Harvard Business School Case Study (9-717-430) | Case study performed by IE Business School Master in Management students

1. November 30, 2017
The De Beers Group
Exploring the Diamond Reselling Opportunity
Constança Freire de Andrade | Stefania Bonetti | Clemens Jungmair | Lukas Richter
Final Exam
Harvard Business School Case Study (9-717-430)

2. 2
Problem Definition1
Scenario Business Unit3
Further Recommendations4
Update: Pilot Project2
Agenda

3. 3
Falling business performance, despite growing demand
Company Performance. Industry – Diamonds
§ De Beers lost market share from 90% (1980) to 36% (2015)
§ Issues included antitrust issues and increasing competition
10
15
20
25
30
2008 2018F
Base production
Low demand
Base demand
Production increase
2014F
High demand
2012
Stable production
2016F 2023F2020F2010
§ Demand for gem-quality diamonds will increase by 3% per year
§ Demand is forecasted to exceed supply by 2019, indefinitely
Growing diamond industry offers market opportunities for De Beers
Regain trust in diamond value Diversify revenue streams
Offer reselling opportunities Sustain and regain market share
Demand of gem-quality vs. supply
of rough diamonds, in $ millions
20
30
40
50
60
70
80
90
100
200119951992 19981989
-2,94%
20152013201020072004
Projection
% of De Beers market share in value
1
2
3
4
1. Problem Definition

4. 4
Next option to proceed?
IIDV Development
321
Previous research
Pre-pilot:
“Project Magellan”
Launch of IIDV
§ $1-2 billion annual market
volume (fragmented market)
§ Counter-cyclical business, sales
to wholesale and retail buyers
§ Existing disparities between
value and sales price
Initial market testing phase
§ Qualitative understanding how
recycling works
§ Surveys, focus groups and in-
depth interviews
§ Financial distress, divorce,
death, and disinterest
§ Customers dislike selling
experience
§ Loss in perceived perpetual
value
Formal pilot program
§ Reach customers via website
and build local retailer network
§ Offer highest price possible and
sell through wholesale channels
§ “In store” vs. “send in” option
§ Customers pleased with better
selling experience
§ Average expected gross margin
of 16% for De Beers
Engagement in the recycled diamond trading
2. Update: Pilot Project

5. 5
§ Focus on core business and
abandon project
§ Red light:
1. Major risk for the core
business
2. Unused opportunity
Drop It1 Extend the Pilot
§ Potential: improve selling
experience
§ Unknowns and key factors
hinder the pilot program
2
§ Real growth, full profitability,
and maximum learning
§ Capitalize with up to $20 m
§ Increase scale and expand
internationally
Create Business Unit3
Recommendation to Proceed:
Low Medium High
Consider
§ Generating uncertainty
prevents partnering with
retailers
§ Capital constraints
§ Lack full economic cycle
performance
Stop
§ Customers may not buy in the
future
§ Loss in trust in diamond value
§ Negative impact on core
business
§ Ramp up business over next
years
§ Gross margins sufficient to
cover operating costs
§ Flexibility through autonomy
§ Brand value and reputation –
build customer trust
Proceed
Options to proceed
2. Update: Pilot Project

6. 6
Problems addressed:
§ The value of diamonds is lost in the
recycling market
§ Poor customer experience in
reselling
§ Loss of faith makes customers less
likely to buy diamonds in the future
§ New source of supply
(1/3 of total by 2015)
§ Solution for diminishing
supply in the future
The benefits of entering the recycled diamond market
Positive prospects
3. Scenario Business Unit
Supply
1
§ Additional source of
revenue stream
§ Opportunity for
international expansion
Revenues
2
§ Win back market share
§ Increase supply channels
Market Share
3
§ Brand trust
§ Buyer: certify the origin of
the diamond
§ Seller: seamless customer
experience
Brand
4
§ Brand reinforcement
§ Diamond perpetual value
Value5

7. 7
Loss in diamond value
Maintain high level reputation
High quality of inventory/purchases
Subjective valuation of diamonds
Capital constrains
Price below expected for sellers
Agreements with retailers
Financial crisis
2-sided trust
Rough diamonds sales cannibalization
Price fluctuations
Overgrading by retailers
Fake diamonds
Price transparency
Disagreement with wholesalers
Shift in regulatory laws
LikelyUnlikely
Likelihood
Impact
Negligible
Severe
III IV
I II
Estimated Risk Level
low
medium
high
External
Project Management
Technical
Organizational
Risk matrix
3. Scenario Business Unit
Risk Categories
Risk Management Risk planning Identify risk Impact analysis Response plan Control

