Failure

In The Empire Strikes Back, episode 5 of the Stars Wars films, the Jedi master Yoda utters one of the great lines in the series to Luke Skywalker during Luke’s training: “Try not. Do … or do not. There is no try.” On a similar note, in The Rock Sean Connery puts down Nicolas Cage with this: “Do your best? That’s what all the losers say. Just do it”

The connection between these two movie lines is the real-world situation with Fabrikant. Fabrikant’s failure begins with a management failure. The failing is one of not paying attention to the basics. In his talks with the industry, Maurice Tempelsman has warned for some time now that trouble was brewing in the diamond world. I daresay no one ever thought Fabrikant would be a firm where the trouble would overflow.

Some talk around the trade is that the Wal-Mart effect was the cause of Fabrikant’s problem. The Wal-Mart effect is the demand by the buying staff at the giant retailer for better prices. Rather than lose the Wal-Mart business, the story goes that Fabrikant would make it up in volume. Bring this line of reasoning to Wal-Mart executives and they bristle. Their job is to press everyone for the best prices. They are not responsible for a vendor’s profitability. That’s the vendor’s job.

Pricing—intelligent pricing—has to be competitive and produce a profit. Whoever sets prices needs to know what the total cost structure of the business is and price accordingly. Those who “buy” the business in hopes of future profitability are playing a different version of the infamous Dot-Com Bomb game. It’s one thing to have a low-price-leader item as long as you’re getting profitable margin on the remainder of the line. Many have rued the day they went down this path, and I suspect there are plenty more waiting in the wings to learn about the pitfalls of diamond memo programs that are so popular today.

Thin margins, lavish offices, and large staffs do not work well together. There are numerous examples in the diamond business where one or more of these “business judgments” have brought the players to the financial bar of justice.

A business school colleague once remarked, “It all comes down to management.” Truer words were never spoken. Some failures blame Wal-Mart. Others blame unions. Still others blame a high cost structure or low margins. It’s as though they are unable to navigate the treacherous waters they’ve chosen to enter but won’t accept the responsibility for their own actions and decisions. They have to find someone or something to blame.

It’s not Wal-Mart. It’s not unions. Who made the margins low, given the cost structure? Who allowed the cost structure to continue when the business changed? Who moved my cheese, indeed?

A bad deal is a wake-up call. Walk away. Begin the process of reorganizing. It isn’t easy, but then again, neither is failure.