CASE STUDY

The Mexican narco-trafficking problem

Clive Kerridge and Sophia O. Kerridge

This case study looks at examples of successful international crime organisations, namely Mexican drug traffick-
ing cartels. These illegal businesses are often just as structured, organised and strategically managed as legal corpora-
tions. This case gives an opportunity to evaluate strategic options, from the point of view of Mexican government
policy advisors, as the state attempts to understand the NTOs strategies in order to counteract them.

The problem to define the new governments strategic options and

The new President of Mexico, Enrique Pea Nieto (PRI
Party), came to power in December 2012 with a big prob-
lem on his hands: spiralling violence associated with the
notorious drug cartels.1 During 2011, drug-related deaths
rose to over 12,000, several regions were increasingly law-
less and some of the countrys highest-ranking military and
police officials had been arrested over drug-related crimes.
Then, in mid-2012, the US Congress found HSBCs Mexican
branch guilty of laundering money for some of the nations
narco-trafficking organisations (NTOs). The new president
was facing strong diplomatic pressure, the threat of declin-
ing international business investment (especially in the
US border area), a serious threat to national security, and
recognition that the NTOs were:
. . . now posing a multi-faceted organised criminal chal-
lenge to governance in Mexico.
Report to the US Congress, August 20122
The problem had been inherited from his predecessor,
Enrique Caldern of the opposing PAN Party. In an effort
to tackle the growing strength of NTOs in his home state
of Michoacn, Caldern had deployed the military onto
the streets. Little did he know in 2006 that he would be
unleashing a drug war of huge proportions, destabilising
the illegal narcotics trade and instigating violent battles,
not only between the military and NTOs but also between
the NTOs themselves. As a key part of his election cam-
paign, Pea Nieto had promised to change strategy. His
policy advisors needed to analyse the NTOs activities and
quickly.
The business
The first part of solving any problem is to identify it: Pea
Nietos government was not just facing a problem of wide-
spread violence. This was violence orchestrated by large,
complex organisations that ran very profitable businesses
in the trade of narcotics an industry worth billions of
dollars, employing thousands of people.
In 2010, the UNODC estimated the value of the illegal
global drug trade at $320 billion per year (210bn; 250bn),3
indicating that profits from the US cocaine market alone
constituted $35 billion. In comparison, immigrant smuggling
from Latin America to the USA was valued at $6.6 billion a
year and the arms trade from the USA to Mexico was worth
just $20 million a year (see Figure 1).4
The cocaine trade is a particularly profitable under-
taking due to its non-labour-intensive production, simple
technology and compact transportation. The value added
to cocaine at each stage of the manufacturing and distribu-
tion process reflects the varying levels of risk and complex-
ity. For example, a kilo of cocaine that in Colombia would
cost around $2000 has a value of $10,000 in Mexico and,
after crossing the US border, would sell wholesale at
$30,000. Once broken down, mixed and split among street
dealers, the value per kg is $100,000.5
As can be seen in Figure 2, most of the profits from the
drug trade are at distribution level (to final consumers).

The case was prepared by Clive Kerridge, Senior Lecturer in Strategy at the University of Gloucestershire and Director of consul-
tancy KvH International Ltd, and Sophia Kerridge, who completed her Oxford University research thesis on Mexican and Colombian
drug trafficking violence and government responses, and now works for Peace Brigades International in Colombia. It is intended
as a basis for class discussion and not as an illustration of good or bad practice. Clive Kerridge and Sophia Kerridge 2013. Not
to be reproduced or quoted without permission.

