1. What functions does the CSO perform as a global intermediary? How do these functions help expand the economic pie in the diamond industry?
The CSO performed the following functions before the diamond market bubble collapse in 1980:
* Buffering the rough diamond supply by continuing to purchase rough diamonds of even the mines which De Beers didn’t own under contract to control the supply to the downstream market and stabilize the price.
* (De Beers) Interdicting unofficial routes of rough diamonds by buying smuggled rough diamonds on the open market along with other security measures.
* Sorting rough diamonds into more than 3,000 grades to frame the ...view middle of the document...
* Some mines, such as Zaire, Australia and Botswana, produced diamonds including low-grade ones more and more in 1980s, while the CSO could hardly accept their negotiations.
The decrease of demand due to the bubble burst, and increase of supply from uncontrollable mines, the CSO's stockpiling strategy had broken down.
3. Would you suggest De Beers to extend its operations downward (e.g., retailing)? Why?
* As Exhibit 1 shows De Beers inventory has 1981 excelled sales whereas there operational profit is shrinking from around 1,000 to 250 Million $
* Exhibit 6 shows high inflation since 1973 therefore an increase in nominal prices
* Exhibit 7 forecasts an increase of 1.2 Billion $ in total retail demand value therefore more earnings in retail
* By extending De Beers would control the whole line of business from procuration to retailing and therefore increase selling margin
* De Beers could use its retail power as an already established brand to undercut market competitors and push other retailers out of market. This helps put pressure on producing countries in price negotiations, like Zaire. It even may make De Beers there only choice if a high market share is acquired.
* Knowing more about customers De Beers could increase the bargaining power on producing countries to reduce their production
* De Beers would get more independent from “excessive level of speculation in the market” (Oppenheimer 1978, p. 6) and could profit more from the increasing use of diamonds as “store of value” (Oppenheimer 1978, p. 6)
* De Beers could still pile up rough demands but by using lean management De Beers would decrease inventory of polished diamonds and costs by still increasing profits
Summary: We would advise De Beers to extend its operations also to retailing. De Beers then could control the whole market chain from bare resources to customers. This should increase profitability and could avoid high stocks. Depending on price policy De Beers could own the whole market by undercutting all the other retailers in the market and may...