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Business - Written by on Saturday, July 12, 2008 12:16 - 7 Comments

Wikinomics Report Card: De Beers

Can Wikinomics transform blood diamonds into a girl’s best friend?

This week I will profile the South African based diamond company De Beers. I case you missed my last report card on Blizzard Entertainment; you can find it here. I would like to thank Will Runyon for suggesting this week’s topic and directing me to this excellent Wall Street Journal article. Like my previous entries, I will be evaluating De Beers on the Wikinomics principles of being open, peering, sharing, and acting globally.

Company Background: De Beers has been the most dominant player in the diamond industry for the last 120 years. In the 1930’s Chairman of the De Beers Group Sir Earnest Oppenheimer came up with the idea of single channel marketing. He defined it as:

“a producers’ co-operative including the major outside, or non-De Beers producers in accordance with the belief that only by limiting the quantity of diamonds put on the market, in accordance with the demand, and by selling through one channel, can the stability of the diamond trade be maintained.”

This basically made the diamond industry a cartel in which De Beers controlled 60 – 80% of the world’s supply. They carefully controlled the supply, and effectively controlled the diamond’s rarity. In 1947, De Beers targeting the emotional value of diamonds by launching the campaign “A Diamond is Forever” which Advertising Age magazine named the best advertising slogan of the 20th century. This changed the industry forever as it effectively prevented a secondary market as a diamond was meant to be untouched by any other woman.

Today, De Beers is a company in transition. When CEO Gareth Penny took over in 2006, the company was in the process of completely changing its business model from controlling industry supply to a more demand driven model. Today, it only controls around 40% of diamonds traded worldwide. In addition, movies like Blood Diamond triggered waves of negative publicity about the conflict diamond trade in the 1990’s.

Being Open: Traditionally, De Beers has been very closed in their dealings. Throughout their history, they have tried their best to control industry supply, and keep competition down. In 1994, along with GE, they were charged with price fixing on industrial diamonds. In 2006, De Beers settled numerous class action lawsuits alleging that they were keeping the price of diamonds artificially high and violating anti-trust laws. They agreed to pay out almost $300 million to anyone who bought diamonds from a jewelry store from 1994 – 2006. However, ever since Gareth Penny became CEO and the complete change in business strategy, the company has become more open and transparent. Now, 100% of their diamonds are sold through the Kimberly Process which ensures that diamonds are conflict free. For the second consecutive year, they released a massive “Report to Society”. The Report covers De Beers approach, economics, ethics, employees, communities, environment, and a range of case studies, initiatives and related web sites. However, it was reviewed by Ethical Corporation magazine as “transparent but not entirely reader friendly. You can find the 2007 report here.

Grade: C+

Peering: A peer production model is not generally used in the mining industry. Exploration and extraction data is usually kept very private. However, De Beers should take a page out of the Goldcorp play book. In 2000, Goldcorp was struggling and unable to get the production they wanted out of one of their mining sites. That same year, they launched the Goldcorp challenge where they released over 50 years of geological data (everything they had) to the world offering $575,000 in total prize money to those who found deposits. The challenge was a resounding success, and led to the discovery of an additional 8 million ounces of gold. Since De Beers hasn’t found a new site in over 10 years, they may need to look for more innovative solutions to find more diamonds. Granted, there are significant differences between Red Lake Ontario where Goldcorp’s mine was and Botswana or Namibia. Although not nearly on the same scale, De Beers did co-sponsor Geological Odyssey 2001, a platinum challenge, with Goldcorp and offered a $4000 diamond as a prize.

Grade: D

Sharing: As mentioned above, De Beers is not really sharing much of its intellectual property, but it is doing a good job sharing with Africa, and the communities it operates in. De Beers has a 50-50 partnership with both the government of Namibia and Botswana. The government of Botswana owns 15% of the company and the diamond industry contributes over 33% of the country’s GDP. This allows the country to provide free education to everyone up to the age of 13. While De Beers has been criticized in the past for not hiring enough black employees in South Africa, it has undergone a recent black-empowerment deal so that now 26% of the South African country is in the hands of a black investment vehicle. De Beers is constantly looking for investments into emerging local businesses, and with its partners, invests close to $4.6 billion into African economies. De Beers seems to be shifting its marketing campaign to include African wellbeing. In the WSJ interview, CEO Gareth Penny said:

“We want people to know that with any diamond they buy, that product is not only deeply meaningful to them but, in terms of the contribution that it is making, to Africa”

This shows that their profit sharing with Africa may lead to positive publicity, and ultimately allow them to charge a larger premium.

Grade: B –

Acting Globally: De Beers does most of its mining in Africa, but also owns a few sites in Canada as well. They have failed to capitalize on newer sources of diamonds like Russia, India, Brazil and Australia. Demand is outgrowing supply at an increasing rate, so new sources will need to be found in order to keep up with this rising demand. Emerging market powers like India and China have driven up the demand for diamonds globally. This will lead to rising prices, which may strain its established North American market as it struggles economically. Currently, the U.S. represents 50% of its market share, and countries tied to the dollar represent almost 2/3s of their market. If the U.S. dollar continues to decline, De Beers may be forced to sell diamonds in a different currency to a more international market. It will need to search in alternative markets to find the highest bidders for its diamonds. According to the WSJ, they have no plans to change their American-focused strategy. De Beers should try to replicate its past success in Japan. There was no tradition for romance, courtship, seduction and prenuptial love in Japan; and no tradition that required the gift of a diamond engagement ring. If De Beers was able to penetrate Japanese society, they should be able to shift away from the American market as easily.

