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During a recent Wharton Leadership Lecture, De Beers managing director Gareth Penny offered his audience a multimedia presentation about the international diamond company. It included a backdrop collage on the mining industry with pictures of workers, children and one diamond-drenched model, along with a three-minute film that promoted diamonds through the ages as “Tears of the Gods” (according to the ancient Greeks), “Splinters of Falling Stars” (so said the Romans) and, of course, “A Diamond Is Forever” (the marketing mantra and internationally famous advertising slogan of De Beers).
And while it was clear from the promotional props that diamonds have, in fact, been around forever (“before dinosaurs roamed the earth”), De Beers has not. As Penny reviewed the history of the world’s leading diamond mining and marketing company — founded in South Africa in 1888 — he discussed the radical changes De Beers has made to its business model over the last eight years.
In its quest to become the world’s leading diamond company, De Beers had, over several decades, developed a strategy based on controlling not only large diamond mines, but also the central supply of diamonds. Often called a cartel or a cooperative, De Beers’ single channel marketing exchange held all the rough diamonds available on the open market as a way to regulate demand and set prices.
Over time, De Beers’ efforts to control the supply of diamonds resulted in a stockpile worth $5 billion — a stash that ultimately worked against the company. Between 1989 and 1999, according to Penny, De Beers — by now a “celebrated case study of a monopoly” — failed to make a profit. Hit with antitrust suits brought by the Department of Justice, De Beers was banned from doing business in the U.S. An article in The New York Times noted in 2000 that “the company’s huge accumulation of raw gems, used to help control the supply and keep world diamond prices high, had become a costly albatross. De Beers’ shrinking share of the market was making it harder to support prices by sopping up gems itself.”
After undergoing a strategic review, De Beers decided to abandon more than 100 years of supply-side management and monopoly in order to increase global demand for diamonds. According to Penny, the company abolished third-party contracts, closed 14 business offices and “deliberately moved away from a system driven by central supply to one driven by demand.”
Penny is credited with being the architect of De Beers radical new business model, one that “reshaped not only the world’s largest diamond company but an entire industry.” As the changes were implemented, De Beers watched both its net earnings and profits begin to grow again, with reported net earnings of $730 million in 2006. After settling its outstanding antitrust and civil class action suits with the U.S., De Beers is now free to operate retail stores in New York, Los Angeles and Las Vegas as well as other locations around the world.
“We are now operating as any other business,” said Penny. And in a radical departure from its days of stockpiling billions of dollars worth of diamonds, “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 are very proud of.”
In 2001, De Beers’ shareholders took the company private in a transaction worth $19.2 billion. Today, the De Beers Group is a privately owned company with three sets of shareholders. It operates in 25 countries and employs approximately 22,000 people, with 17,000 based in southern Africa. De Beers produces 40% of the world’s supply of rough diamonds from 15 mines across Botswana, Namibia, South Africa and Tanzania.
According to Penny, De Beers’ philosophy of “Living up to Diamonds” ensures that the company gives back to the communities where diamonds are mined, helping build schools and infrastructures, providing healthcare and fighting diseases like HIV/AIDS. A website referenced by Penny called www.diamondfacts.org states that an estimated five million people have access to appropriate healthcare around the world due to diamond revenues, while “diamond revenues enable every child in Botswana to receive free education up to the age of 13.” Moreover, the industry website claims, an “estimated 10 million people globally are directly or indirectly supported by the diamond industry.”
Gareth Penny is one of the industry’s most well-known figures. Educated in Cape Town and at Eton College, Penny was a Rhodes Scholar at Oxford University before starting his career at Anglo American Corp. in 1988. He ran the Anglo American & De Beers’ Small Business initiatives in South Africa, set up a diamond cutting factory in Botswana and spent two years as personal assistant to the then-chairman of Anglo American & De Beers. He was appointed director of sales and marketing for the Diamond Trading Company in 2001, joined the board of De Beers in 2003, and in March 2006 became managing director and chairman of the executive committee of the De Beers Group of Companies. His leadership role models, he told the Wharton students, are South African civil rights leader Nelson Mandela and former General Electric CEO Jack Welch.
