If you want to win in business, you have to do things better than the competition. And those things — dubbed the value chain by Harvard Business School strategy guru, Michael Porter – are different for every industry. This comes to mind when considering the lessons for legitimate businesses from the successful drug dealing career of Joaquin Guzman whose Sinaloa Cartel controls between 40% and 60% of the $18 billion to $39 billion worth of drugs flowing into the U.S., according to the New York Times.
What does the value chain — a way to map how a business competes that details the activities it performs — have to do with the drug business?
Well consider cocaine. It starts as a liquid extracted from the Coca leaf and ends up as powder sold on city streets. In between, that liquid is refined into powder, stored in bags, shipped to distribution points in the U.S. and retailed on street corners. Meanwhile, the cash generated by those sales needs to find its way into many hands — not the least of which are those of Guzman.
And the amount of cash involved escalates as the product gets closer to the street. According to the Times, Sinaloa buys a kilo of cocaine in Colombia for roughly $2,000, in Mexico, that kilo is worth $10,000; its value leaps to $30,000 once if gets over the border; and when it’s sold into grams for retail distribution, that kilo sells for more than $100,000.
One of the reasons that Sinaloa has such a large market share – giving the 55 year old Guzman a net worth of $1 billion, according to Forbes – is his decision to focus primarily on the challenge of getting drugs across the U.S. border and into the hands of distributors; while outsourcing the other activities.
This leads to the six strategy principles that contribute to Guzman’s wealth and survival:
- Outsource all but the most strategic activities. Guzman’s business really took off when he was able to turn the tables on the Columbian cocaine cartel that originally wanted him to get its product into the U.S. Miguel Angel Martínez, an independent contractor who was paid a fee by the Colombians to move their cocaine, figured out how to fly it from South America to obscure Mexican landing strips. This gave Mexico better access to the U.S. after government officials closed down the Caribbean route that Columbia had been using. When Martinez, working with Guzman, started getting paid in cocaine, instead of cash, the massive logistical operation that Martinez ran became the most profitable part of the industry.
- Kill strategically. 50,000 people have died since 2006 as a consequence of being associated with drug dealing. Guzman uses such killings to send a signal to those who might cheat him in business deals or to wipe out rivals for the market share that was put in play when the former drug king pin, El Padrino, was captured by Mexican authorities, according to the Times. He also kills if the government captures former members of Sinalao and tries to get them to provide details of its operations. Martinez, for example, was captured in 1998 and escaped with his life after repeated prison stabbings and a grenade attack that Martinez believes were ordered by Guzman, according to the Times. For Guzman, killing is meant to reinforce specific values — don’t cheat him and don’t snitch.
- Marry into enemies’ families. As did Vito Corleone, Guzman believes it’s important to keep your friends close and your enemies closer. The drug industry does this, in part, by marrying into their enemies’ families. For example, the mother of Guzman’s recently born twins is “the niece of Nacho Coronel, the Steve Jobs of meth,” according to the Times. This inter-marriage is something of an insurance policy since if a drug lord kills his brother-in-law, he is likely to catch an earful from his wife.
- Innovate constantly in your core activity. Guzman was extremely creative when it comes to getting drugs from Mexico to the U.S. To that end, Sinalao smuggled cocaine on commercial flights and eventually on its own 747s; used container ships, fishing vessels, go-fast boats and submarines that could be sunk if discovered to hide evidence; dug tunnels between Mexico and the U.S.; and put drugs in vacuum-sealed cans of chili peppers from a factory he bought, according to the Times.
- Manage risk compulsively. Needless to say, drug dealing is a risky business and among the most significant are the risk of being killed or captured and the potential to lose inventory or not get paid for it. In response to these risks, Guzman uses techniques — such as splitting big shipments into say, five shipments of 20 kilos each, sharing the investment with partners, compartmentalizing roles of the few who work for Sinalao directly, and setting traps for wholesalers and retailers to test their trustworthiness.
- Pay off government officials. Finally, Guzman pays big bribes, according to the Times. For example, in 2008, Noe Ramirez, then-President Felipe Calderón’s drug czar, “was charged with accepting $450,000 each month.” Such payments are made to many levels in the government below that as well as to police and prison officials — the Times reports on the cushy details of Guzman’s prison experience and the $3 million that was paid to facilitate his painless escape. Not surprisingly, these payments extend to the U.S. as well. The Times reports that the price for U.S. border guards to wave through a car at a checkpoint is ”a few thousand dollars.”
A typical legitimate business probably follows three of these six principles. Which ones? Outsource all but the most critical activities, innovate in your core, and manage risk. As far as paying off officials, the Citizens United case assures there’s no limit to how much money a company can pay a politician running for office.
It’s only the strategic killing and marrying into enemies’ families that don’t generally apply to a legitimate business.