Research Proposal on "Strategic and Operations Management"

Research Proposal 8 pages (3253 words) Sources: 0

[EXCERPT] . . . .

De Beers Case Study

DeBeers Strategic Marketing

Is the diamond industry structure unique in the opportunity it offers for collusion and price maintenance? Compare De Beers' market leadership with that of the Organization of Petroleum Exporting Countries (OPEC). Are there other lessons that businesses can learn from De Beers?

The diamond and oil industries are not unique in creating conditions that allow for collusion and price maintenance. High tech industries including semiconductor manufacturing, peripherals and PC production, and enterprise software industries all have shown the potential to be fertile industries for collusion and price maintenance. The use of collusion and price maintenance has also been the catalyst of government investigations into chicken industry in Africa and the United States. Collusion by Tyson Foods with its own value chain to keep the prices of their chicken below a smaller rival eventually drove the smaller competitor out of business, for example. Collusion in the food industry in Africa is pervasive, driving up the food costs sadly in nations where people are starving. De Beer's successful creation and maintenance of their diamond cartel, enforced using pricing as the commercial weapon to keep it intact, resembles the cartel of Organization of OPEC Exporting Countries (OPEC). Each of these cartels' market leadership occurs despite a relatively inelastic demand curve for the commodities they specialize in. Second, both cartels are extremely protective of their specific markets, despite each defining these markets somewhat differently. De Beers sees their segment as upper income diamond purchasers, while OPEC considers North America to be their most critical market segment. Third, both cartels see nationalism as a threat to their ability to keep their control over served markets. For OPEC, greater nationalism in the form of gas and oil conservation and the growth of hybrid and electric vehicles, in addition to the recent decision to open up the offshore oil fields that border the Eastern and Western coasts of the U.S. Fourth, both of these cartels serve as the catalyst for other nations to become aggressively nationalistic in defining their own sources of supply as it relates to the limited commodities each provides. Fifth, both cartels over time are experiencing less control over the increasing chaotic buying side of their value chains. For De Beers the rise of Wal-Mart as one of the most dominant jewellery retailers globally and their proven ability to gain supplier conformance to their pricing and product standards is the most visible aspect of how chaotic and disorganized the previously orderly and controllable retail channels had been. For OPEC, the buying side of their value chain is now tested as many North Americans completely changed their oil and gas consumption as a result of fears of escalating gasoline prices. In the context of this case study however, De Beers is finding their buyers are capitalizing on the chaos going on in distribution channels and shopping for the best price, irrespective of the branding messages of the company aimed at affluent North American consumers or their attempts to create alliances in the channels. Sixth, both cartels manipulate the supply chains and resulting supply side economics of their industries, and attempt to also define the precise and best price on their industry demand curves as well. Monopolists, who run cartels, regardless of the product, attempt to control the interactions of both demand and supply to control the intersection of these curves, thereby defining optimal pricing for profits and managing their controlled value chains. De Beers and OPEC acting as monopolists have succeeded in keeping heir respective cartels functioning due to the ability to reward or punish members of the industry-wide value chain by giving them the same prices they have which is actually a form of forced collusion. Seventh and related to the previous point, monopolies often struggle with imprecise measures of demand, and equally are challenged when demand drops or rise exceptionally fast. Instead of relying on demand generation in the form of marketing however, monopolists who run cartels attempt to manipulate demand the supply curves until a new optimal price point is reached. De Beers and OPEC both owned their entire value chains as well, so defining a new artificial and often inflated optimal price point is achieved. The new price point is used as the basis of an incentive for others to cooperate with the cartels or be financially harmed by it if they don't.

In terms of the lessons learned for other companies, the first is to not rely purely on the ability to manipulate demand and supply chains in any given industry and instead focus on building a brand that attracts new customers and keeps existing ones. There is no balance in the case study to branding; it is a secondary strategy relative to keeping the cartel in place and controlling the industry's value chain. Second, companies who contemplate creating cartels need to realize that in defining their business models as monopolistic, they create the risk of disintermediation as the Internet is making it possible for smaller competitors with more efficient value chains to replace them. Owning the natural resource and controlling the perception of supply is the core strength of any cartel, yet over time this erodes as substitute products and sources are found. Examples of how cartels in semiconductors were dismantled by competitors' value chains are a case in point. In summary, companies can learn the lesson of being market-driven, not price-driven despite the potential to monopolize the availability of natural resources in their given industries.

Part II: Assume that you are the CEO of a relatively new Canadian-based, well-funded vertically integrated processor and marketer of Canadian-sourced diamonds. Using your knowledge of strategies for entering markets held by incumbent firms (Kotler, Chapter 11), briefly describe which single strategy you would choose to develop to compete against De Beers in export markets outside of Canada. You will need to justify your choice of strategy, and you can assume that your organization will remain independent and not be absorbed nor controlled by De Beers or any other global diamond competitor or trade association for the purpose of responding to this question.

Taking over the role of being the CEO of a Canadian-based diamond mining, processing and marketing firm, and the top priority would be getting to understand the specific aspects of each export market's unique needs, wants and preferences in diamonds. Visiting each of these export markets to fully comprehend the role diamonds play in the lives of the people there is critical. The specific strategy for entering markets held by incumbent firms would first focus on adaptation and customization, and second product innovation. The catalyst joining these two strategies together needs to be the development of entirely new class of diamonds through branding how exceptional the natural beauty of Canada's diamonds are due to the unique natural forces that created them. Both strategies of adaptation and customization followed by product innovation would be accomplished by creating a differentiated value chain that provided for each customer to have their diamond cut and set exactly as they wanted it. The concept of mass customization for diamonds, fulfilled to the consumer through a selective recruitment of retailers would be use globally. Customizing both the diamond cut and the setting would intentionally create very high customer expectations, and the value chain, synchronized from the mining and processing through distribution, would be constructed to meet and exceed those expectations. The concept of a Canadian diamond being a one-of-kind purchasing experience for the consumer, complete with the cut, clarity, strength and mounting defined, would be exceptional by diamond industry standards of today. Only the wealthiest diamond customers globally can afford this level of adaptation and customization to their unique tastes and preferences. In visiting each of the export markets outside Canada, I would look for innovations that could be made in value chain relationships to support this strategic direction of the company. Specifically focusing on inbound logistics of diamond within Canada, through the supply chain to each export market, to outbound logistics, all areas of the supply chain would be thoroughly evaluated for greater efficiency. With the goal of making adaptation and customization affordable for more consumers in each export market than had ever been the case in the past, I would look to turn the innovation of processes into a competitive advantage. Many companies speak of innovation from the product perspective, yet in this business, process innovation would need to be a constant in order to gain significant sales in each expert country. The reason to compete on processes over price is that the value chains in these export nations may have for decades been ignored from what diamond miners and producers need in the way of channel support and assistance. The critical requirement of expanding into export markets with an adaptation and customization strategy is to open up the opportunity for channel partners in each of these markets to also become more profitable than they may have had the opportunity to in the past. In other words,… READ MORE

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