De Beers Assignment 2 PDF

Project Management – MGMT 8021
Project Management
Project Management Task – Case Analysis
The De Beers Group:

Exploring the Diamond Reselling Opportunity
SUBMITTED BY:
UMER ALI KHAN
STUDENT ID: 45678294
SUBMITTED TO:
PROF. STEVE ERICHSEN
UNIT CONVENOR, PROJECT MANAGEMENT MGMT 8021
Macquarie University – S1 2020

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Table of Contents
INTRODUCTION ................................................................................................ 2
PROBLEM STATEMENT .................................................................................. 3
ANALYSIS .......................................................................................................... 4
RECOMMENDATIONS ..................................................................................... 5
FINAL RECOMMENDATION ........................................................................... 6

Introduction
The De Beers Group was founded in 1880 after the exploration of Diamond mines in
South Africa to offer valuable premium diamonds to consumers as a stone of love and
affection. It was founded by Cecil Rhodes, who through this group reshaped and
revolutionized and the untapped Diamond Industry and notably became the pioneer seller of
valuable diamonds throughout the world. The company flourished quickly and by 1887 it
became the world’s largest controller of the diamonds in South Africa as well as controlling
95% of the diamond resources globally. The diamond industry is particularly divided in to
three major segments, 1) Upstream: exploration and utilisation of mines, 2) Middle Market:
cutting and polishing of Diamonds and 3) Downstream: selling and purchasing of diamonds
at retail outlets. De Beers group was involved in the upstream segment as it was the most
profitable one and sold rough diamonds to wholesalers throughout the world. The demand
eventually started to decrease and hence De beers launched an advertisement campaign with
a slogan “A Diamond is Forever” which triggered the demand and changed the concept of
holding a diamond making it more valuable and precious than ever before.
Problem Statement
As the Diamond industry expanded, it brought along both opportunities and threats
for the De Beers group and one big threat was the large number of new entrants into this
industry. One of the major issues that soon prevailed was that people were facing a bad
experience and low prices when it came to resell a diamond which in turn was shifting away
consumer interest and perception towards diamonds. A survey that was conducted by the
company, found that almost 60% of the people who sold diamonds was due to a financial
hardship. In essence, Consumers paid high amounts when it came to purchasing diamonds
and received low amounts when reselling them. In order to retain the value of the diamonds,
to enhance re selling experience, offering true value and to cater to the increasing demand the
company decided to enter into the downstream segment. In order to create demand in the
downstream segment, the company invested in branding, reduced the sight holders’ numbers
from 250 to 50 and opted for joint ventures with premium retailers such as LVMH to sell
diamond jewellery under the De Beers group brand. To further address the issue and to
evaluate a new business opportunity, Tom Montgomery senior vice president launched a pilot
program by the name of International Institute of Diamond Valuation (IIDV). The underlying
purpose of the program was to help customers in determining the true value of a diamond
which was offered to a retailer for selling. Evaluation was based on a number of factors based
on the GIA grading system. In return, the retailer will receive a commission on the selling
price. IIDV aimed to make the highest possible price for the jewellery and once purchased
they finally intended to sell the purchased diamonds back to the wholesalers either as it or by
re-cutting and re polishing them.
The IIDV program was a pilot program which was envisioned to be in place for a few
months. Tom Montgomery after the launch quickly realised the uncertainty associated with
the project that it might end anytime soon due to which retailers were reluctant to sign up, it
became difficult to hire people and capital constraint became a major problem. Tom believed

that the IIDV project had the potential to succeed on all fronts and hence he developed a
presentation to propose it to the executive committee that IIDV should become a permanent
stand-alone business unit. Montgomery had the proposition to invest $20 million in the next
coming years to expand the business and envisioned that as the volume to the sales would
increase so will the profits. However, he knew that the committee would have concerns
regarding the uncertainty of the project, it might lead to cannibalization of rough diamond
sales, it might impact the prices of polished and rough diamonds, and most importantly what
if the new business unit angers the wholesalers who regarded De beers as an upstream
supplier of diamonds.
Analysis
After consultation and advice from the Bain and company, De beer’s is deciding on
adopting a vertical monopoly, which will be extending from mines to the retail. This is
different from what previously de beers did in controlling the global supply chain to now
targeting directly to the customers through branding, advertising and marketing of diamonds.
In order to determine the most appropriate course of action in evaluating IIDV as a pilot
program or transitioning it to a stand-alone permanent business unit we need to take several
options and factors into consideration. For a matter of finding the best course of action it is
considerate to take porters five forces of model to analyse the internal factors and PEST
analysis (Political, Economic, Social and technological) to take the external factors into
consideration.
Considering the political scenarios, most significant troubles for De beers group has
been due to new imposed laws and regulations on the upstream segment due to the trading of
blood diamonds which were used to finance illegal and unauthorised activities throughout the
world. Governments have also introduced a Kimberly scheme specifically targeted towards
the trading of blood diamonds which has impacted and made it more complex to mine and
trade diamonds in the whole sale market. It can be seen from the world production of rough
diamond graphs that after 2008, the production has significantly experienced a dip in the
output. As per the economical trend, it is forecasted that the demand of diamonds will go up
in the future and to cater to that it is important for De Beers group to be on the forefront in
merchandising and gross sales of diamonds to capitalise on the forecasted opportunity. As it
is a luxury good and not a need, the economy must be stable or booming in order for people
to have savings and purchasing power through which they can invest in diamonds. After the
2008 economy crisis, people became more reluctant to buy luxury goods and which has
impacted the diamond market as well. Diamonds are being sold for price less than their actual
estimated value. The social factors have mostly been in favour of diamonds, as they are
particularly associated as an expensive product and fulfils the psychological needs of a
human as in self-esteem, achievement and means to express gratitude and love. In the 20th
century, technology has led to advancement in diamond exploration and production of
synthetic diamonds but with that it has brought in increased competition as well. As a global
perspective, the marriage rates are declining. In order to implement the new strategy of
creating a vertical monopoly, the company would have to invest heavily on marketing and
branding of diamonds to create demand and enhance consumer value. The suggested “forever
mark” campaign is a good idea to shape a new approach towards purchasing and holding

