Conduct a value chain analysis for De Beers, including the new activities of jewellery making and retailing
Conduct a value chain analysis for De Beers, including the new activities of jewellery making and retailing through its joint venture with LVMH.;Part 2 (30%);How sustainable is the competitive advantage created by their new strategy?;Part 3 (15%);Do you support De Beers? entry into the retail jewellery business, or do you think they should focus exclusively on diamond mining, grading, sorting, wholesaling, cutting and polishing?;Attachment Preview;De Beers and the Global Diamond Industry.pdf;S;w;9B05M040;DE BEERS AND THE GLOBAL DIAMOND INDUSTRY1;Danielle Cadieux prepared this case under the supervision of Professor David Conklin solely to provide material;for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a;managerial situation. The authors may have disguised certain names and other identifying information to;protect confidentiality.;Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written;permission. This material is not covered under authorization from CanCopy or any reproduction rights;organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey;Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London;Ontario, Canada, N6A 3K7, phone (519) 661-3208, fax (519) 661-3882, e-mail email@example.com.;Copyright 2005, Ivey Management Services;Version: (A) 2005-06-28;THE STRATEGY DILEMMA;For sixty years, De Beers made sure that diamonds retained their;scarcity value. To do so, the company had to manipulate the;market, keep producers in line, prevent the smuggling, buying, and;stockpiling of diamonds and quash all attempts at competition.2;The South African mining group is surrendering its monopoly;position by giving up its traditional role of buyer of last resort of;every stone on the market.3;De Beers, the South African diamond group, is finalizing details of;a joint venture with Frances LVMH luxury goods group to open;shops around the world selling De Beers-branded diamond;jewelry.4;De Beers Consolidated Mines (De Beers) had successfully managed the global;diamond industry for many decades, propping up prices at all stages of the value;1;This case has been written on the basis of published sources only. Consequently, the interpretation and;perspectives presented in this case are not necessarily those of De Beers or any of its employees.;2;James Lamont, Geoff Dyer, Anglos Initiative, Financial Times, August 8, 2002, p.10.;3;Frabcesci Guerrera, De Beers: All that Glitters is Not Sold, Financial Times, July 11, 2000, p.12.;4;Charles Pretzlik, DeBeers and LVMH to Open Jewellery Shops, Financial Times, January 14, 2001;p.1.;Page 2;9B05M040;chain, reducing price volatility and increasing consumer demand. By the end of;the twentieth century, however, a series of forces threatened De Beers role and;profitability. New diamond mining firms were selling their production on the open;market rather than through De Beers Central Selling Organization (CSO). New;competitors were attempting to grade, polish and cut diamonds outside of the De;Beers value chain. Some retailers were purchasing shares in new mines in order to;create their own value chain, and at least one mine had purchased a retail chain.;New technology offered the possibility of creating synthetic diamonds that would;be indistinguishable from diamonds created by natural forces. Governments were;threatening antitrust actions. Meanwhile, an illicit trade in conflict diamonds;was supporting revolutionary groups and disrupting the market.;Since the mid-eighties, when De Beers controlled 90 per cent of the;diamond market, the company has been watching its empire;shrink.5;De Beers now had to decide whether to maintain its traditional functions or to;embark on a new strategy. De Beers hired a leading consulting firm, Bain and;Company, whose key recommendation was to ditch the role of buyer of last resort;and reduce the unproductive stockpile by selling it on the market.6 At the same;time, De Beers contemplated a shift into the retail jewelry business in a joint;venture with Frances Mot Hennessy-Louis Vuitton (LVMH) luxury goods;corporation that would sell De Beers-branded diamond jewelry. This strategy;would create a new vertical monopoly, while recognizing the disappearance of De;Beers traditional horizontal monopoly. Exhibit 1 presents the diamond value;chain, with an indication of mark-ups added at each stage.;THE MINING INDUSTRY;Carbon was transformed into diamonds within kimberlite pipes, formed through;volcanic activity that created high pressure and heat. In the 1870s, a diamond rush;developed in South Africa based on discoveries