Industry Overview

  • It is a global, highly organised business. Products designed, manufactured, transported, marketed and sold to quarter billion consumers
  • Coca cultivation land – 2000 225000 hectares, 2014 130000 hectares – Talk about Productivity! But then, Coca to cocaine process productivity jumped from estimated 4.7kg/hectare to 7.7kg/hectare
  • Mark ups in supply chain are high. From farm gate price of coca $385 to retail price of cocaine $122000. About 30000%. Also, high costs in between each node
  • There are 47 entry points now on Mexico us border. A cartel has to control at least one of them

Common Problems

  • The same problems faced by most ruthless outlaws & businesses – managing personnel, navigating govt regulations, finding reliable suppliers, dealing with competitors 
  • Most busts are off in estimates since drugs also have to undergo a value adding chain before they reach their street price
  • What do ordinary businesses do when regulators thwart their takeover plans? Try a different regulator. E.g. GE takeover of Honeywell
  • 2 conundrums – how to hire staff and how to make sure they do what they are told to do – are what occupy drug cartel HR managers (a stint in prison is career defining – that’s tier 1 B-School for them)
  • Where the state fails to provide basic law and infra, mafia led public services often benefit the public and give PR to the mafia and keep rivals at bay

Best of both worlds

  • Walmart – Cutting/forcing supply side pressures were put to increase price of production thereby making it costly. But just like Walmart, these cartels leverage their monopsony and the costs are ultimately borne by farmers. Since it is illegal in most places, govt cannot increase the number of buyers. There’s no Walmart in Columbia. But its business learning is. 
  • McDonalds – Franchising, like McDonald’s, has been there in cartels who affiliate local promising gangsters that benefit from training, brand name and arms and cartels benefit from increased presence and muscle
  • Marketing – Traditional marketing has lost its sheen due to free online and offline media. Now it is more about PR – newsjacking. Same is being done by cartels. No of people working in PR now exceeds no of journalists in Britain
  • Supply & Demand – Incentivising to produce an alternate crop is also used to put supply side pressure. But high fluctuation in trade of other legal crops (free trade) demotivated the farmers
  • Amazon – Being online reduces the barriers of entry which shifts focus on customer service to retain share.
  • Network Economy vs Market Economy – Online boom using TOR and bitcoins. Legitimate products follow market economy, drugs follow network economy offline. This problem is overcome online as it also follows market economy
  • Franchise (Tech/Cola players) – There is a risk of free riding in franchise model. So cartels also have to protect their brand name like legitimate firms
  • Innovation – Regulators often struggle to keep up with high innovation industries. Cartels stay ahead of the law by R&D and launch synthetic drugs before they can be banned Do share your views/ feedback in the comments section

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