STRATEGY: INDUSTRY AND COMPETITION
Problem Set 3
1. Throughout the 1990s, several developments contributed to the loss of market-share of the Central Selling Organization, which inevitably led to diminishing profits for De Beers. In 1991, the Soviet Union collapsed and this disintegration brought down the exclusivity that the CSO had enjoyed for so long. Indeed, the fall of communism made it difficult for the cartel to protect its trading agreements. As such, only limited shares of the Russian production reached the CSO, the rest being supplied to the competition by Alrosa (which became the worldwide dominant non-African producer) and other Russian enterprises. In 1996, as a consequence of the CSO’s reluctance to satisfy demand for very small stones, the Argyle mine in Australia (with a very distinctive rough production that De Beers had only a limited capacity to match), controlled by Rio Tinto – a multinational mining company and one of their main upstream competitors – became the first major producer to departure from its contract with De Beers. This disruption seriously compromised De Beers’ punishment capabilities through stockpiling. Additionally, in Canada, another major competitor arose (BHP). De Beers had a problem in these two markets. Unlike African countries, these are nations characterized by strong institutions, with a degree of bureaucratization and stability as well as cultural advancement that do not favor for the kind of “easy bribes” that had allowed the company to control the quantities sold worldwide. However, even in Africa other obstacles appeared. While Angolan and West African output were being diverted to other channels, the concerns about conflict diamonds – reaching their peak with outbursts in Angola through the 90s – also damaged De Beers’ image and only made it more difficult for those diamonds to be sold through the CSO. Finally, pressure from some African governments (Botswana and Namibia, for example) inadvertently or...
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