Q1.

Keeping the period 1945-2015 in mind, comment upon the industry dynamics and shifts that
occurred in the natural diamonds industry? (6 marks)

Answer:
Following the industry dynamics and the shifts that tool place in the natural diamonds industry in
the period of 1945-2015:
● Not a commodity: Diamonds due their creation process are very heterogeneous -
meaning they are very diverse and of different characteristics. Due to this nature, they
cannot be considered to be a commodity like gold or silver which are homogenous
(same in nature globally). This brings a complication to industry as it becomes difficult to
value diamonds - one cannot apply the same pricing metrics to a different diamond as
they do not possess the same characteristic. Therefore, each diamond needs to be
checked for quality and preciousness based on which it is valued.
● Increasing global production and future prospect: The very first industry dynamic to
look at was the growth rate of global diamond production - world production of diamond
rough grew 31% by volume and 70% by value between 2000 and 2005, highlighting the
upward trend of diamond prices. This denoted that the industry was running more due to
the supply side and less based on the demand for diamonds which made it easy for
large players.
● Volume-Value disparity: Among the seven major diamond production countries -
Angola, Australia, Botswana, Canada, the Democratic Republic of the Congo, Russia,
and South Africa - that represented 85% of value production and 96% of global
production volume, there was great disparity in the relationship between the volume and
value of production for some countries. For example, while the Congo and Australia
were significant producers on a volume basis, the value of their production was quite
low. Angola presented the reverse scenario.
● Geographical shift in value chain: The processing part of diamonds (cutting and
polishing) which was once done majorly in India (as it was a cheaper alternative to
countries like China, Israel, South Africa etc.) and other countries like Belgium/Israel
started shifting in the late 1990s to the South African countries as a number of countries
there were amending their diamond laws to support and build local diamond-related
industries. Eg- In 1999, Namibia forced miners to sell a percentage of their diamonds to
local polishers. South Africa passed the Diamonds Amendment Act under which
producers would be hit with duties on exporting rough diamonds.
● Onset of Integration within organizations: The industry also started experiencing an
increased level of forward and backward integration: Mines were integrating forward into
retail and retail outlets were integrating backward by investing in mines. For example, in
1999, high-end jeweler Tiffany & Co. announced that it was buying a stake in a
Canadian mining concern. . In 2003, Aber Diamond, a Canadian mining group,
purchased U.S. luxury jewelry retailer Harry Winston giving it storefronts in the United
States, Japan and Switzerland. In 2005, Russia’s mining giant Alrosa opened up a
diamond retail store in a shopping complex off Red Square.
● Increase in demand for Diamonds: The United States was far and away the world’s
biggest purchaser of diamonds accounting for 46% of total demand followed by the
 Middle East with 12% and Japan with 9%. However, demand, particularly for diamonds
over 2 carats (worth $15,000 or more), was soaring in India and China in concert with
increasing disposable incomes and a growing middle class. India was the fastest
growing diamond jewelry market with a growth rate of 19% in 2005. While at one time
the diamond industry was supply-side driven, with little attention given to the end
consumer, by the late 1990s the industry began focusing more on the demand side. The
main catalyst for this shift was DeBeers’s decision to conduct business in a whole new
way.
● DeBeer’s syndicate and its fall: In the early 1990s DeBeers ruled the diamond
industry. While it only produced 45% of the world’s rough diamonds, it sold 80% of the
total supply from its marketing unit in London. Its market dominance enabled it to choose
whom to sell to, how much to sell, and at what price. Buyers who turned down an offer to
purchase might not be invited to purchase from DeBeers again. Meanwhile, buyers who
strayed from DeBeers’s selling arms and purchased directly from a mine would be
dropped by the company or financially punished.
DeBeers’s monopoly was shaken in the 1990s from the emergence of
three producers that fell outside of its grasp:
● The first was the collapse of the USSR: When diamond deposits were discovered
in Siberia the Soviets had sold their entire diamond production to DeBeers. But
after the USSR disintegrated, DeBeers was unable to enforce the contracts and
Russian diamonds were soon being smuggled into the international market
causing a price fall. At the same time, Lev Leviev joined hands with Russia’s
diamond mining group, Alrosa, established a cutting factory by capitalizing on the
Russian diamond mines.
● The second being lost ties with Argyle diamond mines: In 1996, Australia’s
Argyle diamond mine, which produced low quality diamonds suitable for
inexpensive jewelry, terminated its contract with DeBeers and began marketing
its own diamonds.
● Canada as a diamond producer: The emergence of Canada in the early 1990s
as a diamond producer served as a further threat to DeBeers’s position. While
the company was successful in acquiring stakes in a couple of Canadian mines,
the majority of the country’s production fell outside of its control.

