About diamond

Introduction

“A diamond is forever” (De Beers Group, 2008) is likely to be one of the best known slogans the mining industry has ever had. Sixty years after the foundation of the De Beers Consolidated Mines in South Africa (CMSA) in 1888 (Epstein, 1982) this slogan represents a campaign aimed at marketing the sale of De Beers diamonds.

In the early twentieth century the British – South African company monopolised giving them the control over the majority of the world’s diamond supply. To establish the monopoly, Ernest Oppenheimer, considered as “prototype of the multinational businessman: German by birth, British by naturalization, Jewish by religion, and South African by residence” has perceived that “the only way to increase the value of diamonds is to make them scarce” (Epstein, 1982) in 1910. Ernest Oppenheimer has so far laid the foundation for De Beers’ business strategy of controlling supply that lasted for nearly one century facilitating the process of becoming an international cartel in the late 1930 years.

Within the following twenty years, De Beers monopolised the natural diamond industry on a global scale. The company monitored all pipe mines, was “fully backed by the British, Belgian and French governments [and was considered as] the official channel for the diamond trade” (Epstein, 1982) among all other governments.

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This distinction only lasted until the 1990’s when first threats menaced the monopoly. De Beers has been put face to face with the loss of its position in the world’s diamond producing industry hence they had to cope with a dwindling reputation.

To counter this negative trend which not only existed for the diamond industry but also among customers the De Beers Group had to react. Therefore, this business report is going to examine the factors behind any changes that have taken place in the structure of the company’s value chain in recent years. It will also explain the reasoning behind any points made. To support the reasoning different business frameworks will be use.

The Global Value Chain

Competitive Advantage and Value Chain

Michael E. Porter, professor of Business Administration at the Harvard Business School, analyses the basis of competitive advantage in his book “Competitive Advantage: Creating and Sustaining Superior Performance”, that was published in 1998. He explained that it is the company’s competitive advantage that leads to value creation, hence to gain leverage among competitors in their particular market segment (Porter, 1998).

Porter points out two general distinctions of competitive advantage: either a company can offer benefits at a lower cost than the rival which is called cost advantage or the company surpasses the benefits that are delivered by the competitor which is a differentiation advantage.

To create a competitive advantage, irrespective of its nature, so to say by cost or differentiation the business fields resources and capabilities to finally create superior value. To visualise this issue, one can take in regard the resource-based view in the following simplified model (QuickMBA, 2009).

Contemplating Fig. 1 there is still one step missing before competitive advantage is attained. It is realised by a range of value creating activities which Porter identified as value chain. He further found out that a company needed to outperform one or more of those activities that are above the overall value which ascertains the company being ahead of its competitors (QuickMBA, 2009). To get a better understanding of what the value chain contains and expresses one should have a look at the figure below that was adapted from (Porter, 1998).

Continued

The value chain aims at creating the highest possible value for the company and is the last step to gain a competitive advantage as seen in Fig.1. There can be different reasons why a company may add or even lose value. Throughout the years of business, the firm may have to undertake measures to make a change in the firm’s value chain (e.g. due to external factors). One of these external factors can be the time – in virtue of changing circumstances in the business environment, or a special market. The company needs to move with the times to stay competitive. A negative example that may cause a change in value can be the chaining of unfortunate events (e.g. collapsing market, contract termination with major producers, new competition, and consumer’s taste shift). This chain of unfortunate events would engender dire consequences that may conduce a company to consider changing or restructuring its value chain to haul itself out of the loophole.

In the following section Porter’s theory of competitive advantage and the value chain will be applied on the particular case of De Beers. Afterwards, any factors of the past decade it will be looked at in detail. These factors include any event that occasioned De Beers to react quickly to a negative trend of falling market share and worsening reputation and consequently how the company dealt with the situation to stop this thread.

De Beers’ Competitive Advantage and Value Chain

De Beersoperates since its foundation in the late 19th century as already mentioned in the introduction. From scratch it followed a successful strategy that helped controlling the vast majority of the world’s diamond supply and being market leader since the beginning of its operations. In Fig. 3 is shown briefly how De Beers created its competitive advantage over competitors and how the company managed to acquire a market share of some 85% (Irwin, 2001). The activities that created value and in what way the success story of De Beers continued will be explained subsequently.

Before analysing the value chain it is expedient to have a look at the De Beers Family of Companies (De Beers, Family of Companies, 2009) showing every single member that is at some extent involved in the company’s operations.

Looking at Fig.4 one can see that the Anglo American Group, the Central Holdings Group and the Government of the Republic Botswana are the shareholders of the De Beers société anonyme (De Beers sa). The company’s head office is located in Luxembourg managing and monitoring the entire business whereas commercial activities are executed from subsidiaries in different parts of the world (De Beers Group, 2008).

