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Diamonds May Not Be Forever After All

De Beers, the largest diamond manufacturer in the world, announced this week that the firm will begin to offer man-made diamonds in addition to mined diamonds. This is a dramatic turnaround for the company that was so instrumental in building the value proposition for natural stones and whose head of research and development, as recently as two years ago, claimed would never do anything to cannibalize the industry.

To try to differentiate between the two products, De Beers has created an alternative brand, called Lightbox Jewelry, that will sell lab-grown diamonds at a significant discount to “genuine” stones. These will be defined by De Beers as affordable fashion jewelry that, in a clever twist on their iconic diamonds are forever slogan, “may not be forever, but are perfect for right now.” Employing this strategy, De Beers hopes to maintain the perceived value of mined diamonds while not losing market share to new brands of manufactured stones that are entering the market. In addition, it is embedding a small Lightbox logo in the Lightbox diamonds, which won’t be visible to the naked eye, but will identify the stones as man-made. The hope is that this will help to maintain the exclusivity of the natural diamond market.

An issue is that the manufactured stones are virtually indistinguishable from the so-called “real” ones. Indeed, from a composition and feature standpoint, they are the same. Once consumers fully realize this, maintaining the higher value for mined stones may be unsustainable. Also, De Beers cannot control supply as it has done for years with mined stones to create artificial scarcity. While a single company can control the most productive diamond mines, it has not been able to slow new entrants into the diamond manufacturing business.

The De Beers story reminds us of similar developments in financial services. For example, the adoption of fee based advisory models by leading brokerages, the introduction of ETFs alongside of mutual funds, and the replacement of active managers by cheaper passive investments evidenced most strikingly in Fidelity’s addition of index options to its product line.

In all these cases, successful products and services with strong and widely accepted value propositions were displaced by alternatives that offered equal or better perceived value. Marketing alone was not sufficient to sustain the relative value of these offerings among consumers. To survive, providers were forced to accept new market realities to sustain share.

Whether it’s De Beers in diamonds or Fidelity in active management, the lesson is that under certain circumstances, in order to survive, a company may have to disrupt its own business, even if it means adapting what was at one time a core and highly successful value proposition.