Prepare for a New DTC Marketing Strategy
January 04, 07The New Year has arrived – heralding in a year of transition for De Beers, the DTC, their Sightholders, and the rest of the market. The Supplier of Choice marketing mechanism, as we know it today, will expire on December 31, 2007. It has outlived its era. It has become yesterday’s strategy. Thus the year 2007 will become (and must become) a year of transition, planning and “getting ready” for the post-SoC period.
Whether it will be labeled SoC-2 or something else isn’t relevant – the change will be dramatic. This will not be because Supplier of Choice has failed, although many will say it has, but rather, because external events on the diamond world-at-large if you will, have resulted in dramatic changes since 1999, some eight years ago, when the architects of SoC were designing the scheme.
The DTC is currently reviewing its options. It has brought back the original architects of the strategy, Bain & Company consultants, who are now “all over the place” trying to figure out how to take the diamond trading mechanism forward for the next decade. (Some cynics will say: “They aren’t back, they never truly left.” While that may well be so, what is relevant is that they have been entrusted with coming up with a new strategy.)
Personally, I truly think that
We hope, trust and pray that Nicky Oppenheimer,
I assume that many articles and editorials will be written during the year about the essence of the upcoming changes, but today I merely want to focus on the importance of the process of change itself.
The New De Beers Values: “Living Up to Diamonds”
The development of a new strategy is the first test for De Beers’ management to see if, as it proudly says, “it is living up to diamonds.” De Beers has spent a fortune defining its purpose, its mission, and its values. Its employees attended compulsory workshops so that these values were instilled in their way of thinking, their way of working and their methods of decision-making. Of the five values to which the De Beers of 2007 is committed, one is of particular relevance to the current process: “Build Trust: We will always listen first, then act with openness, honesty, and integrity so that our relationships flourish.”
This value was not in place the first time that Supplier of Choice was dramatically presented to all Sightholders in a cinema in London. Yes, for historically accuracy, some people had been briefed beforehand, enabling at least one DTC broker to storm into the Charterhouse building accompanied by his lawyer to ensure that the brokers were properly protected in the SoC system. But, by-and-large, the industry was caught unprepared.
As former Managing Director
Supplier of Choice was therefore a “compromise” – the best available at the time – as other options, such as the preferred total vertical integration, were legally unattainable. (The “total vertical” option was also rejected because of a lack of prerequisite downstream skills, though, theoretically, these could have been acquired.
From a De Beers perspective, concentrating on the true objectives, Supplier of Choice was an astounding success. It hasn’t faced any new anti-trust problems, it has successfully rid itself of an “illegal pariah” status, it has become accepted in the United States and developed relationships with government and Congress, it has settled all outstanding anti-trust related criminal proceedings, and it is in the process of settling (or fighting) some remnants of civil suits.
Supplier of Choice has also allowed De Beers to create for itself an image of an ethically responsible, transparent, and accountable company. It has entered into joint projects and partnerships with conflict-diamond NGOs that considered De Beers to be a detestable villain prior to SoC. It also enabled De Beers to get rid of a nearly $6 billion stockpile and let its clients pay for it, unwittingly helped by Alan Greenspan’s low interest rate policies.
The only way to measure (“score” to use SoC jargon) one’s success is by seeing that the basic objectives were achieved and, from a De Beers’ perspective, they scored high.
Interests of Clients were Secondary
ow did the clients fare under Supplier of Choice? Some did well, most did so-so, some did downright badly, and some even went “under.” Without being cynical (as I really mean it), I don’t think that that really mattered much to the objectives of SoC. Loyalty to clients, or a client’s loyalty to De Beers, was not a factor in the scoring mechanism and I have never accepted claims that the EC Competition Authorities would not allow such a “subjective” measure to be part of the profile criteria. (Every undergraduate university business courses stress the importance of “customer loyalty”).
There were quite a few diamond companies that were already following a Supplier of Choice strategy before De Beers announced that it had adopted such a strategy. What virtually all Sightholders strongly disliked was the fact that the De Beers, arbitrarily, had imposed a “corporate strategy” on their clients. London knew better. London knew better how any client should run their business. And, at the time that the policy was announced, London did not have anyone in its marketing or sales department that even remotely understood how the diamond business worked and what business strategy was, or was not, in order to compete successfully in the market.
I don’t think that it was at all relevant whether SoC was beneficial to clients; SoC represented a legal imperative to De Beers. In a recent De Beers report to stakeholders, the objective of SoC is defined as follows: “SoC seeks to encourage greater efficiency in the supply of diamonds. It seeks to ensure that, with every category of rough diamonds it sells, it is supplying to those businesses that can demonstrate strong alignment with the SoC strategy. Underpinned by an objective, transparent and dynamic selection process, these businesses will invariably be those that operate efficiently and effectively and can demonstrate an ability to maximize value downstream and enhance demand for polished diamond jewelry.”
Today, there are 93 Sightholders and most clients do not get the goods needed to support their own niche market programs. Instead, they are forced to buy the goods on the market. Today, more original DTC boxes (“sealed” and “unsealed”) are traded in the market than at any time in the pre-SoC period.
It is not my intention now to give points to SoC – although there are some aspects in which SoC boosted spectacular successes – but rather, to stress that the Sightholders and the market viewed Supplier of Choice too much in isolation in terms of what it did, or did not, do for them. That was not the way De Beers viewed SoC.
