Abstract
The diamond industry has gained popularity as well as the industry becoming a lucrative one for the selected few. A great advantage fell on those companies that were formed at the onset of realization of the value of diamond. De Beers was one among those that were lucky to strike gold with the rich deposits in South Africa. This realization made the company to gain dominion over the market as far as the amount of diamond in the market was concerned. With respect to this, De Beers was placed in a position in the market to influence the prices to their advantage and by this manipulation gained substantial profits that kept the company as the market leader. However, the discoveries of more diamond mines in various regions including Canada, Australia, Angola, Botswana, Russia to mention just a few. This new discoveries and explorations meant that the De Beer cold no longer be able to have as much control over the market price as there before. This means that the company needs to adopt a new strategy especially with its continued fall in market share.
Global Diamond Industry and PESTEL
Global diamond industry is one among the few lucrative industries that exist today. The main contributing reasons for this trend is the fact that many players in the market, like De Beers have over time turned to manipulating the market by the amount of diamond in the market. Big multinational diamond corporations have been able to create virtual diamond scarcity that results in an increase in the commodity price. For example, it is noted in Cadieux (2009) that for sixty years or so, De Beer created virtualized diamond scarcity while it stockpiled the commodity and releasing the products in tidbits to the market that purchased the lucrative commodity at premium prices and thus De Beers made enormous profits. As expected this habit comes at a price in the future of the company as will be discussed in just a heartbeat but first an analysis of the industry using PESTEL is crucial.
Politics, money and power are three ingredients that can turn an organization into a complete success while at the same time, drive another company into oblivion. The choice all lies in the decisions that are taken and the consequences both in the short-term and in long-term. Since diamond is a lucrative business, it is anticipated that great gains in terms of taxes will come from the industry. For example, according to Porter (1990; Wu, Lin & Chen, 2009; Federico & Magdalena, 2011; Liu & Hsu, 2009; Dögl & Holtbrügge, 2010), the political atmosphere is able to substantially influence the competitiveness of a company within a nation. For example, by having authority to control investments in different countries within the European region and the US, it was possible for the company’s operations to be minimized as well as denied in certain countries.
In terms of the association of the global diamond industry and economics is concerned, there seems to be a correlation with the region’s economic positions and the import/ exports of the commodity. The European and the United States without forgetting the East Asian countries like China and Japan, provide potential markets due to the stability in their economic systems as well as the ability for individuals to purchase these pricy diamonds. However, it is less likely for most exports to be in developing or underdeveloped countries especially for those countries whose major population live below the poverty line.
Corporate social responsibilities differ from one country to the next (Habib, 2007). This means that a company’s region of operation will dictate what sociocultural aspects to consider and address as part of their corporate social responsibilities (Habib, 2007).
Cadieux (2009) note that development of new technologies that are capable of imitating diamonds and creating artificial diamonds that cannot be distinguished from the rest has brought stiff competition in the market. This is more so with the fact that these artificial diamonds can be produced with much ease and hence are lowly priced and people dash for them in place of those that are formed through acts of nature (Cadieux, 2009).
The environment is important in maintaining global balance and hence ought to be taken care of. However, over the years, with the exhaustion of diamond mines, the mine pits are often left unattended and individuals may try to venture in these mines and tryout their luck of finding diamonds. Recently in the BBC news, it was noted that a mine in South Africa had collapsed on some individuals who ventured in disserted mines and could not be rescued since the rescue operations would cause more deaths as the walls and the roofs of the mines were too unstable.
Profitability and 5 Forces
When a technologically cloned diamond is placed in the market, it brings about unfair competition to diamonds that are mined. However, it is noted that, during diamond furnishing and polishing, there are various qualities that are produced. Cadieux (2009) notes that, among the market leaders in polishing diamond is India and Australia. This means that a well polished and highly refined diamond is likely to fetch good returns due to the high price that is placed on it. There is a high possibility of profitability especially for companies that retain production and processing of naturally mined diamonds by maintaining a premium price and advertising appropriately in such a way that they play down on those that are lowly priced. With respect to the five forces, there has been substantial change in the economics of the diamond industry.
Although in some cases there have been silencing of some suppliers by De Beers in the past like in Zaire, Angola and Australia where De Beers flooded their market with their specific types of diamonds, suppliers have an enormous amount of power within them (Habib, 2007). It is noted that any time there has been discovery of diamonds in the world, De Beers has been on the frontline to cut a deal with the host country with major success in various countries like Siberia in 1957 and Russians were a major benefactor to this deal too. In case a buyer sought to purchase diamonds directly from De Beers’ suppliers, they would be frustrated by De Beers that would seek to acquire that mine and thus cut out such customers (Cadieux, 2009).
Customers too possess a substantial amount of power and can also influence the purchase of commodities and the prices therein (Habib, 2007). Over the years there has been a steady demand by customers and their relative potential to purchase diamonds that has kept the business running.
Another facet is the competitor power that can influence market price and manipulation (Habib, 2007). Cadieux (2009) notes that for sixty years, De Beers enjoyed unprecedented dominion over the market with very few rivals, that enabled the company to have a staggering 95 % market share on the global market. However the discovery of new exploration sites in different regions in the world has seen this market share depreciate sharply such that the company’s market share fell to a mere 45 % with others questioning whether this is a slow death to a once famous and immovable diamond market giant (Cadieux, 2009).
This steady decline has been experienced in De Beers has been brought about by new entrants in the market (Habib, 2007) that have changed the game by investing heavily on value creation technologies as well as employment of new technologies that make it easier to synthesize the rough diamonds at a lower cost as compared to the traditional one. It is important to note that while large Multinational Corporation follows bureaucratic procedures before implementing and investing in new technologies, smaller firms up their game in this respect to gain competitive advantage.
