A

DOCUMENTORY REPORT
ON

PESTEL ANALYSIS
AND
PORTER’S FIVE FORCES MODEL
ON

Indian Diamond cutting and polishing Industry

Submitted to
Mr. JIGNESH DARJI

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM)

M.B.A PROGRAMME
Constituent of Charotar University of Science and Technology
(CHARUSAT)

Presented by
SANNI M. PATEL
M.B.A Semester – III
Roll. No. 09MBA35
SEPTEMBER 2010

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 DIAMOND CUTTING AND POLISHING

India has always been center stage in the dramatic history of some of the world’s most famous
diamonds. India has been the earliest known source of diamonds. Conversely, today India is pioneer in the
gem industry and a world leader in the manufacturing of cut and polished diamonds. Diamonds used in
jewelry worldwide, nine out of every ten cut and polished diamond come from India.

Diamond industry of the Indian market is mainly involved with cutting, polishing and exporting
diamonds. Diamonds cut and polished in India are universally prized, and India has emerged as the largest
diamond-cutting center in the world. Although India pioneered in the cutting of small diamonds yet today,
its craftsmen are equally skilled at cutting all shapes and sizes of stones, and even at faceting colored
diamonds.

Mumbai, Surat, Ahmedabad, Bhavnagar and many small towns in Gujarat are the main polishing
centers of the country. The industry employs one million people, accounting for 95 per cent of the
workforce of the world’s diamond industry. The industry today is a result of perseverance and hard work as
we see it. After India became independent in 1947, for several years, the nation’s economy was in the
depression. Several views for business and commerce opened up as new policies came into place, journey
towards progress and development also began for the diamond industry.

The diamond industry was a scattered cottage industry only three decades ago. Now it gradually
evolved into a modern, mechanized, large-scale operation. Today, with state of the art laser machines,
lathes and diamond-impregnated scaives, most of the medium- and large-sized diamond factories are well
operational. In the world of Diamond industry, this structured and rapid growth of the Indian diamond
industry has a long-lasting impact. The Indian exports of diamonds increased and in turn it reflected greater
than before in the export of designed Diamond.

Indian Diamond was made scrupulously by hand and was traditionally crafted by family jewelers
skilled in a particular style. Large exports directed to the establishment of factories, prepared with the latest
modern machinery. It is the newest methods in the manufacturing process that were employed.

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The Indian Diamond Industry

Rough diamonds are each unique and come in a range of many different sizes, shapes, colours and
quality. The value of any one rough diamond is based on the value of the polished diamond(s) that the
valuator feels can be produced from the rough diamond. However for larger, complex stones each diamond
cutter will assess the stone differently.

These include:

1) Tenders: bids are accepted on a specific assortment of rough diamonds or even on a specific rough
diamond (if large and / or very special). Tenders can be either is by invitation only or open to any and all
bidders;

2) Regular Customers: a similar assortment of rough diamonds would be sold cycle after cycle (a cycle is
5 weeks) to the same customer. These customers are called core customers by BHP Billiton, sightholders
by the DTC and regular customers by Rio Tinto;

3) Window sales: very specific assortments of rough diamonds are offered for sale on a one-time basis.
These types of sales are designed to determine highest market value for certain assortments of rough
diamonds; and

4) Non-arm lengths: these sales occur when the buyer is a joint venture partner or subsidiary of the mining
company. They are usually a mechanism for mining companies to be involved in the downstream
businesses.

Diamond industry in Gujarat

Gujarat is the leading State in India in Diamond sector, as it contributes to about 72% of the total
exports of India. has a well-established diamond industry. Gujarat accounts for about 80% of the diamonds
processed and 90% of the diamond export from India. Surat has 65% share in India's diamond trade. The
advantages of investing in diamond processing in Gujarat are:

• Low cost, economic and skilled labour.

• Availability of large number of skilled labour.
• Upcoming Diamond Park and Diamond special economic zones.

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Diamond Cluster in Gujarat

Current scenario of Indian diamond industry

India is fast becoming a global hub for Diamond. In other words, nearly 9 out of 10 diamonds sold
worldwide are cut and polished in India. Thanks to positive government policies such as 100 per cent FDI
in Diamond through the automatic route, India is on the verge of becoming the focal point of the global
Diamond industry.

• Total Diamond exports from India stood at US$ 20.88 billion for 2007-08, a growth of 22.27 per cent
over US$ 17.08 billion the previous year, as per the Diamond Export Promotion Council (GJEPC).