The Family of Companies is integrated across the breadth of the global diamond value chain. This covers exploration of deposits, sorting and valueing rough diamonds as well as cutting and polishing diamonds. We will have a closer look at these single instances in a little while. De Beers sa & shareholders owned and controlled JV and independently subsidiaries and divisions managed subsidiaries

Since we now got to know of which arms the Family of Companies consists we can examine De Beers’ value chain presenting slight changes from Porter De Beers adapted to its business.

Since De Beers focused more and more on creating demand rather than controlling supply, they realised that a bad reputation of a consuming good they wanted (and needed) to sell has impacts on demand. De Beers’ response to face this problem was taking a key role in the implementation of the Kimberley Process which is an international certification scheme that is aimed at controlling the rough diamond trade. It requires a governmental certification of any shipments of rough diamonds proving that diamonds are free from blood – so to say not sold to prolong a conflict. De Beers’ efforts were being rewarded in January 2001 when Kofi Annan, the UN Secretary General praised the company saying that they “set an example with its response to criticism of the diamond trade in Africa and its efforts to ensure that traders and consumers of diamonds will no longer unwittingly help to finance warlords” (Irwin, 2001).

To recapture the erstwhile good reputation of De Beers they presented two more novelties.

• Forevermark

• De Beers needed to establish a brand name first in Europe later in the US. Therefore the company formed a strategic alliance with Moët Hennessy Louis Vuitton (LVMH) a French luxury goods group (Irwin, 2001).

  In the hope of creating globally a differentiation between De Beers Forevermark diamonds and stones one can purchase via internet the company put a lot of money into marketing strategies and campaigns to publicise the new brand and create an association with the utterly luxurious high class. A feature that lived through the entire time frame of this partnership is that De Beers jewellery always has been and will be sold exclusively in special De Beers stores.

• Downloadable Reports

• In 2001 De Beers published on their website the very first time an annual report revealing details about the workings and profits of the company. It is said that it is “the most comprehensive view […] that has ever been published” (Irwin, 2001). The intention of this published report was the direct address to shareholders of which a great part resided in the US.

Two years later, in 2003, De Beers’ independent arm the DTC implemented the “Supplier of Choice” strategy – another project in their strategy shift. It is a sales programme aimed at selecting clients (sightholders) for De Beers. There are special sightholder selection criteria and considerations that provide a framework enabling the DTC to make an objective valuation of applicants. This method contributes to an allocation considered as fair and efficient (De Beers Group, 2008).

The next big change in the company was the change of the Managing Director. Gary Ralfe tried his best to help De Beers not to go down fighting within this highly competitive environment over years. He wanted to transform the once successful business steeped in history into a modern competitive market player that at one point can regain a position they once held. Since Gary Ralfe retired in 2006 he could not finish his projects whereas his successor Gareth Penny now was charged with them. And it was this director change that breathed new life into the company. Gareth Penny, who beforehand was the director of sales and marketing of the DTC, his new role as MD was now to face all the issues that Gary Ralfe tried to antagonise. Penny first started to put new efforts on De Beers’ role in the Kimberley Process, always emphasising that De Beers only trades and sells conflict-free diamonds. To remove any doubts clients might have about the diamond’s origin of De Beers’ jewellery the company introduced in 2006 the De Beers Passport.

This passport accompanies every diamond purchase and certifies that the sold jewellery is certainly blood free. It is the first and only company offering such a certification to clients (De Beers Jewellers, 2009).

The second main achievement of Penny’s business reshaping plan is a higher concentration on the joint ventures with African governments. Between De Beers and the Government of Botswana a joint venture has been agreed in 1969, 40 years ago (De Beers Group, 2009). Since 1992 this joint venture is called Debswana (cp. Fig.13). A very important step was taken in May 2006 when the Government of Botswana and De Beers signed three very meaningful agreements. Those comprised a regeneration of mining licenses for 25 years, a prolongation of the selling contract for five years and the establishment of the DTC Botswana. It was in the same year that De Beers bettered their diamond production record producing in total 34.3 million carats (De Beers Group, 2008). But the relationship was even more intensified in 2008 when De Beers moved its diamond-sorting facility to Botswana. This facility is the world’s largest and most innovative sorting institution avouching for the precious stones to stay in the country for a little longer (O’Connell, 2009). De Beers or better Gareth Penny does create a lot of good for the country since Botswana counted for a long time to the world’s poorest countries in terms of living condition and development rate. Meanwhile Botswana displays economic growth rates that are highest on a global scale (Morapedi, 2009). De Beers cooperation with the government thereby all foreign direct investment they put in the country forwarded growth within four decades. Nowadays Debswana is the country’s largest non-government employer, since they are giving 25% of the residents a place to work (Morapedi, 2009). Investing in diamond production, De Beers’ aid contributes to export revenues of 76%. The diamonds create nearly half of the government revenues and they account for a third of Botswana’s GDP (Morapedi, 2009).