Z27_JOHN2545_10_SE_EM27.indd 707 10/15/13 3:10 PM

 708 THE MEXICAN NARCO-TRAFFICKING PROBLEM
Figure 1 Estimated annual value of some global
criminal markets in the 2000s
Source: UNODC World Drug Report 2010, Figure 4, p. 33
Figure 2 Distribution of gross profits (in %) of the
$35 billion US cocaine market, 2008
Source: UNODC World Drug Report 2010, Figure 39, p. 79
However, the fragmented and decentralised nature of end-
level distribution means that concentrated wealth is at the
international trafficking level. So, although 70% of gross
income goes to dealers selling to consumers, there are thou-
sands of street-level drug dealers in the USA who share
those profits. In their celebrated 2005 book Freakonomics,6
Levitt and Dubner encapsulate this fragmentation and low
retail profitability in the title of Chapter 3: Why do drug
dealers still live with their moms?. At production level,
there are various supply sources and little value has yet
been added, so gross profits are small compared to those
made by the international drug trafficking organisations.
Z27_JOHN2545_10_SE_EM27.indd 708
This smuggling or trafficking is undertaken by a select
number of groups that specialise in complex operations,
coordinating products from many sources and delivering
them to numerous destinations. Through this bottleneck,
wealth and power are concentrated. It has been estimated
that the Colombian Cali and Medelln Cartels, which dom-
inated the cocaine trade during the 1980s, each made
close to $5bn annually just from cocaine trafficking.7
The illicit drug trade is not a static or stable industry.
For decades, Latin America has been the main supply
source for the US market, the worlds largest consumer of
marijuana, opiates, cocaine and ATS (amphetamine-type
stimulants). However, the dominant criminal organistions
and the types of drugs being trafficked have changed:
whereas earlier traffickers primarily dealt with marijuana,
Colombians became the worlds principal cocaine traf-
fickers. Colombia has continued to be one of the biggest
cocaine producers in the world but Mexican NTOs are now
the dominant traffickers, also involved in the marijuana,
opiate and ATS trades. These evolutions in market control
or dominance occur due to factors such as changes in an
NTOs ability to operate or fluctuations in demand. For
example, in 2012, ATS demand in the USA was increasing,
whereas cocaine demand there was forecast to decrease;
yet cocaine demand in Europe was predicted to rise.
Legal and illegal businesses: the law
enforcement effect
The illicit nature of the industry means drug trafficking
is always at risk of interruption by law enforcement.
Therefore, NTOs are often organised to keep a low profile
and avoid the states attention. Yet they maintain the capa-
city for violence and to co-opt or corrupt state employees
so they can guarantee impunity and protection over their
activities. NTOs face additional operational costs because,
unlike legal businesses, agreements cannot be enforced or
arbitrated by the law. NTOs have to enforce their own
contracts and settle their own disputes, with violence if
necessary.
Like legal businesses, however, the drug trade benefits
from economies of scale. Organisations seek to expand and
integrate various stages of the industry, where possible mono-
polising the market, to maximise efficiency and profitability.
Low barriers to entry, and the attraction of quick and high
profits, ensure constant new competition that can poten-
tially destabilise the market. Stability and control may be
achieved via NTO alliances (though such alliances are often
temporary) or with the division of territories and markets.
The unpredictability of operating under such conditions
inevitably requires NTOs to be adaptable: for example, if
leaders are arrested it must be possible to substitute them
quickly. This supports the observation by a high-level panel
10/15/13 3:10 PM

