De Beers strategy - Grade: First PDF

Preview

Summary

In-depth strategic analysis of De Beers Group of Diamonds, consisting of corporate, business and industry level analysis using value chain framework, and VRIN....

Description

Warwick Business School IB3D80: Corporate Strategy Part A

A Critical Strategic Analysis of De Beers Group of Companies

Student ID: 1511235 Word Count: 1990

1

Introduction De Beers Group of Companies (DBG), is a subsidiary of Anglo American plc (85%) and the Government of Botswana (15%). It is the world’s largest diamond company present in all areas of the supply chain, ranging from mining/exploration, production, trading, manufacturing as well as jewellery marketing (De Beers, 2017); having exploited their opportunities since the 1880s (Marketline, 2017). This extensive coverage of the supply chain provides a glimpse of their successful business strategy. Through the implementation of various strategic models, this essay will look to provide an analytic overview of the diamond industry. Furthermore, it will aim to dissect DBG’s strategies used to attain competitive advantage across different streams of the supply chain. Overview of the diamond industry The industry is generally notable by two categories: industrial grade diamonds (rough) and gem grade diamonds (polished). It boomed when DBG’s campaign “A Diamond is Forever” launched in the 1940s, which associated diamonds with romance (GIA, n.d.). The standard supply chain of the diamond industry can be viewed below:

To effectively analyse the industry, Porter’s Five Forces framework (Porter, 1979) will be used, deepening the understanding of the competition and difficulties of the market:

2

Bargaining Power of Buyers-Low Suppliers have constrained supply so customers are unable to enjoy bargaining power. Since there was never a substitute (synthetic diamonds just emerging), customers were left with no other options or price points (Johannesburg and Windhoek, 2004). The culture and emotions created by diamonds and their relation to key life moments emphasised their beauty and importance (Rapnet, 2016) and left little room for buyers to negotiate. The financial was the only phase that gave the buyers some sort of bargaining power, due to a fall in demand and invariably meant oversupply and thus a fall in price.

Threat of Substitutes-Moderately low Currently, the only substitute to the original diamonds are synthetically produced diamonds. Synthetic diamonds first came in to production in the 1950s; however have only just started to emerge, offering customers a lower price point for virtually the same stone to the human eye (GIA, 2016). This prompted DBG to produce and make available diamond detection devicesDiamondSure and DiamondView, preventing the categorisation of synthetic diamonds as natural diamonds (De Beers, 2015). The global synthetic diamonds market is estimated to be worth $28.26 billion by 2024 (Business Insider, 2018). Since the threat is growing, precautions and strategical changes must be implemented to prevent future losses.

Figure 2 shows synthetic diamonds being approximately 17% cheaper than natural occurring ones, which would seem appealing to consumers.

3

Threat of New Entrants-Moderate With vast changes occurring within the industry in the past two decades; particularly the breaking of the DBG monopoly, there has been a large scope for new firms to rise in the industry (Dauriz, Remy and Tochtermann, 2014). Varying trends and regulations, along with discoveries of new mines in Russia, Botswana and Canada have made it possible for SMEs to join the market. In fact, there has been an increase in M&As between these tier companies with an attempt to grow. Despite these changes and new entrants, it remains harmless for larger players since the combined market share of Alrosa and DBG was above 60% in 2016 (Figure

3).

With

increasing

pressures of bank loans and repayments, SMEs struggle to trade as they lack financial ability and status (Bain&Co, 2017).

Bargaining Power of Suppliers-High

Early control of mines allowed larger companies to manipulate the supply of rough diamonds, enabling them to dictate market supply and prices. Formal relationships with governments allowed companies to exploit their strategies of controlling. Figure 4 shows that the top companies hold an oligopoly in diamond production and dominate supply (Grynberg and 4

Mbayi, 2015). Entrance of new rivals comes with the issue of excess supply, leading to the mass purchasing of rough diamonds by larger firms to prevent market flooding, thus retaining supplier power. Rivalry Amongst Existing Competitors-Moderate to High

Constant rivalry amongst major competitors allow prices to stabilise and no monopoly to exist (despite the two largest companies holding 60% of market share). The industry is exceedingly sensitive to consumer preference changes and this causes companies to alter their structures, generating more rivalry as they seek to benefit from first mover advantage (Dharmadhikari, 2008). The way companies can gain competitive advantage and differentiate from competitors is with the purpose behind their diamonds. Profit margins tend to stay low due decreasing prices, in attempt to gain market share- a clear sign of competition (Figure 5).

