A

DOCUMENTORY REPORT

ON

PESTEL ANALYSIS

AND

PORTER’S FIVE FORCES MODEL

ON

Indian Diamond cutting and polishing Industry

Submitted to

Mr. JIGNESH DARJI

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM)

M.B.A PROGRAMME

Constituent of Charotar University of Science and Technology

(CHARUSAT)

Presented by

SANNI M. PATEL

M.B.A Semester – III

Roll. No. 09MBA35

SEPTEMBER 2010

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DIAMOND CUTTING AND POLISHING

India has always been center stage in the dramatic history of some of the world’s most famous

diamonds. India has been the earliest known source of diamonds. Conversely, today India is pioneer in the

gem industry and a world leader in the manufacturing of cut and polished diamonds. Diamonds used in

jewelry worldwide, nine out of every ten cut and polished diamond come from India.

Diamond industry of the Indian market is mainly involved with cutting, polishing and exporting

diamonds. Diamonds cut and polished in India are universally prized, and India has emerged as the largest

diamond-cutting center in the world. Although India pioneered in the cutting of small diamonds yet today,

its craftsmen are equally skilled at cutting all shapes and sizes of stones, and even at faceting colored

diamonds.

Mumbai, Surat, Ahmedabad, Bhavnagar and many small towns in Gujarat are the main polishing

centers of the country. The industry employs one million people, accounting for 95 per cent of the

workforce of the world’s diamond industry. The industry today is a result of perseverance and hard work as

we see it. After India became independent in 1947, for several years, the nation’s economy was in the

depression. Several views for business and commerce opened up as new policies came into place, journey

towards progress and development also began for the diamond industry.

The diamond industry was a scattered cottage industry only three decades ago. Now it gradually

evolved into a modern, mechanized, large-scale operation. Today, with state of the art laser machines,

lathes and diamond-impregnated scaives, most of the medium- and large-sized diamond factories are well

operational. In the world of Diamond industry, this structured and rapid growth of the Indian diamond

industry has a long-lasting impact. The Indian exports of diamonds increased and in turn it reflected greater

than before in the export of designed Diamond.

Indian Diamond was made scrupulously by hand and was traditionally crafted by family jewelers

skilled in a particular style. Large exports directed to the establishment of factories, prepared with the latest

modern machinery. It is the newest methods in the manufacturing process that were employed.

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The Indian Diamond Industry

Rough diamonds are each unique and come in a range of many different sizes, shapes, colours and

quality. The value of any one rough diamond is based on the value of the polished diamond(s) that the

valuator feels can be produced from the rough diamond. However for larger, complex stones each diamond

cutter will assess the stone differently.

These include:

1) Tenders: bids are accepted on a specific assortment of rough diamonds or even on a specific rough

diamond (if large and / or very special). Tenders can be either is by invitation only or open to any and all

bidders;

2) Regular Customers: a similar assortment of rough diamonds would be sold cycle after cycle (a cycle is

5 weeks) to the same customer. These customers are called core customers by BHP Billiton, sightholders

by the DTC and regular customers by Rio Tinto;

3) Window sales: very specific assortments of rough diamonds are offered for sale on a one-time basis.

These types of sales are designed to determine highest market value for certain assortments of rough

diamonds; and

4) Non-arm lengths: these sales occur when the buyer is a joint venture partner or subsidiary of the mining

company. They are usually a mechanism for mining companies to be involved in the downstream

businesses.

Diamond industry in Gujarat

Gujarat is the leading State in India in Diamond sector, as it contributes to about 72% of the total

exports of India. has a well-established diamond industry. Gujarat accounts for about 80% of the diamonds

processed and 90% of the diamond export from India. Surat has 65% share in India's diamond trade. The

advantages of investing in diamond processing in Gujarat are:

Low cost, economic and skilled labour.

Availability of large number of skilled labour.

Upcoming Diamond Park and Diamond special economic zones.

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Diamond Cluster in Gujarat

Current scenario of Indian diamond industry

India is fast becoming a global hub for Diamond. In other words, nearly 9 out of 10 diamonds sold

worldwide are cut and polished in India. Thanks to positive government policies such as 100 per cent FDI

in Diamond through the automatic route, India is on the verge of becoming the focal point of the global

Diamond industry.

