De Beers

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Q1. What does exhibit 1 tells us?
First of all, it tells us that the inventory strategy is consistent regardless of how CSO sales and overall profit from operations perform. This strategy was launched so that the De Beers could control demand and prices. Evidently it also shows that the 1980’s bust is a low peaking point for De Beers, as inventory levels for the first time is significantly higher than OP and CSO SALES. Q2. Please briefly talk about the recent boom-and-bust

The 1970s were a turbulent time for the diamond market, which saw the growth of inflation that led to speculation and hoarding in the rough diamond market. Eventually, the drastic increase in interest rates to the diamond trade coupled with falling retail demand burst the diamond bubble, which led many industry players to go bankrupt. As a result, several producer countries were reconsidered their relationship with De Beers’ CSO, also leading to the expansion of the economic pie of the diamond market. Q3. Please briefly talk about De Beers and the problems to be solved. For most of the 20th century, maintaining control of world rough diamond output was possible through political or coercive means, or through their raw buying power. However, the CSO eventually started losing control of supplier nations, for example Zaïre, who in 1981 decided not to renew its contract with De Beers. Since 1980, competition also increased due to the growing number of diamond suppliers on the market. The appearance of these powerful actors, including BHB Billiton, Alrosa and Rio Tinto eventually called into question the continued feasibility of DeBeers’ monopoly strategy. In general their biggest problem is the enormous amount of control that they have to assert in order to keep their current strategy. By aiming to, constantly satisfyieing all stakeholders or controversially begin to vertical integrate new processes into the De Beers. Q4. What does Exhibit 4 tell us? Is De Beers a quasy-monopsony (single buyer)? When looking at exhibit 4, it illustrates the high intensity of arrangements and purchases that De Beers were involved in 1982 with CSO’s arrangements and purchases and the relationship between the diamond suppliers in different countries. When analyzing the exhibit, CSO controls 67% of the world’s diamond supplies and it could be said that De Beers is considered a quasy-monopsony because it controls 95% of the diamond industry, which enables them to effortlessly control market prices. In addition, we learn the commission rate for each diamond sold by De Beers is around 13.75%. As a quay-monopsony, De Beers’ control tactic of supply is by selling diamonds 10 times a year at ‘sight’ to determine at what price and how many diamonds are sold. Each time around 125 to 150 exclusive members were invited to CSO to purchase diamonds, where they were powerless and had no choice to accept or reject the grade of diamond and the prices. Furthermore, members were not allowed to negotiate or sell to retailers, and were required to update De Beers with information on market and inventory levels. By auditing the demand and supply of diamonds, De Beers could make sure that clients are not secretly overstocking diamonds and made un-announced visits to client factories to check their financial records, inventories, machinery, and employees hired to calculate how many cut diamonds clients are producing. Q5. Please briefly talk about the supply-side of diamond industry. When discussing the supply of the diamond industry, CSO is the global middle-man which controls rough diamond supplies and buys out all other diamonds found around the world. Apart from monitoring the demand of the world’s diamond, they also control the supply chain, which gives them full control to set their own equilibrium market prices. As for the demand of diamonds, they were very high due to the heavy advertising made by De Beers, which was advertised everywhere from movies, magazines, and over 70% of...
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