Brief Synopsis of the Issue
ALROSA Group from Russia stands as one of the most renounced Russian diamond
producer brands. ALROSA extracts their fine diamonds from the deep mines of
Yakutia, a fat situated republic within Russia. Since its inception in 1994, ALROSA
continued to look for ways to make a strong footing in foreign markets, especially
due to the fine quality of the diamond and diamond embedded and crafted pieces of
jewellery. As for 2017, too, ALROSA Group is very much continued to explore newer
international territories to explore for penetration to ensure growth and sustainability.
On this aim, ALROSA’s primary advantage is that it has access to a rarely
accessible mine in Yakutia, the market itself is highly controlled and capabilities to
produce diamonds of any shape and size. (Bain & Company Inc, 2012)
Undoubtedly, ALROSA Group’s contemporary success is much contributed by the
diamond type that is only available at Yakutia in Russia. The mines are first explored
in 1950’s and the stock of Diamond was so good in number that it alone can meet
the annual diamonds demand of Russia. Since there is surplus of stock of diamonds
in Yakutia, the excess require being exported outside the country to earn foreign
currencies; (Tichotsky, 2000). So, ALROSA s sourcing is very strongly based on
unique capabilities and the only thing that needs the management to concentrate is
marketing and selling the diamond pieces of jewellery to international territories to
make ALROSA a globally reputed brand. (Agarwal & Devgun, 2017)
While expanding to Europe, ALROSA would need to enter the UK market since the
UK within Europe has unique tastes for diamond pieces of jewellery and economic
consumption strength. The World Bank in a report predicted that the preference for
diamond jewellery in the UK is progressing so fast that by 2019 the demand for
diamond jewellery alone in the UK can take over the total supply. Currently, the UK
is the fourth largest importer of diamonds. So, its annual consumption is quite huge,
without many predictions. However, UK credits the consumption of such volume of
diamond jewellery to its internationalized economy and trading system,
simultaneously. (CARE Ratings Ltd, 2017)

Recommendation(s)
When intending to expand operation beyond the border, every business considers
multiple market entry strategies and forms. They analyze the cost and benefits
associated with each model and then based on the operational requirement,
involvement, and cost and profitability choose to select one. As for ALROSA Group,
too, there is need to weigh between multiple engagement models in foreign markets
as part of its international expansion. Considering ALROSA’s unique aim and
operation; four types are recommended, which include direct exporting, owning
subsidiary, online sales, and franchising.
Through franchising, ALROSA Group will have control over the operation of the
franchise and can continue to generate profit through getting royalty and premiums.
This method is profitable as ALROSA will have less to manage in everyday operation
but all the profits will be securely withdrawn to ALROSA’s own bank account in
Russia. Consumers like the franchise will have their own arrangement for every unit
of sale to account the royalty or franchise fee or premium to reimburse to parent
brand ALROSA Group.
Through have online sales outlet ALROSA Group can also consider optimizing its
web stores for the UK market. Here all goods will be in the inventory of ALROSA and
they will have to back the operation with strong customer service team. Once goods
are ordered in the UK, the diamond jewellery will be shipped by courier from Russia.
This is the convenient method and ensures online visibility. ALROSA certainly need
to get the best kind of logistic support from its courier as diamond jewellery are
expensive and require secure delivery. Loss of single parcel here can result in the
non-repairable financial loss.
Through opening a directly owned full subsidiary, ALROSA can get tax benefits. As
opening directly own subsidiary will entitle it to tax relax as per the UK laws. It will
also give the brand more control of the operation in the UK. Contrary, the UK will
count it as a foreign direct investment.
Through direct exporting, ALROSA Group will also enjoy its complete control over
the operation in the UK. They will also enjoy some rights of protection for their
trademark too. However, threats of substitution aside industrial competitiveness
dynamics will continue to influence the performance of the brand. (Knobel &
Firanchuk, 2016)