• The United States and Hong Kong were the largest importers of Diamond from India, with a share of 26
per cent each, followed by UAE at 21 per cent.

• Gold Diamond exports increased from US$ 5.2 billion in 2006-07 to US$ 5.6 billion 2007-08.

• The domestic market for Diamond is likely to increase to US$ 20 billion by 2010 and US$ 30 billion by
2015.

• India is the largest consumer of gold in the world, followed by China and Japan. India consumes nearly
800 tonnes of gold that accounts for 20 per cent of world gold consumption, of which nearly 600 tonnes
go into making Diamond.

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The PESTEL analysis

The macro environment includes all relevant focus outside a company’s boundaries relevant in the
sense that they are important enough to have brought on the decision. An industry ultimately makes about
its business model and strategy.

Why many forces in the micro environment are beyond a company’s sphere of influence?
Company’s strategy may be needed for answer it. Micro environment includes all general force that do not
directly touch on the short run activities of the organization but that can and often does, indulgence
its also ran decisions.

Political Factors:-

The Government of India (GoI) has been working to develop the Diamond industry in India through
several initiatives but under the purview of Diamond industry. The main political factors are as follows.

• Excise duty: In the budget of year 2008-09 government reduce excise duty from 10% to 5% on cut
and polished diamond units.
• Marketing and control orders: Import of rough diamonds controlled by the Jewellry export
Promotion Councils. The Council provides market information to its members regarding foreign
trade inquiries, trade and tariff regulations, rates of import duties, and information about Diamond
fairs and exhibitions.
• FDI approval: India is now the third most favored destination for Foreign Direct Investment (FDI),
Government of India may permits 49% of FDI in the Diamond industry. FDI of $ 2 billion are
invested in terms of working capital in the industry.
• Government policies and taxation: From January 1, 2008. It has made the import of polished
diamonds completely duty free. To reduce the transaction cost for the diamond sector, testing
facility at International Diamond Laboratory (IDL), Dubai, has been incorporated in the list of
laboratory/certifying agencies.

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Trade Policy for Diamond

Replenishment Licences:
The exporters of gem and Diamond products are entitled for REP licence as per rates indicated in
the Handbook of Procedures. Such licences are transferable.

Diamond Imprest Licence:

Diamond Imprest Licences are issued in advance for import of rough diamonds and for export of
cut and polished diamonds. These licences or the materials imported against them may be freely transferred
after the export obligation has been fulfilled.

Bulk Licences for Rough Diamonds:

Bulk licences for rough diamonds are allowed to any exporter whose annual average f.o.b. value of
exports of cut and polished diamonds during the preceding three licensing years was not less than Rs.75
crores and iv) any overseas Company with its branch office in India whose annual turnover in diamond
during the preceding three licensing years is not less than Rs.150 crores.

• Import of raw material (rough diamonds) is highly affected by war and global market conditions.

• Fund contribution: As per current scenario to ease the liquidity problem in diamond industry the
task force constituted by RBI..
Task Force may propose asking banks to finance diamond manufacturers especially small and
medium ones against their stock of polished diamonds.

Economic factors:-

Per capita consumption: Per capita consumption power of customers may highly affect diamond jewelry
purchase. India`s per capita income is likely to grow more than double over the last seven years, to Rs
38,084 in the current fiscal, reflecting improvement in the living standards of the average Indian.

• Per capita income, according to the advance estimates for national income is expected to grow by
14% during the current fiscal.
• However, after discounting for inflation, per capita income is expected to rise to Rs 25,661
representing an increase of 5.6%.

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National income: As & when the national income of the people of any country increase it will indirectly
leads to more investment in diamond jewelry or ornaments.

State board regulations: Gujarat government declares various polices.

Custom Act: In the Union Budget (2007-2008), custom duty on cut & polished diamonds was reduced to
3% from 5%. The Council had made several representations to Government on the exemption of custom
duty on cut & polished diamonds.

Social factors:-

The main social factors of the organization, which are deals as the business organization are as
follows.

 Emergence of retail org. makes people aware about diamond as a luxury product or an investment
option.

 Emergence of substitute: Diamond Diamond is preferred by consumers with increase in the price
gold.

 Changing consumer preferences: with the increase in standard of living consumer preference
change from gold Diamond to diamond Diamond, it’s also considered for status symbol.

Technological factors:-

The main technological are as follows.