Apart from any foreign direct investment in Africa and conflict free diamond issues an important point to mention last is that Penny always has been very keen on stimulating technology development. Supporting those processes financially the general idea behind was the aim to keep down production and sorting costs.

Impacts of 10 years reshaping measures

Although all the measures of reshaping the company sound very promising, one would expect a growth in profits and reputation. But these apparently obvious consequences of all the efforts cannot be proven since the strategy shift also affects the company’s value chain in a somewhat negative way.

One can see the financial situation of De Beers over the past five years. Since 2005 the profits are decreasing continuously whereas the decrease rate of the total costs is minimal, so to say not evident. This phenomenon is going to be proven in the following.

• decreasing market share

• The macro-environmental factors that came up throughout the 1990 years are the cause for the negative development of De Beers’ market share. Summarised, the single reasons were:

  • discovery of rich deposits in Canada
  • emergence of new competition
  • taste shift among customers
  • economic decline in consuming regions and
  • the stigma of blood diamonds.
• customers turn into competitors

• The DTC sells the rough diamonds to a range of companies. As far as one is in this “selling process” these companies are customers of De Beers. But since the companies continue manufacturing the stones, selling them to alternative retailers the diamonds are at one point offered on the market as well as De Beers jewellery. In this sense, De Beers is competing with its customers.

• commitment to corporate social responsibility

• De Beers not only concentrates on foreign direct investment in African countries, it also cares for its employees and their families. Among all the activities and measures that are undertaken by De Beers three of them will be highlighted.

  • The employment rate of Historically Disadvantaged South Africans in management roles in the De Beers Consolidated Mines (see Fig.3) was at 45.5% in 2008, the year before at 39% (De Beers, Family of Companies, 2009).
  • The De Beers constant workforce consists of 21.8% women. Nearly one fifth of management positions are filled by females. (De Beers, Family of Companies, 2009).
  • De Beers implemented a disease management programme. Their investment supported additional medical treatment offers outside the insurance scheme to all employees and their relatives. Since the exposure of De Beers employees to especially HIV and Aids is dangerous in terms of the worker’s and worker’s families health but also in terms of business continuity. The programme focuses on prevention, treatment and care and support (De Beers, Family of Companies, 2009).

Despite all the positives points of De Beers’ CSR activities the company has to be careful with the amount of money it is investing since costs tend to escalate quite easily In Fig. 14. one could already notice that costs are still too high in proportion to the total revenue of the firm.

Even though the profits of De Beers are following a downward trend the company is diligently improving to stay highly innovative and portray a serious competitor on the market. The shift to a new business model of creating demand De Beers has made it to a modern competitive player taking continuously measures to add up to its competitive advantage, e.g. steady development and generation of technologies as well as foreign direct investment. The latter means a huge support of a developing country that certainly needs external aid to improve the economic situation inside the country.

Conclusion

Throughout this business report it was demonstrated that the firm De Beers always has been a very successful company. From scratch of its operations, De Beers followed well-wrought business concepts. Since the company is British-South African by origin methods to internationalise business operations had been very favourable in terms of creating success. The main aspects, making the business growing were 1st investing directly in African countries such as Botswana and Namibia, 2nd exporting directly to Britain and many other countries and 3rd establishing important joint ventures with e.g. African governments. Although De Beers took great risks operating how it finally did it got a maximum reward possible what is likely to be its secret of a successful business.

Through the ages De Beers created itself high reputation among customers, further the firm had a competitive advantage benefitting from operating very early on this particular market. The company enjoyed a protrusion of know-how and knowledge about the market manifesting it by locating itself intelligently. All these points favoured De Beers’ monopoly which they held over decades.

Accidentally the luck has turned. In the late 1980 years and throughout the 1990’s an unfortunate series of events should end De Beers’ success story. With increasing frequency international media casted a poor light on De Beers blaming the company to finance civil wars in African countries such as Sierra Leone or Angola.

But De Beers had somehow to get through this period full of obstacles since it had a long track record to defend. Furthermore the firm possessed still a good position on the market. To overcome those problems De Beers responded proactively in initiating a multifaceted strategy shift that was realised progressively throughout a decade from 1999 until today.

De Beers had to learn a lot about its business environment since they did not operate as a monopoly any longer. But De Beers has a fair chance having learned from its mistakes within those past ten years. The company is likely to grow out of this challenge and might improve operations and achieve higher profits in the future. But since they have to bear additionally caused costs e.g. by the Supplier of Choice strategy and still compete with their customers who possibly could establish own brands which would diminish De Beers’ power in sales the company exposes itself to a fight that keeps probably extending over several years.

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