5

Analysis of DBG The above framework exemplifies that the diamond industry is highly competitive, dominated by suppliers and of competitive margins. Thus, to explore the corporate and business level strategies, this essay will look at their value chain by breaking it down into streams, analysing each with a resource-based view and the VRIN framework. Established in 1888, DBG has had its great share of opportunities, allowing it to excel in all areas of the supply chain. Being the first of its kind, DBG was able to enjoy relations with governments and control the largest mines, supplying 90% of the worlds’ diamonds in the 1990s (Business Insider, 2011). Their strategy was solely focused around being a monopoly. However, the discovery of new diamonds fields, break-up of the Soviet Union and change in government policies led to the rise of other major companies (BHPB and Alrosa)-eliminating their horizontal monopoly (Srinivas, 2013). Their vertical integration strategy in the early 21st century (from a horizontal monopoly) enabled them to extend their business to the downstream activities of the supply chain. This allowed business units to flow with more ease and aid one another in scarce times, not having to rely on external sourcing and reducing costs- creating synergies for the group by the creation of interorganisational relations. It implies that if one stream performs poorly, the other streams could uphold the burden. Their strong position and ability to acquire companies provides means to transfer resources/skills for greater efficiency, beneficial for complementary units. Figure 6 provides an overview of the main resources/capabilities of DBG:

Figure 6: Resources/capabilities

6

The supply chain of DBG can be viewed in the forms of upstream, downstream and midstream shown below:

Figure 7: De Beers’ strategy across the pipeline Source: De Beers, 2014

7

TCA-Temporary competitive advantage SCA-Sustainable competitive advantage CP-Competitive parity

Internal Analysis of Upstream Businesses Resources/

Valuable

Rare

Inimitable

Geographi-

Yes- consumers

Yes- not all

Yes- difficult to

cal locations

purchase

companies can

enter locations

can be shared

diamonds from

afford

which DBG

and exploited

operates in

for the benefits

Capabilities

various locations

Non-

Competitive

substitutable

Implications

No- locations

TCA

Relations

No- valuable for

Yes-they have

No- relations

No- can be

with

the firm

been able to

can be created

exploited

Governme-

sustain

nts

relationships over a

CP

long period of time Mines

Yes- exploit more

Yes/No-firms may

No- access to

Yes- the mines

gems thus more

have access to

mines can be

cannot be

supply

mines, however

granted given

bought until

DBG has

sufficient

DBG has

ownership over

capabilities

ownership

several

and size

TCA

DBG’s business strategy is to obtain mining expeditions in countries where they can assist governments to attain their ambitions while maintaining a profitable and well-rounded business (De Beers, 2016).

Current joint-ventures with the government are located in Namibia,

Botswana, and South Africa. In Namibia, Namdeb Holdings have a 50% shared venture with the government since 1994. DBG also has a 50% joint-venture with the Government of Botswana since 1968. In 2016, they made $5bn in payments to partners, joint-ventures and governments as royalties to uphold commitments, strengthening their relationships. Their partnerships with governments creates economic benefits for both the group and the opposing party, such as creation of jobs or increased profits. This synergy is key for De Beers’ strategy as they remain one of the most international diamantaires. Regarding production, DBG owns underground and open-pit kimberlite mines. Through this specialized technique, they supply 8

both tool and application manufacturers globally. Ths gives them competitive advantage as they increase their product portfolio, enabling them to dominate the production process. Internal Analysis of Midstream Businesses Resources/Capabilities

