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Diamonds are a fascinating concept that has captivated many through the 20th century. The Forbes article, "Diamonds Disrupted", concedes that not until relatively recently in the 1940s were diamonds viewed as a luxurious good for engagement rings. De Beers captivated the world with a marketing slogan that “Diamonds are Forever”. While the sentiment is nice, the advertisement created a broad mythos of misinformation about the diamond industry that is still coveted as fact to this day. Cited by Forbes, Ira Weissman of Diamond Pros pulled the curtain back on some of the misinformation stating that “…people began to buy them believing they are worth something, and they’re still in demand for the same reasons.” Much of the mythos of the value of diamonds are rooted in the assumption many in the general population believe the supply is limited. Rohin Dhar, CEO of Priceonomics, and author of the “Diamonds Are Bullshit” article leads us down the rabbit hole a bit further elaborating on the illusion of the rite of passage by purchasing a diamond engagement ring induced by De Beers marketing. Dhar asserts that this rite of passage creates social pressure that contributes to the demand that drives the inflated price. It should be noted though, that through a long and entangled history leading up to the mid-century pivot, De Beers came to own most of the world’s diamond mines and therefore the supply chain. Dhar cites the discovery of several diamond mines in the 20th century that De Beers purchased or influenced control over to preserve its control of the supply chain. Intriguingly, the mines not owned by De Beers are forced to funnel all diamonds through the Central Selling Organization (CSO), which is a diamond distribution organization owned by De Beers. Diamonds are offered from the CSO to a group of 250 partners at a non-negotiable market price. De Beers virtually has authoritative control of the diamond supply chain from the ground to the store. Fast forward to the emergence of the synthetic diamond. According to the CNN article “De Beers admits defeat over man-made diamonds”, synthetic diamonds “…share the same physical, chemical and optical characteristics as natural stones. But they are not nearly as valuable.” As of this particular article, De Beers recognizes the threat this alternative product presents to the natural diamond. Despite being an outspoken critic of synthetic diamonds, De Beers has operated a synthetic diamond operation under the company name Element Six with its first synthetic diamond successfully produced in 1959, although the product historically has been used exclusively in only industrial applications. Given the shift in consumer demands, De Beers has shifted into the synthetic diamond market for jewelry under the brand name Lightbox with an investment into a $94 million production facility in Portland, OR.

Now that we have the state of play, let’s analyze the disruption in the diamond industry. Clearly, De Beers is the key stakeholder and the most at risk by this emerging technology. For nearly a century, De Beers’ value chain has perpetually been the value system of the diamond industry. Downstream from De Beers, there is a full ecosystem of stakeholders. These are the diamond mines that extract the product. There are retailers that purchase from the CSO. Not to be forgotten are the hopeless romantics purchasing natural diamonds. There are many invested parties to the diamond industry susceptible to the coming disruption. But how have they historically been entwined? Following the Porter & Millar, 1985, value chain and primary activities, De Beers’ inbound logistics are comprised of the diamond mines it purchased over the course of the 20th century. It created the Operations ecosystem by way of the Central Selling Organization to collect product from producers not part of the Inbound Logistics activities. From there, De Beers’ Outbound Logistics & Marketing and Sales from the Central Selling Organization dictated the market price of the diamond and who bought it. As for the Service value activity, diamond reselling is essentially worthless, according to Dahr, “Diamonds are Bullshit”. Because there is actually ample supply, retailers have no incentive to buy diamonds from customers above wholesale, although the end user often purchases the diamond at 100-200% above wholesale. Once you own a diamond, you are stuck with it. In this value chain, De Beers’ eliminated rivalry amongst competitors (Porter, 2008). According to Porter, “Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers” (Porter, 2008). Because there was no rival to De Beers at the time, there was no price competition. Therefore, there was no need to erode profitability and the prices De Beers commanded shifted from the diamond industry to the prices consumers paid at retailers. However poorly positioned for the customer this seems, this value chain becomes De Beers’ disadvantage in the jewelry market.

