De Beers' Multifaceted Strategy Shift
Faced with such challenges as new sources of competition and suspicion about conflict diamonds, Gareth Penny had to rethink the basics
A diamond may be forever, as De Beers' famous advertising slogan contends, but is the same true of a business model? That was the question facing Gareth Penny, managing director of De Beers, in the late 19'90s, when the famed diamond cartel found itself beset by a series of events that ultimately forced it to examine and then retool its business strategy.
Since the company was founded in 1888, De Beers followed a strategy of supply control. In addition to mining its own diamonds, it bought diamonds from other producers and had what it called the "central selling organization," controlling some 90% of the world's diamonds. Its tight control over such a vast amount of supply enabled De Beers to keep prices high for a commodity that is neither particularly scarce nor useful. If a competitor offered diamonds on the market outside of De Beers' central selling organization, De Beers would simply flood the market with similar stones, thus eliminating any pricing power the competitor might offer.
By the end of the 1990s, the business model of controlling supply and managing how much of its inventory went to market at any time was no longer effective: New sources of diamonds were discovered in sufficient quantity that they could be sold competitively outside of De Beers' central selling organization. Demand for diamonds was dropping at a time when demand for other luxury goods was increasing. Brand-conscious consumers viewed the stones as anonymous commodities, and the precious stones, long marketed as an emblem of eternal love, became tainted by the phrase "blood diamonds" and came to symbolize the ill-gotten gains of rogue governments.
Sparking Demand
Many of the challenges that De Beers was