DeBeers Case Analysis and PEST Analysis Essay
DeBeers Case Analysis and PEST Analysis
De Beers is currently being faced with some new challenges that are making it necessary for us to consider a change in the way we do business. With recent turmoil in Western Africa, where illicit diamonds are beginning to come from war torn villages, and other sources of diamonds being found in Russia and Australia, it is clear that we need to begin to move into the U.S. market. However, legally, De Beers is in violation of the U.S. antitrust laws and is therefore being prohibited from selling directly in the U.S. market. Throughout the following memo I will identify the problems we at De Beers are currently facing. I will then make a set of recommendations for action to help us move into the U.S. market by proposing a relaxation of U.S. antitrust laws with restrictions on illicit diamonds, and finally I will conclude with some implementation steps for the solutions that have been recommended.
A PEST analysis has been performed on the current situation facing De Beers. In the following section, I will focus on the most important problems identified in the PEST analysis for which we must find solutions and also on the most important positive forces that we must leverage to our advantage in order to maintain or gain market share. Please see Exhibit 1 for details on the PEST analysis and additional information on other issues we are facing and forces that might help or hinder our market share in the U.S.
The most important of the problems we are faced with are due to Political issues in the United States and elsewhere. Due to war in western Africa, diamonds are beginning to flow from the war torn fields of Sierra Leone and Angola, and in Russia, mines are being controlled locally as opposed to in collaboration with De Beers. These challenges alone pose a threat to the power that De Beers currently holds over the diamond industry. Due to these challenges, we initiated a branding campaign attempting to brand De Beers diamonds to the consumers. This campaign was centered in the U.S., where “legally, the entire De Beers group – its officers, its operations, its marketing structure – was in violation of the U.S. antitrust law” (Burns, 2000). This prohibited De Beers from directly selling in the United States. Additionally, a political issue that we need to leverage to our advantage is the U.S. foreign policy towards helping to rebuild Africa. These political issues will be further addressed in the recommendations section.
Economically, there is an expected surge in diamond sales expected to occur in the U.S. this year. This emphasizes the fact that we need to be uninhibited in our marketing and sales efforts in the U.S. if we are to continue to be a successful company. Another economic issue that we are facing is that the historical price of diamonds is leveling off and may even be decreasing as new sources of diamonds are being found. This decrease in prices could be devastating to De Beers and the diamond industry as a whole and needs to be avoided at all costs. The other large economic issue we are facing is our method of stabilizing the diamond prices. The stockpiling we currently utilize to control the supply of diamonds and, more specifically, control the price of diamonds, is eating away at our profits, resulting in a low stock price. Our shareholders, of whom 21% are from the U.S., are starting to voice dissent about our low share prices.
Technically, we have been using our single channel distribution system to work our way around the antitrust laws in the United States and to keep an arms length from the U.S. legal system. By selling to diamond merchants through the Central Selling Organization in London, and controlling the supply of diamonds offered to these merchants, we control what stones enter the market at what price. This single distribution channel has been at the core of our ability to regulate the diamond market and without this means of distribution, De Beers and the entire diamond industry would greatly suffer. By winning relaxed antitrust laws in the U.S., we would be able to continue to leverage the power of the single channel distribution system.
Socially, the perception of diamonds is that of a beautiful and rare stone that is a symbol of romance and of greed and has been treasured as such for centuries. In the nineteenth century, the supply of diamonds increased, turning the stones from something only the elite could purchase, to a commodity that could be purchased by the mass market. Even with this increase in supply, the perception of diamonds remained that of a rare and valued commodity. Therefore, even though the supply of diamonds increased, the perception that they were rare was not tarnished, leaving the price of this commodity high. This is a key point that we need to leverage: consumers expect and want the price of diamonds to remain the expected price of a unique and high valued commodity.
The primary stakeholders that will be affected by this impending move into the U.S. market and relaxation of the U.S. antitrust laws are De Beers and its shareholders, the African economy, the diamond industry as a whole, and diamond consumers. If these antitrust laws are not relaxed, then De Beers market share will crumble while being replaced by lower priced competitors, leading to an overall decrease in the diamond prices, leading to less profit to everyone in the diamond industry. The African economy also has a large stake in this decision. If the diamonds from war torn fields are accepted into the diamond market, consumers will unknowingly be supporting rebel controlled diamond mines.
Lastly, if the antitrust laws are not relaxed, the shareholders of De Beers will most likely experience a short term increase in stock price while the stockpile is being depleted, but in the long run, the stock price will bottom out and will not rise again because the price of diamonds will be permanently lowered. The stakeholders that will be most impacted here are De Beers as a corporation and the diamond industry as a whole, including the African economy. I will focus on these stakeholders in the recommendations section.
Recommended Solutions and Implementation Steps
The following solutions are being recommended for De Beers to implement in order to convince U.S. policy makers to relax the U.S. antitrust laws and allow De Beers to directly do business in their diamond market. De Beers needs to approach U.S. policy makers with the following arguments and ask for relaxation of the U.S. antitrust laws with some restrictions. The criterion for these solutions is that they are feasible to implement with our current resources and that they do not generate negative press about past lawsuits.
My first recommendation is to approach U.S. policy makers with the fact that diamonds are a commodity and not a necessity. One of the main purposes of the U.S. antitrust laws is to protect consumer well being. Diamonds are not a necessity and the lack of a diamond does not make ones life materially different. Therefore, by helping to stabilize the supply and price of diamonds, we are not hindering the success of people or businesses within the U.S. By keeping the price of diamonds stable, we are not lessening the quality of life of any consumers, however we are keeping consumer value stable. Those millions of consumers who have already invested in diamonds do not want to see the price of their investment decrease. By continuing to help stabilize the price and supply of diamonds, we will ensure that their investment will maintain value.