of the United Nations that: Organised crime is increasingly
operating through fluid networks rather than more formal
hierarchies. This form of organisation provides criminals
with diversity, flexibility, low visibility and longevity.8
Such adaptability can also be seen through novel traf-
ficking mechanisms, which are introduced to remain ahead
of the competition and law enforcement, for example via
tunnels under (and catapults over) the USMexican border
or small submarines operating in the Caribbean; also
through the development of new generations of drugs
which are easier to transport, less complex to produce, and
harder to detect. As for longevity, life expectancy for the
people involved in NTOs is often short (with prison as the
most likely alternative), as the police and military attack
the NTOs organisational structures.
Balloons and mercury
NTOs do not benefit from the legal and other protections
enjoyed by legitimate businesses. However, they are not
constrained by the legislation and state bureaucracy that
can slow down business growth and development. In some
senses, NTOs are operating in a completely free market! To
survive in such fast-changing environments, NTOs have
to be dynamic, entrepreneurial organisations. For example,
if the state suppresses drug production in a certain part
of the country, NTOs will often transfer their activities to
another area, or even abroad, where law enforcement is
less effective (the balloon effect: squeeze a balloon and
the air moves to the parts with less pressure).9 When
counter-narcotics efforts in Colombia during the late 1980s
reduced NTO capacity to manage complex international
smuggling routes, Mexican groups began taking over cocaine
trafficking. Additionally, when the state puts pressure on
the senior levels of large NTOs, these organisations tend
to split into many smaller units (the mercury effect). This
occurred in Colombia once the Cali and Medelln Cartels
had been destroyed. It is worth noting that none of these
measures resulted in the termination of international
trafficking or the illicit drug trade.
The growth of the Sinaloa Cartel
Perhaps most embarrassing for the Mexican authorities
has been the continued dominance of the Sinaloa Cartel,
often referred to as the worlds leading organised crime or
mafia business. Its infamous leader, Joaquin El Chapo
Guzmn, heralded in various narcocorridos (modern
Mexican folk songs) for his legendary outlaw status,
amassed a personal fortune which in 2012 Forbes maga-
zine valued at $1bn. Guzmn had been arrested in 2001
but managed to escape and had repeatedly eluded recap-
ture, continuing to direct the Sinaloa Cartel, which went
Z27_JOHN2545_10_SE_EM27.indd 709
THE MEXICAN NARCO-TRAFFICKING PROBLEM 709
on to dominate the illicit trafficking industry in Mexico and
much of the Americas. Rumours about this NTO and its
ability to influence and corrupt state officials were rife to
the extent that the PAN government felt compelled to
release a statement in 2010 that it was not cooperating
with the Sinaloa Cartel to bring down competing NTOs.
The Sinaloa organisation has strong local roots and
was one of the original cartels, dating back to long
before the 1980s. Based in Sinaloa State, it controlled
marijuana production and trafficking in much of north-
west Mexico, mostly destined for the US market. The
political stability during the many years of the PRI Partys
control, up until 2000, meant that the Sinaloa Cartel
had embedded itself into the political structure, protecting
its activities and members. As its leader, Guzmn was
the local patrn, somewhat similar to the figure of The
Godfather,10 enforcing his own law among the local popu-
lation and giving out favours, buying him a strong local
support base that served to protect him during his many
years as a fugitive.
This local support base and political protection network
was typical of Mexican NTOs until the early 2000s when
the situation began to unravel for two principal reasons:
The democratisation and election of a new governing
party (PAN) in 2000 destabilised the traditional polit-
ical links NTOs no longer had the same patronage
and protection networks they had enjoyed under the
PRI.
Previously dominant Colombian NTOs, subjected to
heavy government and US pressure, started to lose
its ability to manage complex international trafficking
operations. They were already working with Mexican
crime gangs, so the Colombian groups started to sell
cocaine directly to the Mexican NTOs, which then
independently managed transportation and supply to
the US market.
Although the Mexican state had previously been able to
limit or informally manipulate NTO activity through its
links with the cartels, Mexicos new PAN government was
less able to do so, leaving NTOs to operate with more free-
dom. The US cocaine market was a huge opportunity for
the cartels, with enormous profits to be made. Consequently,
Mexican NTOs started to develop their structures to accom-
modate the international trafficking of cocaine, meaning
new transport routes, connections and management of
supply chains.
NTO diversification
After dramatic growth in the 1980s and 1990s, by the
year 2000 US cocaine demand was reaching saturation
so, while Mexican NTOs had the opportunity to take a
10/15/13 3:10 PM
 710 THE MEXICAN NARCO-TRAFFICKING PROBLEM
dominant position in this billion-dollar market, there
was not much opportunity to expand the market itself.
An outcome was that the main Mexican NTOs were
soon facing strong competition from each other over access
to the lucrative US market. Competition was based on
territorial control access to trafficking routes in Mexico,
border areas, production areas, places with corrupt law
enforcement, and ports of entry and exit (including
airports).
As the competition became fiercer, several NTOs looked
for ways to diversify, moving into new markets, such as
cocaine for Europe, or supplying new illicit drugs (prin-
cipally methamphetamines) into North America via their
established routes and contacts (Figure 3). Others took the
opportunity to reinforce their local territorial control by
developing the domestic consumer market, in this way
involving more local people in their business model and
increasing local dependency on (and thus loyalty to) that
NTO.
The Sinaloa Cartel, for example, building on its existing
dominance of the Mexican drug trafficking market and its
relationships with US distributors and Colombian sup-
pliers, expanded international operations to almost all of
the Americas and started to develop trafficking networks
through western Africa, as a route to penetrating the
Figure 3 Cartel territories and drugsmuggling routes, 2008
Source: Stratfor
Z27_JOHN2545_10_SE_EM27.indd 710
European market. Strategically located on the western US
border, it also developed various complex but effective drug
corridors for all types of illegal narcotics making their way
into the USA. Such was their territorial dominance that
anyone involved in any part of the drug trade in their ter-
ritory had to do it under the watchful eye of the Sinaloa
Cartel, paying taxes. Although these groups were not
directly affiliated, their activities got absorbed into the
Sinaloa Cartels network of interests.
With the extra income generated from this new era
of trafficking, the Sinaloa Cartel had to find new ways of
investing and protecting its cash. One was money launder-
ing, the creation of new legal businesses where the carbel
could hide and reinvest its drug profits. Involvement in
legitimate businesses presented new markets that the
Sinaloa Cartel could seek to monopolise, using a mixture
of legal and illegal methods. Looking to increase its
market position further, the cartel also pursued an aggres-
sive strategy of territorial expansion from 2005 onwards,
seeking to control the entire west coast of Mexico from
Guatemala up to California and the US border states.
This brought it into direct territorial conflict with other
NTOs, notably the Gulf Cartel, its main historical com-
petitor on the East Coast, resulting in a series of bloody turf
battles.
10/15/13 3:10 PM