related to kimberlite pipes that had;been found there. Cecil Rhodes had a monopoly on the pumps that were necessary;to drain water from the mines, and he received ownership claims in many of his;customers mines. By 1880, he had created the De Beers Mining Company. Even;at this early date, Rhodes used his diamond inventory to manipulate prices;flooding the market at times, in order to purchase his competitors firms at;distressed prices. By 1888, De Beers controlled 95 per cent of the worlds;diamonds.;With the death of Rhodes, De Beers was vulnerable to a takeover. Ernest;Oppenheimer had created the Anglo American Corporation to purchase gold;5;James Surowiecki, The Diamond Market vs. The Free Market, The New Yorker, July 31, 2000, p.27.;Francesco Guerrera, De Beers: All That Glitters is Not Sold, Financial Times, July 11, 2000, p.12.;6;Page 3;9B05M040;mines, and by 1919, he expanded into the diamond mining business. De Beers;purchased Oppenheimers mines in return for stock in De Beers, and by 1929;Oppenheimers firm, the Anglo American Corporation, controlled De Beers.;However, the Depression of the 1930s threatened substantial price decreases, with;inadequate demand to absorb global production. In response to this threat;Oppenheimer extended his activity up the value chain by creating the Central;Selling Organization (CSO), as a marketing branch of De Beers.;Oppenheimer began an active program of purchasing diamonds from the mines;that he did not own, and stockpiling the diamonds in times of surplus in order to;maintain the price. The CSO became the only source in the world for rough;diamonds, and thus was able to regulate global supply in response to global;demand. In 1992, for example, De Beers imposed a 25 per cent cutback in its;purchases, compelling suppliers to adjust to a temporary decrease in global;demand. In this way, the Oppenheimer family controlled the global diamond;market for many decades. De Beers held the power to decide the number of;diamonds available to the global market at any given time and also persuaded the;worlds diamond miners to market virtually all of their diamonds through the CSO.;This power made it possible for De Beers to prevent volatility in the price of;diamonds, and to raise the price continually over time.;The Oppenheimers created the single-channel marketing system;of shoveling all available stones to the clearing house. They came;to dominate DeBeers after Ernest Oppenheimer took control of;most of Namibias diamond mines nearly a century ago. He;formed a mining conglomerate called Anglo American, before;grabbing the chairmanship of De Beers. The family is thought to be;worth around $4.5 billion today (2004).7;From the 1930s until the 1990s, De Beers produced a major share of the worlds;diamonds, but its share fell gradually over time, and by the 1980s, was less than 50;per cent. New mining technologies and more sophisticated capital markets;facilitated the entry of new mining companies. In 1957, diamonds were;discovered in Siberia, and De Beers quickly negotiated an agreement with the;Soviet government to purchase their diamonds. Soviet production rose to between;20 per cent and 30 per cent of the world production. For a brief period in the mid1980s, the Soviet Union left the De Beers cartel, but it soon negotiated an;improved arrangement with De Beers in which Russia was promised a steady;inflow of foreign currency. In Australia, the Argyle Diamond Mines PLC initially;sold its production to De Beers, but broke from the cartel in 1996, selling its;diamonds to participants in the Indian diamond-cutting industry. Also in the 1980s;and 1990s, substantial supplies were found in Angola. In the 1990s, it became;clear that Canada contained vast diamond resources, and new corporations took an;7;Special Report: The Diamond Cartel, The Economist, July 17, 2004, pp.60-62.;Page 4;9B05M040;increasingly active role in the Canadian mining sector. Canada was expected to;become the worlds third largest diamond producer, by value. DeBeers;percentage of the worlds mining production was at risk of falling even more.;Analysts pointed to the new mines as the beginning of the end for De Beers;This stable, established, and monopolistic system is now falling;apart... other big miners got hold of their own supplies of;diamonds, far away from southern Africa and from De Beers;control. In Canada, Australia and Russia rival mining firms have;found huge deposits of lucrative stones. 