MASTER OF BUSINESS ADMINISTRATION

MGT 6798

CASE METHODOLOGY:

An Individual Assignment

Submitted to: Mr. Ayub bin Hj. Khalid

Submitted by: Fakhrul Anour bin Abdullah G1136857

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CONTENTS

1- ABSTRACTS 2- INTRODUCTION 3- PROBLEM STATEMENT 4- SWOT ANALYSIS 5- CONCLUSION 6- RECOMMENDATION 7- OTHER REFERENCES

Page 02 Page 03 Page 07 Page 10 Page 11 Page 13 Page 14

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ABSTRACT

Pure diamond is well known throughout the world as the symbol of luxury, beauty, strength and love. What is more important is the natural value of diamond adorned by its quality as the most precious gem which may possess by a woman. As DE BEERS emerged as the world leader in diamond business for more than 100 years, surpassing many generations, the sustaining secrets has yet to be discovered in all its strategy. But one thing for sure, instead of just being the producer for a product thats only meant for luxury life, the depth of its organization is highly respected for its philanthropy awareness and faithful works upon social responsibilities in its environmental issues. Case followed will analyze the living concept of DE BEERS that goes timeless against all odds.

We are conscious of our responsibilities not only to our shareholders, to the industry as a whole and to the consuming public, but also to the governments of the countries in which we operate.
Harry Oppenheimer, De Beers 1995 Annual Report
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INTRODUCTION

THE DIAMOND VALUE CHAIN

EXPLORATION

The value chain of natural or rough diamond business is consisted of each expensive journey that could took many years with detailed activity in protruding the gems finest, solid and glittering ever existed in the world. Typically it took at least 12 to 15 years to progress; from exploration until mine production (alluvial, underground or/and open pit), with experience and technology being the key to reduce ample time and operating costs. To be precise, diamond industry is a luxury business that consume the manpower of underprivileged. And without government interference for social stability and welfare, this business might lead to corruption and immorality. DE BEERS incepted in year 1888 is the major player in natural diamond productions which not only play as the influenced utilizer of the value chain but also holds the Diamond Trading Company (DTC); a sales and distribution arm that control 75% value of the worlds rough diamonds. As the vertically integrated diamonds producer, DE BEERS also controls the power of supply to its sightholders (dealers designated as DTCs clients) with no guaranteed specific quality offered. As of year 2000, DE BEERS remained the worlds leading diamond producer and distributor with extensive activities in the value chain of exploration, mining and distribution of rough stones as well as significant influence in processing, manufacturing and marketing.

MINING SORTING DISTRIBUTION TRADING OF ROUGH STONES PROCESSING

GRADING FOR RETAIL CONSUMPTIONS

JEWELERY MANUFACTURING

RETAILING

From India to Brazil then South Africa, gem quality diamonds were usually alluvial as lower-grade stones could not withstand the arduous trip to the surface and along waterways deposited by water erosion of kimberlite pipes.

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Though during year 2000 the diamond stocks of DE BEERS rapidly decreased since 1998, but the earnings owned increased. Thus made DE BEERS decided to spend over $70 million on new exploration with a multinational team of 200 geologists involved. The result, DE BEERS mined more than 36 million carats in year 2000 or one-third of industry by volume and 45% by value, mainly in underground and open-pit mines.

While alluvial diamonds qualified as the gem quality compared to underground and open pit diamonds, but many alluvial producers did not employ best practices, and their operations were often more labor intensive than necessary. In addition, bureaucracy, administrative charges, and corruption added to industry costs.

The rich and famous of diamond business took its toll of historical journey that involved many changes not only in its value chain process but also to the countries where it held the mines. Since the precious stone was referred as diamond as far back as 2,500 years ago and first trading center known existed in Venice during 774 A.D., many years later the digging for diamonds had turned into colonization of mines field by Cape Colony and the racial issue for labor supply (apartheid) as the discovery entered South Africa at the region of Kimberley. When DE BEERS was formed by Cecil Rhodes (with Barney Barnato), the business value of diamonds increased as it practiced social responsibility among its workers by subsidizing the creation of a local school of mines, health clinics and numerous other causes. DE BEERS which controlled almost 100% of South Africa diamond output and 90% of world diamond output, formed British South Africa Company to acquire mining rights throughout south-central Africa, in effect, became the shadow government. That explained when Cecil Rhodes became Prime Minister of Cape Colony in 1890 and enacted laws benefitting mine owners.
As Prime Minister of Cape Colony, Cecil Rhodes (who never married and also invested in gold) restricted voting rights to literate persons, but championed educational reforms and turned his attention to the development of the country.

