Case Study – DeBeers Diamond Dilemma|Course hero helper

Posted: January 31st, 2023

Read the Case file ( Case Study – DeBeers Diamond Dilemma.pdf ) and follow the instruciton on the case report requirement pdf

his case was prepared by Cate Reavis under the supervision of Professor David McAdams. Professor McAdams is the Cecil and Ida Green Career Development Professor.

Copyright © 2008, David McAdams. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.

07-045 January 7, 2008

DeBeers’s Diamond Dilemma David McAdams and Cate Reavis

The mystique of natural diamonds has been built by the industry. One hundred fifty million carats of mined diamonds are produced every year, so they are really not that special if you look at those terms.1

—CEO of Gemesis Corporation

We don’t see synthetic diamonds as a threat, but you cannot ignore it completely.2 —Stuart Brown, Finance Director, De Beers

It was early summer 2007 and Lee Mandell decided that the time was right to propose to Diane, his girlfriend of four years. Being the romantic he was, Lee wanted to pop the question over a candle light dinner that included an exceptional bottle of Bordeaux. Logistical details of where to buy the special ring and what type of diamond, however, were less certain in his mind.

Lee and Diane had recently rented the movie Blood Diamond, set in Sierra Leone in the 1990s when a civil war was raging and the rebel group, the Revolutionary United Front, relied on proceeds from smuggled diamonds to finance its military operation. The 11-year war, which ended in 2002, resulted in the deaths of tens of thousands and the displacement of more than 2 million people, nearly one- third of the country’s population. Both Diane and Lee had been disturbed by the story the movie told, the hardship and violence, the children who were forcibly recruited to fight, and the lives that were

1 Karen Goldberg Goff, “Cultivated Carats,” The Washington Times, February 4, 2007. 2 Danielle Rossingh, “DeBeers Says it Can’t Ignore Synthetic Diamonds,” Bloomberg, May 17, 2007.

DEBEERS’S DIAMOND DILEMMA David McAdams and Cate Reavis

January 7, 2008 2

destroyed all over gems that were worn by hundreds of millions of people, men and women alike, throughout the world.

As he thought about his options, Lee recalled a magazine article he had recently read about the growing market for synthetic diamonds. The article described the process by which diamonds could be grown in a laboratory environment, far from the war torn lands of Africa. Chemically, lab-grown diamonds were identical to diamonds that were extracted from the ground. Instead of taking millions or billions of years to form, hundreds of miles underground, however, a laboratory environment could produce a flawless diamond within days.

Lee was starting to think that a synthetic diamond was a great alternative. But how would Diane react upon learning he had bought her a diamond that was made in a laboratory just outside of Boston? Would she be relieved and touched by his humanitarian and eco-friendly purchase or would she wonder if the 20% to 40% he would save by buying a synthetic diamond was an indication of the depth of his love?

For producers of synthetic diamonds, it was consumers like Lee Mandell that proved there was a market demand for an alternative to the natural diamond. But for South Africa-based DeBeers, which up until the late 1990s single-handedly controlled the world’s supply of diamonds, Lee’s rationale was misguided and he was giving his girlfriend nothing more than costume jewelry. Nevertheless, the fact of the matter was that people were buying lab-produced diamonds and the number doing so was growing at a faster rate than those buying those extracted from the ground.

The dilemma that DeBeers faced came down to whether it should enter the market with its own synthetic diamonds or whether it should have faith that synthetics would be a passing fad and that, at the end of the day, consumers would always prefer buying what, in DeBeers’s mind, was the real thing. Complicating the company’s dilemma, however, was the fact that it was in the midst of trying to remake its image, tarnished from decades of anti-competitive business practices, to one that was demand driven and focused on brand development. While DeBeers at one time produced 45% of the world’s rough diamonds and sold 80% of total supply, by 2007 it was producing 40% and selling just 45%.3

Did synthetic diamonds in fact pose a threat to the diamond industry? If so, what should DeBeers’s response be, if any?

The Diamond Industry

Natural diamonds, the hardest, most transparent material in existence, were made of carbon atoms that over the course of millions of years and with tremendous heat and pressure deep under the earth’s

3 “Diamonds: Changing Facets,” Economist Intelligence Unit, February 26, 2007.

DEBEERS’S DIAMOND DILEMMA David McAdams and Cate Reavis

January 7, 2008 3

surface bonded into a cubic structure.4 Due to their heterogeneity, unlike gold or silver, diamonds were not considered a commodity. As one diamond trader explained, “When you talk about commodities, you know that a ton of copper is worth this much, and an ounce of gold is worth this much because they are homogenous. But diamonds are not homogenous.”5

Supply

The global diamond industry produced an estimated $13 billion of rough stones and $62 billion in jewelry annually. Between 2000 and 2005, world production of diamond rough grew 31% by volume and 70% by value, highlighting the upward trend of diamond prices (Figures 1 and 2).

Figure 1 Diamond Rough Production by Volume and Value (2000-2005)

Source: “The Global Gems and Jewelry Industry – Vision 2015: Transforming for Growth,” KPMG, December 2006.

Figure 2 Diamond Rough Prices, 1996-2005

Source: “The Global Gems and Jewelry Industry – Vision 2015: Transforming for Growth,” KPMG, December 2006.

4 Karen Goldberg Goff, “Cultivated Carats,” The Washington Times, February 4, 2007. 5 James Dunn, “Glittering Prizes,” The Australian, October 4, 2006.

his case was prepared by Cate Reavis under the supervision of Professor David McAdams. Professor McAdams is the Cecil and Ida Green Career Development Professor.

Copyright © 2008, David McAdams. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.