Grade: C

Overall Verdict: De Beers is still doing very well financially. Their masterful control of the diamond market over the last 120 years has led to a very strong position. They are starting to make strides in becoming a next generation enterprise. By continuing to apply Wikinomics principles, they should be able to remain #1 in the industry. With the current market conditions, a new diamond discovery would prove extremely profitable for the company. Its current methods aren’t working, so it will need to tear down its walls, and continue to open up to the world’s knowledge.

Overall Grade: C

Knowing how masterfully De Beers has created demand for diamonds, will you still spend/expect two months salary for a diamond engagement ring? Did De Beers do such a good job creating demand for its product that it doesn’t need Wikinomics? Is De Beers still exploiting Africa?

Thanks again to Will Runyon for suggesting this topic. If you have your own idea for a Wikinomics Report Card, message me on facebook, or e-mail me at bletalik@ngenera.com



7 Comments

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Wikinomics » Blog Archive » The Wikinomics Roundup: Week in Review
Jul 14, 2008 0:32

[...] On July 12, 2008… Ben Letalik published the most recent Wikinomics Report Card: Wikinomics Report Card: De Beers [...]

DH
Jul 14, 2008 15:58

Ben, interesting analysis, and of particular interest to myself given some work I did a few years ago in the diamond producing areas of Sierra Leone.

A couple of questions regarding your post (organized by section)

Being Open – You note that since 2006 they’ve become more open and transparent – how so? Have they release info on the volume of diamonds stored vs. released to market?

Sharing – An important new initiative run in Botswana sees all sorting and some cutting/polishing of diamonds done in country, creating an additional 3000 jobs over and above mining activity.

Overall – What will be the competitive impetus for a more open/collaborative strategy? Will it be new finds by other diamond co’s or a consumer shift towards synthetic diamonds?

And finally, how exactly are they migrating to become a Next Gen Enterprise? Would be very interesting to see a deeper analysis to see if this was in fact true.

Cheers, DH.

Ben Letalik
Jul 15, 2008 14:46

Dan: Thanks for the comment.

Being Open: I think De Beers is more open than it has been in the past, but a lot of it has been tooting its own horn. I skimmed through the 140 page “Report To Stakeholders”, and it didn’t mention the volume of diamonds stored or released to market. Their portfolio of statements didn’t include the standard financial statements either. However, as a private company, this is their right. Regardless, making a 140 page document that talks about targets and goals free to the public is certainly a sign of opening up.

Sharing: Part of them being open is publicizing new initiatives like this. Not hiring enough Africans to do things beyond mining activity was a major public complaint about the company.

Overall – Currently, there isn’t a true impetus for a more open/collaborative strategy. At this point, they seem to be using it more as a marketing opportunity. Changing the conflict diamond negative publicity into “Saving Africa”. If anything does propel them to take a chance by becoming even more open, it would be if they ran out of supply, or didn’t have enough supply to control prices. Since demand is poised to outgrow supply significantly, this may attract new players to the market that may find new mines around the world. This could greatly decrease De Beers’ influence.

I think the De Beers marketing department over time has done enough to stop the threat of synthetic diamonds. A diamond’s value isn’t its beauty, it is what it represents to your partner.

I would love to do a more in depth analysis in the future. Perhaps a follow-up post in the future.

DH
Jul 15, 2008 15:49

“A diamond’s value isn’t its beauty, it is what it represents to your partner.”

We swear Ben works for us and not DeBeers.

:)

Alan
Jul 15, 2008 17:25

Interesting choice.

DeBeers is one of the marketing giants of our time (what other company could literally install their product into a life-changing ritual).

On the other hand, it’s no exaggeration to say that they seem to have lost their moral compass along the way. It was once true that DeBeer’s executives could not set foot on US soil since the company had basically fled the justice system there (anyone know if that is still true)?

Interestingly enough, I also believe their participation in the Kimberly Process is far from alturistic either. It’s simply another attempt to do what they’ve done all along, lock up the distribution channel in monopoly fashion. This from a company that’s long practiced “cleaning” their diamonds via a dilution process that makes diamonds untracable to their questionable sources.

I think I can describe DeBeer’s in two words:

Evil Genius

Wikinomics » Blog Archive » NIMBY Stops Powerplant, Saves Mississauga Lakefront
Jul 24, 2008 11:31

[...] don’t have another entry this week, but if you missed my last entry on De Beers, you can find it here. The Report Card will return next week, better than ever! Tags: Wikinomics Report Card citizen [...]

Wikinomics » Blog Archive » Wikinomics Report Card: Starbucks
Jul 28, 2008 15:09

[...] coffeehouse giant Starbucks. In case you missed my last report card on De Beers; you can find it here. You can now find all my previous entries, and posts relating to them on the new Regular Features [...]

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