8;THE GRADING PROCESS;An important role of the CSO was the ability to grade diamonds on their many;dimensions and to provide a guarantee for each diamond in regard to its particular;grade. De Beers quality guarantee was accepted throughout the world. Hence;diamond wholesalers had an incentive to purchase from the CSO, quite apart from;the threat of punishment if they sought to deal directly with a mine. Grading;involved the weight in carats, the color and clarity of the stone, and the shape that;could be cut out of the stone. Rough stones could lose half of their weight in;cutting and polishing, and so the grading was crucial for the wholesalers who;would purchase a group of diamonds. For everyone in the value chain, the CSO;fulfilled this necessary function, reducing risk for all participants.;Small diamonds that did not meet the standards necessary for jewelry were used as;industrial diamonds that could cut other metals in the production process of many;industries. Even with these diamonds, De Beers sought to control the worlds;supply and hence global prices.;THE CSOS SALES PROCESS;The CSO sold rough diamonds to wholesalers. Some wholesalers then sold them;to the firms specializing in cutting and polishing, while others retained ownership;throughout the cutting and polishing process, and simply paid a fee for this work.;To maintain control of the diamond industry, De Beers selected its buyers on the;basis of their commitment to buy only from De Beers, and offered its diamonds at;non-negotiable prices. Selected buyers, known as sightholders, came to London;to purchase from the CSO.;The CSO had the power to choose whom to sell to, how much to sell and at what;price. De Beers compiled boxed lots of diamonds containing a range of different;quality stones, and this approach allowed De Beers to sell less desirable diamonds;8;Ibid.;Page 5;9B05M040;in the same box as top-of-the-line gems. If a buyer were to turn down an offer to;purchase a particular box of diamonds, the buyer might not be invited to purchase;again. If the buyer were to purchase directly from a mine, the buyer would be;permanently ostracized from De Beers value chain. Often De Beers might come;to own the mine that had been outside its system, or negotiate a contract for that;mines output. A buyer that had declined to purchase from De Beers would then;be without a source. This fear of being driven out of business kept De Beers;buyers returning.;Every fifth Monday diamond dealers made their way to 17;Charterhouse, the elegant London building where the C.S.O.;dispensed its wares. There they were presented with a box of gems;with a set price attached, and their only choice was yes or no.;No bargaining was allowed.9;Over the years, the CSO imposed a charge of only 10 to 15 per cent on its cost of;diamonds for fulfilling its various functions. As indicated in the financial;statements of Exhibit 2, in 2003, with its new strategy, this charge was 10 per cent;STOCKPILING;The global demand for diamonds was relatively inelastic, depending largely upon;the use of diamonds in engagement rings. However, the global supply of;diamonds was volatile depending upon new discoveries and new mining;investments. Consequently, the price of diamonds could fluctuate greatly. As;early as the 1930s, De Beers realized that it could influence the world price of;diamonds by stockpiling them during periods of excess supply and then reducing;its inventory during times of relative shortage. In this process, De Beers could;ensure that its mining operations were able to maximize their profits. Since De;Beers stockpiled diamonds that it purchased from other mines, as well as its own;De Beers ensured that even competing mining companies achieved price stability;at escalating price levels.;Throughout its history, De Beers used its stockpile as a way of punishing mines;that dealt directly with wholesalers or cutters. When a mine left the cartel, De;Beers would flood the market with the particular quality of diamonds produced by;that mine. This action was taken against mines in several countries at various;times, including Zaire, Australia and Angola. Furthermore, De Beers used its;stockpiles to limit speculative build-up of inventories. In the 1970s, for example;Israel was experiencing rapid inflation, and merchants began to hoard diamonds as;a hedge against inflation. De Beers imposed a temporary surcharge on diamonds;sold through the CSO in order to dampen speculative purchases, since a speculator;would fear substantial losses when the surcharge was withdrawn. De Beers also;9;James Surowiecki, The Diamond Market vs. the Free Market, The New Yorker, July 31, 2000, p.27.;Page 6;9B05M040;threatened to reduce the diamond allocation to Israeli wholesalers, and even;dismissed some Israeli sightholders from the right to purchase. However, the;development of new mines outside