DeBeers, in order to keep the market dominance, was forced to hold large
portions of diamonds due to which by the end of 1990s, its market share had
fallen from 85% to 65% while its diamond stockpile had grown from $2.5B to $5B

● Blood Diamonds: The flooding of diamonds worth $1.2B in the market by the rebels in
mid- 1990s led to a supply of money into the conflict of Angola and the rebels as
DeBeers was forced to buy those ‘blood diamonds’ in order to maintain the supply.
DeBeers’s involvement in the “blood diamond” trade was exposed in a 1998 report by
Global Witness which accused the company of “operating with an extraordinary lack of
accountability. This brought forward a great operational challenge to the market’s
biggest player (DeBeers) and changed the industry dynamics to some extent where
 people started asking questions about the origin of diamonds and whether the value
chain was rewarding the wrong side of humanity.

Q2. Comment upon some of the many strategies/ tactics used by De Beers to handle the
various challenges that De Beers has faced since its inception till 2015 to build itself up and
grow into a giant company? (8 marks)

Answer:
Following were a few tactics/strategies used by De Beers to handle the different challenges that
it faced and that helped it grow into a giant company:

● The early advantage that DeBeers enjoyed that helped it become a giant was its
monopoly in the market. While it produced only 45% of the world’s rough diamonds, it
sold 80% of the total supply. It was basically a “take what we give” type of scenario
where the end consumers did not have much choice and had to go with whatever
DeBeers had to offer. It purchased directly from the mines and sold it at their desired
price, time and place. Buyers who did not comply with it were punished in different ways.
Thus, DeBeers in a way maintained its monopoly which helped it consolidate its market
share and helped it become a giant.

● After DeBeer’s market position was shaken due to the fall of USSR and various
competitor moves, DeBeer’s took to the strategy of creating an artificial supply by
stockpiling diamonds and releasing them when a certain price level was reached.
Although, this strategy was more like a forced move that the company had to take and
thus did not help it as much - rather, the company’s share price during this period fell
from $17 to $12, a nearly 30% drop.

● In 1998, after all the cases and allegations on DeBeers related to “Blood Diamonds”, it
implemented a new strategy that was now demand-driven and brand-focused where it
paid more attention to profits rather than market share. It now started to focus on product
differentiation and create value for customers by creating better products at better
prices.

● Within DeBeer’s demand-driving strategy was what it called the “Supplier of Choice”
initiative wherein DeBeers aimed at being a supplier of the customer’s on choice rather
than being a last resort or purchase for them. Within this program, DeBeer’s reduced the
number of sightholders from 120 to 80 and also gave the sightholders a choice to
purchase the product that they wanted from DeBeers rather than purchasing whatever
DeBeers offered them. DeBeers wanted more brand building for itself and wanted
people to have a positive perception towards the company, therefore it started selecting
sightholders based on the marketing savvy and not just financial strengths.

● In order to boost the value of natural diamonds and create a differentiation for natural
diamonds, DeBeers also came up with the “Forever mark” scheme under which the
 sightholders could use DeBeer’s ForeverMark logo that could be etched into natural
diamonds. The logo in a sense, guaranteed that the diamonds were natural, ethically
traded and non-treated. DeBeers also shared its marketing data with the sightholders
including the buying habits and patterns and the number of engagements worldwide.
Those sightholders that were able to build strong brands for themselves and for the were
reimbursed to some extent by DeBeers for the money that they spent on advertising and
marketing as a better business for the sightholder meant a better business and brand
image for DeBeers as well. This was a good strategy as through this DeBeers was
able to improve its brand image passively.

● Also, diamonds being a luxury item that suffered lack of branding gave DeBeers an
opportunity to brand their products as branded luxury items in the diamonds and
jewelry segment which in a way boosted their financial performance. There was the
absence of a branded diamond company and this gap was identified by DeBeers which
it tried to fill by bringing in its product line into the branded jewelry segment. In 1997, a
wholesaler who sourced diamonds from DeBeers began selling a branded diamond
called “Hearts of Fire '' which was differentiated as “the world’s most perfectly cut
diamond”. This brand produced a whopping $40M in sales each year. Therefore,
branding of diamonds started making sense as the market was shifting to a
demand-driven model.

● Then there were the non-wedding advertisement campaigns which included the
“Celebrate her” campaign, “Women of the world raise your right hand” campaign.
DeBeers entered into a joint venture with LVMH to open up a series of retail stores and
thus diamond jewelry was sold under the name of DeBeers. In 1999, DeBeers entered
into the brand world by marketing a limited-edition (20,000 stones) Millennium diamond,
engraved with the company’s logo and the year 2000. The Millennium diamond’s
campaign came with a tag line of, “Show her you'll love her for the next thousand years.”
DeBeers’s brand positioning was accompanied by attempts to widen its customer base.
All this helped in building a strong brand image for DeBeers and helped in increasing its
market presence while creating a differentiation for DeBeer’s products.

