Restructured DTC to Focus Solely on Rough Distribution as Core BusinessJuly 05, 07
In order to enhance the integrity of the Diamond Trading Company’s (DTC) Sightholder selection process, the DTC and De Beers have agreed to separate the responsibilities for the distribution of rough and for the marketing and promotion of the generic polished product. This means that the 50-member DTC marketing staff and the $200 million marketing budget will move from DTC to De Beers.
The corporate objectives of De Beers are much wider and varied than those of the DTC and the move may impact the level of generic promotions throughout the world.
Concepts such as the DTC Forevermark will henceforth become the responsibility of De Beers, far removed from the Sightholders and their allocations. The impact of the move will be major; the reasons behind the decision are complex.
A driving force behind the decision is DTC managing director Varda Shine and her determination to operate Supplier of Choice 2 (SoC2) in the fairest possible manner. The SoC2 model, devised by Shine, has returned some degree of “human discretion” to the Sight eligibility evaluation procedures.
In a process flowchart sent recently to all DTC Sight applicants, Shine illustrated which decisions are “manual” and which are “automatic.” The manual decisions are said to follow an “objective commercial decision-making process, entirely governed by business rules that have been agreed in advance.”
Many assessment decisions are now made by the Key Account Managers (KAM), who are responsible for entering data into the computer models. The output decisions (i.e. decisions on Sightholder selections and allocations) made by the computer will be reviewed by senior DTC staff. These executives, says Shine in her letter, “will not change outputs manually, but they may challenge the inputs and ask for these to be verified and re-scored if necessary.”
Because of the wide scope for human discretion in the process, it is imperative that no irrelevant external elements be included in the Sightholder’s Profile Questionnaire. This is one reason for the “cleansing” (for lack of a better term) by the Ombudsman of the applications before they are forwarded to the DTC.
Some applicants may show that they support certain marketing initiatives of the DTC, or have an interest in some of the programs, or otherwise give an impression that they do their best to lend support to DTC marketing programs. KAM’s may unwittingly make associations which should not be reflected in the scoring process for the specific categories for which the applicant applied. That is not desirable. The DTC must be dedicated to one task only: the distribution of rough. There should be no conflicts or confusion in doing this task.
The DTC’s $200 million annual marketing budget is largely spent on generic advertising, and partly used in support of specific DTC clients’ marketing initiatives. In the previous SoC1, Sightholders would often refer to specific DTC-supported marketing programs, trusting that this would enhance their marketing score. Clients believed that the display of tangible support for DTC-sponsored programs would “help” in the allocation of decision-making.
Under SoC2, where the KAM’s human discretion is significant, there is a risk that profiles or remarks from business review meetings that refer to DTC marketing programs may inadvertently be given greater weight in the scoring process.
Shine has been advocating for a considerable time that “marketing” and “distribution” functions require total separation. Traditionally, the generic marketing budget was part of the DTC because it was financed with contributions from the contracted producers, as part of the marketing arrangements’ terms concluded between them and the DTC. When SoC was first introduced, the then-DTC managing director kept control over the marketing budget and decisions.
The funding has been changed now. With the establishment of DTC Botswana and DTC Namibia, the funding formula has been impacted, while the contribution by the Russians is falling away.
Sources familiar with the pending changes intimate that Shine and De Beers managing director
After the unintended consequences of SoC1, the Penny-Shine team doesn’t want to take changes with SoC2. “Varda and Gareth want to be holier than the Pope,” remarked one insider familiar with the process.
Indeed, the lessons drawn from SoC1 inspired the restructuring, though larger corporate strategic considerations and perceived shareholder interests also played a role.
The unintended consequences from SoC1 keep hovering over De Beers’ decision-makers. Patently wrong SoC1 assumptions also had implications on the marketing programs. For example, SoC1 had erroneously assumed that “one size fits all,” forcing players to compete against each other for market share rather than encouraging them to grow their business. It unintentionally (and wrongly) provided incentives to inefficient, small branding initiatives. SoC1 failed to support alternative business models as it should have and, to be blunt, made many other blunders.
SoC2 endeavors to rectify these shortcomings, placing a tremendous burden on the DTC staff’s skills, understanding and judgment.
Conflicts Arising from Distribution and Marketing under one Roof
The marketing programs do far more than just create consumer advertising; they now market the DTC Forevermark and actually develop the brands to be used by clients. Though the direct marketing support to Sightholder programs has become much less significant, there is a potential for conflicts.
The strategic consultants Bain & Company have also come to realize that “distribution” and “marketing” must be separated. We believe that an announcement to this effect is imminent.
The DTC’s marketing team, under the leadership of
“Any major restructuring decision must deliver added value,” said one large Sightholder familiar with the changes. “De Beers has now a market value of close to $20 billion and this is relevant as changes in the shareholding situation remain high on the agenda,” he added.
Publication before ‘D-Day’
July 18th is the “D-day” for sight applications for the next three years. On this day, all applicants will push the electronic “submit” button on the internet, and all applications will go to the Ombudsman and his team for the first screening. Prohibited information will be deleted, and the Sightholders will have a chance to make some minor changes.
The move of the marketing programs from the DTC to De Beers impacts Sightholders in various ways. For instance, De Beers has sold the right to use the name De Beers to its joint venture with LVMH. So now a situation will arise in which the DTC Forevermark is going to be marketed by De Beers, since it can no longer market the name De Beers. In a way, the marketing change makes sense. De Beers had promised Sightholders that the Forevermark would also be used for non-DTC goods, as long as they are properly documented (i.e. non-conflict) diamonds. It also affects non-DTC rough considerations and it may have ramifications for the De Beers-LVMH jewelry retail joint venture.
To be frank: I don’t yet understand all the ramifications of the marketing shift. However, it will allow the DTC people (the KAMs and others) to be fully focused on distribution – which is no small feat given the fact that they also must fulfill roles within the context of DTCs in Namibia, Botswana, South Africa and the Northwest Territories. Shine and her team can dedicate themselves to earning $6 billion plus for the shareholders of De Beers, instead of being burdened by how to spend $200 million in marketing.
It is going to be interesting to see what rationale De Beers will give to the move. The agenda of the DTC is clear and straightforward: sell the greatest amount of goods for the highest possible sustainable price to those companies who can add the greatest added value to these diamonds.
The mission of De Beers, however, is more complex and less obvious. I expect that, as managing director of De Beers, Penny must have various strategic reasons for assuming direct control over the $200 million marketing budget, if, indeed, that is what will happen. We’ll probably learn about these reasons if and when the announcement is made.
For the DTC, however, this is undoubtedly a welcome development. Shine and her team can focus fully and solely on the testing evaluation and selection process of new Sightholders, which will be followed by a transitional contract period. During this transitional period, Sightholders will have to set achievable annual performance targets before new contracts will go into effect in April 2008.
To macro-manage DTC International plus the various African countries’ DTCs is a formidable challenge in its own right. Shine should welcome the redefinition of tasks between DTC and De Beers – as she will be the first to admit: this is good for the DTC.
Let’s see now what De Beers will do with the marketing team. Penny can do more with it than just supporting diamonds, and I expect that we’ll be seeing new and different corporate marketing initiatives that will go well beyond diamonds. It’s a nice budget for management to have to advance the shareholders’ corporate objectives. As a private company, the team and the budget can – and maybe should – be used to serve shareholders rather than the generic interests of the entire diamond world. In a way, one might wonder and ask, “What took them so long?”
Have a nice weekend.