its control meant that De Beers ability to;control global supply through its stockpiling was continually diminishing.;De Beers once controlled (though did not mine directly) some 80;per cent of the world supply of rough stones. As recently as 1998 it;accounted for nearly two-thirds of supply. Today production from;its own mines gives it a mere 45 per cent share. Only a contract to;sell Russian stones lifts its overall market share to around 55 per;cent.10;Furthermore, the economics of stockpiling changed. In the 1990s, the increase in;mines and production led to substantial increases in De Beers stockpiles, and De;Beers faced increases in its carrying costs, augmented by high interest rates in the;last decades of the twentieth century. Analysts pointed to the escalating costs of;De Beers stockpiling system;De Beers practice of soaking up the worlds excess diamond;supply by serving as the buyer of last resort has proved;tremendously expensive. De Beers has had to spend billions to;stockpile diamonds in a vault, accumulating dust instead of interest.;In the past four years the companys profits have stayed flat. 11;It also appeared that the stock market did not appreciate the value of the stockpile;as it determined De Beers share price. At one point, for example, De Beers share;price was $23 yielding a market capitalization of $9.2 billion. If one deducted the;value of non-diamond investments ($7.25 billion) the balance was only $1.95;billion, suggesting that financial markets were prepared to pay only $1.95 billion;for De Beers stockpile, which was valued at the time at $9.25 billion. If De Beers;were to reduce its stockpiling role, then the value of De Beers shares might be;expected to rise considerably. Consequently, related to the new strategy would;also be the question of whether the Oppenheimer family should buy back the;shares currently held by the public at what might be a relatively low price in the;context of a more effective corporate strategy.;CUTTING AND POLISHING;Firms that specialized in cutting and polishing developed a highly skilled;workforce. There was a tendency for these firms to cluster in specific cities or;regions where these skilled workers could be found. For many decades, such;clusters had existed in Israel and India. These firms had to purchase from the De;10;Special Report: The Diamond Cartel, The Economist, July 17, 2004, pp.60-62.;James Lamont, Geoff Dyer, Anglos Initiative, Financial Times, August 8, 2002, p.10.;11;Page 7;9B05M040;Beers wholesalers or risk being excluded forever from the De Beers value chain.;Faced with this threat, the cutting and polishing firms were committed to De;Beers. From time to time, a firm did operate outside the De Beers chain, but De;Beers was quick to blacklist such a firm.;By the early years of the 21st century, governments with diamond mines were;advertising publicly to attract cutting and polishing firms in order to create jobs;and to increase their tax base and export earnings. On August 28, 2004, for;example, the Botswana Export Development and Investment Authority (BEDIA);issued a request for consultants to undertake a study to determine the feasibility of;developing value-added activities in Botswanas diamond industry.;This;advertisement stated that the specific objectives of the study were: To establish the;potential for increasing cutting and polishing activities for diamonds mined in;Botswana to generate further revenue from rough diamonds.;To identify opportunities for establishing a jewelery sector, taking into account;other precious and semi-precious stones.;To analyse the global and regional markets for the industries.;To perform a SWOT analysis and benchmark Botswana with competitors for;the investment.;To profile key diamond cutting and polishing, and jewelry companies and;pinpoint key individuals within companies that play an important role in the;site selection process.12;JEWELRY MAKING AND RETAILING;The retail sector consisted of an exceptionally large number of individually owned;jewelry stores as well as retail chains. Certain jewelry makers focused on the mass;market, often replicating particular designs. Retailers might widely advertise these;standard designs with special low prices. Other jewelry makers designed pieces;individually for the elite custom market. This custom design process would be;labor-intensive and far more expensive. In this market segment, the jewelry would;not be subject to price competition. In fact, high prices would convey an image of;exclusivity and quality that could increase demand for these pieces. The quality;and size of stones used differed significantly between these market