● Upon the entry of Synthetic Diamonds, there were two strategies implemented by
DeBeers to protect the future of natural diamonds: (1) It developed a Gem Defensive
Program through which it warned the jewelers about synthetic stones and in 2000 it
started supplying machineries to gem-labs to distinguish between synthetic and natural
diamonds. (2) It focused on customer education where it promoted the beauty of
natural diamonds as the process of its creation and the benefits that mining communities
get via the business of natural diamonds. This strategy would help create a strong
connection with the consumers as it depicted the economic reforms that could take place
in the mining community if people bought natural diamonds.
Q3. Comment upon 'changing consumer perceptions' towards conflict minerals and ethical
sourcing as a whole since 2005 till date (6 marks)
Consumer perception started changing towards conflict minerals and ethical sourcing as a
whole since 2005 due to multiple reasons:

● After the release of movies like Blood Diamond, people came to know about the dark
realities of Diamond production and sourcing. It played a major role in forming a resistive
public perception towards conflict minerals and made people think about the purchase of
natural diamonds due to the ethical issues revolving around it. From what happened in
Angola and Sierra Leone, it made clear to the public about the financing of the wars
using smuggling of diamonds. This made people hesitant of buying natural diamonds as
in the back of their minds they had this picture of them contributing into the war and
being a part of the blood diamond trade.

● People raised questions around the sourcing of diamonds as it also came to be known
that the mining communities did not receive enough remuneration for their hard
work. It came out that people in the mining countries saw minimal reforms and cash
inflow even when they were the core producers of precious stones like diamonds. This
made buyers further hesitant of buying diamonds as they did not agree with the injustice
that was happening with the mining communities. The people working in mines spent all
day working and even putting their lives at risk to mine the diamonds and in return they
could barely make a living out of it. This was deeply saddening and general consumers
did not want to associate themselves with a product that came after creating problems
for people. Also, when people bought natural diamonds they were always told by the
sellers that the money would go to the development of the mining communities and
people living in Africa which actually did not happen. This led to a decline in demand for
natural diamonds and thus reduced its prestige.

● With reports of growing circulation of blood diamonds in the open market, customers
started being agitated regarding the ethical implications. Diamond industry and various
governments were forced to introduce new measures like the Kimberley Process
Certification Scheme which saw participation of 70 countries globally to monitor abuses
in the industry. Stricter monitoring practices were implemented including shipping all
diamonds in tamper proof containers with certificates verifying they came from a
legitimate source. All these measures in turn made customers more aware of the depth,
scale and the seriousness of the issue which in turn changed their perception.

● But even the Kimberley Process Certification was not efficient in monitoring the
authenticity of diamonds as one example, Sierra Leone, which accounted for up to 33%
of the world’s smuggled diamonds, had a mere 200 monitors for the entire country
sharing 10 USAID-donated motorcycles. It was even said that there was no
improvement in the mining community even after the reforms were implemented as
working conditions for many Africans involved in the mining business remained
appalling, opining, “Conflict-free diamonds should not be confused with ethical
diamonds.”
● Adding to the unethical practices involved with natural diamonds, the fact that synthetic
diamonds were free from all these controversies led to a good alternative for the
customers. Customers could buy diamonds with exactly the same characteristics as
natural ones without having to bear the guilt of being a part of conflict mineral trading
and blood diamond trading. Adding to this, the availability of colors in synthetic diamonds
gave them another reason to choose man-made diamonds over natural ones: man-
made diamonds had more variety.

● Even in the industrial sector, synthetic diamonds started to become more popular
as many in the industry believed that due to the chemical composition of the diamond
and its ability to be used in a wide array of industries, synthetics would inevitably have a
bright future beyond the jewelry industry. As microprocessors became hotter, faster, and
smaller in accordance with Moore’s law,synthetic diamonds could be used as a
substitute to heat sensitive silicon. Diamond microchips could handle extreme
temperatures allowing them to run at speeds that would liquefy ordinary silicon.

● Still natural diamonds had the sentimental value attached to them that the synthetic
ones couldn’t have - natural diamonds being costly gave a different sense of value.
When people wanted to gift diamonds to their loved ones, they did not want to hold back
and have a thought in their mind that they were gifting a “cheaper alternative” (synthetic
diamond) rather than an “authentic” diamond (natural diamonds). This thought in the
customers’ mind prevented them from radically shifting from natural to synthetic
diamonds.