Background
Globalization while making access to labor and capital and management freer than
before, has greatly contributed in adding more pace to modern day trade and
commerce. If one of the most unsought benefits that globalization brought, it would
be the creation of a global consumer class looking for better quality products at
affordable prices. Such consumers are the key players in modern-day trade and
commerce drive. Economies, as such, are more integrated into making their offering
to consumers. If we put this theoretically this signifies the relativism where
knowledge, truth and morality are not universal and static, but they evolve as
society, civilization and culture progress themselves. Such relativism cannot
be isolated from the normativism because primacy of social norms and
advocating for the same is an even functional element in human civilization,
not just for Russia or UK. So, what does it mean? Russia’s exploration of the
diamond mine and estimation for its mineral stock have called for change in its
economy. The diamond qualities are far better and labor is cheap. Even though
Russia has a weaker currency, selling diamonds to abroad can give it strength.
The former socialist republic, though inherited a corrupt state system, putting
the diamond industry on a global market economy can be viewed as a key
instrumental efforts towards democratizing Russia, further. For instance, Russia
alone remained under long international sanction for trade and commerce. This
sanction crippled its economy. However, as the World Trade Organization (WTO)
resulted, Russia’s subsequent negotiation efforts resulted in its widening pathway
towards doing business in Europe. As for diamond, the subject of the product of this
paper, Russia comes as the top exporter of diamond jewellery. For long it has been
perceived that all the diamond mines are based in the continent of Africa. It
contained exporters like Botswana, Angola, Democratic Republic of Congo and
Namibia and alike. But Russia’s export of diamond toppled them all, especially for
last two decades since Yakutia region is unveiled. (Gilmore & Gleditsch, 2005)
(Gianmarco & Sampson, 2016)

International trade theory:
As mentioned earlier that every business requires to analyze and conduct its
cost-benefit analysis for deciding the international trade engagement model. For
Russia, the opportunity comes in producing a diamond jewellery at lower costs than
other countries like Botswana, Canada, Angola, and others. This reflects the
Ricardian theory of opportunity cost, presented in 1776. Russia’s Yakutia and Sakha
regions are known to contain the huge stock of expensive metals and gems which
include both gold and diamonds, together. So, its raw production cost is naturally
lower and this appears as a natural advantage for Russia benefiting all other
areas of production and management . With lower production cost at mining level,
Russia ensured cheaper labor input to make this jewellery. They have not only
included human into the production line but also mechanized the extraction and
crafting process to adopt mass production strategies. So, all such strategies with
production, give ALROSA a strong base to expand beyond Russia and considering
the economy of UK and its consumer preference; the UK becomes an ultimate
destination for the ALROSA Group. For any other country, it would, therefore, mean
to firstly have unconditional access to a mine rich with mineral stocks of fine gems
like Diamond, the technological sophistication, and manpower; which are
undoubtedly quite difficult. For instance, African nations producing diamonds are
now having quite exhausted stocks and the manpower engaged are forced to do it in
controversial terms. There are reported instances of forced labor, unequal pay
and gender discrimination. Use of child labor in African mines is a global
concern now. In fact, much of diamond exporting economies in Africa are
heavily polarized with corrupt state system and practices that are unethical
and inhumane. Russian diamonds thus represent more ethical product for
consumers to buy as consumers are now increasingly becoming sensitive to
labor practice issues. Even if the African miners decide to mechanize and advance
their extraction system, the unpredictable stock in the mine does not guarantee them
a long prospect. Contrary, Russia’s stock is quite large that even if it exports raw and
unfinished diamonds to a second country to get them finished and crafted for
exporting into a third country; Russia will still have a substantial amount made from it
too. (Vahtra & Liuhto, 2008) (Liuhto & Jumpponen, 2001) (Yakovleva, et al., 2000)

