Since the company was founded in 1888, De Beers followed a strategy of supply control. In addition to mining its own diamonds, it bought diamonds from other producers and had what it called the "central selling organization," controlling some 90% of the world's diamonds. Its tight control over such a vast amount of supply enabled De Beers to keep prices high for a commodity that is neither particularly scarce nor useful. If a competitor offered diamonds on the market outside of De Beers' central selling organization, De Beers would simply flood the market with similar stones, thus eliminating any pricing power the competitor might offer. By the end of the 1990s, the business model of controlling supply and managing how much of its inventory went to market at any time was no longer effective: New sources of diamonds were discovered in sufficient quantity that they could be sold competitively outside of De Beers' central selling organization. Demand for diamonds was dropping at a time when demand for other luxury goods was increasing. Brand-conscious consumers viewed the stones as anonymous commodities, and the precious stones, long marketed as an emblem of eternal love, became tainted by the phrase "blood diamonds" and came to symbolize the ill-gotten gains of rogue governments. Sparking Demand
Many of the challenges that De Beers was facing—including the drop in demand and the taint of "blood diamonds"—beset the diamond industry overall, according to Penny. But as the largest player by far in the diamond business, those challenges were magnified for De Beers. "By the end of the 1990s, that [supply-management] business model no longer worked for us," says Penny. "It wasn't economically feasible, it was legally challenged, and it was just something that needed to change." De Beers shifted its strategy from managing supply to driving demand. Under its "Supplier of Choice" program, De Beers had the goals of stimulating diamond demand by 5% per year; improving the...
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