Entering
the Illicit Drug Trade in Kazakhstan is Likely Not a Smart Business Decision
Executive Summary:
In the context of
Porter’s Five Forces, it is not a smart decision for a new drug cartel or
criminal organization to try to enter the illicit drug trade due to the high
amount of competitive rivalry that already exists within that industry. Many
more factors in Porter’s Five Forces work against an incoming competitor than
factors that work in favor of an incoming competitor. However, there are
outside factors that the Five Forces model did not allow for that could have an
impact on whether or not a cartel or criminal organization would chose to enter
the illicit drug trade market in Kazakhstan.
Discussion:
Kazakhstan’s geographic
position makes is very well-suited to be a major transit point for the illicit
drug trade in Central Asia which then in turn spreads to other parts of the
world. Due to the extensity of the market, the analyst thought it would yield a
new way to approach this law enforcement/national security problem from a
business perspective. The forces that were analyzed were Threat of New Entry, Threat
of Substitutes, Bargaining Power of the Supplier, Bargaining Power of the
Buyer, and Existing Competitive Rivalry in the Industry with their many
sub-factors that contribute to each force.
The first force that
was analyzed was Threat of New Entry. Under this force, the factors that were
most applicable to this problem were low barriers to entry and restrictive government
policies. It is assessed that there are low barriers to entry because just since
the 1990s, hundreds of new competitors have appeared in the market of all sizes
and ethnicities. In regards to restrictive government policies, obviously this is
going to have an effect on an illicit market. According to the Ministry of
Foreign Affairs of Kazakhstan, there are already many efforts to combat drug
trafficking that are underway in the nation.[1] Not
only has Kazakhstan ratified all major UN conventions that are in this field,
but they also have recently taken major steps forward to combat this problem.[2] For
instance, Kazakhstan actively cooperates in national and international combatting
efforts which include the Program on Combating Drug Addiction and Drug Business,[3] International
Committee of the UN Office for Drug Control, the Central Asian Regional
Information Coordination Centre (CARICC), the Paris Pact Initiative, Triangular
Initiative,[4] and
others.[5]
Just since 2009, millions of dollars have been donated to the combatting of
drug trafficking in Central Asia.[6] All
of these factors led the analyst to believe that this particular force would strongly
work against a new group that wants to enter the illicit drug trade in
Kazakhstan.
The second force that
was analyzed was Threat of Substitutes. The factor within this force that had
the most impact was the product itself. As all drugs create very different “highs”
and people have a preference for those particular effects and/or an addiction
to a specific drug, the chance of a consumer switching to a different drug
would be extremely low. Because of this, the analyst determined that this force
would work in favor of a new group entering the market in Kazakhstan because
there will always be people that want a specific drug and will not switch who
they buy from in order to buy a different drug.
The next force that the
analyst looked at was the Bargaining Power of the Supplier. Under this
category, the most important factors were lack of a price floor and price
ceiling and lack of limitations on how much can be produced. Due to the illegal
nature of this industry, there are no government regulations placed on the
production of illicit drugs and narcotics, hence no price ceilings or floors
and no limitations on how much can be produced. This allows for a lot of
flexibility with pricing and amount of illicit drugs that are produced which
will then in turn affect supply and demand. This force has a large impact on
the market as a whole. Because of the factors mentioned above, the analyst
determined that the Bargaining Power of the Supplier as a whole is a force that
could work either for or against a new organization that wants to enter the
market. If the supplier is greedy, then the product might become more expensive
to purchase to then later sell for profit, however, if the supplier is not
greedy then it allows for the traffickers to purchase the products at a lower price
which would give them a higher profit. There are also very many producers of
illegal drugs which would have an interesting effect on the market.[7]
Next, the analyst
analyzed the Bargaining Power of the Buyer. The main factor that contributed to
this section was customer switching costs. In the illicit drug market, a smart
buyer will just buy from the cheapest seller which would make customer
switching costs either low or negligible. However, in this case money might not
be the only determining factor as there are many groups operating. Because of
this, there are likely organized crime groups that have control over certain
areas and/or instill some type of fear in the populous.[8]
Since there was not much information available on this topic, however, this
force could either work for or against a new group that wants to enter the
trade. Based on this information, however, the analyst determined that is more
likely for the organized crime groups to exert some type of control in a
certain area which would make this force work against a new group.