A changing competitive landscape . . .
The Gulf Cartel had expanded in much the same way in the
early 2000s but had also developed a new wing to its
operations: a paramilitary section that came to be known
as the Zetas. The Zetas served to enforce the Gulf Cartels
law, collect debts and generally ensure territorial control
and protection of assets. Through violence, the Gulf Cartel
achieved control of the entire eastern coast by 2008.
In response, and in order to expand into new areas, the
Sinaloa Cartel did much the same, creating various armed
groups or allying with local crime gangs. To build up those
enforcement operations, the Sinaloa Cartel increased its
investment in areas such as weapons procurement and tra-
fficking, recruitment and corruption of military and police.
This led to further diversification in cartels activities: to
keep their paramilitaries busy, and, to enforce territorial
control, these groups dedicated their time not only to sup-
porting and protecting the narco-trafficking operations
and assets, but also moved into extortion, human traffick-
ing and other criminal activities that benefit from the
presence of armed protection. These new activities meant
that the government of Mexico was faced with highly com-
petitive and successful criminal business organisations,
willing to compete violently and now developing military
capabilities.
Although tackling the cartels with force became harder
for the state, these more diverse NTOs also developed a
weakness: they could not survive without the capability to
deploy force against the competition, which in turn could
not survive without the huge income from trafficking,
which was needed to fund arms procurement and increased
personnel numbers. Managing the multifaceted nature of
these organisations (legal and illegal business, together
with military elements) meant expanding management
capabilities. Expansion inevitably implied more difficulty in
keeping below the radar of the state.
. . . and changing alliances
As the NTOs rapidly became stronger and more diverse,
internal tensions and frictions increased, aggravated by
frequent attacks from competing NTOs, causing constant
changes in the NTO management hierarchies. This led
to many clashes, such as a dramatic rupture within the
Sinaloa Cartel in 2008 after a leadership dispute, resulting
in a new splinter NTO that the Sinaloa Cartel immediately
came into competition with. The same happened in other
cartels, as the new paramilitary wings started to assert
their own authority and undermine the parent organisa-
tions traditional modus operandi.
From 2006 onwards, the Mexican police and military
stepped up strikes against the cartels, while the NTOs
Z27_JOHN2545_10_SE_EM27.indd 711
THE MEXICAN NARCO-TRAFFICKING PROBLEM 711
increasingly attacked each other: violence levels exploded,
resulting in thousands of deaths every year and huge
organisational instability for many of the NTOs. While the
aim for all of them was to manage successful international
trafficking operations, for which they prefer a relatively
stable environment, survival was now based on eroding
their main competitors.
Despite the inter-NTO competition and the governments
drug war initiatives (Figure 4), the Sinaloa Cartel con-
tinued its strategy of aggressive expansion and attacking its
rivals, including those with which it was once allied. While
it suffered defections, deaths and arrests, its ability to main-
tain successful trafficking operations allowed it to continue
dominating the market. Arguably, the continuing leader-
ship and legendary status of El Chapo was the glue that
held the Sinaloa Cartel together, giving it stability despite
changes to the hierarchy below. The Sinaloa Cartel con-
tinued to successfully undermine lesser organisations,
through street battles and bombings and by organising the
arrest and death of their leaders and through the success-
ful corruption and co-option of state agents.
A threat to stability of the state?
The year 2009 saw a new dynamic, as the Zetas broke
away from the Gulf Cartel and expanded control dramatic-
ally through eastern Mexico and into Central America,
using extreme levels of violence and brutality when deal-
ing with opponents. The Zetas are formed principally of
military deserters or people with some form of military
training, which is clearly reflected in their organisational
structure. Their military chain of command and strict
discipline have meant that when leaders are removed,
there is a clear line of succession. The organisations repu-
tation for violence and lack of second chances has allowed
them to assert authority over new business activities
despite their rapid organisational and operational expan-
sion. The Zetas, unlike the more traditional NTOs, are more
opportunistic: they have no need to win over the local
population, and their principal motivation is income and
gaining control over varied illegal industries in as large an
area as possible.
The resulting clash between the Zetas and the Sinaloa
Cartel is also a clash of business models. Sinaloa and the
older drug cartels focus on exploiting their core com-
petences (international trafficking capabilities) and main-
taining their brand reputation (for quality and reliability)
in the industry. Embedding their activities in local eco-
nomies is central to their survival and, at the highest levels,
family and personal ties reinforce the networks. In con-
trast, the Zetas are more involved across a range of local
criminal businesses and are less dependent upon inter-
national trafficking operations. Although risks are spread
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 712 THE MEXICAN NARCO-TRAFFICKING PROBLEM

