Topics in Information Management

De Beers Case Analysis

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.

Compare and contrast tacit versus explicit knowledge, as described by Nonaka.  Is any type of knowledge more valuable than another? (hint, draw from the live lecture here)  Explain the knowledge spiral in detail.  How does it cause knowledge to grow, how can this process be managed, and why do you think I choose to structure the discussion forums for our class the way they are currently?

Nonaka takes the analogous complementary concepts of tacit and explicit knowledge and synthesizes them the best consumable way possible: analogously.  In his 1991 article, Ikujiro Nonaka explores the vastness of tacit and explicit knowledge and their role in business. As we learn in Nonaka’s article, in order to grow, organizations must master these two knowledge types as they feed into the knowledge spiral. The knowledge spiral plays a vital role in the Knowledge-Creating Company. But what are tacit and explicit knowledge?

Tacit knowledge is “knowledge that is difficult to transfer to another person by means of writing it down or verbalizing it.” It is a described as a form of intuition. According to Nonaka, tacit knowledge is “hard to formalize and, therefore, difficult to communicate to others.” Conversely, explicit knowledge is very “formal and systematic”. It is “knowledge that can be readily articulated, codified, stored and accessed.” On their own, tacit and explicit knowledge operate on opposite ends of the knowledge spectrum. Tacit knowledge is an internalization of personalized interpretation of knowledge while explicit knowledge is a communicable, externalized knowledge. However, Nonaka demonstrates that both forms of knowledge when strategically synthesized contribute to the spread and growth of knowledge, especially within the organizational structure. The challenge presented in this process is “finding a way to express the inexpressible.” Creative use of descriptive tools helps to convey this translation. Use of slogans, symbols, and portmanteaus in Japanese based demonstrate the creative conceptualization linking the tacit and explicit. Individually, tacit and explicit knowledge have varying degrees of value. In the instance of the Osaka Hotel’s head baker in Nonaka’s opening example, the tacit knowledge of how to make the bread alone is highly valuable to the baker, but holds low value to the observing software designer Ikuko Tanaka. When Tanaka was able to create a link between the tacit and explicit process by observing the head baker’s technique, she was able to use that explicit knowledge to create Matsushita Electric Company’s record sales setting bread making machine. Japanese culture is filled with adages of masters of their craft passing tacit knowledge to students or peers. These often come from years of experience. In the Conley (2018) article, the author acknowledges the need for “intergenerational wisdom sharing”. Conley offers his four methods that reverberate the processes Tanaka took: “Offer mid-morning wisdom talks”; “Recognize your ‘wisdom workers.’”; “Develop a mutual mentoring program”; “Create an Employee Resource Group (ERG) focused on wisdom”. Although these are four distinct methods for intergenerational knowledge transfer, once you strip away the frills the basis for all four of these processes is communication.  In our example from Nonaka, while the explicit knowledge used to create the bread maker is generally valuable, it is only valuable because of the tacit knowledge integrated into its formulation from Tanaka’s observations.

Quantifying whether one type of knowledge is more valuable than another is a difficult argument. To an individual, tacit knowledge creates a personal connection to a subject matter. It can be a source of creative inspiration that creates competitive advantage through differentiation. However, unless it can be communicated, the value of the particular tacit knowledge ends with the holder at that point. Explicit knowledge is particularly valuable to an organization when it needs to be disseminated. It is how we exchange ideas by forming a basis of communication. However, as demonstrated in Brown & Duguid (2000), explicit knowledge generally maintains its value in a predictable environment. Examined through the Xerox case study, the replicability of success in an organization by explicit knowledge is only propped up by rigidity in thought process. Brown & Duguid cite, referencing Xerox that, “the company's documented repair processes assume that machines work predictably. Yet large machines, made up of multiple subsystems, are not so predictable.” Accordingly, there is an element of tacit knowledge absent in the rigidity of process driven knowledge. Tacit knowledge exchanged outside of documented explicit processes shows the value of creativity. Xerox workers interact through “Storytelling,” in tacit to tacit exchanges. In the field when processes fail, “Improvisation,” takes over. In my professional experience I managed a team of field technicians working for a physical security alarm company. In this field, there is a strong need to follow explicit processes, as our product protected millions of dollars in customer inventory. We found appointing an experienced technical consultant to an advisory support role helped offset technician inexperience or need for training. In this instance, the support role was held by a former technician that held 30 years of experience in the field. Understanding the general need for improvisation allowed our support role to relate to the technicians and transfer his tacit knowledge within the guardrails of explicit processes the field technicians had to follow. As it goes, neither tacit or explicit knowledge alone is more valuable than the other. It is when the two can be linked together in the Knowledge Spiral that knowledge holds the greatest value.