• As diamond industry try to moving up in to the value chain they are focusing more on they use high
end equipments.
• Technology solutions are also available for production control, supply chain and inventory
management in the Diamond industry.

The Special Economic Zones and Diamond Parks developed in various states offer technology-enabled
environments that are conductive to growth and quality production.

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Environment Factors:-

This section draws on literature relating to the general environmental impacts associated with ASM
and related processing activities, and – where available – specific information relating to the production of
gemstones. In relation to environmental impacts of ASM and gemstone ASM in particular, the situation in
each country varies according to the type of gemstones being exploited, the social and natural environment
of the area and cultural and organizational aspects of the mining operation itself.

 Exploration

 Underground Extraction

 Surface Extraction

 River Dredging

Due to the unique geological nature of gemstone deposits, whereby mineralisation is localised in small
pockets, processing of mined gemstones differs from one gem to another. Generally, however, the
processing of gemstones that occur as distinct crystals consists of hand sorting with the aid of the visual
characteristics of the gems (fluorescence, shine, colour). Typically, no equipment is used in this process.
Normally, such pieces recovered during hand-sorting in the pits and trenches still need

Legal Factors:-

• Trade Facilitator: The Council undertakes direct promotional activities like organising joint
participation in international Diamond shows, sending and hosting trade delegations.

• Advisory Role: A crucial area of activity of the Council has also been aiding better interaction and
understanding between the trade and the government.

• Nodal Agency for Kimberly Process Certification Scheme: GJEPC has been appointed as the
Nodal Agency in India under the Kimberly Process Certification Scheme.

• Training and Research: The Gems & Diamond Export Promotion Council runs a number of
institutions that provide regular and part-time training in all aspects of manufacture and design in
Mumbai, Delhi, Surat and Jaipur.

• Boosting Exports: Among the promotional activities GJEPC undertakes for the sector is the
organising of joint participation of member - exporters in some important international exhibitions
and puts up promotional stalls in others.

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The Five Force Analysis

The Five Forces model of Porter is an outside in business unit Strategy tool that is used to make an
analysis of the attractiveness of an industry structure. Attractiveness in this context refers to the overall
industry profitability. The overall industry attractiveness does not imply that every firm in the industry will
return same profitability. Firms are able to apply their core competences, business model or network to
achieve a profit above the industry average. We use this model for Indian diamond industry
(For this analysis we use likert scale for intensity of the particular force in the overall industry
structure. 1 = very low, 5 = very high)

Supplier Power:

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 Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of
suppliers of each key input, the uniqueness of their product or service, their strength and control over you,
the cost of switching from one to another, and so on. In case of diamond industry –

Elements Low Moderate High Attractiveness

Differentiation of inputs * High
Switching cost of suppliers & firms in the industry * High
Presence of substitute of inputs * Low
Supplier concentration * High
Importance of volume to suppliers * Moderate
Cost relative total purchase in the industry * High
Impact of input on cost / differentiation * High
Threat of forward integration relative to threat of
* Moderate
backward integration by firms in the industry

Supplier power is MEDIUM. With negligible domestic production of gold and gemstones, India
relies largely on imports. Bargaining power of Indian industry enhanced by the fact that India is the largest
consumer of gold. In rough diamonds the major global suppliers have very few alternatives customers
(cutting and polishing) for their cheaperrange of rough.

Buyer Power:

Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the
number of buyers, the importance of each individual buyer to your business, the cost to them of switching
from your products and services to those of someone else, and so on. If you deal with few, powerful buyers,
they are often able to dictate terms to you.

Buyer power is MEDIUM to HIGH. Bargaining power in gold Diamond limited to fabrication
charges. In diamond cutting and polishing the bargaining power of Indian exporters arises from the fact that
a majority of the world’s rough diamonds production is cut and polished in India.

Elements Low Moderate High Attractiveness

Bargaining leverage * Low
Buyers concentration versus Firm
* Low
concentration
Buyer volume * Low

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Buyer switching cost relative to firm switching
* Low
cost
Buyer information * Low
Ability to backward integrate * High
Substitute products * Low
Price sensitivity * Low
Price/total purchases * High
Product differences * Low
Brand identity * High
Impact on quality / performance * Low

Competitive Rivalry:

What is important here is the number and capability of your competitors – if you have many
competitors, and they offer equally attractive products and services, then you’ll most likely have little
power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the
other hand, if no-one else can do what you do, then you can often have tremendous strength.

