Monday, December 10, 2012

The Shimmering Blue Ocean

The odds that you or your partner will spend a fortune on a gemstone in your lifetime are unbelievably high. What is even less believable is the fact that the notion of gemstones, particularly diamonds being the gift synonymous with love was practically unheard of till as late as the 1930s. However by the 1990s, (according to Bain and Company) more than 80% of the brides in the United States received diamond rings. The creation of the demand for stones can be attributed to the single-handed efforts of the South African firm founded by Cecil Rhodes - De Beers. This is perhaps one of the earliest known examples of a company creating a previously non-existent marketspace. A concept that is termed as the 'Blue Ocean Strategy' in the writing by W.C. Kim and R. Maurborgne.

Before the 1930s the stone was known primarily for being the hardest material known. A characteristic that meant that diamonds had a lot of potential to be used in industrial equipment. If it were only for the demand for diamonds for industrial equipment, it is estimated that the stones would retail today for a meager price between $2 and $30. Following the great depression, the price of diamonds was plummeting across the world. Positioning the stone as one of the most precious luxury product was a strategy that not many could have thought of. De Beers group which controlled 90% of the world’s rough diamond production and distribution saw a huge opportunity. They created an entirely new ‘blue ocean’ market which was virtually uncontested.

In 1938, De Beers identified United States as a big market for diamonds. The game plan was to convince Americans that diamonds equated love. The aspirational value of these stones was created by a brilliant marketing and supply control strategies. Some pioneering advertising campaigns for DeBeers by the agency N.W. Ayer caused the sales in United States to increase by 55%. This was a success given that this was during the uncertain times of the World War II. Some iconic campaigns including using paintings of Picasso, Dali and other famous artists followed. In 1947, the legendary slogan “A Diamond is Forever” appeared with Hollywood celebrities promoting diamond jewels. The campaign went on to inspire a James Bond franchise. The sales of diamonds has never slowed down since, in the United States.

DeBeers has replicated the introduction of diamonds and equated them to romance in other countries with no traditional affinity towards diamonds as gemstones. The strategy was executed almost unto perfection in multiple geographies. An often quoted example of this is Japan where diamonds were non-existent as a luxury product till the 1960s! The creation of this billion dollar industry was definitely a case of creation of psychological value for a product at a global scale.

Oppenheimer, the head of De Beers is known to have commented -
“A gemstone is the ultimate luxury product. It has no material use. Men and women desire to have diamonds not for what they [diamonds] can do but for what they desire”. 

 The psychological need and the aspirational value of diamonds as the ultimate luxury product is perhaps the result of near perfect execution of strategy by the De Beers Group. Allegedly, the scarcity of diamonds is also strategically architected too, by a cartel-like control of the supply chain that runs from South-Central Africa to South America to South Asia to Antwerp. In the last decade, the industry has been in controversies involving ethical issue related to use of child labor and mining in conflict zones. With the introduction of relatively cheaper and good quality synthetic diamonds, the question is if the manufacturers can create a substantial shift in the market for diamonds? Has the story of the diamond industry come a full circle? Are diamonds really forever?

References and further readings:
Blue Ocean Strategy (Kim and Mauborgne, Harvard Business Review, Oct ‘04)

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