Total Diamond exports from India stood at US$ 20.88 billion for 2007-08, a growth of 22.27 per cent

over US$ 17.08 billion the previous year, as per the Diamond Export Promotion Council (GJEPC).

The United States and Hong Kong were the largest importers of Diamond from India, with a share of 26

per cent each, followed by UAE at 21 per cent.

Gold Diamond exports increased from US$ 5.2 billion in 2006-07 to US$ 5.6 billion 2007-08.

The domestic market for Diamond is likely to increase to US$ 20 billion by 2010 and US$ 30 billion by

2015.

India is the largest consumer of gold in the world, followed by China and Japan. India consumes nearly

800 tonnes of gold that accounts for 20 per cent of world gold consumption, of which nearly 600 tonnes

go into making Diamond.

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The PESTEL analysis

The macro environment includes all relevant focus outside a company’s boundaries relevant in the

sense that they are important enough to have brought on the decision. An industry ultimately makes about

its business model and strategy.

Why many forces in the micro environment are beyond a company’s sphere of influence?

Company’s strategy may be needed for answer it. Micro environment includes all general force that do not

directly touch on the short run activities of the organization but that can and often does, indulgence

its also ran decisions.

Political Factors:-

The Government of India (GoI) has been working to develop the Diamond industry in India through

several initiatives but under the purview of Diamond industry. The main political factors are as follows.

Excise duty: In the budget of year 2008-09 government reduce excise duty from 10% to 5% on cut

and polished diamond units.

Marketing and control orders: Import of rough diamonds controlled by the Jewellry export

Promotion Councils. The Council provides market information to its members regarding foreign

trade inquiries, trade and tariff regulations, rates of import duties, and information about Diamond

fairs and exhibitions.

FDI approval: India is now the third most favored destination for Foreign Direct Investment (FDI),

Government of India may permits 49% of FDI in the Diamond industry. FDI of $ 2 billion are

invested in terms of working capital in the industry.

Government policies and taxation: From January 1, 2008. It has made the import of polished

diamonds completely duty free. To reduce the transaction cost for the diamond sector, testing

facility at International Diamond Laboratory (IDL), Dubai, has been incorporated in the list of

laboratory/certifying agencies.

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Trade Policy for Diamond

Replenishment Licences:

The exporters of gem and Diamond products are entitled for REP licence as per rates indicated in

the Handbook of Procedures. Such licences are transferable.

Diamond Imprest Licence :

Diamond Imprest Licences are issued in advance for import of rough diamonds and for export of

cut and polished diamonds. These licences or the materials imported against them may be freely transferred

after the export obligation has been fulfilled.

Bulk Licences for Rough Diamonds:

Bulk licences for rough diamonds are allowed to any exporter whose annual average f.o.b. value of

exports of cut and polished diamonds during the preceding three licensing years was not less than Rs.75

crores and iv) any overseas Company with its branch office in India whose annual turnover in diamond

during the preceding three licensing years is not less than Rs.150 crores.

Import of raw material (rough diamonds) is highly affected by war and global market conditions.

Fund contribution: As per current scenario to ease the liquidity problem in diamond industry the

task force constituted by RBI..

Task Force may propose asking banks to finance diamond manufacturers especially small and

medium ones against their stock of polished diamonds.

Economic factors:-

Per capita consumption: Per capita consumption power of customers may highly affect diamond jewelry

purchase. India`s per capita income is likely to grow more than double over the last seven years, to Rs

38,084 in the current fiscal, reflecting improvement in the living standards of the average Indian.

Per capita income, according to the advance estimates for national income is expected to grow by

14% during the current fiscal.

However, after discounting for inflation, per capita income is expected to rise to Rs 25,661

representing an increase of 5.6%.

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National income: As & when the national income of the people of any country increase it will indirectly

leads to more investment in diamond jewelry or ornaments.

State board regulations: Gujarat government declares various polices.

Custom Act: In the Union Budget (2007-2008), custom duty on cut & polished diamonds was reduced to

3% from 5%. The Council had made several representations to Government on the exemption of custom

duty on cut & polished diamonds.

Social factors:-

The main social factors of the organization, which are deals as the business organization are as

follows.

Emergence of retail org. makes people aware about diamond as a luxury product or an investment

option.

Emergence of substitute: Diamond Diamond is preferred by consumers with increase in the price

gold.

