1. VISION STATEMENT
To be the world’s leading provider of traditional and quality diamonds. Justification:
World: This gives the idea that Debeers is targeting the entire world market “consumption of diamonds” Provider: Debeers is looking at provision of this product at all phases of the value chain Traditional: To still focus on the production and sale of natural diamonds to service that existing portion of the market. Quality: This means that Debeers will continue its age long tradition of supplying and marketing world class diamond varieties. Also, the company seeks to enter into the synthetic diamond industry; however, its products from there will still be of quality.
2. KEY STRATEGIC CHALLENGE
The Key strategic challenge of DeBeers Company is the threat posed by the synthetic diamond production industry.
3. STRATEGIC ANALYSIS
This is classified under macro-environmental analysis and internal analysis. The macro-environmental analysis includes employing the seven components of the macro-environment (PESTEL) and using Porter’s five forces model of competition. The internal analysis will basically cover the SWOT analysis model.
SEVEN COMPONENTS OF THE MACRO-ENVIRONMENT:
A. Political, legal and Regulatory factors:
Passing in 2002 of the Kimberly process certification scheme: This was to help curb trade in blood diamonds from war-tone countries in Africa and also avoid widespread consumer boycott. Southern African Countries such as Namibia and South Africa passed laws (Diamonds amendment act of South Africa, 2005) that forced miners to sell percentages of their production to local cutting and polishing firms. This was an attempt to allow local participation in the downstream sector of the diamond trade which was much more profitable.
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Anti-trust laws in the United States (Sherman Anti-trust act) forbid certain price control prices in the diamond industry. The European Union also enabled competition in the industry by barring debeers from buying from Russian-owned firm; Alrosa. The United States federal trade commission brought about a clear market distinction between “synthetic” and “natural” diamonds. B. Global forces:
There have been consistent increases in production volume, supply and pricing. Between 2000 and 2005, world production of diamond rough grew 31% by volume and 70% by value, highlighting the upward trend of diamond prices (Figures 1 and 2).
The players in the value chain of the diamond trading industry have witnessed key changes over the last decade. The typical value chain spanned from production, cutting and polishing, retailing. This value chain has no longer become specific to any company; however, most diamond trading companies have vertically integrated to cover all sectors. This was seen in Tiffany & Co. (A jeweler) buying a stake in a Canadian mine for $104 million. Aber Diamond (A Canadian mine) also purchased a luxury jewelry retailer Harry Winston. Russia’s mining giant Alrosa also opened up a diamond retail store. This change in the value chain broke debeers’s monopoly in the diamond trading industry. The global market has now become demand-driven and brand-focused, whiles diamond is slowly becoming a commodity. C. Social forces:
The main societal attitude towards diamond purchasing is the perception that buying a “real” diamond is the best way of communicating affection. Others also perceive that whether “natural” or “synthetic”, a diamond is a diamond. Some also believe that buying synthetic diamonds is much more ecologically friendly. The other social force is that purchasing “natural” diamonds is a step in helping mining communities especially in Africa rather than a few people in the United States. D. Technological forces:
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Modern methods of producing low cost, low carat and flawless diamonds by the Chemical vapour deposition method have come to play. However, the High pressure, high temperature (HPHT) method is still available. Modern technological advances in the use of micro-processors for most devices have necessitated the potential use of synthetic diamond as an input for micro-processor production. E. Natural Environmental factors:
Age-old ecological threats of the extractive industry hold for the diamond industry. These include the loss of human and animal habitats, failure by some mines to reclaim land green-house gas emissions and the extinction of certain animal species. Synthetic diamond production on a large scale involves the mining of graphite (HPHT method) which also has ecological concerns as diamond mining. F. Demographics and General economic conditions:
Users of retailed diamond cut across the world with the United States being the leading demand market. (see Fig 3)
Fig 3.