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The business of DE BEERS decreased as Cecil Rhodes deceased (in 1902) when its share fell to 40% due to large competition and new governance. With the re-establishment of government as the Union of South Africa in 1910 (as part of the British Commonwealth), the racial separation policies was introduced to uphold the apartheid regime that increased human separation by skin colors by enacting the lawsThe Mines and Works Act of 1911 and The Natives Land Act of 1913.

The purpose of the company is to make profits for its shareholders, but to do so in a way that makes a real and lasting contribution to the countries and communities in which it operates.
Earnest Oppenheimer, 1954 (Chairman of DE BEERS)

When Earnest Oppenheimer took over DE BEERS in 1929 for almost 30 years, it had to go through a series of challenges of the Great Depression which began in 1930. It has fueled Afrikaner nationalism and the drive for white supremacy and racial separation in South Africa. Though Oppenheimer was against the Afrikaner nationalists, but with the National Party came into power in 1942, the era of apartheid began. This caused DE BEERS to fight for their workers by having different policies than the government. Though being criticized for not fought enough against the apartheid, Ernest used his influenced to raise 3 million and constructed 15,000 houses over three years in Soweto then was preoccupied with philanthropy and improving the plight of blacks.
Ernest Oppenheimer was the founder of the Anglo American Corporation in 1917 to mine gold, which then took a major stake in DE BEERS that made him chairman in 1929. During his era, Diamond Distribution was consolidated into the Central Selling Organization, later to become the Diamond Trading Company (DTC).

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In 1957, the son of Ernest, Harry Oppenheimer replaced his father as the Chairman of DE BEERS and would be CEO until 1984. He would preside over a period of vigorous expansion in the industry and the company as well. With the new discovery of diamonds in 1967 at Bostwana, he negotiated with the government that led to 50-50 partnership called De Beers Bostwana Mining Company (Debswana) which would control all diamond mining in the country. Bostwana government used the 50% share in Debswana to build schools, infrastructure, and health care services.

Just like his father, Harry also well known for his philanthropy where he initiated a fund which financed numerous projects that contributed to community development on a large scale in South Africa, particularly in the arenas of education and health.

Harry also spent some time as the Member of Parliament for Kimberley (1948 to 1957) and became the opposition spokesman on economics, finance and constitutional affairs. His opposition to apartheid was well known as were his philanthropy and business principles. Nicky Oppenheimer, the son of Harry succeeded him as Chairman in 1985. Exploration was expanded and after years of trials, DE BEERS developed the Namibia fields through a joint venture with the government called Namdeb. One-third of Namibias annual foreign exchange earnings contributed by diamond revenues and it were the second-largest employer and the countrys largest taxpayer, procuring many goods and services from Namibian suppliers. During his period, there were external factors affecting the business performance of DE BEERS such as the liberalization of South Africas international trade policies at the end of the 1980s and the collapse of the Soviet Union in 1991. But among all the external challenges, DE BEERS still continue its philanthropy works through the De Beers Fund.
Nicky Oppenheimer era went through the end of apartheid in year 1994 when Nelson Mandela became the president of South Africa.

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PROBLEM STATEMENT

The end of apartheid era in 1994 had changes the policies made in South Africa. The situation had become different for the native people where high priority then given to them instead of the Afrikaners. While recognizing that diamond mining had made economic contributions, a growing proportion of policymakers in Africa believed that the diamond industry had not generated sufficient contribution by way of value-added processing activities. Therefore the Minerals Development Bill was drafted by the South African Department of Minds and Energy (DME) which would become the countrys new mining law by year 2000 and give the state exclusive custodianship of all mineral rights. Then a new policy called Black Economic Empowerment (BEE) came into effect in 2000 with a goal of creating opportunities for previously disadvantaged communities and individuals, including black Africans, women and people with disabilities.