In order to implement this, we need to conduct some consumer surveys to support the fact that consumers are pleased with stable diamond prices and present these facts to U.S. policy makers. We also need to gain the support of other members of the diamond industry to help with this solution. By leveraging our relationships with other diamond mine owners, distributors, wholesalers, and retailers, we can work together to convince U.S. policy makers that the value of this luxury item is sustained due to it’s perceived rarity and in order for the diamond industry to survive, this perception needs to remain untarnished. The other players in the diamond industry, mentioned above, benefit from this perception as well, so it should be relatively simple to gain their cooperation in this matter.
African Growth and Opportunity Act
The current U.S. foreign policy that seeks to support the reconstruction and redevelopment of Africa needs to be fully leveraged by De Beers. The Clinton administration has pledged it’s dedication to Africa by the pending African Growth and Opportunity Act. We need to pledge our support of all U.S. policy toward U.S. – Africa relations and offer our contribution to the African economy. Some of the countries in Africa that are currently suffering from violent wars could greatly benefit from their diamond assets if helped by De Beers.
They currently lack the knowledge and technical skills needed to mine diamonds effectively. With De Beers’ help, these African countries can begin to develop their economy and stabilize their relationships with the U.S. In order to leverage this foreign policy, we need to enlist the help of U.S. – African relations activists groups as well as activists groups dedicated to the rebuilding of Africa to help us get our message across to U.S. policy makers. We need to convince the U.S. government that De Beers is a positive force in the African economy and by allowing us the antitrust rules to be relaxed in the U.S., we can help to build a stronger relationship between Africa and the U.S.
Illicit Diamond Embargo
De Beers needs to work with the U.N. to place an embargo on illicit diamonds coming from the war torn fields of Angola and Sierra Leone. These diamonds come from rebel controlled mines, and by allowing these diamonds to enter the marketplace, we are supporting the bloodshed involved in mining these diamonds. Therefore, we need to pledge our support to stop these illicit diamonds from merging with our diamonds in the marketplace. We will differentiate our own legitimate African diamonds from the illicit diamonds coming from the blood stained rebel controlled mines. We will also pledge to the U.S. and the U.N. to not purchase any rough diamonds from these rebel controlled mines. This will be the key restriction we will agree to in our request to have the antitrust laws relaxed.
We need to continue our marketing efforts aimed at branding our diamonds. In addition to creating more prestige around our brand of diamonds, we are also certifying that our diamonds do not come from the war torn rebel controlled mines of Africa. By continuing our branding effort, we will continue to increase the demand for the De Beers diamonds, which will help to decrease our stockpile, and in turn slowly increase our stock price, pleasing our
shareholders. In addition, it has been proven that with these marketing efforts, consumers are willing to pay a premium for a De Beers diamond, which will further protect us from the possibility of decreasing prices in the future by increasing our profits.
We at De Beers are facing some difficult challenges and are being forced to look at the way we run our business. In looking at our methodology we have determined that the way we run our business, and the way the diamond industry works, is in the best interest of De Beers as a corporation, the diamond industry as a whole, the African economy, and consumers. As an African company, our paramount concern is to use the diamond industry to help the African economy begin to rebuild itself. We believe that by relaxing the U.S. antitrust laws and abiding by the restrictions mentioned above, the United States can help us further enhance the African economy while maintaining a strong diamond industry, which in turn, benefits the consumers in the United States by preserving the value of their diamond investments.
Items of high importance are marked with an upward arrow for strong positive forces and a downward arrow for strong negative forces. These are the issues that have been focused on in this memo. The other items are also important, however solutions to these problems are out of the scope of this document.
Political forces working against De Beers
U.S. Antitrust laws (1890 Sherman Act and 1914 Clayton Act) – De Beers is in full violation of these laws
Wars in Africa leading to leakage of illicit diamonds from rebel controlled villages
Russia defections leading to leakage of illicit diamonds
End of apartheid in South Africa
Political Forces working for De Beers
U.S. foreign policy seeking to support the reconstructoin an development of Africa
Pending African Growth and Opportunity Act
De Beers has found that it is out of reach of U.S. legislation while it does not do business directly with the U.S. because it is a South African company
Economic forces working against De Beers
Historical price of diamonds leveling off and starting to decrease
21% of shares are held by U.S. citizens. These shareholds are beginning to put pressure on De Beers because although the value of the commodty we sell is very high, the stock price is relatively low due to our stockpile
Economic forces working for De Beers
Prices have been kept uniform on diamonds historically
Surge of over a 10% increase of diamond sales expected in U.S. market, hitting $20 billion in 1999. This can be a positive force if De Beers can maintain market share in the U.S.
Social forces working against De Beers
Negative press from previous lawsuits where De Beers avoided being acquitted or settled.
Social forces working for De Beers
Despite supply of diamonds, consumer perception that the stone is rare persists, allowing the price of diamonds to be higher than supply would dictate
The marketing De Beers has been using to brand diamonds has been successful. According to a survey, consumers are willing to pay a 15% premium for a De Beers branded diamond
Technical forces working against De Beers
The current diamond industry market structure is changing (i.e. diamonds are coming from more sources that solely De Beers owner mined, and the demand from the U.S. is increasing)
Technical forces working for De Beers
Single channel distribution system. This is the reason the diamond industry has thrived over the past century, however this is one of the main aspects of the way we run business that is in violation of the U.S. antitrust laws.
Burns, Jennifer L., Forever: De Beers and U.S. Antitrust Law. Harvard Business School Publication: 9-700-082. Harvard Business School, 2000.