De-Beers-at-the-Millennium--2007

9-706-518REV:FEBRUARY5,2007________________________________________________________________________________________________________________ProfessorPankajGhemawatandSeniorLecturerSoniaMarcianopreparedthiscase.Thiscasewasdevelopedprimarilyfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.PANKAJGHEMAWATSONIAMARCIANODeBeersattheMillenniumInthelatetwentiethcentury,thepolitical,social,cultural,economic,andcommercialenvironmentofthediamondindustryhadchangedperhapsmoreradicallythaneverbefore,andDeBeersknewithadtochangewithit.…Thecompanyembarkedonastrategicreview,andinApril1999soughthelpfromexternaladvisors.Bainwasselected.…Theresultingcorporatestrategyhasfundamentalimplications—forDeBeersandtheentireglobaldiamondindustry.—BainandCompanywebsiteIntroductionInearly2000,DeBeerswasrunningaveryvisiblemillennialcampaignfordiamondscenteredontheMillenniumStar,a203-caratflawlesswhitediamondthatwasreportedlyinsuredformorethan$100million.Ithadbeenunveiledinfall1999bySophieMarceau,aFrenchactressfreshfromplayingthefemaleleadinaJamesBondmovie.1TheMillenniumStarwentondisplayinLondon’sMillenniumDomeandwaspromotedwithatwistonthetraditionalDeBeerstaglineof“ADiamondisForever.”InthewordsofNicholas(“Nicky”)Oppenheimer,DeBeers’schairman,“Millenniacomeandgo,butdiamondsareforever.”Evenasitstressedthetimelessappealofitsproducts,however,DeBeerswascontemplatingsweepingchangestoitsstrategy.DeBeershadlonguseditsCentralSellingOrganization(CSO)tobuytheoutputofminesthatitdidn’titselfownandthenoptimizedthetimingofthereleaseofthoseroughdiamondsalongwithitsowntothedownstreamtrade—whichimpliedstockpilingduringperiodsofexcesssupply.Thisstrategyhadhistoricallyworkedwell,buthadcomeunderpressureinthe1980sand1990samidstincreasingsupply.Asaresult,NickyOppenheimer,whosefamilyhadcontrolledDeBeersformorethan70years,commissionedastrategyreviewshortlyafterhebecameDeBeers’schairmanin1998.DeBeersengagedthestrategy-consultingfirmofBain&Company,whichconcludedthatDeBeers’straditionalstrategywasnolongerworkableandrecommended,instead,ademand-drivenstrategythatwouldemphasizedifferentiationratherthanmaximizationoftheshareofdistribution.Suchastrategyswitchwouldreshapetheentirediamondindustry,aswellasDeBeers’spositionwithinit,butinwaysthatwerehardtopredict.Addingtothetumult,DeBeersandtheindustryalsofacedmountingcriticismfordealingin“conflictdiamonds”thatwerefuelingcivilwarsinAfrica,aswellasregulatorythreatsinkeyconsumingcountries.Giventhese706-518DeBeersattheMillennium2uncertainties,wasthemillenniumtherighttimetoradicallychangeastrategythathadworkedfornearlyacentury?Thiscasebeginsbytracingthehistoricalevolutionofthesupplyofroughdiamondsandthedemandforthem.ItthendescribesthechallengesconfrontingDeBeersin2000andtheresponsesthatitwasconsidering.Exhibit1providesanoverviewoftheentireindustryin2000.SupplyDiamondswereformedoutofcarbonthathadbeensubjectedtoenormouspressureandheatdeepwithintheearth.Untilthesecondhalfofthenineteenthcentury,theyhadbeendugoutofriverbeds:firstinIndia,andtheninBrazil.Suchalluvialdepositswerelaterdiscoveredtoresultfromtheerosionofkimberlitepipes:formationsofcrushedrocksshapedlikeice-creamconesthatvolcanicactivityhadforcedtotheearth’ssurface.Diamonddepositshadoriginallybeendiscoveredbyaccidentorthroughtheeffortsofsmall-scaleprospectors.Butbeginninginthemid-1960s,scientificmethodsforfindingdiamondshadledtosignificantnewdiscoveries.Theactivitiesofdevelopingandminingdiamonddepositsvariedgreatlywiththeaccessibilityofthestones.Extractingdiamondsfromalluvialdepositsinriverbedsrequireddiggingandsievingsilt,butwasgenerallyaverylabor-intensiveprocessrequiringminimalcapitalinvestments.Forthisreason,andbecausepropertyrightsweredifficulttodefineandenforceintheratherwideareasinwhichalluvialdepositsweretypicallyfound,thesetypesofdepositslentthemselvestosmall-scaleminingandcouldeasilybecomemajorprizesincivilwars.2In2000,onshorealluvialminingwastheprimaryformofdiamondextractioninAngola,theDemocraticRepublicofCongo(theDRC,formerlyknownasZaire),SierraLeone,andotherWestAfricancountries,butthefurtherpotentialofmostofthesefieldswasthoughttobelimited.Kimberlitedeposits,incontrast,wereexploitedthroughlarge-scaleopenpitandundergroundmines.Thecapitalrequirementsofkimberliteminingwerehighingeneral,andespeciallyforundergroundminesthatmightrequiredrillingthroughmorethanakilometerofrock.Aftertheorewasexposed,itwasblasted,conveyedtoacrusherthatreduceditinsize,andthensentontothemaintreatmentplant,typicallylocatedclosebyforfurtherp