Figure 4 Evolution of the Sinaloa and Gulf Cartels, 200312

Source: Sophia O. Kerridge

Z27_JOHN2545_10_SE_EM27.indd 712 10/15/13 3:10 PM


Figure 5 Mexican drug cartels main areas of influence, 201213
Source: Stratfor
across various operations, those local businesses have
much lower barriers to competitive entry and are more
susceptible to fragmentation. Furthermore, their rapid
expansion and excessive use of violence have attracted
the attention of various states and competitors, and forced
Zeta units to adapt constantly. Blood, rather than political
corruption, is their currency.
From 2010 to 2012 the violence continued: frictions
caused divisions; divisions led to several new organisa-
tions and new alliances. Meanwhile the Mexican state,
through police and military responses, continued trying
to break the NTOs power and influence (Figure 5) by
attacking their organisational hierarchies. While this has
served to destabilise the NTOs, it does little to limit the
business of drug trafficking, as the organisations merely
adapt and continue supplying drugs to their customers.
As a sombre warning to the incoming President Pea, there
was no pause in the levels of violence after his election in
2012: indeed the NTO violence was even reaching Mexico
City, something many thought the cartels would never
dare. The need for a new approach was evident. This was the
challenge for President Pea Nieto and his policy advisors.
Z27_JOHN2545_10_SE_EM27.indd 713
THE MEXICAN NARCO-TRAFFICKING PROBLEM 713
A new strategy in the war on drugs
By 2012 it was clear that the states strategy was not
having the desired results. If anything, quite the opposite:
there was widespread anxiety about personal and public
security, particularly in the main cities. A new presidency
was an opportunity for a new approach in the war against
the cartels, perhaps confronting them from an altogether
different position.
In theory, a change in political leadership should
affect NTOs negatively, since previous political linkages
would end and fresh ones would have to be established
within the new political system. With the election of the
PRI in 2012, the party that had previously accommodated
NTOs was returning to power. Although rumours of a
return to the previous system of cohabitation with the
NTOs was fiercely denied, the pervasive violence meant
that such options surely would be considered, if they might
guarantee better public safety.11
At the same time, the Mexican state also has to respond
to various national and international influences. In a
democracy, where the president has just a few years to
10/15/13 3:10 PM
 714 THE MEXICAN NARCO-TRAFFICKING PROBLEM
turn things around, there have to be visible improvements
if there is any hope for re-election. There are also external
influences that need to be considered, such as foreign
investment, US political pressure, and impacts on neigh-
bouring countries as the NTOs expand across beyond
Mexicos borders.
Evidently, the previous administrations policy of
armed attacks on the NTO hierarchies and short-term
disruptions of certain drug routes had not produced the
desired results. In part, this was because that strategy had
not attacked the root of the problem, the business of drug
trafficking.
To develop an effective strategy, the state needs to
understand how the NTOs grew to be so large and wealthy;
what strategies NTOs used to develop their markets and
fight their competition. Much like other companies may
look at competitors and try to evaluate their strategies as
a means to improve or adapt their own, the state can also