Valuable

Rare

Inimitable

Distribution streams

Yes- allow

Yes-

Yes- such a

customers to

developed

scale would

recreate same

purchase

streams over

not be

benefits

stones

time

possible

Yes- customers

Yes- takes

No- possible

No- given

have a sense of

time to build

to reach but

resources

trust

this level of

would take

would be

Reputation

Technology

Non-

Competitive

substitutable

Implications

Yes- unable to

SCA

reputation

too long

possible

Yes/no-it could

Yes-

No- possible

Yes- no other

lead to better

DiamondView

to recreate

efficient way

quality diamond

and

however

as of now

production

DiamondSure

would be

identify lab-

very

grown gems

expensive

CP

TCA

DBG differentiates its products by applying the ‘4Cs’- carat, colour, clarity and cut, to classify each of its stones, giving them a unique way of observing and categorising diamonds globally (GIA, 2016). To dominate the industry, they created their own distribution channel- Central Selling Organisation (CSO). Sightholders were handpicked, 100 at a time for tenders who are unable to negotiate supply or price, giving DBG extensive power and ability to maintain market discipline.

Being the only distribution channel until 2000 gave them strong competitive

advantage (Atkinson, 2000). Due to new mine discoveries and loss of control they do not remain a monopoly; nonetheless, the group continues to invite sightholders to exclusive tenders.

9

Internal Analysis of Downstream Businesses Resources/Capabilities

Brand-Forevermark

Marketing abilities

Valuable

Rare

Inimitable

Non-

Competitive

substitutable

Implications SCA

Yes- provides

Yes- takes

Yes- the

No- brands

top 1%

time and

same brand

could provide

jewellery

resources

cannot be

similar

replicated

functionality

No- way to

Yes/no-

No- can be

No- other

increase

strong

obtained but

techniques

revenue

marketing

may not have

could prove

efforts paid off

same impact

effective

No

CP

in earlier stages Consumer

Yes- allows

No- others

No- ability to

understanding

company to

can obtain

understand

adapt

customer

consumers

products

information

CP

too

Marketing has proven to be one of DBG’s strongest competencies. This is evident from their launch of the “A Diamond is Forever” campaign and their strategic decision to open another jewellery retailer, Forevermark, in 2008 as one of their two diamond brands. Forevermark diamond is marketed as ‘beautiful’, ‘rare’ and ‘responsibly sourced’.

Each The

diamonds are inscribed with a microscopic ID number allowing DBG to differentiate them from others, giving each diamond its own identity (FT, 2015). Their understanding of worldwide consumers led them to relaunching the Forevermark brand during Q1 2017 in China, in attempt to boost revenues (SCMP, 2016)- their second largest consumer (Figure 7).

Figure 8: Total consumer demand Source: De Beers, 2014

10

Key Challenges and Plausible Solutions Two of the most threatening challenges DBG face are synthetic diamonds and the scarcity of diamonds. Given the fall of the pearl industry due to rising popularity of plastic pearls, only 1% of industrial pearls today are authentic (FT, 2017) – a precedence that the diamond industry wants to avoid, with the introduction of synthetic diamonds. DBG’s strategy has focused on tackling lab-grown diamonds with technology, DiamondView and DiamondSure, to identify synthetics (Patterson and MacDonald, 2016). It would be beneficial for DBG to incorporate synthetic diamond companies in their group to maintain market leadership. This would create a synergy

as

the

partner would be introduced to larger

Figure 9: Total consumer demand Source: De Beers, 2014

funding

and

conducted R&D.

CEO Bruce Cleaver noted, “Between now and 2020 there is very little supply” (SCMP, 2016). With the group being aware of shortages, they will take extensive measures to acquire sufficient supplies. Their vertical integration strategy protects them from this shortage since they may shift their core focus from upstream to mid-downstream business activities. To protect themselves from short-supply DBG would have to ensure maximum stock-retention beforehand, possibly by acquiring smaller firms and investing in new expeditions for the search of unexplored mines. Based on their position, DBG’s strategy is well equipped to tackle such challenges, whether it be aggressive acquisitions or shifting focus across their supply chain.