Changing consumer preferences: with the increase in standard of living consumer preference

change from gold Diamond to diamond Diamond, it’s also considered for status symbol.

Technological factors:-

The main technological are as follows.

As diamond industry try to moving up in to the value chain they are focusing more on they use high

end equipments.

Technology solutions are also available for production control, supply chain and inventory

management in the Diamond industry.

The Special Economic Zones and Diamond Parks developed in various states offer technology-enabled

environments that are conductive to growth and quality production.

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Environment Factors:-

This section draws on literature relating to the general environmental impacts associated with ASM

and related processing activities, and – where available – specific information relating to the production of

gemstones. In relation to environmental impacts of ASM and gemstone ASM in particular, the situation in

each country varies according to the type of gemstones being exploited, the social and natural environment

of the area and cultural and organizational aspects of the mining operation itself.

Exploration

Underground Extraction

Surface Extraction

River Dredging

Due to the unique geological nature of gemstone deposits, whereby mineralisation is localised in small

pockets, processing of mined gemstones differs from one gem to another. Generally, however, the

processing of gemstones that occur as distinct crystals consists of hand sorting with the aid of the visual

characteristics of the gems (fluorescence, shine, colour). Typically, no equipment is used in this process.

Normally, such pieces recovered during hand-sorting in the pits and trenches still need

Legal Factors:-

Trade Facilitator: The Council undertakes direct promotional activities like organising joint participation in international Diamond shows, sending and hosting trade delegations.

Advisory Role: A crucial area of activity of the Council has also been aiding better interaction and understanding between the trade and the government.

Nodal Agency for Kimberly Process Certification Scheme: GJEPC has been appointed as the Nodal Agency in India under the Kimberly Process Certification Scheme.

Training and Research: The Gems & Diamond Export Promotion Council runs a number of institutions that provide regular and part-time training in all aspects of manufacture and design in Mumbai, Delhi, Surat and Jaipur.

Boosting Exports: Among the promotional activities GJEPC undertakes for the sector is the organising of joint participation of member - exporters in some important international exhibitions and puts up promotional stalls in others.

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The Five Force Analysis

The Five Forces model of Porter is an outside in business unit Strategy tool that is used to make an

analysis of the attractiveness of an industry structure. Attractiveness in this context refers to the overall

industry profitability. The overall industry attractiveness does not imply that every firm in the industry will

return same profitability. Firms are able to apply their core competences, business model or network to

achieve a profit above the industry average. We use this model for Indian diamond industry

(For this analysis we use likert scale for intensity of the particular force in the overall industry

structure. 1 = very low, 5 = very high)

Supplier Power:

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Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of

each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching

from one to another, and so on. In case of diamond industry –

Elements Low Moderate High Attractiveness

Differentiation of inputs * High

Switching cost of suppliers & firms in the industry * High

Presence of substitute of inputs * Low

Supplier concentration * High

Importance of volume to suppliers * Moderate

Cost relative total purchase in the industry * High

Impact of input on cost / differentiation * High

Threat of forward integration relative to threat of

backward integration by firms in the industry* Moderate

Supplier power is MEDIUM. With negligible domestic production of gold and gemstones, India

relies largely on imports. Bargaining power of Indian industry enhanced by the fact that India is the largest

consumer of gold. In rough diamonds the major global suppliers have very few alternatives customers

(cutting and polishing) for their cheaperrange of rough.

Buyer Power:

Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the

number of buyers, the importance of each individual buyer to your business, the cost to them of switching

from your products and services to those of someone else, and so on. If you deal with few, powerful buyers,

they are often able to dictate terms to you.

Buyer power is MEDIUM to HIGH. Bargaining power in gold Diamond limited to fabrication

charges. In diamond cutting and polishing the bargaining power of Indian exporters arises from the fact that

a majority of the world’s rough diamonds production is cut and polished in India.

Elements Low Moderate High Attractiveness

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Bargaining leverage * Low

Buyers concentration versus Firm

concentration* Low

Buyer volume * Low

Buyer switching cost relative to firm switching

cost* Low

Buyer information * Low

Ability to backward integrate * High

Substitute products * Low

Price sensitivity * Low

Price/total purchases * High

Product differences * Low

Brand identity * High

Impact on quality / performance * Low

Competitive Rivalry:

What is important here is the number and capability of your competitors – if you have many

competitors, and they offer equally attractive products and services, then you’ll most likely have little

power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the

other hand, if no-one else can do what you do, then you can often have tremendous strength.