The diamond industry is vital to the South African and southern African economy. Rather than boycotts being instituted, it is preferable that through our own initiatives the industry takes a progressive stance on human rights issues.
Nelson Mandela, 1999 (former President of South Africa)

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In addition to the changes in policies as one of the biggest challenges, a potential threat came into the gem market by the advancing technologies for synthetic production. Thus DE BEERS needed a new strategy to cope with both a rapidly changing industry environment and new expectations of society.

Also known as laboratory-created diamond, laboratorygrown diamond, cultured diamond or cultivated diamond.

The diamond produces in an artificial process, as opposed to natural diamonds, which are created by geological processes.

Synthetic diamond

In 1998, a transition of DE BEERS management began a review of its strategy. Highlighted by the social challenges faced by DE BEERS, the review suggested that diamonds compared unfavorably with the luxury goods sector in marketing. With transition of the diamond industry in year 2000, although the growth rate of United States diamond sales increased some, other markets, especially those in the Far East, saw steep declines in growth rates. With that DE BEERS concluded that brands could sell diamonds just as they sold other luxury goods and that innovations were needed to drive demand.
Jonathan Oppenheimer, the son of Nicky, became Chairman of De Beers Consolidated Mines along with Gary Ralfe (Managing Director of De Beers Group, Gareth Penny (Managing Director of DTC) and Stephen Lussier (Head of Marketing) to draft a new strategy for DE BEERS.

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After gaining the endorsement of antitrust authorities in Europe, DE BEERS introduced a new four-legged strategy for the new century as below: FOUR-LEGGED STRATEGY

First-legged: To improve efficiency and margins from De Bees own operations

Second-legged: To stimulate demand of diamond by at least 5% per year

Third-legged: To establish De Beers own brand that directly meets the end customer
2013 Forevermark [x] Gareth Pugh

Fourth-legged: Suppliers of Choice (SOC) to improve efficiency and productivity of sight holders

SOC-01: To make the diamond value chain more efficient by selling rough stones to a smaller number of vertically integrated sightholders that would have to meet demanding criteria with respect to finance, manufacturing, distribution, and ethics.

SOC-02: DE BEERS would provide more value-added services such as training, a secure extranet, marketing, greater generic advertising and cooperative campaigns, data support, and market intelligence to sightholders.

SOC-03: DE BEERS would offer sightholders the use of Forevermark, a brand that would be positioned to be associated with adherence to the highest professional and ethical standards. This would replace the DE BEERS name on all generic advertising.

SOC-04: Sightholders were required to comply with the best-practice principles (BPPs) that ensured all value-chain activities were responsible and ethical with respect to the conduct of all business practices, also recorded all business transactions.
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SWOT ANALYSIS

OPPORTUNITES
1) Technology advancement 2) Market expansion 3) Employment opportunities 4) Government policies to support industry

THREATS
1) Competitive threats especially on synthetic diamonds 2) Strict law and regulations 3) Issues on security and quality

STRENGTHS
1) Strong position within industry 2) Established relationship with government as well as slight holders 3) Heavy investments in marketing and advertisement

S-O
Long-run credibility and high relation with governments to sustain the industry are the network chances to improve strategy by increasing the value of brands. Also it is best for the company to enhance affordability.

S-T
Synthetic diamonds are the main threat to rough diamonds, but good business networking of DE BEERS socially and politically can sustain its value to customers. Though competition increased with strong position of good relations, value sustained.

WEAKNESSES
1) 2) 3) Difficulties in acquiring the rough diamonds Heavy spending in operations Limited mines location offsite the civilized areas.

W- O
Improvement of technology may increase the value chain productivity by reduce costs, optimizing results and discovering new location for diamonds shorter period than before.

W-T
With difficulties of finding rough diamonds, DE BEERS increased inventory by buying stocks from competitors. Competing with synthetic diamonds, DE BEERS used technology to prove quality differentiation.

