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CASE 13
Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement
Ring Market
I. CASE ABSTRACT
Built on the premise of making engagement rings selection simpler, Blue
Nile, Inc. (formerly known as Internet Diamonds, Inc.) has developed into the
largest online retailer of diamond engagement rings. Unlike traditional jewelry
retailers, Blue Nile operates completely store–front-free, without in-person
consultation services. The business conducts all sales online or by phone and
sales include both engagement (70 percent) and non-engagement (30 percent)
categories.
1
Therefore, the company focuses on perfecting its online shopping
experience and “providing extraordinary jewelry, useful guidance, and easy–to–
understand jewelry education to help you find the jewelry that’s perfect for your
occasion.”8
Decision Date: 2010 FY Sales: $333 million
FY Net Income: $14 million
II. CASE SUBJECTS AND ISSUES
Strategy Formulation Global Monopoly
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
IV. CASE OBJECTIVES
1. To discuss online retailing.
2. To discuss the jewelry and diamond industry.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
VI. DISCUSSION QUESTIONS
1. How does Blue Nile create trust in buying an expensive item like an
engagement ring?
2. How does Blue Nile educate potential customers?
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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6. Can Blue Nile expand its product offerings beyond diamonds and jewelry?
7. Is Blue Nile “Stuck in the Middle?”
VII. CASE AUTHOR’S TEACHING NOTE—Not Available
VIII. STUDENT STRATEGIC AUDIT
● Current Situation
A. Performance
1. History
a. Mark Vadon founded Blue Nile, Inc. in 1999.
b. Established in Seattle, Washington and has expanded by adding
a subsidiary, Blue Nile Worldwide, that caters to the UK and
all members of the European Union.
2. Economic Performance
a. In 2004, Blue Nile had its IPO and now shares of the company
3. Rankings and Accolades
a. Awarded the Circle of Excellence Platinum award by
Bizrate.com since 2002.
i. The award is for a company ranked the best online
B. Strategic Posture
1. Mission
a. To provide customers education, guidance, quality, and value,
allowing customers to shop with confidence when purchasing an
engagement ring and other jewelry products.
b. Vision
2. Objectives
a. To derive profit.
i. Achieve highest possible return for shareholders.
ii. Increase Market Share.
b. Educate customer base so that customers can make informed
decisions.
3. Strategies
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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a. Growth through lower costs than competitors.
i. Online jewelry purchasing, rather than brick–and–mortar
stores.
e. Online purchasing
i. “Diamond Search” tool—customers can examine the entire
inventory of diamonds online.
ii. “Build your Own” tool allows customers to see the
diamond jewelry that was designed before purchase.
iii. Android and iPhone Apps
● Corporate Governance
1) Board of Directors
(1) Eight members
(a) Two internal Members
(i) Chairman of the Board—Mark Vadon
1. Worked as a management consultant for Bain and
Company prior to founding Blue Nile.
2. B.A in Social Studies from Harvard University and
M.B.A. from Stanford University.
(ii) CEO and President—Diane Irvin
1. Vice President and CFO of Plum Creek Timber
(b) Six external members
(2) Publicly traded.
(3) Board members have very diverse work experience.
consultants.
2) Top Management
● CEO and President—Diane Irvin
● Nine Executives
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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■ Backgrounds in different industries, such as public
○ International expertise
■ Not a lot of international experience, but one
● External Environment
○ Societal Environment
● Economy
○ Gold prices are high (T)
○ Global marketplace (O)
○ Slow economic growth (O)
● Technology
○ Developed countries
■ People are receptive to handheld technology and apps
(O).
■ Social networking tools to share experiences, photos
(O).
○ Developing countries
■ Lack reliable internet access (T).
■ Lack online purchasing habits (T).
● Political—Legal
○ Many of the diamond source countries have a lack of legal and
political stability, have corruption and have laws that are
not enforced (T).