diamonds. In terms of the upstream segment, the strategy should be top cut down costs of
mining as the costs are quite prevalent as of now and as the mines get deeper, they will
certainly keep on rising. Hence the operating margins will shrink, and the cost of rough
diamonds will go up while the consumers willing to pay for a diamond does not seem to rise
at the equal ant proportion.
De beers have been in a monopolistic position in the upstream business where there
are only 20 firms and the top 5 firms control 70% of the exploration and production.
Whereas, in the downstream business there are 200,000 small retailers which constitute to
65% of sales and 5000 large retailers which constitute to 35% of the total sales. The operating
margins are the highest in the upstream business of 23% and notably does not have any
competition as well. One option can be for De beers group to concentrate on the upstream
segment and put in resources to minimise exploration costs and to concentrate on the whole
sale market. This will be beneficial in terms that the company will not experience aggression
from the downstream segment in terms of competition. Evaluating the external elements, the
bargaining power of supplier in terms of De beers group is low. This is due to the own
distribution channel that De Beers group has, and it has control over both upstream and down
stream segments. De beers group sells its products directly to the wholesalers or LVMH and
other brands with whom they have a joint venture. The bargaining power is high in the
upstream segment as compared to the downstream segment in which it is medium. The
bargaining power of buyers is low as there is no substitute for a market in the diamond. As
the demand for diamonds is increasing exponentially as compared to the supply of diamonds
that is decrease due to scarcity. De Beer’s group has a competitive advantage of being
geographically present in 28 countries and has mining facilities in 4 countries as well.
Recommendations
One possibility considering the scenarios is that the committee approves the IIDV
project as a separate independent project and they only concentrate on the 5000 large retailers
who De beers group take on board and provide them with the resources of IIDV project. It
will be beneficial as the large retailers will constitute to relatively higher profit margins of
12% and only 35% of the sales which will help De beers group in investing less in terms of
capital and resources yet reaping the profits. In this way they will cater to the downstream
segment and eventually the small retailers in order to remain competitive would have to
adhere to the market trends of valuation of diamonds and providing better customer
experience. De beers group should minimise the costs in the the upstream segment and
achieve efficiency in the mid-stream segment. The cost of rough diamonds is $120 per carat
which is sold for $200 per carat but as it goes along through the mid-stream and into the
down stream it eventually has a price of $900 per carat. That is a huge profit and an
opportunity for the De beers group. They need to regain the trust of the customers through
making a better re selling experience and that cannot be done unless and until and major
player comes into play and set new norms and procedures to determining and offering true
value of diamonds. IIDV program is of considerate importance and worth investing in time
and resources because if the company does not do so the value of the diamonds will decrease
and so will the demand. The pros of creating secondary market will be that it is going to
create new demand, but the cons will be that it will increase speculation and will take time

for the market to establish. Another possibility is to liquidate low end, through this the
company can liquidate lower quality diamonds and use proceeds to purchase higher quality
stones which will create the much-needed liquidity for the company and maximize profit on
larger, higher quality stones. Another alternative can be to decrease production, this will lead
to decrease inventory coming into the market and De beers has a majority control of the
market. But through this the disadvantage can be adverse impact to relationship with
diamond-producing countries and other companies may increase production and benefit from
it.
Final Recommendation
The final recommendation will be to put IIDV as a separate permanent business unit
incorporating De beers hold from upstream till downstream segments. They should acquire
additional financing which will required to purchase the excess inventory preferably through
CSO. It is vital to create more demand and reduce the supply and hence the company should
reduce output of De Beers controlled mines. In order to the project to be successful and to
reap high cash inflows and profits, it is vital to increase the demand of the product, for which
the company should employ aggressive advertising strategy aimed towards the downstream
segment.

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Project Management – MGMT 8021

The De Beers Group:

Macquarie University – S1 2020

Macquarie University – S1 2020

Macquarie University – S1 2020

Macquarie University – S1 2020

Macquarie University – S1 2020

Macquarie University – S1 2020

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