Thus enters the synthetic diamond. Before technology impacted it, De Beers’ competitive advantage was virtually monopolizing the natural diamond industry. With the emergence of the synthetic diamond, De Beers countered by positing the implied scarcity of the natural diamond and discrediting the synthetic diamond as inferior quipping “Real is rare”. However, De Beers’ assumption that this would dissuade consumers proved to be false. While De Beers had a firm control in four out of five of Porter’s Five Forces in the jewelry market (Rivalry Amongst Competitors, Threat of New Entrants, Bargaining Power of Suppliers, & Bargaining Power of Buyers), the competitive advantage presented by technology allowed the “Threat of a Substitute Product” from the synthetic diamond to form. Consumers began to realize that the natural diamond may not be as intrinsically valuable as they were led to believe, which began the search for substitute products. The synthetic diamond presented a Blue Ocean opportunity to the diamond jewelry industry. According to Kim & Maugorgne, 2004, “buyer value comes from the utility and price a company offers”. Since there is little value or utility in a natural diamond after purchase, the high prices of natural diamonds lead consumers to find greater value in synthetics by way of the lower prices they can offer for similar utility—a symbol love. Therefore, synthesizing the Southwest low-cost case study in Porter (1996) and then echoed in Porter (2008), the strategic positioning of a synthetic diamond attracts price sensitive customers who might not have bought a natural diamond otherwise or customers who do not find value in the high prices currently commanded by natural diamonds. Therefore, the synthetic diamond provides an “attractive price-performance trade-off”. And as a high threat substitute product, according to Porter (2008), “when the threat of substitutes is high, industry profitability suffers.” This is the greatest potential impact to the diamond industry.

Stakeholders in the natural diamond industry have plenty to be worried about by the synthetic diamond. The emergence of the synthetic diamond creates new threats from Porter’s Five Forces the natural diamond industry, and namely De Beers, has not had to consider for some time. De Beers’ traditional strategy of buying out the competition will not apply here. The downstream impact will run from the consumer back to production in the diamond mines. Much like the case of GM and the shift in brake technology as described in Chesbrough and Teece (1996), De Beers is suffering from a byproduct of centralization. For years, the downplaying of the synthetic diamond has cost De Beers significant position in the diamond market. While they have embraced the industry shift, the Deseret News studied in Gilbert (2012) might lend some insight to the fate of key stakeholders in De Beers. Much like De Beers, the Deseret News operated a standardized traditional model for many years and faced an onslaught of emerging competitors. The result was a dramatic decrease in revenue for the paper. While the Deseret News was able to reinvent itself, that reinvention did not come without a price forced to cut costs by 42%. Employees were forced to be laid off and the paper shifted its business model. It is conceivable to envision similar Transformation A impacts on the stakeholders with De Beers.

The power of the buyer will cause a trickledown effect for stakeholders in De Beers’ value chain. Porter (2008) addresses this conceding that “…consumers tend to be more price sensitive if they are purchasing products that are undifferentiated.” As we have discovered in the CNN article, “De Beers admits defeat”, there is little difference between synthetic diamonds and natural diamonds. Because there is little differentiation, buyers will generally move towards the cost-effective synthetics. Downstream, the supply of natural diamonds will increase even further as fewer consumers opt for natural diamonds. Diamond mines will feel less demand and be forced to cut costs, likely related to labor, similarly to the experiences in Gilbert (2012). Assuming they adopt synthetic diamonds, retailers will experience declines in revenues (assuming the rate of engagements will stay the same, and therefore the purchase of engagement rings). Regarding consumers, Porter (2008) makes an interesting observation about the threat of substitute products, "Substitutes are always present, but they are easy to overlook because they may appear to be very different from the industry’s product: To someone searching for a Father’s Day gift, neckties and power tools may be substitutes. It is a substitute to do without, to purchase a used product rather than a new one, or to do it yourself". For the consumer stakeholders in the natural diamond industry, there are two segments of buyers that will find an interesting value opportunity. The two segments of consumers that stand to become stakeholders in synthetic diamonds are (alluded to earlier in the Porter, 1996, Southwest synthesis): 1. Consumers that would not have bought natural diamonds; 2. Consumers that do not accept the price of natural diamonds. While segment 2 stands to be a threat to retailers, segment 1 actually presents an opportunity. The question stands though, is the cohort in segment 1 large enough to offset the decline in revenues impacted by segment 2 in meaningful volume? While there is likely some pain and contraction in De Beers future, all is not lost for the company. Gilbert asks the compelling question that De Beers will need to answer: “What is the real need that connects them (customers) to our brand?”

