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Strategic Thinking Amid Global Uncertainty

How to plan for success in a volatile economic environment.

By Martin Rapaport
 

The beginning of a new year is an appropriate time to take stock. We count our diamonds, examine our finances and evaluate our performance. It’s also a good time to review our strategy and ask a few hard questions.

Are we doing the best we can when it comes to adding value to the products we sell?  Are we working too hard for too little? How can we work smarter? Are we keeping up with the changes taking place around us? How can we position ourselves for success? How can we improve our decision making?

It’s okay if you don’t know all the answers. The important thing is to ask the questions. Take time and think about how you and your business fit into the big picture. Identify your goals and figure out how you will accomplish them. Plan and position yourself for success. Recognize that in many instances you do not need to work harder but you do need to work smarter. Consider that an ounce of strategic planning is worth many pounds of effort.

The diamond and jewelry business is growing increasingly complex. It’s not just prices, competition, new technology or changes in the supply chain. Something big is happening and it is affecting everything. It’s so big that it is predictable and it will continue over many years. Our strategic opportunity is to identify this major wave of change, figure out where we are on the wave and come up with a strategy to reposition ourselves so we can ride the wave to greater profits.

Economic Power

From a business perspective, the most important event of this decade is the massive transition of economic power from the West to the East. Mature, overdeveloped countries are giving way to demographically empowered, aggressive, expanding developing countries. The East is rising, fueled by one hundred million new middle-class consumers every year and millions of new millionaires. Over the next decade, resource- and labor-efficient developing countries will morph into economic powerhouses. The globalization of production has evolved into the globalization of demand and wealth. Yesterday’ssuppliers are today’s consumers.

Signs of shifting economic power are everywhere: Persistent U.S. unemployment, Chinese real estate speculation, the euro crisis, surging and plummeting gold prices, record auction sales, Indian inflation, Botswana asserting resource rights, the Arab Spring and more.

While the long-term trend is clear, short- and medium-term developments are creating extreme uncertainty and volatility. The massive shift in economic power is so strong and slow moving that it is creating “noise” in the form of market instability. It’s sort of like a very slow-moving financial earthquake. As the wealth shifts, new problems pop up and markets interactively adjust. Straight-line strategic solutions — based on a simple scenario where America/Europe goes down and China/India goes up — are unworkable.

While the road ahead is full of ups and downs, bumps and curves, it does point in one direction and provides an opportunity for strategic analysis and policy guidelines. We know that the West/East transition process will take years and extend through this decade. We also know that it is a process and not a short-term on/off switch. Therefore, we should expect and anticipate continued volatility in the commodity, currency, credit and equity markets. All of these markets have significant impact on diamond and jewelry supply and demand. While it’s a good idea to take advantage of volatility that enables us to buy low or sell high, we must discipline ourselves not to overreact to short-term disasters or windfalls. Responsible firms should resist the opportunity to speculate. Buy if you have a customer and sell if you have the goods, but don’t gamble. 

No New Normal

Those looking for, and basing their strategy on, a stable “new normal” will not only be disappointed — they will probably be out of business. In fact, no “new normal” will emerge in the foreseeable future. So fasten your seatbelts and install your emotional and financial shock absorbers, it’s going to be an exciting ride.

The ups and downs and continued volatility are good news for many companies capable of adapting to a rapidly changing environment full of uncertainty and opportunity. Flexible innovators, risk takers and specialized traders will be successful if they can quickly adapt to ever-changing market conditions. The new environment will increase rewards for those who can quickly and efficiently get the right products at the right price to the right buyers at the right time. Distribution and sales will be more important than production.

Big won’t necessarily be bad, but it won’t necessarily be better either. Turbulent markets with extreme volatility create more level playing fields, especially when they are accompanied by the opening of massive new markets like China and India. Big firms need to think smaller and small firms need to think bigger.

No one can ignore the opportunity provided by hundreds of millions of new consumers in India, China and other Far East countries. Yet global market conditions are unstable in these countries. Does a big company really want to make huge bets in uncertain times? Perhaps it’s better to create more focused and specialized teams selling specific products to specific customers. Should a smaller company attempt to enter the Indian or Chinese market if they have specialized expertise and excellent supplies of particular diamonds at good prices? Of course, they should.

From Production to Distribution

Suppliers must also become much more proactive. Too many companies think they are entitled to sell a product at a profit just because they produced it. While production is necessary, it is not sufficient. Production without marketing and sales is like a ship on dry land. A product is only as good as its marketing.

It’s time to wake up to the fact that De Beers and friends are no longer supporting generic diamond marketing. There is no World Gold Council or Platinum Guild for diamonds. It’s every man and woman for himself and herself. If you don’t sell your product, no one else will.

Lots of people complain about the great price differential between rounds and fancies but few do anything about it. As the price differentials increase, fancy shapes have become a more competitive and interesting alternative to rounds. There are millions of potential fancy shape buyers in China, but they are only buying rounds. Those who seize this opportunity and develop more buyers for fancies won’t be complaining about price differentials — they will be making money.