The United Kingdom
A key reason behind UK’s referendum decision to favor BREXIT is ultimately the
economy. Europeans around the UK migrate to the UK to get medical benefits and
protection coverage of insurance as it is the best in the continent. Now, the problem
is it is the UK citizens only who pay the tax to their government to offer them populist
health, medical and alike coverage facilities. When they see their hard paid taxes get
evaded by European intruders; due to the European Commission; it does not give
them any good feelings. This is just one example why the UK differed from others;
(Schneider, 2016). It’s colonial history details that they have enriched their history for
centuries after centuries that even after having so few population, being completely a
separate land; it still represents world’s most influential economies. Since the
adoption of the free market economy, too, the UK continued to grow. It has the
strong skilled workforce, innovative technological capabilities, knowledge capital,
strong GDP and more importantly a very strong currency of itself. So, UK’s consumer
stayed at the heart of everything that can be said about its economy. Currently, a
Briton household earns more than 25000 GBP a year, with the disposable income of
3.2%. (De, 2014) (Boele, 2016)

 

 

Research on the Assessment Topic
As ALROSA wants to expand its business to international market, the goal is to find
a promising market in terms of business performance that can ensure ALROSA
sustainability and growth and profit maximization possibilities. In considering these
conditions, the UK market stands as an ideal destination as its growth is steady for
the last couple of years. The market has not reached a saturation point yet, like the
US market. Again the UK economy has innate capabilities to divert and bypass
global economic shocks which are very likely in cases of China and India. UK
consumers are more in buying diamond jewellery and at least 75% of the UK
household has one diamond ornament. (Gemdax, 2015)

 

As far competition is concerned the UK is currently dominated by brands like Argos,
H Samule, Pandora, Goldsmiths, Tiffany & Co, Ernest Jones and others. Most of
these share similar kind of retail chain structure with a few exceptions of being
privately held firms. All offer higher quality of diamond jewellery. But very few
originally source them from Russia or its Yakutia region. The most complained
problem of UK’s diamond consumers includes fake diamond jewellery, cheap and
fake offer, use of Cubic Zirconium, and artificial diamond. ALROSA , therefore, can
really make a breakthrough to regain the consumer trust. (Lucara Diamond, 2017)
(BBC.com, 2014)
The UK has also announced that all transported diamonds that do not originate from
the European Union, will remain taxable. Therefore, ALROSA has a taxation benefit
too. The UK has flat 0% tax rate for loose diamonds while for finished crafted ones
there is 20% flat tax rate. Either way, the prevailing taxation structure is very much
beneficial to ALROSA. (Lucara Diamond, 2017)

Arguments against the Recommendation(s)
As for odds to the previous section, ALROSA will continue to face some risks in the
UK market. UK is the biggest European ally of the US who shares the very volatile
diplomatic relation with Russia and UK often acted in favor of the US starting to
lending its support for imposing the sanction on Russia. So , politically there is a
risk in operating in the UK as Russia will continue to look forward making its
ways towards Crimea and Ukraine. The political tension between Russia and
UK is often reasoned by third entities, like the USA as UK always stands as its
ally on global and geopolitical matters. The BREXIT is also an instance of
de-Europeanization. Economically the Russian Ruble is far weaker against the UK’s
GBP. So, there are certainly economic risks not only in exchange rates but also in
fiscal and monetary policy shifts. Russia always has to consider the UK’s political
and economical context in different ways because even after being a member
state of the EU they voted to exit, maintained their currencies consumption
power, represent a consumption oriented consumer class who are much
sensitive to ethical sourcing, buying and supply chain of products of their
prides. UK’s internal policies of international trading, at bilateral levels with
Russia and under the jurisdictional scope of the EU are not same. UK cannot
be equated as just another destination with the EU by Russia; rather Russia
needs to undertake much calculated approach in penetrating and capitalizing
the UK consumers for diamond jewellery. Besides, there is a weakness on
ALROSA’s side, that, its supply line is often disrupted by bad weather. Alongside
ALROSA also needs to consider that corruption in Russian mining industry and
diamond business have resulted in the immediate closure of numerous businesses.
(Zemnisky, 2017)