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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● Sociocultural
○ Average age of first–time newlyweds in the United States is
increasing, which means more spending power (O).
○ Public events displaying jewelry (O).
○ Task Environment
● Threat of new entrants (Low)
○ Capital—inventory, labor, and traditional store locations.
● Bargaining power of buyers (Low)
○ With the Internet as the medium, most customers do not have
the opportunity to haggle over prices.
● Threat of substitute products (Low)
○ Few substitutes for an engagement ring in developed
countries.
● Bargaining power of suppliers (High)
● Rivalry among competing firms (High)
○ Primary Competitors
■ Independent jewelry stores
■ Retail vendors
■ Jewelry stores, such as Tiffany & Co
○ Online competitors
● Power of unions, governments, special interest groups (Low)
○ Industry lacks unions
■ Diamond workers in mines have the ability to stop
working due to inadequate conditions.
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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● Internal Environment
○ Corporate Structure
● Management structure (S)
○ Blue Nile serving the United States
○ Blue Nile Worldwide serves the UK and members of the European
Union
○ Corporate Culture
● Values
○ Market share (S)
■ Financial progress is measured by market share, which
means health brand recognition, customer service, and
product satisfaction.
○ Corporate Resources
● Marketing
○ Overview (S)
■ Technology to enhance customer experience.
■ Capture market shares during recession.
○ Direct sales channels (S)
■ Blue Nile App
○ Advertising (W)
■ Limited magazine and billboard endorsements.
○ User–based/word–of–mouth advertising (S)
○ Results
■ Blue Nile’s unique visitors between 2007 and 2009
decreased 36 percent
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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■ Time is taken to become comfortable with the process.
○ Customer confidence (S)
■ Thirty Day money back guarantee.
○ Customized website (S)
■ Enhanced customer experience through customized
information
■ Ability to view ring images with detail
○ Applications (S)
■ Apple and Droid
● Finance
○ Financial results and analysis
■ Liquidity
● Ability to repurchase stock when undervalued.
● Cash used to keep debt low.
■ Profitability
● Net profit margin has remained consistently
around 4.0 percent (Neither S or W).
Key Ratios
2010
2009
2008
Explanation
Current
Ratio
1.34
1.34
1.10
(current assets).
Current Ratio = CA/CL
Blue Nile has a CR ratio greater
ROI (%)
9.3
9.8
13.0
ROI = NP after taxes/Total Assets
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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The decline is ROI each year is
because assets are not being
utilized as well as in prior years.
Blue Nile has seen its cash and cash
equivalent holdings increase by $35
million from 2009 to 2010, or 44%
ROE (%)
28.8
29.6
60.2
ROE = NP after taxes/shareholder
equity
Equity has been decreasing each
year.
Net Profit
Margins
(%)
4.3
4.2
3.9
NPM = NI/Revenue
NI has increased slightly faster
than revenues each year. This is due
to consistent selling and
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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○ Vulnerability to economic downturns
■ Sales decreased by 7.5 percent in 2008 because of the
stock market crash (W).
■ Long–term debt ratio is effectively zero.
○ Stock options (S)
○ Liquidity (S)
■ $79 million in cash during 2011.
○ Investing (S)
● Research and development
○ Expanded website into international markets (S)
■ 20 percent increase in sales in the fourth quarter of
2009 attributed to selling in new countries.
● Operations and logistics
● Human resources management
○ Current HR management system (W)
■ Low employee growth opportunities.
○ Training (W)
■ Little training or standardization of procedures.
○ Corporate culture (W)
■ None of the nine senior managers are involved in human
● Information systems (IS)
○ Objectives and strategies (S)
■ IT is used to educate the customer and simplify the
○ Performance (S)
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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■ The website has been one of the primary competitive
advantages Blue Nile has had over its competitors.
■ The website is used both as an educational tool and a
primary sales channel.
