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MNGT4800 Case15 Notes

by: Peyton Oglesby

MNGT4800 Case15 Notes MNGT 4800

Peyton Oglesby
GPA 3.37

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These notes cover the powerpoint and lecture presentation on case 15. This will be on exam four.
Strategic Management (Section 009)
Dr. Peter Stanwick
Class Notes
notes, MNGT4800, Case 15, De Beers
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This 10 page Class Notes was uploaded by Peyton Oglesby on Sunday March 13, 2016. The Class Notes belongs to MNGT 4800 at Auburn University taught by Dr. Peter Stanwick in Spring 2016. Since its upload, it has received 115 views. For similar materials see Strategic Management (Section 009) in Business, management at Auburn University.

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Date Created: 03/13/16
MNGT 4800 Case 15- De Beer’s Diamond Dilemma Background info  De Beer’s was founded in 1888 by Cecil Rhodes in South Africa o Largest diamond mining company in the world o Completely vertically integrated o Privately held since 2001 De Beers & The Global Diamond Value Chain  Step 1: exploration  Step 2: mining  Step 3: sorting and distribution  Step 4: cutting and polishing  Step 5: jewelry manufacturing  Step 6: retail The Diamond Industry  The Production o $62 billion in jewelry o $13 billion annually in rough stones  Cutting & Polishing o $19 billion industry o More often cutting & polishing is located closer to mining operations o Traditionally dominated by India (less than fifty percent by volume)  Trend toward industry vertical-ization  Demand o 46% of the market is US o China & India are growing rapidly Current Problems  Strategic transformation o From supply to demand orientation o From “buyer of last resort” to “seller of choice” o From public to private o From prominence on market share to focusing on profitability  Creating a distinguished diamond brand o Unique cuts, etchings, and logos o Marketing and retail strategy  How to address the synthetic diamond threat: o Chemically identical o 15-40 percent cheaper o Less flaws and more colors De Beer’s External Environment • Emergence of 3 major competitors o Increased production:  Russia  Australia  Canada • Antitrust lawsuits in the US & Europe o Accused De Beers of fixing industrial diamond prices o U.S. barred company from conducting business • Blood diamonds o Angolan rebels flood market w/diamonds to fund civil war o International anger and demand for “clean” diamonds o Development of Kimberley Process Certificate Challenges of West African Nations • West African countries such as: o Sierra Leone o Congo o Angola o The Ivory Coast have diamond deposits, which are a few feet from the surface, usually in marshy areas in river beds. • Very easy for rebel forces to swiftly seize diamond operations. The Negative Impact of Blood Diamonds • Approximately 4% of all diamonds sold in the 1980s & 1990s were considered “conflict diamonds” • Al Qaeda used the illegal diamond trade to launder millions of dollars. • Wars funded in Africa by diamonds resulted in 3.7 million deaths & 6 million displaced people. The Kimberly Process • ^^^was the response to conflict diamonds. • This process is an international certification process for diamond producing countries-- that verifies that the diamonds being sold didn’t come from the areas of conflict  • In 2006, it was projected that 99.8% of the global production of diamonds were sold via the Kimberly process. • The fundamental weakness of the process is that is doesn’t guarantee that the diamond hasn’t been smuggled from a country of conflict into a Kimberly Process certified country. • Since 2006, diamonds have been trafficked into Ghana from the Ivory Coast • The Ivory Coast has been in a civil war since 2002 o Therefore, the Ivory Coast isn’t Kimberly process certified • Ghana on the other hand is Kimberly Process certified Major Competitors in the Diamond Mining Industry  Alrosa o Controls 97% of Russia’s diamond production o Formed as a consolidation of all the major diamond operations in Russia in 1992 o Became a brand name of diamonds  Rio Tinto o One of the largest exploration & mining companies in the world. o Mine:  Aluminum  Cooper  Diamonds  Energy products  Gold  Iron ore  And other minerals. o Rio Tinto has diamond operations in:  Australia  Canada  Africa. o Has “Select Diamantaire Mark” brand diamonds.  BHP Billiton o ^ the world’s largest diversified resource based company o Established “CanadaMark” brand for diamonds from their Canadian mines o Established “Aurius” for non-Canadian diamonds  Harry Winston Diamonds o Known for their high end jewelry & timepieces o Aka the “jeweler to the stars” Single Channel Marketing • Controlling the supply of diamonds is known as “single channel marketing” & was justified by adding stability to the marketplace. • “Only by limiting the quantity of diamonds put on the market, in accordance with the demand, and by selling through one channel, can the stability of the diamond trade be maintained.” (Ernest Oppenheimer) De Beers’-Control on the Market th • For the majority of the 20 century, De Beers controlled about 90% of the diamond market • By the mid 1980’s they controlled 85% of the market • Through their monopolistic control, De Beers was able to establish the sightholders system o Sightholders System  De Beers invited 125 diamond merchants from around