Want Better Strategy? Learn from Narcos: Mexico
Want Better Strategy? Learn from Narcos: Mexico
*Note: I’m not advocating or defending any illegal activities.
** Note: I actively discourage anyone from engaging in the drug trade.
***Note: There will be spoilers in this if you haven’t seen the show. You’ve been warned.
Early summer this year, two great works collided in my mind: Richard Rumelt’s Good Strategy/Bad Strategy and Netflix’s Narcos: Mexico.
Both I found fascinating. Rumelt is a crystal clear thinker who has been working on understanding and articulating strategy for decades. He helped me see where so much of strategy falls short.
N:M proved fascinating because of the intellectual sophistication in the lead character, Miguel Angel Felix Gallardo. Rumelt helped me understand the framework with which Gallardo approached his situation to create an impressive (though illegal, dangerous, deadly, and unfortunate) empire.
The show provides us with an entertaining intersection of Michael Porter’s work with Rumelt’s.
For those looking to improve their decision making in a competitive environment, this will highlight some frameworks for approaching challenges.
Let’s keep this really simple for those who have seen the show and those who haven’t.
Gallardo has an opportunity, or at least sees one. He has access to a better product (marijuana) than anyone else. His partner has developed a more potent product that consumers will love more than what they’ve known before.
On top of its appeal to consumers, the product has less waste, meaning more of it can be shipped per pound (or kilo, outside the US), leading to great yields per delivered container. (In a flawed explanation, their product, “seedless,” might fit into a 7 inch by 5 inch by 3 inch package per kilo, whereas the current product might fit into a 8.5 inch by 5 inch by 4 inch package per kilo. The result is that more weight can be moved per truck, lowering unit costs.)
But Gallardo has a problem. Or a lot of them, actually. This list is sufficient for this illustration, but not exhaustive.
- The army currently raids the fields where product is grown, burning it. Inventory that has been growing for months, maybe even years, is ruined quickly, with no recourse.
- If Gallardo could address that problem, he’d have to distribute it via a series of plaza bosses who need a cut, and are generally unstable. Their world is full of violence, leading to death, which is, well, not a source of stability in a supply chain operation.
- If Gallardo could deal with the threat of people killing someone in his operation, or his distributors, he’d have to deal with the fact that every plaza boss sets their own price. The incentive to move more product is to cut prices, leading to depressed margin.
- If that problem were dealt with, he’d likely be worried about someone stealing his premium product.
- If he weren’t worried about that, he has to deal with the fact that he can’t grow it near other product, because the cross-pollination from other plants would ruin his premium product.
- And he has nowhere to grow it.
Pretty big series of problems.
But the key to Gallardo’s strategy is that he correctly identified the core issue. And this is where many of us go astray: we see a problem, but rush to a solution rather than deal with the right problem.
If you follow Shane Parrish, he suggests putting a firewall between problem definition and problem solution. Effectively, find the problem first, but don’t rush to solve it. Once we know what the problem is, we can then work toward the correct solution.
The core issue? The distribution model in this industry was broken.
It led to violence (read: instability and additional costs).
It promoted price wars (read: reduced profit).
It had no leverage over government intervention.
It lacked coordination, meaning any advantage someone had would be stolen, thus disincentivizing innovation.
Gallardo knows his opportunity is DOA unless he fixes the distribution model. That’s the core issue on which all the others turn. Address that appropriately, and he has some leverage to move product and build stable profits.
How to do this is challenging enough. But first let’s look at the work of Michael Porter to help inform our understanding of Gallardo’s situation.
If you’ve not heard of Porter’s Five Forces, you have now.
Porter says that competition comes in a variety of forms.
- New entrants into an industry chip away at market share, forcing existing players to spend more to keep customers, through more marketing, R&D, or lower prices.
- Suppliers can hold leverage over current players if there aren’t many providing the product or materials. If I have one source of a raw material, for instance, they hold me hostage.
- Existing competitors compete for market share in a variety of ways.
- Substitute products can take market share by providing an alternative solution to a customer’s problem.
- And customers can gain bargaining power over their suppliers. For instance, if one customer represents a large portion of a company’s revenue, they can begin to dictate terms and prices.
Gallardo saw all of this. As the narrator says, “He understood the game better than anyone else.”
New entrants created more instability operationally and in terms of pricing.
He could be the supplier, but didn’t have the real estate to produce it and control it.
Competition would undercut prices, as well as disrupt his supply chain through turf wars.
(The government was another form of threat, but we’ll deal with that momentarily.)
Subs wouldn’t be so much of an issue because he had the sole product, but he needed to protect it, again, from his rivals who wouldn’t care about trademark or patent protection.
Customers’ power largely would come from competitors offering lower prices.
He also realized that the distribution model was the key to a guiding policy. The guiding policy was a defined approach to attacking the opportunity and the attendant challenges. Unite the distributors, or plaza bosses, and it effectively dealt with the majority of the problems he faced.
Gallardo’s policy would be a unified organization, made up of the various plazas. It would lead to lasting and durable profits. He was creating the moat around his castle through this larger organization.
He’d provide the product to all of them, eliminating the threat of theft. In coming together like this, they’d also get the land they needed and secure its protection.
By working together, they could set prices, creating a monopoly for buyers. They’d have the supplier power over their customers.
Their distribution would be safe from violence, eliminating lost product, people, and operational capacity. Internal rivalry would, at least for a time, take a backseat to greater profits from coordination.
The increased profits and cash flow from a smoother operation made it easier to afford paying off officials who represented a threat.
And all of this effectively locked out new entrants: they didn’t have access to the product consumers would want, they couldn’t compete in terms of profitability with their product, and they’d deal with the 800 kilo gorilla in the market (government officials) if they tried to get into the game.
Not a bad way to go, if you want to win.
Rumelt talks about coherent action based on your guiding policy. The policy should reduce complexity. So let’s look at Gallardo’s actions.
He brought all the plazas together in one organization. They agreed on territories.
He collectively set prices to stabilize and maximize profitability.
He focused their efforts, staying out of cocaine, opium, and other products they could traffic, despite having a great distribution operation. Those involved securing supply from a third party, was logistically more challenging, and posed higher risks.
He leveraged advantages: they owned a superior product and the entire distribution network. No one could compete with either, and definitely not both together.
Finally, he benefited from the disarray or lack of oversight from a “competitive threat”: the governments weren’t concerned with stopping them. And those who might be, they were able to “partner” with.
As the series goes on, you see all the strategic mistakes that may be impossible to avoid in this industry: the people, non-financial motivations, the governments who get involved, etc…. It ends badly, for everyone. Predictably.
But in the short-term, we can learn from Gallardo’s identification of the right problem. We can look at his guiding policy of unionization to create stability and lock out competition. And we can learn from his actions.
Want to talk about your strategy?
Email me at adam@thenorthwoodgrp.com
