Five Forces and DeBeers
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srkntmcrsFive Forces and DeBeers
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srkntmcrsPorters five forces analysis of De Beers The Porters model helps to analyze attractiveness of an industry by considering following forces.
1. The likeliness of new entrant: The more difficult it is for other firms to enter a market; it is more likely that the incumbents can make relatively high profits. High cost of entry New entrant needed to invest relatively high capital. Through achieving supply-side economies of scale (producing/distributing large volumes of rough diamonds DeBeers could take advantage of lower per unit costs), ability to meet capital requirements able to secure funds to stockpile diamonds so that the market wouldnt be flooded, p1, p3), enjoyment of incumbency advantages (in addition to their experience, DeBeers also had advantages based on control of mines/access to the best raw materials as well as technology p2, p3) Achieving supply side economies of scales, they were able to corner the market. Also, De Beers strong brand presence, existing mining and political relationships, access to new mines, own distribution channel and control of output made it nearly impossible for new entrants to enter the diamond market. 2. Bargaining power of customers: As suppliers seized bargaining power, customers couldnt enjoy power of bargaining and its benefits. There was no equivalent substitute for diamonds that customers could seek for. Additionally, other factors such customs and traditions, perceived as a luxury-goods item left less room for customers to bargain. 3. Bargaining power of suppliers: Control of rough diamonds gave suppliers ultimate bargaining power. The suppliers achieved the control supply by owning distribution channel. They had good alliances and relationships with foreign governments. They demanded cash on delivery. 4. Threat of substitutes: This measures the ease with which buyers can switch to another product that does the same thing. There is virtually no substitute of diamonds. Diamonds became part of cultures and traditions. They are perceived as symbol of social status quo. Diamonds quality being unbreakable stone is related to the bond of relationship. The customers emotional attachment with as diamonds as forever makes the threat of substitutes insignificant. 5. Existing customer rivalry: The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry will be higher if there is large number of similar sized firms. DeBeers kept rivalry low through its command of market share (less competition able to break in), stockpiling of diamonds (ability to stabilize price), differentiation of products and lack of product perishability (no strong temptation to cut prices) diamonds are forever.