The Knowledge Spiral cultivates the best environment for knowledge growth. Nonaka demonstrates a 4 step process of the nurturing of tacit knowledge into explicit knowledge: Tacit to Tacit; Explicit to Explicit; Tacit to Explicit; Explicit to Tacit. First, it begins as a “Tacit to Tacit” exchange, learning tacit skills through “observation, imitation, and practice”. Defined as “socialization”, it creates a localized base of understanding. Next, the “Explicit to Explicit”, or “articulation”, exchange grows the implied understanding into a language that can be articulated amongst team members. While this exchange does not expand the company’s knowledge base, it is a synthesis of information the develops to cultivation of the tacit to tacit exchange. Thirdly, in a “Tacit to Explicit”, exchange, the company formalizes articulated knowledge into a standardized process or understanding that can be replicated throughout. Finally, the “Explicit to Tacit” exchange demonstrates others beginning to internalize the knowledge and understand it in an intuitive way. Although it is described in four steps by Nonaka, the knowledge spiral is a continuing process. As explicit knowledge becomes tacit in an organization, the process starts anew compounding knowledge in the organization into a “knowledge-creating company”.

The most important aspect to managing a knowledge-creating company is redundancy, according to Nonaka. In a “Tacit to Tacit” breeding ground, there is a need for a “common cognitive ground”. Because tacit ideas are not easily communicated, it helps employees recognize communication efforts and therefore “spreads new explicit knowledge through the organization so it can be internalized…” Allowing different teams to take different approaches allows for internal competition that leads to competitive advantage. The Canon case study in Nonaka (1991) demonstrates that “A team is divided into competing groups that develop different approaches to the same project and then argue over the advantages and disadvantages of their proposals. This encourages the team to look at a project from a variety of perspectives.” This approach allows for teams to develop common understandings despite their divided structure and allows the company to implement concepts more quickly. In order to best manage this approach, it is key to keep an open stream of regular communication. A designated leader, as demonstrated in the Canon case study, is vital to help ensure the team stays within reasonable guardrails to maintain that “common cognitive ground”. This system of management echoes Treacy & Wiersema (1993) and the product leadership value discipline, demonstrating that “Product leaders avoid bureaucracy at all costs because it slows commercialization of their of their ideas. Managers make decisions quickly, since in a product leadership company, it is often better to make a wrong decision than to make one late or not [at] all.” Synthesizing the characterization about making wrong decisions, in a properly run redundant knowledge-creating company it is nearly impossible to make a wrong decision. There are merely ideas presented that are not the most effective. As Nonaka (1991) demonstrates, “Under the guidance of a team leader, the team eventually develops a common understanding of the “best” approach”. Noting the synthesis in Treacy & Wiersema (1993) here, knowledge-creating companies fit into the mold of product leadership. As redundancy is implemented, technology is also exponentially taking people out of the equation. As noted by the Hagel & Brown (2017) article on scalable learning, as our world changes at an exponentially growing rate, “existing knowledge depreciates at an accelerating rate.” It is important to help the learning processes that can adopt scalable efficiency as technology and processes improve. This way we can keep tacit knowledge alive in growing knowledge-creating companies while maintaining explicit growth.

Regarding the structure of MBA 619/IS 611 specifically, several elements play into the effectiveness of this strategy. Specifically, we are creating our own knowledge spiral. Firstly, our team backgrounds are intended to be widely different by design. This combines 6 to 7 tacit knowledge bases debating the most effective approach to a solution. The effectiveness demonstrated by Nonaka (1991) shows that “Teams play a central role in the knowledge-creating company because they provide a shared context where individuals can interact with each other and engage in constant dialogue on which effective reflection depends. Team members create new points of view through dialogue and discussion.” Noting course objective number 3 from our syllabus in Goh (2021), we are challenged to be able to, ”Think critically when making business decisions, even in uncertain environments” by the end of this course. By creating teams and debating the best possible responses weekly, we are synthesizing the knowledge spiral described by Nonaka. Each week we take tacit viewpoints, socialize to discuss our diverse tacit interpretations. We then articulate our findings in debate to show explicit understanding. Once we have a common understanding, we formalize that into a submission to our team leader, Prof. Goh. Finally we internalize the newly formed knowledge into a tacit form and begin the process anew each week. Thus, as we reconvene each week building on the cumulative knowledge gained, we are creating our own form of a knowledge-creating company.

References

Tacit Knowledge - https://en.wikipedia.org/wiki/Tacit_knowledge#:~:text=Tacit%20knowledge%20or%20implicit%20knowledge,it%20down%20or%20verbalizing%20it.

Explicit Knowledge - https://en.wikipedia.org/wiki/Explicit_knowledge#:~:text=Explicit%20knowledge%20(also%20expressive%20knowledge,as%20complementary%20to%20tacit%20knowledge.

“Balancing Act: How to Capture Knowledge Without Killing It” (Brown & Duguid, 2000)

“The Knowledge- Creating Company” (Ikujiro Nonaka, 1991)

“Customer Intimacy and Other Value Disciplines” (Michael Treacy & Fred Wiersema, 1993)

“4 Ways to Help Different Generations Share Wisdom at Work” (Chip Conley, 2018)

“Great Businesses Scale Their Learning, Not Just Their Operations” (John Hagel III & John Seely Brown, 2017)