segments.;It was clear that some customers were prepared to pay very high prices in their;efforts to demonstrate personal style and glamour. Examples of firms focusing on;the upper-income groups were Harry Winston and Tiffanys in New York. A New;York Times article described discriminating buyers;Take Anna Rothschild, a 31-year-old Manhattanite just getting;divorced from her second husband. Her first, a stockbroker, gave;12;Executive Focus: Bedia, The Economist, August 28, 2004, p.21.;Page 8;9B05M040;her a five-carat, round diamond set in platinum from Harry;Winston. Her second husband gave her a six-carat, emerald-cut;diamond with trilliums on the side. She designed it with him at a;private jeweler (cost: about $75,000).;Personally, Mrs. Rothschild said, I would have preferred 10;carats. But husband No. 2, an English businessman, thought that;was vulgar and inappropriate. He wanted a more understated type;of style.;Next time around, Mrs. Rothschild said, I would like at least an 8carat canary diamond. They are much more rare than just a regular;diamond, and Ive tried on my friends rings and I know it looks;good on my finger.;See, if youre medium-boned, even four carats can look small on;your body, she added.;In fact, engagement rings of four carats or more are not uncommon;in Upper East Side social circles, and many women echo Mrs.;Rothschild view that a smaller diamond might get lost visually on a;woman of any heft. At Tiffany, for example, insiders were;horrified that Jerry Seinfeld only bought a two-carat ring for his;new bride, Jessica Sklar. Couldnt he afford more? Really, said;one employee, who didnt want to give her name.13;The jewelry retail sector had recently experienced several major changes, each of;which might impact De Beers strategy. New giant chains, especially Wal-Mart;and Costco, had expanded their market share, and Wal-Mart stores were now the;worlds largest jewelry retailer. Further, these chains were upgrading their jewelry;counters with larger inventories of better quality diamonds. In addition, the;Internet retail business was expanding, and consumers were gaining easy access to;much greater knowledge about prices and qualities of diamonds. Online sales of;all jewelry rose to $1.9 billion during the 2004 Christmas season alone, more than;doubling from the 2003 level. Meanwhile, global sales of diamond jewelry were;growing at a rapid pace. In 2004, sales of diamonds and diamond jewelry in the;United States exceeded $20 billion, up nearly 10 per cent from 2002.;In 2003, Aber Diamond, a Canadian mining group, announced its purchase of;Harry Winston, an upscale New York-based retail jewelry chain, with stores in the;United States, Switzerland and Japan. Tiffanys and other exclusive retailers were;not standing still in the face of the changing retail environment. In 1999, Tiffany;Co. announced that it was buying a stake in a new Canadian mining venture for;13;Monique P. Yazigi, Bigger Diamonds Are a Girls Best Friend, The New York Times, February 13;2000, p.22.;Page 9;$104 million and would bypass the CSO. Tiffany & Co. also extended its;geographic scope, opening more than 100 retail stores outside of New York, with a;total of 5,000 employees and an annual revenue of well over $1 billion. By 2005;Tiffanys was the third-largest U.S. diamond retailer, by sales.;DE BEERS ROLE IN STIMULATING GLOBAL DEMAND;De Beers convinced the world that a diamond symbolized love. The diamond is;forever slogan was a brilliant marketing ploy that was invented in the 1930s when;diamond demand was at an all-time low. Hollywood actresses co-operated by;sporting the glamorous rocks, and the public ate it up. Although a luxury item, this;penetrating marketing transformed the stone into a necessity in the public eye. As;a token of love and devotion, and the symbol of marriage, this diamond marketing;created a tradition. Some ads advised men that they should spend two months;salary on an engagement ring. The phrase, a diamond is forever was an ongoing;theme in DeBeers retail advertising. De Beers also succeeded in portraying the;idea that diamonds were rare. Although sales had been largely in Western Europe;and North America, De Beers advertising was an important element in convincing;the rest of the world that diamonds were a key element of the Western lifestyle and;romance. Japan was quickly becoming a major market for diamond jewelry. Both;China and India were experiencing rapid increases in diamond jewelry sales, and;they could become huge markets in the future. Nevertheless, the United States still;purchased 51 per cent of the worlds diamond jewelry, the Euro region, 14 per;cent, Japan 14 per cent