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Challenges of DE Beer Company - Case Study Example

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This paper "Challenges of DE Beer Company" explores the factors in the macro-environment that affects the various decisions within an organization, the strategic development, and analysis of an organization, and corporate social responsibility…
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Challenges of DE Beer Company
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?DE Beer’s Diamond Dilemma Pestle analysis of De Beer’s Diamond Dilemma Some of the factors in the macro-environment that affects the various decisions within an organization are political, economic, social, technological and environmental factors. All these factors are can be analyzed using Pestle framework (Gillespie, 2009). Political factors These factors emerge from the various policies, which are imposed by the government. De Beers as an incorporation had to deal with different political upheaval since it operated in different countries and had to sell its products to different countries as well (Gillespie, 2009). The political upheaval in Soviet Union in the year 1991 causes a lot of profit loss to De Beers Incorporation (Danielle, 2005). Before this upheaval, the Soviet Union and De Beer Incorporation had trading agreements and that dates back to the year 1950s. In this same year, deposits of Diamond were found in Siberia and from the trading agreement; Soviet Union had agreed to sell all their diamonds to this Incorporation. The integration of the Soviet system resulted into the collapse of the trading agreements that De Beer had with them and therefore, the enforcement of the various contracts were not possible. The political upheaval in Angola in the year 1990 also weakened the operations of De Beer Incorporation. The rebels were able to take control of major diamonds mines from the then President Dos Santos and this forced De Beer to purchase blood diamonds. Apart from Angola, other African countries, which were trading partners for De Beer, also suffered a lot of political upheaval. Countries like Sierra Leone, Democratic Republic of Congo, and Liberia were equally affected by the political upheaval and that led to reduced trading by De Beer. Trading in blood diamond later caused the company many revenues following their exposure in the year 1998. Economic factors Changes in the economy greatly affected the operations and organization of many business corporations (Gillespie, 2009). Due to hard economic times in diamond trade in the year 1999, De Beer was able to experience some shifts in its value chain (Danielle, 2005). A lot of integration in terms of forward and backward movement was experienced. Many investments in mines by the retail outlets were being experienced at that time and at the same time many mines were equally becoming retailers. This integration proved it tough for De Beer since the company returns were greatly reduced. In the same year, jeweler Tiffany and Company that has been sourcing most of diamonds from De Beer announced its withdrawal and it bought some mining concerns from Canada at a cost worth $ 104 million. These economic factors affected De Beer Company and the Company opted to safeguard its market dominance. The safeguarding practiced proved to be very expensive for this company since it was forced to buy diamonds from inflated prices. Some of the diamonds, which were purchased at inflated prices, were later sold at very low prices. The emergence of Australian Argyle Company into the diamond trade further weakened the market bases for De Beer since this company was able to produce low quality diamonds, which were later sold cheaply. The inflation in prices of diamonds from other countries where De Beer was sourcing them also made this company in the year 1990 to lose a lot of its market share (Danielle, 2005). The share price for this company was also able to reduce from 17 to 12 $ between the year, 1989 and the year 1998 and the fall in price presented a percentage drop of close to 30. Social factors These factors generally affect the demands of the various products produced by an organization. These factors circumrotate on the labor and the workforce within an organization (Gillespie, 2009). The processing of diamond in De Beer Company had several processing industries, which were helpful in the cutting and polishing of the processed diamonds. The Indians dominated the workforce in the organization and close to 1 million workers in the processing industries were Indians. The cost of hiring these people was significantly lower compared to the cost in other countries, in the year 1990, the market position of De Beer was relatively small and this led to loss of workers. Some countries more so from the Southern African countries were forced to enact laws, which saw local polishers getting a share of the locally mined diamonds. Technological factors Technology also increases the competitive nature an organization (Gillespie, 2009). The sale of diamonds recorded by De Beer in the year 1997 was slightly lowered compared to other years. Boston wholesaler applied use of some technology to market its diamonds products and the market was overwhelmed by its innovation. The Boston wholesaler carried out branding of its diamonds stones and this helped it to create some sort of model for its products. The branded diamonds were called Hearts on Fire and the different between these products