Continuing the Gilbert (2012) analysis, De Beers has already engaged in Transformation B with investment in the Lightbox brand. De Beers has demonstrated the concepts of this transformation with “the construction of a separate business with its own profit formula, dedicated staff, distinct processes, and singular culture.” From here, leaders at De Beers will need to consider Nolan and MacFarland (2005) and the Four Modes on the “IT Strategic Impact Grid” on how to proceed. In order to preserve the base it stands to lose, De Beers best turns to the “Factory Mode”. In the deployment of its synthetic diamond product, the company needs highly reliable technology to make the shift, but there is a low need for new technology as the infrastructure to make synthetic diamonds is already in place with its Element Six business unit. In summary, De Beers is best suited to follow concepts from Cuoto (2002) by imposing a strong value system in its search for meaning. “Since finding meaning in one’s environment is such an important aspect of resilience, it should come as no surprise that the most successful organizations and people possess strong value systems. Strong values infuse an environment with meaning because they offer ways to interpret and shape events.” While De Beers faces certain adversity with the emergence of the synthetic diamond, all is not lost. The company has duly faced harsh criticism, but by aligning its values with a balanced direction, De Beers can find success on a more equitable path.

Managing the disruption caused by the synthetic diamond will be key to De Beers’ success. From its ascent to power in the natural diamond industry, De Beers has not experienced significant failure while promoting a single product. The fallacy of success here lies in the notion that De Beers operated believing nothing could ever undercut the power of the natural diamond—“Real is Rare”. It did not have a need to consider Porter’s Five Forces seriously so it operated freely until the emerging technology of synthetic diamonds disrupted the industry. However, even as De Beers makes a Transformation B towards synthetic diamond retail, as noted in the CNN article, they are placing a tiny Lightbox logo on each synthetic diamond produced as if marking their territory in the natural diamond industry to differentiate, seemingly justifying a price difference. In the Reuters article “Lab-grown diamond prices slide as De Beers fights back”, De Beers admits it wants to suppress the value of synthetic diamonds in favor of naturals, stating “the hope is this will reinforce the mystique of stones formed in the earth’s crust so consumers keep buying them for major events such as engagements.” In the same article, De Beers has been accused of flooding the synthetic market to drive prices down. Diamond Foundry Chief Executive Martin Roscheisen chastises De Beers, claiming, “It’s a very high-risk gamble that De Beers is taking that so far we don’t see working out, because they have primarily legitimized the man-made category.”

Putting the Lightbox brand in the spotlight will help position De Beers to hold a sustainable future as a provider in the jewelry industry. And De Beers should do everything in its power to maximize the value of that product, within reason. In annual terms, there is finite number of engagements each year. By replacing the supply of natural diamonds to retailers with Lightbox synthetics, De Beers can lure more retailers to purchase the more price-attractive product to draw in buyers and offset some of the declines in natural diamond sales. Which according to Forbes, “Diamond Wars; And The Winner Is Not Natural!”, 2019, the natural diamond industry is adjusting to the will of the consumer posting double digit declines of 39% and 44% at sales events over the course of 2019 when compared to sales earlier that year.

Natural diamonds are on the way out. Because natural diamonds are in decline, De Beers ownership of diamond mines needs to be reconsidered. De Beers should sell its majority controlling interest in diamond mines around the world to different parties to create competition or simply close them down, although retaining some control which we will explore. In Porter (2008), because we know rivalry is destructive to profitability, “Price competition is most liable to occur if…Products or services of rivals are nearly identical and there are few switching costs for buyers. This encourages competitors to cut prices to win new customers.” We also know diamonds are all intrinsically the same, synthetic or natural. If De Beers creates several independent competitors in the mining space that are funneled through the CSO, it can help offset some of the declines in revenue of natural diamond sales by forcing the prices down through competition and therefore increasing its profit margin. By retaining a portion of control, De Beers can regulate its supply when market conditions from mines selling do not meet its demands. Crassly enough, this can further suppress the cost of buying diamonds from mines and force a market contraction after liquidating its inflated infrastructure. As the natural diamond demand decreases, De Beers should cut its losses now and let remaining diamond mining competitors vie for the remaining marketspace creating more true scarcity. De Beers’ best chance for success will be investing in and expanding the Lightbox synthetic brand and cutting costs and overhead in its natural diamond mining organization.