Debeers Case Debrief - Business Model Notes

DeBeers Business Model - DeBeers is a cartel - a collection of diamond mines and diamond and diamond sellers - The members of DeBeers collectively agree to restrict the number of diamonds released to the world market to raise the value of their diamond assets. - By structure, a cartel is not stable as there is a strong incentive for a member to cheat for a one-shot gain. - In this case, we see that Russia, Zaire, and Israel have all deviated from their agreement upon quotas of diamonds to try and take advantage of short-term returns. - We also see that Russia and Angola have fully defected from the cartel. - Note: Had 80% market share → decreased to 40%/50% due to competition. The Central Selling Organization - The CSO is the glue that holds the cartel together. - The CSO has all the power within its member relations. - The CSO makes a “take-it, or leave-it” offer where the price and quantity offered to each DeBeers Seller is fixed. - The CSO enforces the collusive arrangement. - Note: CSO - Price and Quantity are fixed within its members. Stockpiling Diamonds and Controlling Market Forces - Stockpiling is when DeBeers takes diamonds out of the market, locks them in a vault and pretends like they are not there. - What market forces can DeBeers control with stockpiling? - Supply - when DeBeers stockpiles its own diamonds coming from its own mines. - Demand - when DeBeers acts as a “Buyer of Last Resort,” buys outside diamonds and then stockpiles those. DeBeers and US AntiTrust Laws - Antitrust laws make monopolizing a market, cartels, excessive market power, and other collusive arrangements illegal. - “The reach of the U.S. antitrust laws is not limited, to conduct and transactions that occur within the boundaries of the United States. Anti-competitive conduct that affects U.S. domestic or foreign commerce may violate the U.S. antitrust laws regardless of where such conduct occurs or the nationality of the parties involved.” - DoJ cannot prove DeBeers does sufficient business with US interest. - DeBeers usually trades 7 times outside of the US before the diamonds get to the US. Stockpile Bursting, DeBeers needs Advice - Ailing from an ever-growing stockpile, DeBeers hired Bain Consulting to give strategic management perspective on how to proceed. - Bain recommended changing advertising to focus on DeBeers brand, instead of just diamonds. - DeBeers’ diamonds are expected to fetch 15% higher prices than rivals (Russia, Angola, and newly discovered Australian diamonds). - However, targeted advertisements with the DeBeers logo could bring about more antitrust liabilities. Nicky Oppenheimer’s Speech - Nicky addressed antitrust policy directly in his speech to the Harvard Business School. - Nicky stated that DeBeers should be an exception to the rule, because of the economic good that they do on the African Continent. - Example: Botswana’s infrastructure investment put forth by DeBeers can be traced to double digit growth in the country’s GDP for two decades. - Is Nicky’s speech compelling? The DeBeers Case UPDATE: - Given Bain’s recommendation around brand differentiation, DeBeers needed to find a way to enter the US market directly to leverage its 15% premium with customers. - Nicky’s Speech was compelling in light of the African Growth and Opportunity Act signed by the U.S.: - October 2005: DeBeers agreed in principle to a class action antitrust lawsuit in the US (pay $295 million in damages and bollow anti-monopoly guidelines). May 2008: the courts approved the settlement as fair. 2010: the settlement was appealed, but in 2012, the Supreme Court upheld the settlement. Since the 2008 settlement, DeBeers has gained the right to open stores in the US, cutting out a lot of the intricate trades that happened outside the US. - Currently, DeBeers signature stores are in Houston, TX; Naples; FL; and New York, NY. Brand Strategy to fight Competition - With added competition, DeBeerds had to be brand strategic. - The superior brand allowed DeBeers to strategically sell off its stockpile by taking sales away from its competitors without flooding the market with diamonds. - Basically, DeBeers focused on grabbing more market share within existing sales, so that it would not devalue the diamond market with excessive supply. - - - - Sample Case Questions 1. According to the DeBeers case, which of the following is a correct statement? a. DeBeers uses a stockpiling to balance the number of diamonds released to the market in an effort to stabilize diamond valuations at a high level. 2. According to the DeBeers case, the US courts were unsuccessful at prosecuting DeBeers for antitrust violations because: a. DeBeers could not be shown to have a significant business presence in the US market.