De Beers diamonds

Leadership in the diamond business

Humans have been captivated by diamonds for thousands of years. The ancient Greeks referred to them as "tears of the Gods", while the Romans called them "splinters of falling stars".

by Knowledge@Wharton
Last Updated: 23 Jul 2013

Modern estimations of diamonds ("Diamonds are forever", "Diamonds are a girl's best friend") may be less fanciful, but power of the gems to captivate remains as strong as ever. The diamond industry, however, has seen far less consistency. During a recent Wharton Leadership Lecture, Gareth Penny, managing director of De Beers, the world's leading diamond mining and marketing company, discussed the radical changes that the company has had to make to its business model over the last eight years.

In its drive to become the world's biggest diamond company, De Beers had spent decades developing a strategy based on controlling not only large diamond mines, but also the central supply of diamonds. Through its single channel marketing exchange, De Beers held all the rough diamonds available on the open market as a way of regulating supply and demand. As a result of this strategy, De Beers eventually built up a stockpile of diamonds worth $5 billion, but stopped making money. Anti-trust laws banned the company from operating in the US, and between 1989 and 1999, it failed to make a profit.

After conducting a strategic review, De Beers decided to abandon its supply-side management model in a bid to increase global demand for diamonds. According to Penny, this process, which involved abolishing third-party contracts and closing 14 business offices, "reshaped not only the world's largest diamond company but an entire industry". The company settled its anti-trust and civil class actions in the US, regaining its freedom to operate in New York, Los Angeles and Las Vegas, and reported net earnings of $730 million in 2006.

"We are now operating as any other business," Penny said in his speech at Wharton. "We now have two months' worth of stock, total. So from the time we mine something in the ground to [the time we] sell it to our clients, we have a couple of months in our pipeline, which we're very proud of."

In 2001 De Beer's shareholders took the company private in a transaction worth $19.2 billion. Today, it operates in 25 countries, employs 22,000 people and produces 40% of the world's rough diamonds.

Penny told the audience that when it comes to leadership, there's no substitute for "going right out to the coal face of the business, to where it really happens. Don't be afraid to run a factory, to learn what it takes to manage employees every day."

He added: "The things I find myself doing now are spending a day with the guys on the ship and spending a night with the geologists in the field. You will one day be involved in managing and motivating people, and it's the single most important thing you can do."

Penny recounted how he was recently asked to participate in a discussion on leadership in which the question arose of what the great leaders like Bill Gates and Jack Welch have in common. The answer, Penny suggested, was that they were all themselves. "What is your competitive advantage?" Penny said. "What makes each of you different from the person sitting next to you? What is in your DNA that makes you successful? Be yourself - more positively and with skills. That is the one subset that unites great business leaders."

Source: Knowledge@Wharton
Review: Nick Loney

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