Penny’s lecture on leadership made no mention of the issue of “conflict diamonds” — those mined in war zones in Africa and sold by rebel movements to finance armed conflicts — until the subject was raised in a question from the audience. The conflict diamonds issue has been particularly visible this past year, due largely to an Academy Award-nominated film called Blood Diamond; rapper Kayne West’s song, “Diamonds from Sierra Leone”; and a controversial documentary about current conditions in the diamond industry called “Bling.” How, Penny was asked, does De Beers ensure that its activities are not directly involved in or support the trade of conflict diamonds?
Penny responded that “it goes back to the essence of how our businesses are structured.” In 2000, around the same time De Beers revamped its supply chain operation, the issue of conflict diamonds was addressed by a coalition of governments, non-governmental organizations and the diamond industry. The result was the establishment of the Kimberley Process Certification System. The process, backed by the United Nations, has practically eliminated trade in conflict diamonds, according to the diamond industry, which reports that today, “over 99% of the world’s supply of diamonds is from sources free of conflict.” De Beers has announced that “every diamond in De Beers diamond jewelry is conflict-free and child-labor free.”
“We only sell our own mined diamonds,” said Penny. “We are absolutely certain about what we sell. The Kimberley Process tracks the flow of diamonds through the world, and this requires [numerous] regulations. We are doing everything that we can to find that one last stone that hasn’t gone through this process. The response to conflict diamonds is not to say that it doesn’t exist. We are proud that the diamond industry is among the most regulated in the world.”
Business analysts for years have suggested that the conflict diamond controversy turned out to be advantageous to De Beers. In August 2000, The New York Times reported that “human rights groups were accusing [De Beers] of buying illicit diamonds from African rebels and rulers who used the proceeds to help pay for their wars. The essential mystique of its product, nurtured over decades of artful image-building and brawny cartel management, seemed threatened by association with these so-called blood diamonds.” Faced at the time with a dwindling share of the world’s diamond market, De Beers elected to become what the Times called a “squeaky-clean crusader for guarantees across the industry that ‘conflict diamonds’ … be kept out of the world of luxury goods.”
Indeed, the controversy over blood diamonds in the late 1990s actually seemed to work in De Beers’ favor, forcing a distinction between the legitimate trade that it dominated and corrupt traffic by rebel groups, a distinction totally supported by the diamond company. Author Edward Jay Epstein, who had written extensively about De Beers before the conflict diamond controversy, was quoted in several publications acknowledging that, in his opinion, the De Beers strategy created “another brilliant coup.”
Today, according to Penny, diamond jewelry accounts for nearly half of all sales in the luxury goods market. And although the world-wide diamond consumer market is very fragmented, “the biggest consumer market is right here in America,” said Penny. Of the 84 million pieces of diamond jewelry bought each year, “a very significant number, 40 million, are bought [in the U.S.], and the average price is about $750. Diamonds are truly democratized.”
De Beers spends about $100 million a year looking for mines, and is currently developing four new ones — two in Canada and two in South Africa. “We are looking for valued-added opportunities,” Penny said.
DNA and WPA
Addressing the topic of leadership, Penny suggested that there’s no substitute for “going right out to the cold 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. You need that experience as part of your development…. The things that 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.”
When it comes to success, Penny offered the audience a list of four important components every business needs in order to succeed: the ability to focus on and understand the corporate “DNA,” which Penny described as how a company defines “purpose, vision and value”; the ability to understand the inter-relationship between corporate strategy, organization and people; the importance of acquiring and nurturing the right people to work in the organization; and the ability to successfully delegate and execute responsibilities, a process that De Beers executives call work place accountability, or WPA.
Recently, he was asked to participate in a discussion group on the characteristics of leadership. “Everyone wanted to know what great leaders like Bill Gates and Jack Welch have in common. What do they all do well to succeed?”
The answer, Penny said, “is nothing …. But that’s a pretty hopeless answer if there is no commonality. Research shows there is actually one characteristic that relates to all great leaders: Each of them was themselves. They did what they did and they did it extremely well. So be yourself. What is your competitive advantage? 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.”