De Beers Case Analysis Presentation 634vm

8/31/2010

Chandran R 32181 Kaushal Lama 32226 Anwesita Biswas 32108

Priyanka Murthy 32176 Sreeparna Samanta 32239 Aarti Shinde 32295

NATURAL DIAMONDS – Industry Structure Diamonds are one of the world’s, and specifically Africa’s, major natural resources. An estimated US$13 billion worth of rough diamonds are produced per year, of which approximately US$8.5 billion are from Africa (approximately 65%). The diamond industry employs approximately ten million people around the world, both directly and indirectly, across a wide spectrum of roles from mining to retail. Global diamond jewellery sales continue to grow, increasing three-fold in the past 25 years, and are currently worth in excess of US$72 billion every year. The diamond industry can be separated into two distinct categories: one dealing with gem-grade diamonds and another for industrial-grade diamonds. About 30% of diamonds are of gem quality and are distributed to experts for cutting, polishing and jewellery manufacture. 70% of diamonds are sold for industrial applications including cutting, drilling, grinding and polishing in industrial applications.

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THE DIAMOND PIPELINE Bringing diamonds from the earth to consumers

EXPLORATION Diamonds often exist within kimberlite rock, a mineral located often beneath overburden (such as sand, soil or glacier). Kimberlite found by prospectors by testing the ground for changes in magnetic fields.

Main diamond producing countries are: Angola, Australia, Botswana, Canada, the Democratic Republic of the Congo, Russia, and South Africa

MINING Diamond mining methods – Open Pit, Underground, Alluvial, Coastal and Marine The ore containing the rough diamonds goes through many stages of crushing and processing before it can be sorted and classified.

[Locations – Same as above] DeBeers – major player in developing, constructing, operating and maintaining a mine.

SORTING Sorting experts sort and value diamonds into different categories for sale. Different categories - dependent on size, shape, quality and colour. Range of standard colours - Very rare diamonds, known as ‘fancies’

Kimberley Process certificate proves that they are from conflict free

Distinguishing marks, ‘inclusions’ make each diamond unique.

THE DIAMOND PIPELINE (Contd..) CUTTING AND POLISHING Diamantaires cut and polish the rough diamonds into shapes Classified by their cut, colour, clarity and carat weight (the ‘Four Cs’) Sold to wholesalers or jewellery manufacturers in one of the 24 ed known as bourses

Main diamond cutting and trading centres - Antwerp, Mumbai, Tel Aviv, New York, China, Thailand or Johannesburg.

JEWELLERY MANUFACTURING Wholesalers sell these to jewellery designers, manufacturers or retailers. Manufacturers will produce diamond jewellery designed and commissioned by a retailer or other jewellery designer. They may also create jewellery, designed by in-house teams, and sold direct to retailers. System of Warranties

RETAILING The final stage of the diamond pipeline is when diamond jewellery is sold by retailers to the consumer.

Diamond Jewellery Markets –

The value of diamond jewellery sold each year is approximately US$72 billion – including cost of diamonds, precious metals and other gems.

India (3%), China (2%), The Gulf (2%) and other countries (23%).

USA represents the largest market (50%), Japan (15%), Italy (5%), Diamond jewellery is the most sought-after category of luxury goods

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PORTER’S 5-FORCES MODEL

INDIVIDUAL FORCES AND THEIR IMPACTS ON INDUSTRY FACTORS

IMPACT THREAT OF SUBSTITUTES

Growing market for synthetic diamonds

Focus on educating the final consumer on the CSR activities promoted by the companies Marketing strategy - natural diamonds as an object of desire, highlighting its exclusivity Spending on R&D to develop and supply machinery designed to distinguish man-made from natural stones.

COMPETITIVE RIVALRY WITHIN THE INDUSTRY Emergence of diamond producers

Artificial market and price manipulation Flood the market with similar diamonds at below market prices Hoard inventory by selling less

THREAT OF NEW ENTRANTS Though raw diamonds are plentiful, it is hard for a new competitor to enter into the industry Diamond industry is primarily a protected cartel. Diamond dealers and wholesalers work in a very close-knit, vertically integrated chain which makes it hard for an outsider to penetrate. Diamond mines are very capital intensive and are often in countries with unstable political environments.

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INDIVIDUAL FORCES AND THEIR IMPACTS ON INDUSTRY FACTORS

IMPACT BARGAINING POWER OF SUPPLIERS

Increasing levels of forward and backward integration (mines were integrating forward into retail) Dependence on single supplier changing Antitrust regulators Blood diamonds

Change of supply focused industry to strategy that was demand-driven and brand-focused whereby profits were more important than market share Change in the relations with sightholders Kimberley Process Certification Scheme Detailed documentation and certification

BARGAINING POWER OF CONSUMERS Increasing level of forward and backward integration (retail outlets were integrating backward by investing in mines) Supply-side driven, with little attention given to the end consumer Changing consumer perceptions Emerging market for synthetic diamonds

Increased focus on the demand side Changes in brand positioning, marketing strategies Differentiate the product by retailers and create value

De Beers

De Beers and the various companies within the De Beers Family of Companies are in the diamond, diamond mining, diamond trading and industrial diamond manufacturing sectors. It is by far the largest company in all these categories. De Beers is active in every category of industrial diamond mining: open-pit, underground, large-scale alluvial, coastal and deep sea.

