Industrial Organization Final Paper 1

De Beers Diamonds Objective: What business strategy made De Beers a dominant company in the diamond industry? I. Diamond industry This industry is normally distinguished into two categories: gem-grade diamonds (more commonly referred to as jewelry) and industrial-grade diamonds. A little over 50 percent of the amount of diamonds become gemstones for jewelry. For industrial purposes, diamonds are beneficial to use because of their hardness, thermal conductivity, and optical dispersion. Diamond Industry benefited when the campaign with the theme, A diamond is forever by De Beers was launched in the 1940s, which made diamonds strongly associated with romantic love, first in the United States and then globally. Due to this, hundreds of millions of dollars were spent in the notion that diamonds signify romance and love.
$15,639 billion
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
eB ee rs SM Al r o C (C sa at oc a) BH O P C the Pe ont r ro tra Di lle d a G em mo D nds H ia m ar ry ond s W in st o Ri n o Ti nt o D

Sales (US$)

Source: Equity Communications research

Based on the graph above, the four-firm concentration ratio for the diamond industry is 85%-meaning a very high concentration. This also means that 85% of the industry output is produced by these four largest firms. Due to the concentration ratio in the diamond industry, their demand curve becomes inelastic because of the small number of other substitutes, which differentiates diamonds.

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As the number of advertisement sales ratio becomes larger, it becomes easier to control the price. Therefore, it enables them to increase profit whenever the demand for diamonds is inelastic. II. Diamond history: How it came to be They say that the first diamonds were discovered in rivers of India and ever since their first appearance, diamonds were integrated with images of wealth and status. Unfortunately by the eighteenth century, the diamond supply in India was vastly exhausted and the diamond trade ended up shifting to Africa. During this period, London, Amsterdam, and Antwerp became influential trade and sorting centers for diamonds. There are two main figures when it comes to early rise of diamond trade: Cecil Rhodes and Ernest Oppenheimer. In 1870, tremendous amounts of diamond deposits were found in Africa. This triggered Rhodes to buy claims to mining operations that included the farm of two brothers, Diederik and Johannes de Beer, in which one of the most influential diamond firm, De Beers, is named after. In the later years, Oppenheimer bought De Beers shares whenever it became available for sale and was later announced as the chairman of De Beers. Oppenheimer contributed to much of De Beers success and continued on to dominate much of the industrial manufacturing, marketing, trading and mining of the diamond business. III. About De Beers Cecil Rhodes By the late 1800s, Rhodes had bought up all of the diamond fields as he developed a business tactic to combine all of the small shareholders of the diamond mining industry into large shareholders. Rhodes was very successful and was able to build an entire monopoly on all production as well as the distribution of South African diamonds over a span of few years. By 1888, De Beers Consolidated Mines, Ltd was established and Rhodes had the control over the supply and demand of the diamonds. Not only was Rhodes capable of setting prices, but he also had the market power over the distributions of the rough diamonds and the polished diamonds. By the time of Rhodes death in 1902, De Beers had control over 90 percent of the rough diamond industry. Ernest Oppenheimer Ernest Oppenheimer is known for his success of turning De Beers Company into an empire. Under his authority, it was almost impossible to deal diamonds without the companys association and Oppenheimer established individual contracts between the suppliers and buyers. De Beers also

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broadened their business by entering and expanding into the international market using campaigns that increased the sales of diamonds. This enabled the prices of diamonds to spike up dramatically. The Oppenheimer family was able to conquer the diamonds market in the United States. With the same business strategy and its convincing campaigns of equating diamonds to love, De Beers had great power in the diamond industry. De Beers successes in the United States lead them to be influential in other major countries where the diamonds were made a part of peoples lives. Nowadays, it is common for a man to propose to a woman with a diamond ring. De Beers was the first to associate diamonds with a romantic wedding. There was a significant decrease in the price of diamonds during the mid-1930s, but with a convincing motto that states, A diamond is forever, the prices of diamonds skyrocketed. In the mid 1950s, De Beers experienced some threat to their multi-billion dollar monopoly business as the Soviet Union found a Siberian mine. However, De Beers overcame this obstacle by simply purchasing the entire inventory from Siberia and remained to be at the top of the diamond mining industry. De Beers eventually had to change their business structure in the recent years and cooperate with other countries involved with the diamond mining industry. This is because countries such as Russia, Canada, and Australia all have their own large supply of diamonds and they refuse to stick to the one channel system that De Beers always emphasized. Other problems including flat prices of the diamonds forced De Beers to come down from the monopoly and shift towards a more oligopoly-style business structure. Anglo American, which was another diamond company that Ernest Oppenheimer created, bought the majority of the ownership of De Beers just last year, ending the 80 years monopoly streak. De Beers continues to make significant profits to their business as they shifted its company strategy to mainly focus on marketing the diamonds with the De Beers luxury brand image. They have been very successful promoting its own diamonds as well as their retail stores and possess over thirty retails stores all over the world. The company still plans to expand the number of stores as they markup increasing profits every year. IV. Business strategy and Global value chain of De Beers De Beers is the worlds largest diamond company that is active in all areas of the diamond mining and takes part in the exploration process, production process, marketing of rough diamonds, manufacturing diamonds as well as the marketing of polished diamonds. These five processes of De