● Analysis of Strategic Factors
○ Situational analysis—see exhibit 3
○ Review of mission and objectives
■ Current mission and objectives are appropriate for current business
model.
● Provide quality jewelry at low prices—this would need to be
reviewed as a new strategy, which would be to provide
● Strategic Alternatives and Recommended Strategy
○ Strategic alternatives
■ Establish a luxury label that offers a higher quality selection.
● Pros
○ Targets specific segment that has a tendency to
● Cons
■ Establish a physical presence by creating boutique stores offering
appointment–only concierge services to high–end buyers.
● Pros
○ Increase sales (not necessarily profit).
● Cons
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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○ Cost of brick–and–mortar stores and additional
employees in stores.
■ Create luxury club for high–end buyers.
● Pros
○ Personalized service for high purchasers.
■ Establish “Platinum Club” as a rewards club to encourage repeat
business.
● Pros
○ Encourages future purchases and referrals.
■ Do nothing
● Pros
○ Continue to evaluate and watch the market before making
any strategic changes.
● Cons
○ Recommended strategy
■ Establish luxury label that offers a higher quality selection.
● Implementation
○ Organizational structure
■ The boutiques would be created under a new luxury label.
● Blue Nile would have two divisions—BlueNile.com and the new
luxury brand.
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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○ Programs
■ Concierge services—customers make appointments with a professional
jeweler.
● Ability to see the jewelry selected online in person, in
addition to higher–end products available only in the store.
■ Marketing—need to market new luxury brand and stores to target
market.
● Need to determine the appropriate name of the new luxury
brand.
● Market to existing customers who exceed a specific
income/spending threshold.
○ Feasibility and timetables
■ Financial feasibility
● Currently feasible due to lack of long–term debt.
■ Timetable
○ Necessary standard operating procedures
■ Current operational procedures are appropriate for Blue Nile.
■ Need HR procedures put in place.
● Policies around employee diversity, cultural environment, and
employee training programs.
● Evaluation and Control
CASE 13
Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
○ Current information systems are supporting the company’s activities. When
the stores are brought online, systems will need to be altered to capture
○ Reward systems are currently not adequate
■ HR Procedures need to be updated and should include appropriate
reward policies.
● Need two different reward systems—one for the BlueNile.com
employees and the other for the new luxury brand. Store
employees will have different rewards than employees working
online.
CASE 13
Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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CASE 13
Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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Exhibit 4—A. Financial Ratio
Analysis
2010
2009
2008
1. Liquidity Ratios
Current Ratio
1.34
1.34
1.11
Inventory to Net Working Capital
0.58
0.65
2.48
Cash Ratio
1.11
0.91
0.79
2. Profitability Ratios (%)
Net Profit Margin
4.3%
4.2%
3.9%
Gross Profit Margin
21.6%
21.6%
20.3%
Return on Investment (ROI)
9.3%
9.8%
13.0%
Return on Equity (ROE)
28.8%
29.6%
60.2%
3. Activity Ratios
Inventory Turnover
16.51
15.55
15.68
Days of Inventory
28
30
29
Net Working Capital Turnover
9.53
10.19
38.92
Asset Turnover
2.19
2.32
3.29
Fixed Asset Turnover
22.23
20.74
22.84
Average Collection Period
Accounts Receivable Turnover
Accounts Payable Period
84.56
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4. Leverage Ratios
Debt to Asset Ratio
0.52%
0.64%
0.98%
Debt to Equity Ratio
Times Interest Earned
Coverage of Fixed Charges
Current Liabilities
5. Other Ratios
Price/Earnings Ratio
60
72
32
Dividend Yield on Common Stock
Exhibit 4 – B. Common Sized
Statements (%)
2010
2009
2008
Costs and Expenses
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Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market
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Operating Expenses
50,654
45,997
44,005
Total Operating Expense
311,603
282,787
279,338
Other
Interest Income,
Net
35
122
1,420
Other Income, Net
217
209
445
Total Other Expense