and the products sold by De Beer was a cut. De Beer was able to lose some revenues in the window period before they actually started branding their own diamonds. Environmental factors Environmental factors are caused due to changes in climate as well as weather. For example, in the case of high temperature then the rates of production in the diamonds will greatly reduced and similarly reduced temperature will also affect the production from the mines (Gillespie, 2009). The weather effect on most of the mines were positive since from the observations made by the scientists, grizzly and caribou bears were not feeding a round the mines. Although the in mines, many greenhouse gases were emitted since diesel at time is used to fuel and power the mining. Legal factors These factors have a direct relationship with the legal environment and they involve passing of regulations and laws that control the operations of the organization. These legislations on most cases give restrictions to the organizations thereby limiting their profit making techniques (Gillespie, 2009). Enforcement of laws by different countries for example Namibia in the year 1999 led to shrinkage of De Beer. Similarly, South Africa was able to enact some amendments as well as regulations and these amendments were required to be effective from the year 2007. In these acts, diamonds producers were expected to be heavily charged based on rough diamonds exports. These enactments greatly affected De Beer Company, which at times was involved in the export of rough diamonds, and through these laws; they were able to incur many revenues losses. Porter’s five forces model The strategic development and analysis of an organization can be achieved through the applications of Porter five framework analyses (Porter, 2008). These forces tend to take into consideration the various competitive and attractiveness of the market for the given organization under analysis. Out of the five forces, three are external competition while the remaining two are threats, which are found within the organization. Threats of new entrants De Beer Company had to face it off with many entrants into the diamond business. The existence of many entrants made this company to lose revenues in terms of reduced sales as well as expenses to overcome their strategies (Porter, 2008). In the year 1999, a threat was imposed on De Beer Company by Tiffany jeweler and Company that announces its entry into the market as well as its determination of business contracts with De Beer. The entry of this Company meant that the abnormal profits that were constantly being enjoyed by De Beer would come to a stand still. Several other Companies made their entry into the business and some of them were Aber Diamonds and Alrosa. Threat of substitute products or services De Beer Company was dealing in natural diamonds and due to the nature and the processes involved in the mining, some techniques in synthetic manufacturing of diamonds came up (Porter, 2008). The market demand of these synthetic diamonds was on the rise since close to $ 50 million volume of these synthetic diamonds could be sold. Some of variety of the synthetic diamonds, which were in the market, is Adia Diamonds, Gemesis, Apollo, Chatham, and Life Gem. The existence of these synthetic diamonds greatly reduced the sales volume for the natural diamonds. Bargaining power of customers The customers always put the Company under pressure and this pressure at times is used to determine the prices of the products hosted by the company (Porter, 2008). The branding of the diamonds by the wholesaler from Boston created some competitiveness in the demands of the customers. De Beer Company was later forced to brand its diamonds as well as the customers were fond of branded diamonds. Due to the branding started by the Boston based wholesaler, the customers developed some bargaining power of branded diamonds. Bargaining power of suppliers The various suppliers of the labor as well as raw materials to an organization at times act in the capacity of power source to the organization (Porter, 2008). The withdrawal of Tiffany jeweler and Company from the list of suppliers for De Beer Company greatly affected it. The forward and backward integration that is retailers becoming investors in the mines and the miners becoming retailers also affected the returns of De Beer Company. The Company gain was greatly affected since it could no longer the economies of scale that it was previous enjoying. During the year 2006, this Company was able to enter into an agreement with Russia following it previous agreements to have conflict free markets. Stockpiling tendency was developed by Be Deer Company in an attempt to control the market prices. This tendency made the company to be in bad books with some of its suppliers and it was forced to develop a strategy, which was demand center. Intensity of competitive rivalry A very good example is the Boston based wholesaler who was able to command the market due to branding of its diamonds (Debora, 2006). The initial idea of this wholesaler forced an organization like De Beer to follow suit and to brand its diamonds as well. The introduction of synthetic diamonds also forced De Beer Company to start supplementing it natural diamonds with the synthetic diamonds (Elsa, 2007). This was on the realization that the synthetic diamonds were gaining more ground in the markets as compared to the natural diamonds. Stakeholder analysis The different stakeholders in the business of diamonds