07-045 January 7, 2008

DeBeers’s Diamond Dilemma David McAdams and Cate Reavis

The mystique of natural diamonds has been built by the industry. One hundred fifty million carats of mined diamonds are produced every year, so they are really not that special if you look at those terms.1

—CEO of Gemesis Corporation

We don’t see synthetic diamonds as a threat, but you cannot ignore it completely.2 —Stuart Brown, Finance Director, De Beers

It was early summer 2007 and Lee Mandell decided that the time was right to propose to Diane, his girlfriend of four years. Being the romantic he was, Lee wanted to pop the question over a candle light dinner that included an exceptional bottle of Bordeaux. Logistical details of where to buy the special ring and what type of diamond, however, were less certain in his mind.

Lee and Diane had recently rented the movie Blood Diamond, set in Sierra Leone in the 1990s when a civil war was raging and the rebel group, the Revolutionary United Front, relied on proceeds from smuggled diamonds to finance its military operation. The 11-year war, which ended in 2002, resulted in the deaths of tens of thousands and the displacement of more than 2 million people, nearly one- third of the country’s population. Both Diane and Lee had been disturbed by the story the movie told, the hardship and violence, the children who were forcibly recruited to fight, and the lives that were

1 Karen Goldberg Goff, “Cultivated Carats,” The Washington Times, February 4, 2007. 2 Danielle Rossingh, “DeBeers Says it Can’t Ignore Synthetic Diamonds,” Bloomberg, May 17, 2007.

DEBEERS’S DIAMOND DILEMMA David McAdams and Cate Reavis

January 7, 2008 2

destroyed all over gems that were worn by hundreds of millions of people, men and women alike, throughout the world.

As he thought about his options, Lee recalled a magazine article he had recently read about the growing market for synthetic diamonds. The article described the process by which diamonds could be grown in a laboratory environment, far from the war torn lands of Africa. Chemically, lab-grown diamonds were identical to diamonds that were extracted from the ground. Instead of taking millions or billions of years to form, hundreds of miles underground, however, a laboratory environment could produce a flawless diamond within days.

Lee was starting to think that a synthetic diamond was a great alternative. But how would Diane react upon learning he had bought her a diamond that was made in a laboratory just outside of Boston? Would she be relieved and touched by his humanitarian and eco-friendly purchase or would she wonder if the 20% to 40% he would save by buying a synthetic diamond was an indication of the depth of his love?

For producers of synthetic diamonds, it was consumers like Lee Mandell that proved there was a market demand for an alternative to the natural diamond. But for South Africa-based DeBeers, which up until the late 1990s single-handedly controlled the world’s supply of diamonds, Lee’s rationale was misguided and he was giving his girlfriend nothing more than costume jewelry. Nevertheless, the fact of the matter was that people were buying lab-produced diamonds and the number doing so was growing at a faster rate than those buying those extracted from the ground.

The dilemma that DeBeers faced came down to whether it should enter the market with its own synthetic diamonds or whether it should have faith that synthetics would be a passing fad and that, at the end of the day, consumers would always prefer buying what, in DeBeers’s mind, was the real thing. Complicating the company’s dilemma, however, was the fact that it was in the midst of trying to remake its image, tarnished from decades of anti-competitive business practices, to one that was demand driven and focused on brand development. While DeBeers at one time produced 45% of the world’s rough diamonds and sold 80% of total supply, by 2007 it was producing 40% and selling just 45%.3

Did synthetic diamonds in fact pose a threat to the diamond industry? If so, what should DeBeers’s response be, if any?

The Diamond Industry

Natural diamonds, the hardest, most transparent material in existence, were made of carbon atoms that over the course of millions of years and with tremendous heat and pressure deep under the earth’s

3 “Diamonds: Changing Facets,” Economist Intelligence Unit, February 26, 2007.

DEBEERS’S DIAMOND DILEMMA David McAdams and Cate Reavis

January 7, 2008 3

surface bonded into a cubic structure.4 Due to their heterogeneity, unlike gold or silver, diamonds were not considered a commodity. As one diamond trader explained, “When you talk about commodities, you know that a ton of copper is worth this much, and an ounce of gold is worth this much because they are homogenous. But diamonds are not homogenous.”5

Supply

The global diamond industry produced an estimated $13 billion of rough stones and $62 billion in jewelry annually. Between 2000 and 2005, world production of diamond rough grew 31% by volume and 70% by value, highlighting the upward trend of diamond prices (Figures 1 and 2).

Figure 1 Diamond Rough Production by Volume and Value (2000-2005)

Source: “The Global Gems and Jewelry Industry – Vision 2015: Transforming for Growth,” KPMG, December 2006.

Figure 2 Diamond Rough Prices, 1996-2005

Source: “The Global Gems and Jewelry Industry – Vision 2015: Transforming for Growth,” KPMG, December 2006.

4 Karen Goldberg Goff, “Cultivated Carats,” The Washington Times, February 4, 2007. 5 James Dunn, “Glittering Prizes,” The Australian, October 4, 2006.

 

SOLUTION

De Beers, a diamond mining company, faced a dilemma in the late 1990s when the supply of diamonds started to exceed the demand. This resulted in a decrease in diamond prices and threatened the company’s monopoly in the diamond market.

To address this issue, De Beers launched a marketing campaign that emphasized the emotional and symbolic value of diamonds, rather than their monetary value. The campaign, which included the slogan “A Diamond is Forever,” was successful in increasing the demand for diamonds and stabilizing their prices.

However, this marketing strategy also faced criticism from those who saw it as manipulative and unethical. Additionally, the campaign faced challenges from new diamond producers who were not part of De Beers’ monopoly, and from consumers who were becoming more aware of the negative social and environmental impacts of diamond mining.