Competitive rivalry is HIGH. Bulk of the industry in India is concentrated in the unorganized
sector and employs around 1.5 million workers serving over 0.2 million gold jewellers and 8000 diamond
jewellers. The majority of Indian diamond workforce is employed by small units that process diamonds on
job lot basis. However the share of the unorganized sector has dec lined in recent years.

Elements Low Moderate High Attractiveness

Industry growth * Low
Fixed or storage cost/(value added) * Low
Intermittent overcapacity * Moderate
Product differences * Low
Brand identity * High
Switching costs * Low
Concentration and balance * Low
Information complexity * High
Diversity of competitors * Low
Exit barriers * High
Threat of Substitution:

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 This is affected by the ability of your customers to find a different way of doing what you do – for
example, if you supply a unique software product that automates an important process, people may
substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is
viable, then this weakens your power.

Elements Low Moderate High Attractiveness

Relative price performance of substitutes * Low
Switching cost * High
Buyer propensity to substitute * Moderate
Threat of substitute is LOW. From historic times gold has played pivotal role in the Indian social
fabric. Gold is value in India as savings and investment behind bank deposits. Gold is also preferred metal
in Diamond. Domestic diamond Diamond demand is low but increasing at a high rate because of higher
income and aggressive marketing strategies.

Threat of New Entry:

Power is also affected by the ability of people to enter your market. If it costs little in time or money
to enter your market and compete effectively, if there are few economies of scale in place, or if you have
little protection for your key technologies, then new competitors can quickly enter your market and weaken
your position. If you have strong and durable barriers to entry, then you can preserve a favorable position
and take fair advantage of it.

Elements Low Moderate High Attractiveness

Economies of scale * Low
Proprietary product differences * High
Brand identity * Low
Switching cost * Low
Capital requirements * Low
Excess to distribution * High
Absolute cost advantage

 Proprietary learning curve

* Low
 Excess to necessary inputs

 Proprietary low cost product design

Government policy(in terms of complexity) * High
Expected retaliation * Low
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 Barriers to entry are LOW. Low capital requirement but skilled manpower is essential. Ability to
invest in more advanced technology is becoming increasingly critical.

Opportunities

• New markets in Europe & Latin America:

As Europe and latin America have emerging market of diamond so Indian diamond industry
can track this market to boost up its revenue.

• Growing demand in South Asian & Far East countries:

As demand of diamond in south asian and far east countries has increases at increasing rate
so Indian diamond industry can track this market to boost up its revenue.

• Removal gold control act:

It is another important aspect that creates opportunities for Indian diamond industry by way
of removes the rules and regulation of gold.
• World’s largest source for trained, skilled and adaptive manpower:
One million craftsmen associated with it. Their skills can be harnessed for designing and
making modern Diamond. Cheap and skilled labors available in India. Committed Yong & dynamic
Entrepreneurs.

• Increased understanding of global retailers:

Extensive network of offices –presence in all major markets several companies are global
players. Excellent marketing network spread across the world. Liberalized Government policies &
Conducive Environment for bi-lateral business
Threats

• Threats from close substitute:

As entrance of Synthetic diamond which is close substitute of real diamond leads to threats for Indian
diamond industry.

• China, Sri Lanka and Thailand’s entry in small diamond segment

• Infrastructural bottlenecks, frequent changes in ex-im policies, irregular supply of gold.
• Over dependence on single-channel supply chain. Decisions of De Beers and Argyle’s terms for
renewing their supply contract.
• High domestic interest rates compared to elsewhere:
The overall lending rate in Indian financial market is too high with comparison to financial Market of
other countries so it affects the overall investment of country along with the investment in diamond.

• Small firms lacking technological/ export information expertise:

As small firm not have so much capital fund to invest in technology and research and development

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because of this they haven’t get benefit of technological advancement.

• Low productivity compared to labor in china, Thailand and Sri lanka:

The labours of Indian diamond industry are less productive than the labour of China, Thailand, and
Srilanka.

• High carring cost:

As the major raw material requirements need to be imported, companies normally stock huge quantities
of inventory resulting high inventory carrying costs.

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References

⇒ Ministry of Finance, Government of India, http://finmin.nic.in

⇒ Legislative Department, India Code, http://indiacode.nic.in
Income Tax Department, Government of India,

⇒ http://www.incometaxindia.gov.in
⇒ http://www.bignerds.com
⇒ http://sezindia.nic.in
Special Economic Zones in India, Government of India,

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