were the seven producer countries and these countries were Canada, Botswana, Australia, South Africa, Russia, and Democratic Republic of Congo. These countries acted as the major stakeholders in this diamond trade. USA served as a major buyer of this diamonds and therefore it was a stakeholder in the business. De Beer on the other hand was a major seller and processor of diamonds and it was rivaled with companies like Tiffany jeweler, Boston wholesaler, and smaller scale retailers and miners. USA being a major buyer of this product had a lot of bargaining power as a customer and it was to accuse De Beer of going against Sherman Antitrust. Corporate social responsibility In the year 1990, De Beer was able to be a monopoly in the international diamonds trade and from this monopoly; the company was at liberty to choose the buyers to sell to and suppliers to buy from. The corporate social responsibility of this company was well written in its mission of controlling and dominating the world’s diamonds processing and sales. The various market forces later influenced the various decisions at De Beer Company and some of its guiding principles were; development of demand-driven strategies and brand focus, focusing on profits rather than holding large market share and development of supply strategies Identification of threats and opportunities De Beer Company was able to identify the Boston wholesaler as well as the various synthetic diamonds producers as major threats (Elsa, 2007). The threats were identified based on the various effects that they imposed on this Company whether in terms of reduction of markets share or impedance to sales and appeal to customers. De Beer as a threat noted the formation of cutting venture by both Leviev and Alrosa in Russia since that would mean scrambling of markets since at that time it was the only cutting and processing Company. The determination of the contract between Australia Argyle diamond mine and this company was also noted as a threat. One of the sources of opportunities was through developing good relationships with the suppliers as well as focusing on demand. The entry of this company into synthetic production of diamonds was also another opportunity to increase its market share as well as to gain more profits (Debora, 2006). The company was also able to indulge in blood diamonds in order to gain more market share and profits. Identifying strategic options facing a company The identification of the strategic options is based on the use of Porter’s 5 forces models. Through the focus on its reduction in market dominance, De Beer Company was able to identify its strategic options and able to provide remedy for the various options facing it (Danielle, 2005). One of the options facing it was the emphasis of market share rather than profits generations. To reverse these options, the company decided to rebuild its relationships with its suppliers as well as to drop the stockpiling tendency. The aspects of repairing the earlier relationships were intended to help this company to appeal to its earlier suppliers to be able to supply it with diamonds. The achievement of this option would mean that the company could achieve its market dominance like I the early 1990s. Selecting a strategic course of action and justifying it One of the strategic courses of actions for De Beer Company was to developed good relationships with the suppliers and the customers (Danielle, 2005). This was necessary because De Beer Company realized that it was loosing the market share as well as profits to its competitors more so the synthetic producers of diamonds (Debora, 2006). Another strategic move by this company was during the year 2006 when this company decided to enter into an agreement with Botswana Government. The joint venture was called Debswana and it was necessary for the purpose of increasing the market share as well as strengthening the foundation of this company. Botswana being one of the major stakeholders of diamonds production was a nice partner since this company would be assured of continuous supplier of diamonds. Once the company was in a steady acquisition of diamonds, then it was good to dominate the world market like in the year 1990. Conclusion The strategic management of diamonds proved to be a challenge to De Beer Company and the challenge was based on wrong strategies. Having revived its strategies, the company was able to enjoy large market share as before in the year 1990. De Beer Company was forced to indulge in blood diamond trade in order to supplement its sales and market dominance. However, taking part in the blood diamonds trade made the company to receive many accusations from the world corporate bodies. These bodies felt that the involvement of De Beer Company in the blood diamond trade further escalated the prices of the diamond worldwide. A lot of death was caused since tycoons as well as wealthy individuals operated this blood diamond business. References Danielle, C. 2005. De Beer and the Global Diamond Industry. Ivey Case No. 9B05M040 Debora, L.S. 2006. Continuity and change in the international Diamond Market. Journal Elsa, W. 2007. Synthetic Diamonds are still a rough cut. CNET New journal, 2 (3): 21-65 Gillespie, C. 2009. PESTLE analysis of the macro-environment. Oxford: Oxford of Economic Perspective, 20 (3): 23-89 Porter, M.E. 2008. The Five Competitive Forces That Shape Strategy. Harvard business Review, 2 (3): 12-34 University Press. Read More
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