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CONCLUSION

The four-legged strategy has open up a new way of diamond business especially for DE BEERS. Based on its strategy reviewed in 1998, the top 15 diamond jewelry brands accounted only for 13% of sales when compared to the top perfume brands (80% of sales) and the top 16 watch brands (50% of sales). Relating to such review, the new strategy has given a new strength to DE BEERS in increasing its marketing value to expand performance in the industry. By year 2000, most of the four strategies have been legged for further development of DE BEERS in long-run. Completed the acquisition of its first mine outside the African continent, The Snap Lake project in Canadas Northwest Territories. DE BEERS built a diamond recovery plant in Kimberley Completed the Orapa 2000 project in Botswana which has doubled mine capacity to 12 million carats a year Commissioned a high-technology Aquarium project at Debswanas Jwaneng mine, including automated recovery plant and a sorting facility. Opened Namdebs new mine at Daberas on the Orange River, replacing the Auchas mine which was near the end of its productive life. Geologists of DE BEERS were also actively engaged in exploration projects, particularly throughout western and central Africa, Canada and India. The establishment of De Beers Group-Louis Vuitton Moet Hennessey (De Beers LV), a partnership that combined diamond expertise with retail expertise and brand management. The goal was to generate direct financial returns from the DE BEERS brand and to catalyze the development of a portfolio of competing diamond jewelry brands throughout the world.

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 Acquired a 50% interest in Hindustan Diamond Company Limited (HDC) and bec ame an equal-joint-venture partner with the government of India in HDCs rough dealership activities in the diamond capital of Mumbai. The DTC contributed to the advertising campaign for three brands (Nakschatra, Ashmi and Arisa).

SOURCED: http://www.debeersgroup.com/en/About-Us/Locations/

The De Beers Group of Companies employs approximately 23,000 people in operations that span the entire diamond pipeline, from mine to finger.

As DE BEERS sustained its branches globally and ventured into new frontiers, the philanthropy activities were never let to waste. As its business in India started to show development along with other countries it has constituted, along with the implementation of BPPs, its businesses expanding in line with humanitarian activities provided. By year 2000, DE BEERS remained the worlds leading diamond producer and distributor; employed 22,000 people in 19 countries, exploration made by 200 geologists in 25 joint venture exploration in over 13 countries. Sustaining purity value against synthetic diamonds, DE BEERS invested heavily in advertising of diamondas a gift of love.

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RECOMMENDATION

At the end of 2000, the DTC announced that its sales of rough-gem diamonds in the millennium year had reached a record level of US$5.7 billion. DE BEERS was also negotiating new five-year selling contracts with the governments of Botswana and Namibia for the entire outputs, which contributed 60% and 11% respectively, of DE BEERS total revenue.
A design of Nakschatra jewelry from India. By the early 2000s, there were 32 Indian jewelry brands, some marketed online. International jewelry companies were opening up manufacturing units in Mumbai, while Icelands Beluga Jewelry was considering manufacturing and selling in India.

DE BEERS had been doing continous CSR (Corporate Social Responsibility) for social and environmental requirements including employee health and safety, child labor, forced labor, human rights and the overall impact of operations on the local community. Through BPPs also it monitored on any criminal activities in its value chain like money laundering and financing of terrorist activities through sales transactions, supply chain management, sourcing of goods and everyday business relationships. It is recommended for this survellience operations being put into certified policies within the organizations to external supported by the government of respected countries involved. Upon ethical in the organization to increase positive value among employees, more policies on behavior should be implemented. When it comes to business, all DE BEERS need to improve is at the level of networking with sightholders where the marketing integration can be develop to increase demand in the market. Instead of focusing on sales based on price of luxury products, DE BEERS should also increase its marketing strategy by buying out more advertising campaigns to develop awareness in many different ways. These campaigns are not necessarily about products value but also can be integrated into its philanthropy activities like most oil and gas companies usually do. Last but not least to sustain its competitive advantage in the industry, DE BEERS must sustain its core business as the producer of pure diamonds instead of venturing into synthetics quality.
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REFERENCES

http://www.debeersgroup.com/

Having read the histories of other countries, I saw that expansion was everything, and that the world's surface being limited, the great object of present humanity should be to take as much of the world as it possibly could.
Cecil Rhodes

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