Last but not least are the other stakeholders like the shareholders and the mother countries where the ores are mined (Habib, 2007). This may be affected by the taxes and tariffs imposed on multinationals in certain regions as well as shareholders’ interests in prices going up for them to have better returns on their share bonuses. Whichever the cause, the economics of diamond is affected by a myriad of factors.
Traditional De Beers’ Business Strategy
De Beers’ business strategy is multifaceted in that there has been application of different approaches to achieve its targets, at whatever cost. However, there are four aspects that seem outright in the case of De Beers. To start with, De Beers had a strategy of stockpiling (Cadieux, 2009). In so doing, the company was placed in position to purchase as much diamond from its suppliers as possible especially during times of plenty at a low price. This stock would be kept till there was scarcity and then offloaded in the market at a premium and thus yield high returns. Since the company commanded over 90 % of the market share, it was able to manipulate the amount of diamond in the market for sale (Cadieux, 2009).
The second approach was one of price control. Due to the artificial scarcity that was being created by the company by purchasing from suppliers and stockpiling these products, it was able to control prices such that the scarcity hiked the prices of diamond to the level that De Beers wanted and then offloaded as much diamond at that price as possible (Cadieux, 2009). Conversely, when the market prices went higher beyond a certain point or there was total scarcity in a certain region, the company would then offload more diamond in excess such that the market was flooded with diamond and thus bringing the prices down like in the case of Zaire and Angola.
Thirdly, due to its sheer size and power, the company employed intimidation tactic such that small and medium sized companies that were venturing into the diamond market were required to purchase directly from De Beers at whatever price De Beers told them to (Cadieux, 2009). Failure by one company led to the company soliciting the other sources that such a company has as their suppliers and purchase that supply chain. In so doing, they would drive companies out of the market (Cadieux, 2009). Additionally countries that sought to purchase or sell diamond away from De Beers were met with floods of diamond of the type they intend to sell and thus crash the prices and devalue their diamond in return, a sure punishment that Zaire, Australia and Angola can attest to (Cadieux, 2009). Additionally, buyers who purchase rough diamonds from other suppliers apart from De Beers were quickly blacklisted and their other suppliers sought for processing on the way forward and thus the company had succeeded in instilling fear among suppliers as well as buyers (Cadieux, 2009).
New Business Strategy
Corporate-level strategy: - Initially, De Beers has majored on rough diamond production and selling and thus limited product line. Despite the high returns from this product line, a time has come for the management to rethink this strategy and venture into processing of diamond by polishing and creating finished products that can be sold directly to the consumers. The chance (Wu, Lin & Chen, 2009) is there to venture in this field with much ease since the resources/ raw materials are at their disposal.
International growth: - Due to its past history of intimidation and cartels (Cadieux, 2009), it is important for De Beers to heal those wounds they might have caused by having a more friendly approach to venturing in the global market. For example, application of Porter’s diamond approach would be most beneficial. In this approach, there is consideration of the chances available, the government factor and the legislations therein, factor condition like infrastructural development and skilled labor, demand conditions, firm strategy and rivals in addition to related and support industry (Porter, 1990; Wu, Lin & Chen, 2009; Federico & Magdalena, 2011).
Business level strategy: - Creation of diverse product line as well as improvement of value chain by creating products and refining the diamond such that there is production of high-value products. For example, relating this with the information technology world, Apple Inc.’s® products are highly priced, high-quality products that continue to dominate the market. Following the Porter’s diamond approach best suits the capability of the organization and provides the company with enormous opportunities that would enable the company to be in a position higher than the rest.
Conclusion
Global diamond industry is one among the few lucrative industries that exist today. Big multinational diamond corporations have been able to create virtual diamond scarcity that results in an increase in the commodity price. When a technologically cloned diamond is placed in the market, it brings about unfair competition to diamonds that are mined. Cadieux notes that, among the market leaders in polishing diamond is India and Australia. Cadieux notes that for sixty years, De Beers enjoyed unprecedented dominion over the market with very few rivals that enabled the company to have a staggering 95 % market share on the global market. De Beers had a strategy of stockpiling. Since the company commanded over 90 % of the market share, it was able to manipulate the amount of diamond in the market for sale. Due to its sheer size and power, the company employed intimidation tactic such that small and medium sized companies that were venturing into the diamond market were required to purchase directly from De Beers at whatever price De Beers told them to. In so doing, they would drive companies out of the market. Initially, De Beers has majored on rough diamond production and selling and thus limited product line. Application of Porter’s diamond approach would be most beneficial for De Beers.
References
Cadieux, D. (2009). De Beers and the global diamond industry. West Ontario: Richard Ivey School of Business.
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Federico, G. T. B., & Magdalena, M. G. T. (2011). Is porters diamond applicable to developing countries? A case study of the broiler industry in Uruguay. International Journal of Business and Social Science, 2(6), n/a. Retrieved from http://search.proquest.com/docview/904525440?accountid=45049
Habib, A. (2007). Legal environment, accounting information, auditing and information intermediaries: survey of the empirical literature. Journal of Accounting Literature, 26, 1-75. Retrieved from http://search.proquest.com/docview/216303876?accountid=45049
Liu, D., & Hsu, H. (2009). An international comparison of empirical generalized double diamond model approaches to Taiwan and Korea. Competitiveness Review, 19(3), 160-174. doi: 10.1108/10595420910962043
Porter, M.E. (1990). The competitive advantage of nations. London: The Macmillan Press Ltd.
Wu, C., Lin, C., & Chen, H. (2009). Integrated environmental assessment of the location selection with fuzzy analytical network process. Quality and Quantity, 43(3), 351-380. doi: 10.1007/s11135-007-9125-z