Competitive rivalry is HIGH. Bulk of the industry in India is concentrated in the unorganized

sector and employs around 1.5 million workers serving over 0.2 million gold jewellers and 8000 diamond

jewellers. The majority of Indian diamond workforce is employed by small units that process diamonds on

job lot basis. However the share of the unorganized sector has dec lined in recent years.

Elements Low Moderate High Attractiveness

Industry growth * Low

Fixed or storage cost/(value added) * Low

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Intermittent overcapacity * Moderate

Product differences * Low

Brand identity * High

Switching costs * Low

Concentration and balance * Low

Information complexity * High

Diversity of competitors * Low

Exit barriers * High

Threat of Substitution:

This is affected by the ability of your customers to find a different way of doing what you do – for example,

if you supply a unique software product that automates an important process, people may substitute by doing the

process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your

power.

Elements Low Moderate High Attractiveness

Relative price performance of substitutes * Low

Switching cost * High

Buyer propensity to substitute * Moderate

Threat of substitute is LOW. From historic times gold has played pivotal role in the Indian social

fabric. Gold is value in India as savings and investment behind bank deposits. Gold is also preferred metal

in Diamond. Domestic diamond Diamond demand is low but increasing at a high rate because of higher

income and aggressive marketing strategies.

Threat of New Entry:

Power is also affected by the ability of people to enter your market. If it costs little in time or money to

enter your market and compete effectively, if there are few economies of scale in place, or if you have little

protection for your key technologies, then new competitors can quickly enter your market and weaken your

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position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair

advantage of it.

Elements Low Moderate High Attractiveness

Economies of scale * Low

Proprietary product differences * High

Brand identity * Low

Switching cost * Low

Capital requirements * Low

Excess to distribution * High

Absolute cost advantage

Proprietary learning curve

Excess to necessary inputs

Proprietary low cost product design

* Low

Government policy(in terms of complexity) * High

Expected retaliation * Low

Barriers to entry are LOW. Low capital requirement but skilled manpower is essential. Ability to

invest in more advanced technology is becoming increasingly critical.

Opportunities

New markets in Europe & Latin America:As Europe and latin America have emerging market of diamond so Indian diamond industry

can track this market to boost up its revenue.

Growing demand in South Asian & Far East countries:As demand of diamond in south asian and far east countries has increases at increasing rate

so Indian diamond industry can track this market to boost up its revenue.

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Removal gold control act: It is another important aspect that creates opportunities for Indian diamond industry by way

of removes the rules and regulation of gold.

World’s largest source for trained, skilled and adaptive manpower:One million craftsmen associated with it. Their skills can be harnessed for designing and

making modern Diamond. Cheap and skilled labors available in India. Committed Yong & dynamic Entrepreneurs.

Increased understanding of global retailers:Extensive network of offices –presence in all major markets several companies are global

players. Excellent marketing network spread across the world. Liberalized Government policies & Conducive Environment for bi-lateral business

Threats

Threats from close substitute: As entrance of Synthetic diamond which is close substitute of real diamond leads to threats for Indian diamond industry.

China, Sri Lanka and Thailand’s entry in small diamond segment Infrastructural bottlenecks, frequent changes in ex-im policies, irregular supply of gold. Over dependence on single-channel supply chain. Decisions of De Beers and Argyle’s terms for

renewing their supply contract. High domestic interest rates compared to elsewhere: The overall lending rate in Indian financial market is too high with comparison to financial Market of other countries so it affects the overall investment of country along with the investment in diamond.

Small firms lacking technological/ export information expertise: As small firm not have so much capital fund to invest in technology and research and development because of this they haven’t get benefit of technological advancement.

Low productivity compared to labor in china, Thailand and Sri lanka: The labours of Indian diamond industry are less productive than the labour of China, Thailand, and Srilanka.

High carring cost: As the major raw material requirements need to be imported, companies normally stock huge quantities of inventory resulting high inventory carrying costs.

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References

Ministry of Finance, Government of India, http://finmin.nic.in

Legislative Department, India Code, http://indiacode.nic.in

Income Tax Department, Government of India,

http://www.incometaxindia.gov.in

http://www.bignerds.com

http://sezindia.nic.in

Special Economic Zones in India, Government of India,

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