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Is it a New Combination?
The story of Cecil Rhodes and the founding of the giant DeBeers group outlines the four paths to a new business
combination.
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SCIENCE
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CIRCUMSTANCE
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EXCESS DEMAND
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Invention I
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Observation
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EXCESS SUPPLY
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Invention II (Innovation)
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Coordination
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Observation
In 1870, Cecil Rhodes emigrated to South Africa from England. He was 17, and had been sent to live on his brother's
cotton farm in hopes that he would regain his health.
In 1867, diamonds were discovered along the Orange River. Cecil Rhodes brother, Frank, quickly got caught up in the
"diamond fever" that swept the area. The two brothers left the farm and moved to the diamond fields at Kimberley.
Cecil's poor health prevented him from working as a digger, so he became a supervisor at his brother's mine.
In 1872, Rhodes went back to England to attend Oxford; but had to return to Africa for health reasons later in the year.
During his trip he observed the huge demand for diamonds in Europe, and of course, he knew about the new supply of
diamonds in South Africa. He spent the next 8 years living 6 months in South Africa and 6 months in England, trading in
diamonds, and studying philosophy at Oxford. By the time he graduated in 1881 he was a very wealthy man.
This story shows how the forces of excess of demand (for diamonds in Europe) and circumstance (Rhodes traveling) worked together to create a new combination through the process of observation.
Coordination
By 1880, Cecil Rhodes was 27 years old, and a wealthy man. The production of diamonds in South Africa had soared
to 30 times the production 10 years before. The cost of diamond mining was becoming prohibitively expensive, since
miners had worked all the easy claims. At the same time, the surplus of supply meant that prices were being driven down.
Once again Cecil Rhodes sensed a new combination. Having studied economics at Oxford, he realized that if he could
coordinate production, he could control the supply of diamonds (restrict supply in order to keep prices high). In 1881,
he formed the DeBeers Consolidated Mining Company, and began buying up small diamond holdings, paying for them with shares in the DeBeers company. By 1889, DeBeers controlled 90% of the worlds diamond production.
In this way, Cecil Rhodes matched excess of supply (of diamonds) with circumstance (his knowledge of economics). He produced a new combination through the process of coordination.
Invention I
In the mid 1880's, Kimberley was at the outer edge of the British controlled lands of South Africa. This posed two problems for the diamond miners: the tenure of their claims was not entirely secure, and the cost of bringing in goods and
machinery was extremely high.
Rhodes began working on this problem by successfully running for parliament in 1881. His platform for election was the
creation of the Capetown to Cairo railway. Once elected, he worked diligently towards the creation of this railway. Rail service arrived in Kimberley in 1885, and prices of goods dropped by half almost immediately.
In this way Cecil Rhodes matched excess demand (for security and for goods from outside) with science (the creation of the narrow gauge railway) to produce a new combination through the process of invention.
Invention II (Innovation)
During the 1890's new diamond finds were discovered in the Transvaal, and in South West Africa. These discoveries resulted in an over-supply of diamonds which caused the price of diamonds to fall. At the same time, DeBeer's costs of
production at the Kimberley mine were increasing, as miners had to dig deeper and deeper.
Cecil Rhodes used his dominant cash position, and the newly completed railway to create a solution to this problem. He
brought in heavy equipment to replace the old mining practices which were labor intensive and costly. These changes
lowered his costs of production to the point where DeBeers became the low cost producer, and thus was able to regain the ability to set prices.
This story shows how Cecil Rhodes was able to match excess supply (of diamonds) with science (new machinery) to create a new combination through the force of innovation.
Footnote:
What Cecil Rhodes is best remembered for is the Rhodes Scholarship. These scholarships are the result of a very creative legacy which he left the world upon his death in 1902.
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