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beers global value chain provide a glimpse of their successful business strategy. The mining entities of this global business, which include Canada, Botswana, Namibia, and South Africa, make up for the exploration process of the value chain. De Beers business strategy is to have mining operations in countries where the company can assist governments to achieve their aspirations while maintaining a profitable and well-rounded business. Current joint ventures with the government are located in Namibia, Botswana, and South Africa. In Namibia, Namdeb Holdings have a 50 percent shared venture with the government, which was made official in 1994. Deswana also has a 50 percent joint venture with the Government of the Republic of Botswana since 1968. As for South Africa, De Beers consolidated mines has a 74/26 partnership with Ponahalo Holdings, which was established in 1888. De Beers aims to continue its sustainable work in Africa to ensure its long-term development. Annually, De Beers has a 3 billion US dollar returns to the continent. As for the production process, De Beers owns underground and open-pit kimberlite mines and through this specialized techniques, they supply both tool and application manufacturers all of the world. De Beers also has operations of rough diamonds, and this operation is help responsible for organizing and selling rough diamonds to independent buyers whom eventually manufacture the rough stones into polished diamonds. The company has its own design and development capacity; however, the cutting, polishing and manufacturing processes are taken place all over major cities of the world. Finally, De Beers is involved in the retailing process through the De Beers Diamond Jewelers and they take pride in the high-end luxury imagine of the best quality diamonds. Value Chain Model
1. Diamond Mining 2. Mine sales 3. Dealers of Rough Gems 4. Cutting Units 5. Wholesale Dealers 6. Retail Selling to Consumers

Similar to the topic we had learned during class, De Beers differentiated its product by applying the 4Cs-- the diamonds carat, color, clarity and cut, to classify each of its good. Since De Beers had one channel system and joint ventures with different governments in Africa, it makes it difficult for other competitors to enter the industry. Due to the

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competitiveness, De Beers created a relatively high entrant barrier for new firms that are trying to involve in this industry for decades.

Enter Entrant Stay Out

Predat Accommodat e

De Beers has the dominant strategy in their advertisement. Due to the successful marketing campaign, diamonds became strongly associated with romantic love, first in the United States and then globally. They have spent over 50 million dollars annually, and created the notion that "A diamond is forever" which targeted male customers who are giving proposal for marriage. By creating this concept, they have differentiated diamond from other substitutes, such as emeralds, asscher, cushion, oval, pear, princess, and so on. Because demand become inelastic when substitute decreases, ASR=AP/PQ=Ea/Ep. As the effect by the advertisement increases as the number of Adv. sales ratio becomes large, it becomes easier to control the price. Besides, due to the dominant supply, they could control the amount of supply, which led them to setting and keeping the higher price. By these strategies De Beers have created their dominant brand image that cannot be substituted by other jewelries.

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First of all, by controlling the supply, De Beers made the diamond demand to be inelastic, which led buyers to purchase this good although it is expensive. From late 90s, when other firms started to enter the market, Diamond price started to decrease. However, De Beers, to avoid this situation, it either bought the new company or manufacturer or it differentiated product by recording a product number on each good it sells. Again this made the demand to be inelastic. Similar to the mentioned above, De Beers advertisement brought two effects. First it included how it differentiated its product by putting a product number on each good it sell, this eventually made inelastic demand, which will lead to higher profit for them. Secondly, as any advertisement by firms do, its advertisement increased the demand even more. Therefore, De Beers advertisement campaign eventually brought tremendous amount of revenue and profit every year. *This will be showed by the equation of ASR (Advertisement to Sales Ratio) According to the data from famous Jewelry site PMW, De Beers is annually spending on $5million on advertisement (advertisement cost). Its total revenue for two specific years, 2009 and 2011, was $6.8billion and $1.77billion. Applying the ASR equation for years, ASR year 2009 5million/6.8billion = 7.35 ASR year 2011- 5million/1.7billion = 0.00294 For both years, De Beers advertisement cost was relatively low compare to its total revenue or sales revenue. It shows its campaign is eventually working IV. Conclusion From the mid-1990s until last year, through its business strategy, De Beers maintained itself as a monopoly firm in the market. Using similar business strategy as what it used in Namibia, De Beers made countries which have mine in it to invest on De Beers. This eventually made De Beers competitive in the mining industry and resulted in De Beers to be a dominant firm continuously. This led De Beers to be the most dominant market power in the Diamond Industry, by having more assets than any other firms. From the managerial point of view, this business strategy of De Beers will be very profitable. However, from economical point of view, maintaining monopoly status will not efficient to both supplier and buyers. De Beers held a 80 year monopoly, but even with the shift to an oligopoly market, they were able to adapt to the changes quickly and promote diamonds through their own brand image.

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Reference

Goldschein, E. (2011, December 19). The incredible story of how de beers created and lost the most powerful monopoly ever. Business insider. Retrieved from http://www.businessinsider.com/history-of-de-beers-2011-12?op=1 Operating and Financial Review of 2011 De Beers (PDF) http://www.angloamerican.com/~/media/Files/A/Anglo-AmericanPlc/investors/reports/DeBeers_OFR_2011.pdf http://inre.jp/text/1510.html http://ameblo.jp/kirimarukun/entry-10097760586.html http://www.debeers.co.jp/about-de-beers