Lastly, the force that
had the most impact on this analysis was analyzed which was the Existing
Competitive Rivalry in the Industry. The factors that had the most influence of
the analysis of this force were the number of the competitors, the growth rate,
and product differentiation. To start, there are hundreds of competitors that
are already operating in the industry in Kazakhstan. In regards to product
differentiation, there is not really a way for any “company” to differentiate
their product in the illicit drug trade which makes the competitive rivalry
high.[9] In
regards to the number of competitors, The Kazakh National Security Committee
said that there were 125 organized drug business groups that were uncovered just
since 1999, and 30 of them were involved in the transit of narcotics.[10]
Based on this alone, one can see how many groups are involved in the area and
how much it has grown which makes the existing competitive rivalry high. Therefore,
this force works strongly against a new group that wants to enter the market.
Overall, the forces
that are analyzed in the context of Porter’s model leads to the conclusion that
it is not a good business investment to enter the illicit drug trade in
Kazakhstan because most of the forces work against that new group. However, in
spite of the Porter’s Five Forces analysis supporting that conclusion, there
are a few other factors that cannot be analyzed in the context of the Five
Forces that contradict that analysis. These include the fact that economic
deprivation is a problem in that region which leads to people getting
interested in selling and trafficking drugs as well as the fact that even though
there are more efforts to combat drug trafficking, the amount that is seized
continuously decreases. Economic deprivation can affect this market in terms of
making it grow because in some instances the only way for a farmer to make a
decent living is by growing and selling opium.[11] If
the economic situations in Central Asian countries continue to be negative,
then it is likely that more and more people will get involved in the illicit
drug market as a means to provide for their families because the market for
illicit drugs is so huge and extensive. Next, in regards to the fact that the
amount of illicit drugs that are seized is decreasing as supposed combatting of
the problem is increasing could be due to alleged collusion with law
enforcement or the government of Central Asian countries, even though on the
surface they may seem to be combatting this problem.[12] The
above information could be possible reasons for a new organized crime group to
enter the industry due to the fact that they may be facing economic deprivation
and have no better means of providing for their families as well as the perceived
notion that law enforcement or the government does not care about the illicit
production so they have a good chance of getting away with it and facing no
repercussions.
In conclusion, this
problem is very complex and due to the illegal nature of it, the problem
becomes even harder to analyze in a way that could produce a good, solid
intelligence. In regards to this topic, there is simply not a lot of helpful,
detailed open source information available to the public, so unfortunately there
must be a lot of speculation of those details. Even so, looking at this problem
from a different angle still produced interesting results that will hopefully
be useful in the future.
Analytic Confidence:
The analytic confidence
for this report is low-medium. One structured analytic method was used by the
analyst. The sources for this were all of medium to high reliability, but there
was a lack of more detailed information that would have been beneficial to the
success of this product. However, the information that was available could be
corroborated. The analyst worked alone and they are not an expert on this
subject. The complexity of the subject is medium to hard. The analyst had an
adequate amount of time to complete the task.
[1] http://www.mfa.kz/index.php/en/foreign-policy/current-issues-of-kazakhstan-s-foreign-policy/counteraction-to-new-challenges/the-fight-against-drug-trafficking-in-kazakhstan
[2]
IBID
[3] http://www.state.gov/j/inl/rls/nrcrpt/2015/vol1/238985.htm
[4] https://www.unodc.org/unodc/en/drug-trafficking/central-asia.html
[5] http://www.mfa.kz/index.php/en/foreign-policy/current-issues-of-kazakhstan-s-foreign-policy/counteraction-to-new-challenges/the-fight-against-drug-trafficking-in-kazakhstan
[6] IBID
[7] http://www.npr.org/sections/parallels/2013/11/14/245040114/afghan-farmers-opium-is-the-only-way-to-make-a-living
[8] file:///C:/Users/Owner/Downloads/05_occaata20090575-100.pdf
[9] http://www.eurasianet.org/node/65425
[10] file:///C:/Users/Owner/Downloads/05_occaata20090575-100.pdf
[11] http://www.npr.org/sections/parallels/2013/11/14/245040114/afghan-farmers-opium-is-the-only-way-to-make-a-living
[12] file:///C:/Users/Owner/Downloads/05_occaata20090575-100.pdf
