De Beers GT and business strategy
What will we do – where we start • Cases study • Commitment (Ghemawat) • Co - opetition (Brandenburger)
Old/new Industrial Organization
• Old: SCP=> analysis of regularities cross industry
• Old: Porter: competitive strategy– why one industry is profitable and one not?
• New: firms heterogeneity – competition within an industry
• New: GT and Cases study
Old IO => new IO (GT) • From Public welfare to Private profit • From average profit to skewness of profits • from industries similarities to industry differences • From «structure» (Scp) to hendogeneity (sCp) • From static to dynamic
Evolution in business strategy • From focus on products and markets • To long run firm specific factors that explain differences in products and markets
Product Market Activities
Why GT not so successful in BS? • Who was studying GT was not interest in BS (e vice versa) • GT studies interactions between agents but is less interested in applications • GT focus on few variables => difficult to test and prove • GT need a high level of information and rationality that are difficult to have in the real world. • GT studies mainly interrelation between firms while heterogeneity in performance often depend on how firms are internally organized.
Cases study • Research question: what we do want to test? And what is the alternative hypothesis? • Model formulation: which model we should choose? – coop o non coop? complete Information or incomplete– signaling, etc. (IO=> I choose a model and I try to test it empirically - BS I have a case study (a real world situation) and I have to select the best model that fit this real situation. • Data generation: qualitative and quantitative • Data interpretation econometric and stitistical tools have some limits.
What do we test in the De Beers case study? • The largest part of the literature on De Beers focus on De Beers reputation not to cut prices of Diamond. • One model that could fit this industry is one on «durables» (every sale today is in competition whit tomorrow sales. Coese’s Conjecture: prices go down very fast to marginal costs if you cannot precommit on prices.
• Is it credible?
Diamond market characteristic that don’t fit well with model «durable goods monopoly» • Sales are quite cyclical (holidays, weddings, etc.) • Resale market very sticky: emotional ties, risk to loose till 50% of the price.
De Beers • Central Selling Organization (CSO) is De Beers’s distribution’s arm • CSO buys diamonds also from mines not owned by De Beers • “Diamonds are forever”
Moreover… • In 2005 De Beers undercut nominal prices for some typology of diamonds. (small one and less expensive) • In real term CSO decreased prices in almost half of the years between the mid-seventies and early nineties.
We need an alternative hypothesis to test • CSO /De Beers works like a control valve that increases price when the ratio stock/trade goes higher than a certain level (75%) • Alternative hypothesis: prices decrease because of Coase’s conjecture
What numbers tell us • From 1978 to 1993 real prices grew any time that the «average stock-to-sales ratio» was lower or equal to 75% • The probability that this outcome is casual is 1 over 10.000
caveat • Model selection: the «dynamic» can be more complicated than the one we put in the model • Many things can happen and can change when you test such a long period. • We don’t have many data (quantitative and qualitative)