Porter’s five forces analysis of De Beers

The Porter’s 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 wouldn’t 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 Beer’s 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 couldn’t 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. Diamond’s 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.