Michael Leff wrote this case under the supervision of Greg Zaric solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
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There are several characteristics that determine the value of a diamond. The most noteworthy of these are known as the four C’s: color, cut, carat and clarity. Other factors are polish, symmetry and certification. All are detailed further in Exhibit 1.
Diamonds naturally occur in many different colors. The rating scale applied to diamonds ranges from colorless to yellow, as any other color is extremely rare. Many feel that this color range is in place to suit personal preferences, rather than to serve as a price determinant.
Cut refers to both the shape and the proportions of the diamond. A diamond with a superior cut has the correct proportions in its facets as well as in its depth and width. The cut of the diamond is the main determinant of its reflective properties. A diamond with an ideal cut reflects light, and therefore appears more brilliant than a diamond with a poor cut. Poor cuts are often the result of the diamond being cut too shallow or too deep.
A carat is a unit of measurement for diamonds where one carat is equal to 0.2 grams. This is not to be confused with karats, which is a measurement for the purity of gold. Larger diamonds are much rarer than small ones, and so they are generally more expensive per carat. For example, all other factors being equal, two one carat diamonds would be less expensive than a single two-carat diamond. However, this effect is most noticeable in the higher carat ranges, and is not as apparent at less than 1.5 carats.
The clarity of a diamond refers to the inclusions (flaws) detectable within it, described in Exhibit 1.
Symmetry measures how well the facets of the crown (the very top portion of the diamond) and the pavilion (the very bottom portion of the diamond) match up. Poor facet alignment allows light to leak out before reflecting. This results in the diamond being less brilliant. In some cases, poor symmetry causes one side to be broader than the other, resulting in an unbalanced appearance. A diamond’s polish refers to how perfect and reflective the diamond’s surface is. Polish and symmetry are both measured on a scale ranging as follows: poor, fair, good, very good, excellent and ideal.
There are many labs that evaluate diamonds based on the characteristics listed above. There are only a small number of well known sources for diamond certification. Two of the most respected labs are Gemological Institute of America (GIA) and American Gemological Society (AGS). Other labs include European Gemological Laboratories (EGL) and International Gemological Institute (IGI), as well as many other small labs run by individual stores.
The professor returned from his shopping expedition with all of the above information, as well as a quote on a particular diamond ring that caught his eye, shown in Exhibit 2.
Now armed with this information, he wanted to know if this was a fair price for the diamond in question. The professor decided the best way to determine this would be to download information from three diamond wholesalers he found on the Internet (see Exhibit 3). Now he needed only some way of compiling the data he obtained in a meaningful fashion, and to use it to value the diamond he had found
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