and the rest of the world, 21 per cent.14;For the retail consumer of diamond jewelry, this market structure created an;opportunity for long-term investment. De Beers control of the value chain;together with De Beers market intervention to ensure stability and gradual;escalation of prices meant that a retail customer was assured that such an;investment would not decline in value.;LEVIEV: AN ALTERNATIVE VALUE CHAIN;Lev Leviev began as a diamond cutter and polisher. Over time, he expanded this;business until he became the worlds largest firm in this activity. At that point;Leviev decided to challenge De Beers by creating an alternative agency for buying;and selling rough stones. Leviev was able to promise job creation in local factories;that he would build to cut and polish the domestic diamond production. This;promise of local investment and job creation gave Leviev a competitive advantage;over De Beers, who were not able to make such promises. His first major direct;purchase outside of the CSO occurred in Russia. With this model, Leviev extended;his direct purchases to other countries, including Namibia. His most daring;14;The Rapaport Report, Rapaport Research, February 2004, Part 1, p.7 (www.rapaport-research.com).;9B05M040;Page 10;9B05M040;challenge was to offer to build a factory in Botswana, at the centre of the original;De Beers empire. Since De Beers purchasing arrangements had been for specific;time periods, Leviev was able to target the end of each arrangement for his attempt;to gain access to the supplies from various mines. By the early years of the;twenty-first century, Leviev had become a major threat to De Beers.;Most worrying for De Beers is that Mr. Leviev is steadily building;his own diamond pipeline from production to sale to international;clients. 15;ANTITRUST IN EUROPE;Public policy issues had arisen frequently throughout the history of De Beers, from;concerns about manipulating supply to accusations of manipulating demand;through marketing, and to controversy over conflict diamonds. With the;expansion and strengthening of the European Union (EU), the European;Competition Commission gained significant power in its ability to institute legal;action in response to what it determined to be anticompetitive action. This new;role for a new European-wide institution was a major force in changing the global;diamond industry. Although Europe was only one component of the global;demand for diamonds, nevertheless, its threat of prosecution was powerful.;A central concern of the European Unions Competition Commission was that De;Beers had signed a long-term contract with the Russian diamond producer Alrosa;for all of its supply. The contract provided for purchases by De Beers of diamonds;worth $800 million a year, and this agreement prevented potential competitors of;De Beers from gaining any access to what was a major component of the global;supply. The five-year Alrosa agreement would significantly restrict the open trade;in diamonds. Although neither De Beers nor Alrosa was an EU company;nevertheless, the European Competition Commission was empowered to intervene;on behalf of Europeans who would have to pay higher prices than they would if;the global market were more competitive. The Commission felt that even if Alrosa;were to limit its sales to De Beers to half of its annual production, De Beers;position in the world market for rough diamonds would be unacceptably dominant.;After considerable negotiation between the Competition Commission and De;Beers, an informal settlement involved a phased reduction in the amount of;diamonds that De Beers would purchase each year from Alrosa. Under the;agreement, De Beers would be able to purchase $700 million of Alrosa diamonds;in 2005, but this amount had to decline by $75 million each year thereafter, until;an annual volume limit of $275 million was reached. This agreement would;ensure that competitors of De Beers would have access to a large supply of rough;diamonds.;15;James Lamont, Diamond Dealer Keeps His Hard Edge, Financial Times, December 4, 2002, p.5.;Page 11;9B05M040;U.S. ANTITRUST;Like European law, the U.S. anti-trust provisions allowed U.S. courts to extend;their jurisdiction beyond U.S. companies and citizens. The Supreme Court had;ruled that The Sherman Act applies to foreign conduct that was meant to produce;and did in fact produce some substantial effect in the United States.;In 1994, The U.S. Department of Justice indicted De Beers on the grounds of;antitrust violations, arguing that De Beers conspired with General Electric to fix;the prices of industrial diamonds. The case against GE was dismissed in court and;the charges