The point here is straightforward. You and your products are only as good as your ability to sell them. The transition from West to East implies the development of millions of new diamond customers. It also implies a transition of diamond profitability from production to distribution.

Marketing

With all due respect to the mining companies and their desire to milk every dollar out of the distribution system, we predict greater profits for distributors who know how to add value and less for miners who neglect fundamental diamond marketing and limit their activity to squeezing profit out of diamond suppliers and distributors.

In some instances, smart mining companies will calculate the cost benefit of marketing their diamonds and take a more active role in increasing demand. For example, if miners wish to increase prices for their oblong or irregularly shaped rough diamonds, it might be a good idea for them to spend money promoting fancy shaped polished in China. Waiting for distributors to drive up rough prices is probably not a good idea given the risks associated with developing demand in the current uncertain environment. Firms that develop demand and distribution must keep their profits. If they don’t, they won’t expand demand. Smart suppliers will make sure their distributors make plenty of profit.

Diamond distributors should be extremely careful about extending credit. Attempting to sell Chinese, Indian or other newly emerging retailers using American memo/credit marketing schemes is suicidal. While it may seem like a good idea to build your distribution on
providing easy credit since interest rates are so low, resist the urge. What will you do when your customer refuses to pay you — have you ever tried to sue someone in China? And what will you do when interest rates surge upward or currencies decline sharply, as they have in India over the past few months?

The only way to build a sustainable business in an uncertain world is through honest added-value scenarios that deliver real added value to your customers. Shortcuts, gimmicks and unsustainable solutions that boost short-term results at the expense of long-term sustainability are especially dangerous in a volatile environment. It’s okay to do less, but whatever you do should be rock solid.

American Retailers

American and European retailers face a different set of strategic challenges. They can’t move their business to where demand is surging. They can’t “Go East” like international diamond suppliers. Their stores and customers are in fixed geographic locations and they have to make the best of the markets they are in.

While the East will be expanding rapidly, the West won’t be disappearing. Western diamond and jewelry demand is deep rooted and has incredible momentum. Bridal will remain powerful and the cornerstone of diamond demand. While fashion jewelry is likely to focus on lower nondiamond price points, diamond jewelry that celebrates important life-cycle occasions has the potential to gain important market share.

If the message to suppliers is “Go East,” the message to retailers in the West is “Go Deep.” Now more than ever, we must concentrate on rebuilding and repositioning the diamond dream in the mind-set of millions of teenagers and twenty-something consumers. Above all else, we must make diamonds, and ourselves, cool and sexy in a world built on symbols, icons and secret status.

By “Go Deep,” I mean go deeply into the head and mind-set of your customer. Rethink and reinvent your approach. Before you can sell diamonds to the new generation of consumers, you must sell yourself. If you are selling bridal, make sure to hire plenty of young people, especially women. Find out what it takes for you to be cool and attractive to young people. Spend a day hanging out at an Apple store. Recognize that not only do your diamonds have to be cool — you have to be cool. Your customers have to identify with you, admire you and trust you.

You might think that all the new customers are in China or India — not so, they are also in America. New generations of new customers are in the pipeline waiting to be sold diamonds. Don’t wait for them to come into your store — go out and turn them on by getting into their mind-space. Rethink and restrategize who you sell to, what you sell, how you sell and why you sell. Buying diamonds should be a fun and interesting experience for young people in love.

Aside from the young people, there is an important generation of sophisticated middle-age customers for whom diamonds are the ultimate symbol of continued commitment. “Go Deep” with them as well. Sell and justify the product — especially if it is expensive, and it should be expensive, to be worthy of the occasion. But more important than selling the product is to sell the occasion.

Are you the best place in town for a tenth or twentieth wedding anniversary gift? What diamond jewelry do you have for important commemorations? Are you the place to go for that super-special something? Are you a celebration jeweler? If you proactively market the celebration idea, the jewelry will sell itself. Position yourself and your products to ride on the basic desire of the customer. You might not be able to create love, but you can certainly service it.

Conclusion

We are living in an unpredictable, volatile economic environment. Change is coming at us fast and hard, from all directions. Furthermore, the rate of change is increasing and it looks like the situation will continue for the long term.

Question: What should you do if it looks like the world around you is spinning out of control?

Answer: Get used to it.

Don’t wait for the world to stabilize — it won’t. Stabilize yourself. Develop and invest in a few fundamental strategies that are so strong and true that they will persist no matter what is happening in the outside world.

Accept the fact that you can’t control the world around you, but you can enjoy the challenges and opportunities. When extreme things happen, don’t overreact.

Obtain a deep understanding of who you are, what you enjoy doing, how you think and, most importantly, how you add value to and for your customers. Don’t be afraid to change. Expect this to happen. Feel free to reinvent yourself as often as necessary. Be brutally honest about your added-value proposition because that is the reason you are in business and the source of all your profit.

Be careful but don’t be afraid. Don’t fight the waves of change. Surf them. Have fun.

Article from the Rapaport Magazine - January 2012. To subscribe click here.

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