De Beers, through Bain & Company, had defined a specific set of corporate strategic objectives and, as we are now entering a new phase in the client-De Beers relationship, it is useful to remind ourselves of these objectives:
· To stimulate diamond demand by at least 5 percent per year
· To improve the efficiency and margins of De Beers operations, from mining to sales
· To leverage the De Beers brand by offering De Beers branded jewelry directly to consumers. (This led to the establishment of the De Beers LV brand - renamed De Beers Diamond Jewellers in 2006 - formed through a partnership between De Beers and LVMH)
· To support clients as they seek to adapt to the changing requirements of their customers as the industry transforms in the 21st century
Supplier of Choice was designed to further all these objectives. “Client Support” was important, but it was, and still is, one out of a legitimate set of overall corporate objectives. In order to achieve all these objectives, Bain & Company saw a need to secure a “behavior” change of the diamond pipeline, sometimes (maybe mistakenly) viewed as the push to downstream vertical integration.
What SoC has done is replace the centrality of price in competition for a “set of values” through which diamond supply chains compete with each other. The underlying premise of SoC, as I understand it, is that the performance of the specific supply chain associated with the Sightholder company rather than the individual company has become (or should have become) the company’s advantage over competitors, and has also become the “yardstick” or “benchmark” by which the DTC, in its allocation decisions, supposedly measures the applicant.
This “downstream” hasn’t worked. To the contrary: Most company failures, bankruptcies, and other “suffering” we have seen under the SoC strategy was on the downstream affiliation levels. I am mentioning this today because a fundamental lesson that should have been learned by Bain & Co. and De Beers is that - it must not think that it knows better how to run Rosy Blue, Steinmetz, Ganz, DD Manufacturing, or any other Sightholder than these Sightholders themselves.
SoC had created a linkage between a client’s blind acceptance of a business strategy (represented by the score card criteria) and the eligibility to secure rough allocations. SoC forced a behavioral change upon its clients and, indirectly, on an entire industry. It truly was a Supplier’s Choice – never that of its customers.
Was it all that bad? Not at all. Today, the Sightholders are running transparent and accountable organizations, they have audited annual reports and are committed to sets of responsible business practices, etc. Maybe that was an inevitable process in any event, but SoC certainly expedited that process. You can call it a favorable “collateral” side effect; but it was not the purpose.
Moving Towards the Supply Mechanism of Tomorrow
We have no reason to believe that the aforementioned (see bullet points) strategic objectives have changed. What has changed is the “awakening” of the African producer countries, which, in the past, were quite happy to collect the economic mineral rent through taxation, royalties, dividends and mining-sector development and employment. Now, as part of optimizing the economic rent, these countries possess high beneficiation expectations – something that will not only dramatically impact the DTC’s strategies, but will determine the future of De Beers itself.
A “failure” to deliver this beneficiation in a meaningful way, and there are quite some astute observers who express genuine doubts about the economic feasibility of some of these aspirations, may create severe problems for De Beers and, therefore, failure is no option.
The new marketing strategies that Bain & Co. must now design will impact the “efficiency” models – the cost of manufacturing (in Africa) is definitely higher than in the Far East or India. It has to find ways in which De Beers will still be able to optimize its rough sales revenues, but also allow Namibian and Botswana factories to make money and sell their polished output (or finished jewelry) at a profit.
There will probably be an interim strategy between 2007 and 2010, as supply undertakings to the local market in Namibia will not be finalized until that year and the DTC marketing agreement with Debswana will also expire in that year. The annual commitments to local manufacturing in Botswana in this period are believed to be $500 million with $300 million going to Namibia – so the impact will not be immediate.
What will Happen to Present Sightholders?
Nothing will be happening fast, as it will take a few years for most of the southern African factories to reach full production. De Beers will likely change the “contracts” and there may be, from 2008, separate contracts with the DTC in the producing countries – or contracts which relate to these companies.
The key issue is how priorities will be established - how the “ranking” will be done. Another concern is one of criteria. It would make sense to establish what the core strengths are for each diamond company (and that may, in some instances, also be “dealing”) and a few more criteria.
The computer model has failed to deliver and some human intervention will need to be re-introduced to the process. Adherence by both clients and DTC employees to the good governance principles should provide confidence in a more flexible system that allows for “human judgments.”
No decisions have yet been made on a future marketing mechanism. The DTC may not be able to accommodate as many Sightholders as it has and it may have to focus on 25-30 companies, plus the southern African manufacturing Sightholders. It may opt for a model of core clients, occasional clients, and, may not even rule out the tendering of some goods.
Bain & Company is also expected to think “out of the box.” There are some proponents of allocating rough to jewelers (Tiffany, Sterling, Zales, etc.) who would then have the goods processed through subcontracting. Thus, instead of diamantaires going downstream, jewelers would go upstream.
In any event, it is expected that De Beers will focus on pursuing its strategic plans – and it is unlikely to change direction merely to accommodate clients. Thus, the ability to influence the likely course of action is limited. We do anticipate, however, that the DTC will see the advantages in engaging its clients in the process and not presenting them with a fait accompli.
This will make the coming transitional year easier for everyone concerned.
Have a nice weekend.