11

References Academic Reports Dharmadhikari, K. (2008). From Cartel to Competition: The Evolution of the Global Diamond Industry. [online] New York: Columbia Business School. Available at: https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/2818/From%20Cartel%20to %20Competition%20-%20The%20Evolution%20of%20the%20Global%20Diamond%20Industry.pdf [Accessed 4 Jan. 2018]. Books Grynberg, R. and Mbayi, L. (2015). The Global Diamond Industry. 2nd ed. London: Palgrave MacMillan.

Institutional Reports Dauriz, L., Remy, N. and Tochtermann, T. (2014). A multifaceted future: The jewelry industry in 2020. [online] Paris: McKinsey. Available at: https://www.mckinsey.com/industries/retail/our-insights/a-multifaceted-future-the-jewelryindustry-in-2020 [Accessed 4 Jan. 2018]. De Beers (2016). Building Forever. Report to Society 2016. [online] London: De Beers Group. Available at: http://www.debeersgroup.com/content/dam/de-beers/corporate/buildingforever/RtS/DeBeers_RTS_2016.pdf [Accessed 9 Jan. 2018]. De Beers (2016). The Diamond Insight Report 2016. [online] London: De Beers Group. Available at: http://www.debeersgroup.com/en/reports/insight/insight-reports/insight-report2016/value-chain.html [Accessed 4 Jan. 2018]. Bain&Co. (2017). The Global Diamond Industry 2017: The Enduring Story in a Changing World. [online] Moscow: Bain and Company. Available at: http://www.bain.com/publications/articles/global-diamond-industry-report-2017.aspx [Accessed 5 Jan. 2018].

Journal Articles Porter, M. (1979). How Competitive Forces Shape Strategy. Harvard Business Review. 57 (2), p137-145.

12

Newspaper Articles Atkinson, D. (2000). De Beers to abandon cartel. The Guardian. [online] Available at: https://www.theguardian.com/business/2000/may/30/1 [Accessed 7 Jan. 2018]. Ge, C. (2016). World diamond supply to peak in 2017, De Beers chief executive says. South China Morning Post. [online] Available at: http://www.scmp.com/business/companies/article/2020408/world-diamond-supply-peak2017-de-beers-chief-executive-says [Accessed 6 Jan. 2018]. Johannesburg and Windhoek (2004). The cartel isn't for ever. The Economist. [online] Available at: http://www.economist.com/node/2921462 [Accessed 5 Jan. 2018]. Financial Times. (2015). A guaranteed diamond is forever. Financial Times. [online] Available at: https://www.ft.com/content/5c46c53e-e38f-11e4-9a82-00144feab7de [Accessed 6 Jan. 2018]. Patterson, S. and MacDonald, A. (2016). De Beers Tries to Counter a Growing Threat: ManMade Diamonds. The Wall Street Journal. [online] Available at: https://www.wsj.com/articles/de-beers-tries-to-counter-a-growing-threat-man-madediamonds-1478434763 [Accessed 6 Jan. 2018]. Financial Times. (2017). The long fall and curious rise of the pearl industry. Financial Times. [online] Available at: https://www.ft.com/content/71bf7030-1954-11e7-9c35-0dd2cb31823a [Accessed 5 Jan. 2018]. Business Insider. (2018). The global synthetic diamonds market is estimated to be worth USD 28.26 billion by 2024. Business Insider. [online] Available at: http://markets.businessinsider.com/news/stocks/The-global-synthetic-diamonds-market-isestimated-to-be-worth-USD-28-26-billion-by-2024-1012667221 [Accessed 8 Jan. 2018]. Srinivas, N. (2013). De Beers fighting to restore monopoly; challenges lie ahead. Economic Times. [online] Available at: http://De Beers fighting to restore monopoly; challenges lie ahead Read more at: //economictimes.indiatimes.com/articleshow/19154196.cms?utm_source=contentofinterest& utm_medium=text&utm_campaign=cppst [Accessed 5 Jan. 2018].

Presentations De Beers. (2014). De Beers Analyst Seminar.

13

Websites De Beers. (2017). Our History - De Beers Group. [online] Available at: http://www.debeersgroup.com/en/our-story/our-history.html [Accessed 7 Jan. 2018]. GIA. (2016). Diamond Quality: A Short History of the 4Cs. [online] GIA. Available at: https://www.gia.edu/gia-n...