magazine, Peggy Jo Donahue , April 19, 2004 5 How are synthetics detected?: http://www.debeersgroup.com 6 Ibid