India and China are also rising and emerging markets with India being the fastest growing diamond jewelry market at 19% in 2005. This is due to the increasing disposable income and growing middle-class. The Brookings Institution estimates that there are 1.8 billion in the middle class, which will grow to 3.2 billion by the end of the decade. Asia is almost entirely responsible for this growth. Its middle class is forecast to triple to 1.7 billion by 2020. By 2030, Asia will be the home of 3 billion middle class people. It would be 10 times more than North America and five times more than Europe. These statistical projections imply that there is a potential profitable market for diamonds in China and India especially. Prices of Diamond are also seen consistent increases (see fig 2) whiles emerging markets see increase in economic growth. PORTER’S FIVE FORCES MODEL FOR COMPETITION
A. Competitors:
Debeers main competitors arise from its loss monopoly on the diamond trading market. Three main competitors are Lev Leviev, Argyle Diamond and Canadian producers such as Amber Diamond. The entrance of such competitors reduced Debeers market share. The reduction in market share of debeers could be attributed to costs of moving away from buying from Debeers were low. Laws governing certain geographical jurisdictions also allowed for competitors to set in. However, even with the drop in the numbers for Debeers; from producing 45% of world’s rough diamonds and selling 80% supply to producing 40% (in 2007) and selling 45%, this has not still not equated any competitor to the operational and market capacity of debeers. The force brought about by competitors will be evaluated as strong, looking at the effect on Debeers’s figures. B. New entrants:
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Existing industry players in various sectors of the value chain may like to expand their operations to control other sectors as has been exemplified by other companies. E.g. retail companies investing in mining concerns, producers expanding into cutting, polishing and retail. For such “new entrants” barriers to entry may be relatively low as such companies have experience the diamond industry and can afford the capital outlays involved. The force from new entrants is rated as moderate
C. Substitutes:
The main substitute material is the synthetic diamond varieties which come easily in various colours and are flawless. These synthetic varieties are also attractively priced (cheaper), easily producible in a shorter period as compared to the natural varieties and also it is relatively cheaper to produce. There is a low cost for buyers to easily switch to use these substitutes. The synthetic diamond is also readily available on the market for consumers. Sales of such substitutes are growing with an expected CAGR of 45% by 2015 with current annual turnover of $50 million. Innovative methods are also being used to brand and market these substitutes.
The micro-processor industry has also become a huge potential market due to certain barriers being overcome. These barriers are: 1) Diamonds were viewed as expensive but these substitutes are cheaper. 2) There has never been a steady and consistent supply of large pure diamonds. But CVD produced diamonds solved that problem. 3) No company or individual had been able to manufacture a negative charged diamond with sufficient conductivity needed to form microchip circuits; this has also been solved by the substitutes. Forces by substitutes have also been rated as strong.
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D. Suppliers:
Due to changes in the industry value chain, loss of monopoly by Debeers and its new strategy, Debeers now works mainly with the supplies from its mine operations. As at 2004, Debeers discovered 39 new deposits and signed agreements with various producers. Diamond has also not seen a shortage in supply and its now in fact becoming a more or less a commodity. Force from supplier bargaining power is weak.
E. Buyers:
The market has now become demand and brand-driven with no monopoly. Consumers now have options ranging from natural diamonds from other producers as well as synthetic diamonds. Buyer costs switching brands are also relatively low.
Some buyers are not price sensitive since they want “real” diamond at all cost. There is also a level of product differentiation in the market. Force from Buyer bargaining power is moderate
EVALUATION OF PORTER’S FIVE FORCES
Fig 4
INTERNAL ANALYSIS (SWOT)
A. Strengths:
Debeers has developed solid mine operations that ensures consistent supply of rough diamonds for its other operations. Debeers has been able to run its operations across the value chain for worldwide production, marketing and selling. Debeers has intangible resources such as its brand experience (for over a century) and a form of goodwill which makes it competitively valuable. Debeers new strategy of branding has helped to bring out new differentiated products such as the “Millennium diamond”, “celebrate her campaign” and the “women of the world raise your right hand”. This branding and marketing strategy has become a distinctive competency. Debeers has developed a strong brand positioning system. (seen its humanitarian work, payment of fines, demand-centered and branding strategy, production partnerships with Botswana and Namibia) B. Weakness:
Debeers is still in the process of remaking its image which has been tarnished from decades monopoly and anti-competitive business practices C. Opportunities: Opportunity exists in the growing micro-processor market for synthetic diamond. Diamonds have been found to be used as substitutes to heat sensitive silicon since they can handle extreme temperatures as compared to silicon. Synthetic diamonds are low-cost and can thus service the low to lower middle income population in provision of diamond jewelry. Increasing growth trend among middle income population in India and China (where demand for two carat diamond is high) guarantee sales of “natural diamond in these regions”. (growth rate in 2005 of 19% for Indian diamond jewelry market) D. Threats:
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The increasing production and sale of synthetic diamonds
Competitors in production and retail sector of diamond industry. WHAT IS THE CURRENT STRATEGY OF DEBEERS?
