Analysis of the Diamond Industry Using Porter's Five Forces
Diamonds are one of the worlds and particularly Africa’s major natural resources. Each year, the industry produces an approximation of US$13 billion worth of diamonds where US$8.5 billion are derived from Africa. The industry employs more than ten million people worldwide both directly and indirectly. The spectrum of roles in this industry ranges from mining to retailing. Global sales of the diamond products have continued to grow on a consistent basis. This growth has increased almost by threefold: for the past three decades. Currently, the industry is worth in excess of US$72 billion. The price of diamonds is not a reflection of the actual scarcity of lack of it in the market. Rather price for diamond products is constant.
Diamonds are used for two main purposes. The first is in jewellery because of its appealing nature and rarity and the second is in the industry owing to its molecular elements. Approximately 30% of diamonds harbor gem quality. These kinds of diamonds can be distributed to experts for cutting, jewelry manufacture, and polishing. Those that do not have gem quality are sold to industrial applications such as polishing, drilling, cutting and grinding. Diamonds are also used as a symbol to express love, emotions, commitment and affection. Moreover, they are mostly used in celebrating unique occasions such births, weddings and anniversaries. They are also considered as the ultimate jewel by many cultures.
2. Identify the participants and segment them into groups, if appropriate
Among the Key participant in this industry is De Beers, which historically owns more than 85% of the world market share. This company which is also owns the main world distribution system and mines is recognized for influencing demand and supply as a means of controlling global prices and market. Another participant in this sector is France’s LVMH which produces and sells luxury goods made of diamond. However, this company has formed a joint partnership with De Beers in distributing branded jewelry. De Beers have also many companies that are affliated with it. These include Central Holding Group, Anglo American Groups, Diamond Trading Group (UK), Namdeb (Namibia), Debswana, and Williamson. These affiliates can also be grouped as De Beers’s shareholders.
In retaining its global monopoly, De Beers employs a unique strategy that ensures the success of this global monopoly. De Beers buys most of the Diamonds generated from mines. Buying officers from external sources are sold to De Beers. External buying offices compete with buyers from outside. De Beers is also a single entity, which determines the quantity of diamonds and the price they could be sold.
Porter's Five Forces Strategy Analysis as it applies to the Diamond Industry
Porters Five Forces Strategy is a model used in analyzing marketing opportunities for an organization. The forces identified under this model are Threats of New Entrants, Rivalry among existing firms, Threats of substitute’s products or services, bargaining power of Buyers, and the Bargaining Power of Suppliers. According to Porter (1979), these five forces work in tandem in determining the nature of competition in a particular industry. The chart below illustrates this model.
Figure 1.1 Porter’s Five Forces Strategy
Source: Chau, Lusanaxay, Malik, Saelee and Saepharn, (2012)
Threat of New Entrants
The Diamond Industry is currently being controlled by a single Monopoly. This entity owns more than 85% share of the world diamond market. In an attempt to control diamond supply in the market the company takes a number of strategies. These include buying all the diamonds from various mines. New Entrants would therefore find it hard to penetrate the market. However, the major threat will come from retailers who are bypassing De Beers and penetrating the market.
Bargaining Power of Suppliers
From De Beers case study, it is apparent that the diamond industry is becoming more vertical. This implies that diamond companies that were previously performing separate activities such as polishing, mining and cutting jewelry stores such as Tiffany have been changed by organizations such as Tiffany’s buying mines. These include Aber, which performs separate activities such as polishing, mining. Moreover, cutting jewelry stores such as Tiffany has been changed by organizations such Aber, which buys its stakes from retailers such as Harry Winston. Consequently, the are many mines today which can reach businesses directly without having to pass De Beers and can negotiate better prices.
Competitive rivalry has not very much affected De Beers. This is because this entity has been able to control the global diamond supply by 85% of all the diamonds that are produced. However, pressure from governments and those of retailers and producers who wish to disband De Beers grip on the diamond market is posing a stiff competition in the market. It therefore, necessitates De Beers to rebrand itself in a different way by providing unique and quality products to its customers instead of making customers to buy anything produced by Dee Beers. In the current perspective, this company has been forced to price its products according to the market rather having to dictates its own pricing. Further, it is important that the company find other markets and customers in order to sustain itself.
Being both a diamond retailer and producer, DeBeers has two kinds of customers, one is that pertaining to the jewelry chain such as Tiffany that buy diamonds from Dee Beers. The second category of DeeBeers customers are those that buy diamond from Dee Beer’s outlets. However, the company has puts much concentration of customers who buy products from De Beers products since the final target happens to be the end user. Most of the people who buy expensive jewelry and diamonds on specific occasions are the one who determines the demand and supply equilibrium.
Bargaining Power of Suppliers
Since most of the products made by Dee Beers is produced by the company, the companies supplies have no much bargaining power.