Presented by: Abul Asim Muhammad Hasan Musharib Raheem Salman Moin Qureshi

Question 1

What functions does the CSO perform as an intermediary? How do these functions help expand the economic Pie in the diamond industry? Why has the CSO been more successful than OPEC?

"By the end of the 1990s, that [supply-management] business model no longer worked for us," says Penny. "It wasn't economically feasible, it was legally challenged, and it was just something that needed to change. De Beers shifted its strategy from managing supply to driving demand.

Gareth Penny, managing director of De Beers, in the late 19'90s

Functions

Control the supply and demand Market the diamonds Restricting the supply of diamonds on the market and raising the price far above what would have been market levels. Grades, distributes, and sells all the rough diamonds to cutters and dealers further down on the road toward the consumer.

DeBeers has persuaded the world's diamond miners to market virtually all their diamonds through DeBeer's Central Selling Organization (CSO) A mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance.

Expansion in the Economic pie

Diamond Trading Co. Botswana, a joint venture between the government of Botswana and De Beers. Creating more than 3,000 jobs10% of all those employed in the manufacturing sector in the country. Created job opportunities. Cash rotation.

CSO successful than other cartel

The market has not been really free. The international diamond cartel was only maintained and has only prospered because it was enforced by the South African government. They advertise! An Ayer memo concluded that the depressed state of the market for diamonds was "the result of the economy, changes in social attitudes and the promotion of competitive luxuries." N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the "social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of "competitive luxuries."

Question 2

How does the expanded economic pie end-up getting divided among the various players in the diamond industry? Why?

Players In Diamond Industry

Mines Operators in South Africa, Siberia<Russia>, Zaire, Botswana and Australia etc De Beers, Single Producer having monopoly in diamond industry Sight Holders, Bulk Buyers Investors ( banks hedging against inflation ) Cutters Dealers Jewelry Manufacturers Retailers

CSO balanced the demand and supply to keep the price stable controlled supply, price and quality Monopolistic policy allowed CSO to divide economic pie among players. Each Player had a certain range of markup on the Diamonds.

CSO Premium and Surcharge

CSO was the Key supplier and base trader of all type of marketable diamonds, therefore its profit depended on the Size and Quantity of Different Grades of Diamonds Surcharge was charged by CSO that had a range between 25-30%. This was done to curb the demand of diamonds by Hoarders. Even in the Presence of Surcharge the CSOs Parcel sell for a Premium of 50-100%. NOTE: 20% of overall diamonds traded were high grade diamonds.

Commission for Different Players

Russia = 10% Commission Due to High Quality and High Value Diamonds Zaire and other players = 20% Commission

arkup Range for Market Players

Cutters Markup = 20% Dealers markup = 10% Jewelers markup = 50% Retailers markup = 100%

CSO is the Key Player in the diamond market, the one that sets the price and supply parameters. Therefore biggest Piece from the Pie got rewarded to CSO and De Beers. Serbia <Russia> was the Best source of high quality- high value diamonds therefore the commission charged from Russia was least and CSO had discriminatory Behavior with Russia due to fear of its directly accessing diamond market.

Zaire, Botswana and Australia etc were charged higher Commission <20%> due to Lower Grade of Diamonds. Cutters, dealer, jewelers as well as retailers charged the mark up as defined above based on the value addition and Inventory Turnover. Higher the markup lower is the inventory Turnover on the respective entitys end

Question 3

Should De Beers pull the plug on the CSO stock piling strategy? Depending on your answer what specific actions would you recommend?