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POSITIVE RESPONSE – By De Beers

Growing market for Synthetic Diamonds Consumer Education Discovered 39 new diamond deposits

Emergence of new diamond producers Focus on brand development Change in relations with sightholders Demand centered strategy -Supplier of Choice Program

Shrinking Market Position Partially reimbursed sightholders Guaranteed natural, ethically traded, non-treated polished diamonds – Forevermark logo

NEGATIVE RESPONSE – By De Beers

Growing market for Synthetic Diamonds

̶ Gem Defensive Program – Lasering “lab-created” Shrinking market position

– Market manipulation Purchase of Blood Diamond Stock piling from other diamond producing nations

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NATURAL DIAMONDS Vs. SYNTHETIC DIAMONDS Factors

Natural Diamonds

Synthetic Diamonds

Creation

Billions of Years

4 days, HTHP Process

Flaw and Blemishes

More flaws and blemishes, adds beauty

Less, Unique carbon Inclusions, distinct colors

Quality

Unique Colors and flaws

No difference Chemically

Weight

Heavy

Light & < 1 Carat

Cost

Expensive

30 – 90% of cost of Original Diamonds

NATURAL DIMAONDS

LAB MADE DIAMONDS

CUBIC ZIRCONIA

Colorless Stones

1 Carat = $6,800 - $ 9,100 0.5 Carat = $ 900 - $ 2,500

1 Carat = $5 - $ 15

Colored Stones

1 Carat - $9,000 (yellow) $ 1,00,000 (pink)

1 Carat = $10 - $15

1 Carat = $2,000 $ 7,000

SHORT TERM STRATEGY

Enter Synthetic Diamond • Venture into new Product Market

Low Cost Diamonds • Manufacture low cost diamonds on a new brand

Growth & Expansion • All forms of diamonds • Increase reach globally

IMPLICATIONS

Huge Investments

New Revenue Stream

Company’s Growth

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LONG TERM STRATEGY

Mass Production

Excess Supply

Drive Competition

Commoditize Synthetic Diamonds

Consumer Awareness

Produce lowest cost diamonds on a Large Scale Flood Market with cheap diamonds. Excessive Supply shall increase competition in price This shall clearly differentiate Synthetic Diamonds Diamonds as a

from Natural

Commodity

In the long run, Natural Diamonds shall remain a and precious product for its Rarity.

FEASIBILITY & POSITIONING Feasibility

De Beers has strong Financial strength to enter Synthetic Diamonds Growing demand for synthetic diamonds Synthetic diamonds usage more in Fashion segment than bridal segment Controlling supply was an illegal move, over production may be feasible and legal

Positioning Natural diamonds – for high class segment Positioned on emotions of relationship Ad campaign such as

Price is just a tag, show your love Naturally!

Synthetic Diamonds – Low cost – Diamond for all segments Positioned on as a add on for beauty. Ad campaign such as It

completes you

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SONY’S PROBLEM

Sony’s name has been synonymous with Portable Music from the beginning. In the ‘80’s when cassette tapes were the popular medium, the Sony Walkman was the leading audio cassette player. As the music industry transitioned from analog to digital, Sony led the way with their Discman line of CD players. But coming to MP3 era, Sony's name stopped being synonymous with "Portable Music“ and started being associated with “proprietary”.

BASIC REASON & COUNTER MEASURES

• Reason: Reliance on MD (Mini Disk) format even after the advent of MP3 player • They came up with flash based music player – NW-MS7 (1999) with 64 MB memory size • Played ATRAC format • Proprietary software SonicStage • Duo port Memory stick

– NW-MS90D with 640 MB and very expensive

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COUNTER MEASURES(Contd…)

To fight with the success of IPod Sony came up with few more models NW-HD1(2004): ATRAC format NW-HD3(2005): Software problem NW-HD5(2007): Cosmetic design problem as buttons developed small cracks

WHAT WENT WRONG WITH SONY?

• 2 huge anchors that prevented Sony's ship from sailing – MD player used their proprietary ATRAC format – Sonic stage which works only in windows platform

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Finally Sony Accepted Mp3 format

• In 2004, Sony accepted Mp3 format • In 2007, Sony came up with A-series music players which ed many files including mp3 format and also they removed the dependency upon Sonicstage • Later they came up with noise cancellation model and other models that ed video files also

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