do this to identify the cartels business weaknesses and
vulnerabilities. By analysing how an NTO has developed
its business model, the state can evaluate its likely strategy
in future scenarios and try to act pre-emptively. Not least,
instead of fighting the symptoms of the NTO problem,
notably violence and the widespread influence of wealthy
criminal families or organisations, it may be more pro-
ductive to beat the NTOs at their own game: by changing
conditions for the business of trafficking.
The new presidents policy advisors were well aware
that suitable counter-NTO strategies would have to be
acceptable to a range of stakeholders, in Mexico and
beyond. For implementation to be feasible, it would be
imperative that the government had sufficient and appro-
priate capabilities. It was a tough but vital assignment.
For further information, see the following videos.
The business model
CNN, How do Mexican cartels get drugs into the US?,
http://www.youtube.com/watch?v=nO2AOQAeVJI
DNA Info, DEAs New York Chief explains the business
model of drug trafficking, http://www.youtube.com/
watch?v=k2bF0-VY1ps
Insight Crime, Drug gangs and human smuggling,
http://www.youtube.com/watch?v=JH9GNd5ARmU&l
ist=UUhEvdHcQEGdoKTsLFeNdb7g&index=3
Z27_JOHN2545_10_SE_EM27.indd 714
The Sinaloa Cartel
http://www.youtube.com/watch?v=4PEi0I6g9eg
Stratfor, Mexican Cartels: Sinaloa Cartel, http://www.
stratfor.com/video/mexican-cartels-sinaloa-federation
Zetas
Reuters, Reuters investigate: Mexico drug cartel
unleashes new levels of violence, http://www.youtube.
com/watch?v=wcQDEexlkWc
Insight Crime, Zetas in Guatemala, http://www.
youtube.com/watch?v=STjiPvDtpb8&list=UUhEvdHcQ
EGdoKTsLFeNdb7g
BBC, Mexico Zetas leader Z-40 captured, http://www.
youtube.com/watch?v=QZswKWg-OaQ
Stratfor, Mexican Cartels: Los Zetas, http://www.
stratfor.com/video/mexican-cartels-los-zetas
Violence as a marketing strategy
Al Jazeera, Mexican drug gangs public relations cam-
paign, http://www.youtube.com/watch?v=MFasg6qI1TY
Money laundering
Al Jazeera, How Mexican drug lords spend their ill-gotten
gains, http://www.youtube.com/watch?v=BY1dcqgEG2I
Notes and references
1. Note that the term cartel, used in reference to large drug trafficking
organisations, does not necessarily mean that they control and
determine market prices.
2. June S. Beittel (2012) CRS Report to the United States Congress,
R41576, 3 August 2012.
3. $1 ~ 0.65 ~ 0.77.
4. UNODC (2010) The Globalization of Crime: A Transnational Organized
Crime Threat Assessment, p. 16.
5. Patrick Radden Keefe (2012) Cocaine Incorporated, New York
Times Magazine, 15 June 2012, http://www.nytimes.com/2012/06/17/
magazine/how-a-mexican-drug-cartel-makes-its-billions.html?
pagewanted=all
6. Steven D. Levitt and Stephen J. Dubner (2005) Freakonomonics: A
Rogue Economist Explores the Hidden Side of Everything, New York:
William Morrow.
7. Sophia O. Kerridge (2011) Drug Trafficking Organizations and the
State in Colombia (19801995) and Mexico (19952011), MPhil
Latin American Studies, Oxford University.
8. United Nations High-Level Panel on Threats, Challenges and Change
(2004), quoted in UNODC (2010) The Globalization of Crime: A
Transnational Organized Crime Threat Assessment, p. 27.
9. Michael Shifter (2007) Latin Americas drug problem, Current
History, February 2007, p. 62.
10. As epitomised in The Godfather mafia movies, based on a novel by
Mario Puzo.
11. El Mundo (2012) Queremos tener tranquilo el pueblo. Todo est en
su mano, Bogot, 2 October 2012.
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