the world to come to London 10 times a year  During these meetings buyers would see diamonds for the first time, and they had to decide whether or not to buy them on the spot—via De Beers’ sale unit, Central Selling Org  If a sightholder turned down a purchase of their allotment of diamonds they would be removed from the invite list and a different merchant would take their place. De Beers & Marketing  Gave financial incentives to movie companies to include diamonds in scenes of movies  They were involved in the development of the song “Diamonds Are a Girl’s Best Friend” in Gentlemen Prefer Blondes  A Diamond is Forever-- campaign started in 1947 Porter’s Five Forces  Threat of New EntrantsLow to moderate o Historical monopoly o 3 new entrants in 1990s:  Russia  Canada  Australia o Significant barriers to entry  Land & mineral rights  Investment capital for mining operations o De Beers is prone to retaliate against competitive attacks o Incumbents are looking to differentiate products  Millennium diamond, Forevermark, Hearts on Fire  Build brand equity & customer loyalty  Bargaining Power of BuyersLow to moderate o 7 countries dominate the global diamond production  88% of value  96% of volume  Value & volume are not necessarily correlated o Suppliers w/ high-quality stones have greater power o Factors limiting supplier power  Backward integration  Fragmented operations o Some suppliers are forward integrating  This limits available supply  Creates new direct competitors o End consumersvery low power  Act individually  Small quantities  Infrequent purchases o Retail jewelersmoderate power  Purchase in higher quantities  Ability to backward integrate o Additional contemplations  Switching costs play a minimum role  Stone quality  Relatively low differentiation between brands  Rivalry Among Existing Competitors/Interfirm Rivalrymoderate to high o Industry was historically a monopoly o Prompt increase in new competitors in recent years  1990s entry of Canada, Australia, and Russia  Industry vertical-ization o Probable to increase in foreseeable future  Sluggish progress in developed markets  High exit barriers (specialized skills & knowledge)  Threat of Substituteslow to moderate o Synthetic diamonds… are they really a viable substitute?  Performance/quality  No structural flaws  Chemically identical to natural stones  Available in multiple colors  Same transparency & hardness  Rated according to same criteria4 Cs  Only limitation is size1 carat or smaller  Price  15-40% less than natural diamonds  Steeper discount for colored diamonds$4K vs. $100K  Indirect costs  No such thing as a synthetic “blood” diamond  More eco-friendly than mined diamonds  Bargaining Power of Suppliers Step 1-De Beer’s stakeholders  External o Customers o Governments o Sightholders o Unions o Local communities o Alliance partners  Internal o Employees o Investors Step 2-the stakeholders interest and claims  Employees o Safe working conditions o Fair wages  Investors o Investment security o Appropriate disclosure of risks and opportunities  Customers o Ethical sourcing o Assurances of quality  Sightholders o Reliable and profitable source for diamonds  African governments o Local economic benefits from the mining activities Step 3-Opportunities and threats of the stakeholders  Employees o Increased productivity, organizational loyalty, positive as preferred employer o Strikes, increased demands for benefits, wages, and better working conditions  Investors o Provide financial support for future initiatives o Withdraw or withhold funds  Customers o Brand loyalty, viral marketing o Purchase diamonds from another company, switch to synthetics  Sightholders o Work together to increase market exposure & sales o Terminate contract & go w/ another supplier  African Govts o Facilitate processes and work together for mutual gain o Expropriation, corruption, and regulatory hurdles Step 5: So, what should De Beers do  Legal o Respect laws of each country o Maintain strong governance and transparency  Economic o Make decision regarding synthetic diamonds o Seek out new natural diamond sources  Philanthropic o Look for different ways to create shared value for all stakeholders o Continue to invest in corporate social responsibility  Ethical o Foster a local economic development in Africa o Environmental sustainability in mining practices De Beers Strengths  Financially stable  100+ years of experience in the industry  Strong position in market share  De Beers’ Management  De Beers’ Image  De Beers’ social responsibility in South Africa  De Beers’ brand recognition De Beers Weaknesses  History of cartel, collusion, Apartheid, and price fixing  Difficulty in separating image from history  Management may be causing Group Think  Slow to adapt to strategic changes De Beers Opportunities  Ability to expand into other countries  Grow partnerships w/ other diamond producers  Manufacture a lower priced “brand name” that can be sold to jewelry manufacturers who work with the mass merchandisers, like Wal-Mart  Diversify into areas other than diamonds o They could follow the lead of Rio Tinto and BHP Billiton & move into other minerals and/or other natural resources De Beers Threats • Downward pressure on pricing • Government intervention (e.g., price fixing and collusion.) • Downturn in global economy • Shift in consumers’ preferences • Man Made Diamonds


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