De Beers Case Notes PDF

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Kreft De Beers in class case debrief notes...

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In-Class Case Debrief 

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De Beers is a cartel o All the members come together collusively and operate as one monopoly (cartel acting as a monopoly) to maximize profits o What’s the risk here?  one member cheating to get ahead and make more profit Zaire, Israel, and Russia have all been named as cheaters who leaked diamonds to the market when they weren’t supposed to Russia and Angola both ended up deciding that they weren’t making enough profits from the cartel and defected (after Russia cheated and was punished) ***The De Beers organization HAS NOT BEEN stable over the years

Central Selling Organization (CSO) o All of the mines will send their signals to the CSO about production of diamonds o From that info, CSO will give a certain amount of diamonds at a certain price to sellers/distributors o The CSO is the brains of the operation o The CSO PERFECTLY CONTROLS price and quantity  If sellers aren’t happy with the amount of and price of diamonds, they are forced to just walk away

 Stockpiling  Anything the CSO doesn’t sell, they store in a secure, undisclosed vault o This gives the illusion that diamonds are, in fact, rare and expensive o They put these diamonds into a vault until they’re needed

o ****What forces does De Beers control with stockpiling?  De Beers directly controls, through stockpiling, the market SUPPLY AND DEMAND  Supply is very obviously controlled with stockpiling  it’s basically like flipping a switch for the mines’ production  If the market becomes flooded with diamonds, De Beers will buy up all of the excess diamonds (disguised as buyers)  they will then stockpile these diamonds o ***They artificially increase the amount of consumers in the market, and this is how they control demand as well o They make the market think that buyers are always ready to buy diamonds  Through the process of stockpiling, De Beers can control (C) Both supply and demand

 Do U.S. Anti-Trust laws apply to non-U.S. Firms? o Yes, as long as a firm has some business interest in the U.S., these laws apply to that firm

o World’s #1 seller of diamonds  De Beers o World’s largest diamond market  U.S. o Diamonds have to go through 7 Non DeBeers sellers before it gets to the U.S.  This creates a paper trail to avoid U.S. Prosecution

 Nicky Oppenheimer’s Strategic Speech to Harvard Graduates o Nicky hardly ever steps foot on U.S. soil o Very strategic  You’re talking to some of the potential future regulators of the diamond industry

o He talked about how De Beers/diamond industry helps enrich economies in Africa o Botswana was the original China and India (skyrocketing economy – double digit growth), when diamonds were found there

o He says that De Beers lays the foundation for growth in the African economy  Bain Consulting’s Strategic Review of De Beers

o Bain figured out that people are willing to pay a 15% premium for a De Beers diamond over all of its competitors (just because of brand recognition)

o De Beers has never advertised its brand name, only on behalf of the industry o Bain says they need to strategically advertise the name, and even etch microscopic logos onto their diamonds

o This was how they would strategically sell off the stockpile o Etching your logo on diamonds brings a new paper trail that could lead to anti-trust violations

CASE UPDATE

 Given Bain’s recommendation around brand differentiation, DeBeers needed to find a way to enter the US market directly to leverage its 15% premium with customers

 Nicky’s speech was compelling: October 2005 De Beers agreed in principle to a class action

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antitrust lawsuit in the US (pay $295 million in damages, and follow anti-monopoly guidelines) o May 2008, the courts approved the settlement as fair o 2010, the settlement was appealed, but in 2012 SCOTUS upheld the settlement. Since the 2008 settlement, DeBeers has gained the right to open stores in the US, cutting out a lot of the intricate trades that happened outside the US o Currently these stores are in Houston, Naples, and NY Brand Strategy to Fight Competition: o With added competition, De Beers had to be strategic o The superior brand allowed DeBeers to strategically sell off its stockpile by taking sales away from its competitors without flooding the market with diamonds. o Basically, DeBeers focused on grabbing more market share within existing sales, so that it would not devalue the diamond market with excessive supply....