were dropped. However, the indictment of De Beers remained in;force, resulting in a situation where De Beers could not officially operate in the;United States, nor could its company officers and directors travel to the United;States. For De Beers, this indictment was a serious obstacle to the implementation;of its new strategy and the creation of retail stores. Faced with this obstacle, De;Beers finally negotiated a settlement in 2004 in which it pleaded guilty to charges;of price-fixing of industrial diamonds and agreed to pay a $10 million fine. With;this settlement, De Beers and its executives were free to visit the United States and;to create a retail network in the worlds largest diamond market. This settlement;also paved the way for De Beers to create a new market image, destroying the;impression that it exercised tough and perhaps illegal business practices. Analysts;were optimistic that these European and U.S. settlements would enable De Beers;to move forward;The (end of the) companys legal complications should ease its;ability to raise financing, conduct market research, develop new;products and launch other new ventures.16;DE BEERS NEW STRATEGY;De Beers system had worked effectively until new value chains arose as;competitors. Some mines believed they could increase their profits by operating;outside De Beers system. Some governments with diamond mines wanted to;create a cutting and polishing business domestically in order to create local jobs.;Some retailers believed they could create a system that would extend from a mine;through to their retail shelves, gaining profit margins throughout the chain.;In its efforts to maintain a leading market position De Beers adopted a new;strategy. With help from Bain and Company Consultants, De Beers decided to;create a new vertical monopoly, extending from the mines to the retail level. The;16;John Reed, De Beers Poised for Return to US After Price-fixing Settlement, Financial Times, July 12;2004, p.1.;Page 12;9B05M040;focus shifted from controlling global supply to adding value through branding and;marketing.;De Beers has abandoned its traditional strategy of supporting;diamond prices by controlling supply, in favor of stimulating;demand through increased marketing and more selective sales;practices.17;The strategy to create a new identity consisted of several related components.;First, the new plan would end the stockpiling of diamonds, the strategy that had;permitted De Beers to dominate for so many years. The extra cash that would be;freed up by selling off the stockpile would be available to spend on marketing and;the creation of a chain of retail stores. Second, De Beers transformed its customer;relationships, adopting a new supplier of choice program. De Beers reduced the;number of De Beers wholesale customers from 120 to 80, and was able to select;those customers with the most cost-effective and successful value chains. De;Beers now demanded greater disclosure of operations from all sightholders, and;they were required to comply with DeBeers new Best Practice Principles (see;Exhibit 3). With the new increased emphasis on marketing, sightholders were also;expected to offer marketing support. In light of its new strategy, the traditional;CSO adopted a new name, the Diamond Trading Company, or DTC. Third, a new;focus on retailing and marketing was intended to present De Beers diamonds as a;branded luxury item. This component of the strategy included an extension of the;product line to include far more than engagement rings.;The DTC hired J. Walter Thompson to develop advertising campaigns based on;themes other than just the wedding. Some campaigns were targeted at men;looking for a way to rekindle a sense of excitement and passion in their;relationships. A Celebrate Her, campaign was designed to motivate men to;purchase solitaire, three-stone and right-hand diamond rings. Men were urged to;show their significant other how valued their relationship was. The diamond gift;would prove his love for her. The three-stone ring campaign included a;memorable ad of a forty-something man on bended knee offering the three-stone;and asking, will you marry me again? The Women of the World Raise Your;Right Hand print campaign targeted the affluent, fashion-savvy woman who had;probably been married at some point, previously received diamond jewelry, and;needed no ones permission to indulge herself. The ad copy encouraged women to;think of rings for their right hands as expressions of personal style for the;independent, worldly, assertive sides of their personalities, and to make their left;hands jealous.
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