Question

Undertake a strategic audit and critically evaluate DeBeers’s current position in the marketplace concentrating on its external operating environment and its internal core competencies. You will need to utilise relevant management models from the course materials and provide supporting evidence from a range of external sources to support your academic argument. (Minimum 2000 words)

Answer 1

Before answering the above question, let us discuss in brief about the concept of External operating environment and Core Competencies:-

An External Operating Environment is composed of all the outside factors or influences that impact the operation of the business. The business must act or react to keep up its flow of operations. The external environment can be broken down into two types: the microenvironment and the macro environment.

The microenvironment consists of the factors that directly impact the operation of a company. Whereas, the macro environment consists of general factors that the business typically has no control over. The success of the company depends on its ability to adapt.

Core Competencies, on the other hand, are the resources and/or strategic advantages of a business, including the combination of pooled knowledge and technical capacities, that allow it to be competitive in the marketplace. They are what the company does best and consist of the combined activities, operations, and resources that distinguish the company from competitors.

For most of the twentieth century, the diamond market was entirely controlled by one company: De Beers. Total control of the industry meant that De Beers set diamond prices. This monopoly no longer exists, and today diamond prices are driven by supply and demand. In the late 1800s, during the diamond rush in South Africa, Cecil Rhodes accumulated as many mining properties as possible and created De Beers Consolidated Mines Ltd. Since the diamond industry was relatively small, the company was able to control every aspect of the industry, especially focusing on distribution.

Once De Beers had control of global supply, it could keep prices stable by stockholding rough diamonds during a weak market and then releasing them once demand increased. One by one, diamond mines in Australia, notably the Argyle Mine, and in Canada would break away from De Beers cartel, bypassing the DTC. De Beers saw its market share fall from a peak of 90 % in the 1980s to 60% by late 1990s.

In the early 2000s, the company changed strategies by promoting its won retail stores and brand name rather than focusing on rough diamond supply control. In 2005 De Beers promised the European Commission it would decrease and eventually phase out the purchase of rough diamond supply control. In 2005 De Beers promised the European Commission it would decrease and eventually phase out the purchase of rough diamonds from the Russian company Alrosa.

Today the diamond industry is dominated by two major players: Alrosa and De Beers.

However, new global demand for diamonds is primarily coming out of China, where the current generation is the first to adopt the Western tradition of giving diamond engagement rings. This boost in new demand for diamonds is forecast to outpace new supply. Russia's Grib mine, which started production last month, will be the first new diamond mine to produce more than 1 million carats per year since Canada's Diavik mine came online in 2003.

With little grassroots diamond exploration, it's likely that the future diamond supply picture is not going to change anytime soon. Global demand production is estimated to be 130.0 million carats in 2014, which would be down 0.7% from 2013. The total value of 2014 production is estimated to be US$12.9 billion, which would be up 2.7% from 2013.De Beers is 85% owned by Anglo American and 15% owned by the government of Botswana.

As per the Business Model, De Beers value proposition lies in the exploration, mining, and marketing of rough diamonds across the world. As such the company's business strategy is primarily driven by its ability to find new sources of diamond supply, manage its shareholder relationships with Anglo American and the various government / joint venture partners and drive sales and marketing in the retail sector.

While the Operating Model argues that as in most mineral extractive industries, finding geographically extractible resources is a significant operational activity and value driver, and requires continued investment. Current De Beers projects are located in the Democratic Republic of Congo, India, Angola, Canada, Botswana, Namibia, and South Africa. Through its subsidiary, Debswana, the company started a $ 500 million expansion project at Jwaneng Mine at an estimated cost of $ 3 billion. This project is expected to provide access to an additional 95 million carats until 2025.