Arguments in support of the Recommendation(s)
As mentioned earlier, that the UK customers are consistently after quality products at
affordable prices which ALROSA can easily deliver them. UK consumers are also
brand sensitive and strongly showcase their brand loyalty. Thus, while operating in
the UK market, ALROSA will need to quickly build its brand image that continues to
lasts for long. For example, a comparison between currently operating brand’s
product and that of ALROSA will justify why consumers should be preferring
ALROSA Groups. An engagement ring from H Samuel with diamond studded all
around on an 18-carat gold ring, weighing 0.5 would cost a UK customer 1999 GBP.
However, a similar engagement ring from ALROSA would be costing as low as 1055
GBP. So, it is quite a big amount that the consumers can save from their single
purchase. As for the aesthetic appeal, look and appearance; both the ALROSA and
the H Samuel engagement rings will be same. Another reason behind predicting the
market behavior towards a positive conversion for ALROSA is that the UK
government is less likely to impose taxation on diamond purchase and possession.
The concept of euro zone of the European Union also encourage the member states
to extend their governmental support in integrating member state’s cross-border
business, tax relief, and capital movement. (ABN AMRO Bank Ltd, 2017)
Implementation of Recommendations
Now the big question is which strategies should ALROSA adopt with regard to
penetrating in the UK market as there are different strategies with different
objectives. ALROSA’s operational details provided earlier in this paper suggests that
its key strength is in having low-cost customization backed by the large mineral stock
of diamond. So, incorporating a continually improving value chain is much easier for
ALROSA Group. It only needs to expand beyond Russia with a slow strategy at the
moment to evaluate international trading performance. ALROSA at the moment
cannot pursue a global strategy as its operational limitations will not support the
global scale expansion. There are legal and economic issues which ALROSA can
avert prior adopting global strategy. It can pursue a multi-domestic strategy, as an
alternative. But multi-domestic strategy will not wipe the legal, economic and local
response risks. It will rather pour more innovation demand on localizing offerings on
the multidomestic model. A transnational strategy thus appears to be very promising
in this context. But deep within translationalization of its foreign operation risks
shooting the costs rapidly up. The foreign subsidiary will add more operational
intensity and complexities, too. (Zemnisky, 2017)
However, when the logistical model of ALROSA Group is evaluated, the international
expansion only adds to its current distribution function. Because mining, crafting
manufacturing are all taken care of at Yakutia. It currently has domestic distribution.
International expansion will only mean a few more goods to land in another territory
under different industrial and governmental arrangements. Such distribution can be
done through the sea and through air cargo. But as diamonds are precious and size
very small; it would be convenient to use air cargo or shipping systems. For
example, using EMS or Royal Mail like courier services. Thus the coverage to reach
a customer will widen for ALROSA as specialized logistics service providers would
be providing the service. A complete declaration of products, its origin, customs
valuation, will help the goods to move into the UK. There needs to be marketing,
which naturally is targeted marketing; so that the costs can be kept to low. (Boele,
2016)
Thus a projected profit can be targeted taking all the associated costs into account to
rationalize the international expansion plan for ALROSA Group. It is certain that
unlike most brands that are now offering and operating in the UK diamond jewellery
market, ALROSA has a more competitive position and can easily set its course
through the British consumers. A market survey would also help the brand while
expert advice from financial consultants will also bring more categorical insight for
the brand. Thus, fulfillment of the aim of international expansion for ALROSA Group
can be said to be very promising and all it awaits is the organizational, managerial,
operational and financial readiness of ALROSA Groups to take the flight to better
sales and sustainability.

 

List of References
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Company.
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http://www.bbc.com/news/world-europe-26436291.
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Tichotsky, J., 2000. Russia’s Diamond Colony: The Republic of Sakha. Reprint ed.
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Kennady Diamonds.

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