DeBeers Case Study

I.

The The De Beer Beers s orga organi niza zati tion on was was succ succes essf sful ul at mo mono nopo poli lizi zing ng the trade of gem quality rough stones for over a century. Please explain the mechanisms by which the rm managed to sustain its central position in the diamond trade for as long as it did. a. First First Move Mover r Advan Advantag tage e 

Dominance over the industry began as soon as Rhodes secured a monopoly on pumps used by diggers in the expell expelling ing proce process ss.. He quickly quickly seized seized command command of the market by purchasing all the major mines in South frica! giving control control to "#$ "#$ of the %orld&s %orld&s output. output. 'his set the the stage for things to come in the diamond trade industry.

b. Establis Establishing hing a Single Single Channel Channel Monopol Monopoly y 

 'he De (eers distribution distribution channel! named named the )entral Selling *rganization *rganization or )S*! +later changed to Diamond  'rading  'rading )o. )o. or D'),! D'),! had the po%er po%er to sell %hat! %hen! and %here they %anted to. -n order to buy from )S*! membership as a Sightholder/ %as required! %hich %as completely the discretion of De (eers! as %as the quality and price of the product being sold. 0o negotiation bet%een the )S* and Sightholder occurred1 all transactions transaction s %ere take2it2or2leave2it. take2it2 or2leave2it. -n order to maintain a stable but rising diamond price! De (eers had the po%er to stockpile inventory in a %eak market or raise the prices charged to Sightholders! and then in an excessively strong price environment +%ith the potential to damage demand,! De (eers had the excess supply on hand to release to the market %hen needed! repressing disorderly price increases.

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 'o  'o keep the the system intact! it %as necessary necessary for De (eers to maintain control of the %orld&s rough diamond supply via purchases through )S*. De (eers maintained a hold on %hat %as a relatively relatively small industry at the time by expanding from mining into every facet of the diamond industry! %ith %ith a focus on monopolizing distribution. distribution. De (eers successfully in3uenced just about all of the %orld&s rough suppliers to sell production through the De (eers

channel! gaining control of global supply. 'his gave De (eers the po%er to in3uence diamond supply and thus diamond prices.

c. Marketing Strategy 

De (eers successfully advertised diamonds to manipulate consumer demand. *ne of the most e4ective marketing strategies has been the marketing of diamonds as a symbol of love and commitment.  young copy%riter %orking for 0. 5. yer 6 Son! 7rances 8erety! coined the famous advertising line 9 Diamond is 7orever9 in :";<. -n =###! dvertising ge magazine named 9 Diamond -s 7orever9 the best advertising slogan of the =#th century.  'hanks to a long! successful marketing campaign by De (eers! diamonds became strongly associated %ith romantic love! >rst in the ?nited States and then globally. -n the :";#s the company launched a long2running and reno%ned campaign around the theme  diamond is forever./ *ver many decades! hundreds of millions of dollars %ere spent to market the notion that diamonds signify romance and love.

II.

!hy has De Beers given up monopolizing rough stones" That is# De Beers had a strategy that served it well for  decades. !hat caused this strategy to lose consonance $%t& with the conditions in its environment'" a. The Dissolution of a Cartel 

Ho%ever! in the second half of the =#th century! as ne% %orld2 class mines %ere discovered in Russia! ustralia! and )anada! it became increasingly di@cult for De (eers to control global supply. 'he biggest risk to the survival of the De (eers cartel %as for these ne% %orld2class mines to begin selling directly to the market! bypassing De (eers. 'he break2up of the Soviet

?nion brought a 3ood of illicit diamonds on to the market! as did the civil %ar in ngola. 

Russia began producing diamonds in the :"A#&s. t >rst! the Russians agreed to sell production to De (eers keeping the cartel intact. Ho%ever! the arrangement %as %eakened in :"BC %hen nti2partheid legislation restrained the Soviet ?nion from dealing %ith a South frican company. 7urther pressure came during the Soviet ?nion collapse in the :""#&s! %hen political chaos and a %eak ruble further separated Russia&s production from De (eer

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Shortly after losing control of the Russian supply! the rgyle ine in ustralia +at the time the largest diamond producing mine in the %orld by volume, broke a%ay from De (eers because of the cartels in3exibility. *ver the next fe% years! other mines follo%ed suit! as ne% %orld2class mines in )anada chose to sell their supply independent of De (eers.

-n an e4ort to maintain control of supply! De (eers began buying diamonds in the secondary market at a premium! but the strategy %as short lived as the cost %as prohibitive. (y the end of the :""#&s! De (eers& market share had fallen from as high as "#$ in the :"E#&s to less than B#$. -n =###! De (eers announced a shift in strategic initiative focused on independent marketing of the De (eers brand! implying that they no longer had control of the market.

b. Governent !ntervention  -n =##:! several la% suits %ere >led in ?.S. courts alleging that De (eers unla%fully monopolized the supply of diamonds! conspired to >x! raise! and control diamond prices! and issued false and misleading advertising./ fter multiple appeals! in =#:= the ?.S. Supreme )ourt denied >nal petition for revie%! and a settlement in the amount of F="A illion %ith an agreement to refrain from engaging in certain conduct that violates federal and state antitrust la%s/ %as >nalized. 

Decline of onopolyθ -n :"":! the Soviet ?nion +the %orlds second2 largest diamond producer by value, collapsed. θ -nvolvement in a :""; price >xing case. θ -n :""B! ustralias rgyle mine became the >rst major producer to terminate its contract %ith De (eers. θ Several rich diamond deposits %ere discovered in the 0orth%est 'erritories of )anada. θ  Diamonds became tainted by the term blood diamonds/.