8. 8
Risk Matrix
Likely
Likelihood
II
Severe
Impact
Capital constrains
Agreements with retailers
Financial crisis
2-sided trust
Maintain high level reputation
Subjective valuation of diamonds
Price below expected for sellers
Risk matrix
3. Scenario Business Unit
External Project Management Technical Organizational
§ Recycling business anti-cyclic as customers cash-in
diamonds in recessions
Financial crisis1
MitigateMonitor TransferAvoidAccept
Credit lines and inter-corporate loans to purchase and store
Price below expected for sellers2
Increase satisfaction by send-in option and higher prices
§ Sellers may not be the buyers
§ Clients will never receive full, but second-hand value
MitigateMonitor TransferAvoidAccept
Risk Management Risk planning Identify risk Impact analysis Response plan Control

9. 9
Risk Matrix
Capital constrains
Agreements with retailers
Financial crisis
2-sided trust
Price below expected for sellers
Maintain high level reputation
Subjective valuation of diamonds
Likely
Likelihood
II
Severe
Impact
Risk matrix
3. Scenario Business Unit
External Project Management Technical Organizational
§ Development of network is crucial, as it is the basis of
the recycling business model
Agreements with retailers1
MitigateMonitor TransferAvoidAccept
Creation of Business Unit will enforce trust
2-sided trust & asymmetric information2
Provide machines needed to determine value
§ Determine fair value for the customer
§ Uncertainty regarding the origin (synthetic or blood)
MitigateMonitor TransferAvoidAccept
Risk Management Risk planning Identify risk Impact analysis Response plan Control

10. 10
Risk Matrix
Likely
Likelihood
II
Severe
Impact
Capital constrains
Agreements with retailers
Financial crisis
2-sided trust
Price below expected for sellers
Maintain high level reputation
Subjective valuation of diamonds
Risk matrix
3. Scenario Business Unit
External Project Management Technical Organizational
§ Decrease of price down to 50% of wholesale price
Subjective valuation with in-store option1
Promote send-in option
MitigateMonitor TransferAvoidAccept
Risk Management Risk planning Identify risk Impact analysis Response plan Control

11. 11
Risk Matrix
Likely
Likelihood
II
Severe
Impact
Capital constrains
Agreements with retailers
Financial crisis
2-sided trust
Price below expected for sellers
Maintain high level reputation
Subjective valuation of diamonds
Risk matrix
3. Scenario Business Unit
External Project Management Technical Organizational
§ Failure may affect reputation of De Beers Group
Maintain high level reputation1
MitigateMonitor TransferAvoidAccept
Promote trust and reliability
Capital constraints2
See next slide
§ Financial needs for set-up, recycling, inventory, etc.
MitigateMonitor TransferAvoidAccept
Risk Management Risk planning Identify risk Impact analysis Response plan Control

12. 12
Assumptions
1 Market Size & Market Share 1.75%
2 Gradual Gross Margin Growth 25%
3 Corporate Investment USD 10 million
4 Discount Rate 8%
5 Annual Revenue Growth 20-25%
NPVProject
USD 2.51 m.
In 1,000 USD
BE
8% Discount Rate
Financial needs
3. Scenario Business Unit
Base Scenario1
10.000
5.000
0
-5.000
-10.000
7.057
4.746
2.581
-192
202020192017
2.309
2015 2016
-5.192
-5.000
2018
-5.000
Unlevered FCF
Accumulated NPV (Investments)
NPVProject
USD 1.65 m.
In 1,000 USD
BE
8% Discount Rate
Neg. Scenario2
10.000
5.000
0
-5.000
-10.000
6.179
4.387
2.581
-192
202020192017
2.309
2015 2016
-5.192
-5.000
2018
-5.000
Unlevered FCF
Accumulated NPV (Investments)
-5%
-5%
20%
15-20%

13. 13
A new approach to customers
A diamond is
forever
A diamond is a
perpetual value
A customer is
forever
Buy a De Beers
diamond as a
symbol of love
Make business
with De Beers
forever
Current Belief Consumer Proposition Desired Belief
Desired DoCurrent Do
5-Box (Re-)Positioning Statement Positioning Statement
Re-positioning of the brand
4. Further Recommendations
“To customers in the upper class, our firm is
target audience
because
the best guarantee of perpetual value and trust
functional, symbolic or experiential benefit
of its lifetime relationship with customers through IIDV.”
support/reason to believe