The current strategy by Debeers is to be demand-driven and brand-focused to increase profits and not necessarily market share. Programs it put in place in relation to this strategy are: Supplier of choice of program
Product differentiation program
Public relations work by building bridges with countries like the United States and partnering with producers like Botswana and Namibia. Gem defensive program; which highlights the qualities of natural diamond as against synthetic diamonds in an attempt to protect the future of natural diamonds (There is little or no information to aid in assessment of current strategy) 4. STRATEGIC OPTIONS: Four strategic options have been proposed for Debeers: Entrance into the synthetic diamond production business to service both micro-processor industry and low-income earners/synthetic diamond buyers. Greater marketing and branding moves into the Indian, Chinese and Asian markets. Continuation of public relations program and consumer education on the negatives of synthetic diamond. (Gem Defensive Program).
Intensification and continuation of branding strategy and product differentiation to suit different markets.
5. RECOMMENDATIONS: Two main recommendations have been proposed to Debeers:
A) Entrance into the synthetic diamond production business to service both micro-processor industry and low-income earners/synthetic diamond buyers: Micro-processors form the base of semi-conductor production. Semi-conductors form essential components of devices such as tablets, cellular phones, wireless devices, personal computers and other electronic devices. Synthetic diamond production has been able to overcome certain barriers for its usage as material for micro-processors (according to Moore’s law).
These barriers are: 1) Diamonds were viewed as expensive but these substitutes are cheaper. 2) There has never been a steady and consistent supply of large pure diamonds.
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But CVD produced diamonds solved that problem. 3) No company or individual had been able to manufacture a negative charged diamond with sufficient conductivity needed to form microchip circuits; this has also been solved by the substitutes. With these barriers overcome coupled with the relatively lower cost of synthetic diamond, a potential booming market is a stake. A Professor of material science at Massachusetts Institute of Technolgy (MIT) is quoted as saying that “diamond is the solution to that problem”. Global trends such as next generation wireless devices, mobile convergence, cloud systems and the rise for immediacy (need for real time date) imply a consistent growth in the micro-processor industry. McKinsey’s report on the global semi-conductor industry put revenues at the end of 2010 at $300 billion and a growth to $400 billion at the end of 2015, thus a CAGR of 33.3% up till 2015. Some consumers also prefer synthetic diamonds most probably due to their low cost.
The synthetic diamond industry even without sales to the micro-processor market has a CAGR of 45% and revenue of $50 million at the end of 2010. This option is also suitable for diamond lovers who cannot afford costly “natural” diamonds. From the competitive analysis, using Porter’s five force model for competition, it was realized that the force posed by substitute products (i.e. Synthetic diamonds) was the strongest, thus to entering into production of synthetic diamonds will minimize this negative force as well as reduce the competitive force from rivals and competitors. B) Greater marketing and branding moves into the Indian, Chinese and Asian markets: Demand, particularly for diamonds over 2 carats (worth $15,000 or more), is soaring in India and China due to increasing disposable incomes and a growing middle class. ( 2 carat diamonds are “natural”)
India was the fastest growing diamond jewelry market with a growth rate of 19% in 2005. India and China are also rising and emerging markets with India being the fastest growing diamond jewelry market at 19% in 2005. This is due to the increasing disposable income and growing middle-class. The Brookings Institution estimates that there are 1.8 billion in the middle class, which will grow to 3.2 billion by the end of the decade. Asia is almost entirely responsible for this growth. Its middle class is forecast to triple to 1.7 billion by 2020. By 2030, Asia will be the home of 3 billion middle class people. It would be 10 times more than North America and five times more than Europe. These statistical projections imply that there is a potential profitable market for diamonds in China and India especially.