14. 14
Blockchain: building brand trust and lifetime customers
Underlying Issues
§ Two sided trust issues
§ Dispersed information due to
paper-based certification
§ Once a certificate is lost
there is no way to assess
the value
§ Once a diamond is lost,
there is no way to trace it
Blockchain Technology
§ Build trust through record-
keeping
§ Create a digital twin of the
diamond
§ Digital records include
dozens of attributes
§ Aggregate dataset, a shared
visible record to secure
diamond value
Storing diamond record forever
Next steps: the future with blockchain
4. Further Recommendations

15. 15
Q&A
Constança Freire de Andrade | Stefania Bonetti | Clemens Jungmair | Lukas Richter

16. 16
Assumptions
Appendix
Assumptions
2016 2017 2018 2019 2020
Revenue growth rate 0% 20% 20% 25% 25%
Additional diamond upgrade revenue 2% 2% 2% 2% 2%
Percentage of Sales:
In Store (%) 20% 20% 20% 20% 20%
Sent in (%) 80% 80% 80% 80% 80%
COS as %-age of sales 84% 81% 78% 75% 75%
Gross Margin 16% 19% 22% 25% 25%
OpEx growth rate 0% 1% 2% 3% 4%
D&A (4% PPE) 120 115 111 106 102
Tax 35% 35% 35% 35% 35%
NWC Change 0 313 435 822 612
Capex (0,5% PPE) 15 14 14 13 13

17. 17
Profit and Loss Account
Appendix
Income Statement
2016 2017 2018 2019 2020
Revenue:
In Store 6,003 7,203 8,644 10,805 13,506
Sent in 24,010 28,812 34,574 43,218 54,023
Diamond upgrades 613 735 882 1,103 1,378
Total Revenues 30,625 36,750 44,100 55,125 68,906
Cost of Sales:
In Store 5,145 5,954 6,880 8,269 10,336
Sent in 20,580 23,814 27,518 33,075 41,344
Total Cost of Sales 25,725 29,768 34,398 41,344 51,680
Gross Margin 4,900 6,983 9,702 13,781 17,227
Operating expenses 5,000 5,000 5,100 5,253 5,463
EBITDA -100 1,983 4,602 8,528 11,763
D&A 120 115 111 106 102
EBIT (Operating Profit) -220 1,867 4,491 8,422 11,662
Interest 275 220 165 110 55
Tax 0 654 1,572 2,948 4,082
Net Income -495 994 2,754 5,364 7,525
Projection Period

18. 18
Balance Sheet
Appendix
Balance Sheet Capitalization
2015 2016 2017 2018 2019 2020
Current Assets:
Cash & Cash Equivalents 5,000 3,505 3,801 4,243 5,141 5,796
Accounts Receivable 0 2,621 2,842 3,173 3,844 4,334
Inventory 0 6,867 7,447 8,312 10,072 11,355
Non-current Assets:
PPE 0 3,000 2,880 2,765 2,654 2,548
Total Assets 5,000 15,993 16,971 18,492 21,711 24,033
Current Liabilites:
Accounts Payable 0 1,488 1,977 2,737 4,347 5,508
Non-currrent Liabilites:
Loans 0 5,000 4,000 3,000 2,000 1,000
Shareholders' Equity:
Common Stock 5,000 10,000 10,000 10,000 10,000 10,000
Retained Earnings 0 -495 994 2,754 5,364 7,525
Total L+SE 5,000 15,993 16,971 18,491 21,711 24,033
Projection Period

19. 19
Net Present Value Calculation
Appendix
Net Present Value
2015 2016 2017 2018 2019 2020
EBIT -220 1,867 4,491 8,422 11,662
Less: Tax -77 654 1,572 2,948 4,082
NOPAT -297 2,521 2,919 5,474 7,580
Plus: D&A 120 115 111 106 102
Less: NWC Change 0 313 435 822 612
Less: Capex 15 14 14 13 13
Unlevered FCF -192 2,309 2,581 4,746 7,057
CF (Investment financing) -5,000 -5,000
Cash Flows -5,000 -5,192 2,309 2,581 4,746 7,057
Discount Factor 0.93 0.86 0.79 0.74 0.68
PV (Cash Flows) -5,000 -4,807 1,980 2,049 3,488 4,803