“Cost of Contraband: Horizontally Operated Cartels and Fentanyl’s Competitive Advantage”

On December 2, 1993, Pablo Escobar was shot and killed atop a terracotta roof in a Medellín suburb. He was 44 years old, moved 800 tons of cocaine a year, had $25 billion of reported assets and was known to residents of Medellín as Don Pablo, or The Boss.

Escobar had built an empire of stunning sweep and unimaginable violence. At its height, it earned as much as $4 billion a year—most of it cash—for its members and controlled 80% of the cocaine supply in the United States, leaving tens of thousands of corpses in its wake.

Pablo Escobar and his partners called their business a cartel, but instead of controlling price and supply, it behaved far more like a criminal syndicate that pumped an endless supply of cocaine into the market and let the market set the price. It was not only a lethal purveyor of stimulants and mayhem, it was also a brilliant business, no different in many ways from a Fortune 500 corporation, but built to operate wholly outside the law.

“What the Medellín cartel did is exactly what any global pharmaceutical firm has to do,” says Philip Heymann, a Harvard Law School professor who fought the drug cartels as a deputy U.S. attorney general in the mid-1990s. “You start with an ordinary manufacturing and sales business, and then you overlay it with three other things to make up for the fact that you are working outside the legal system.”

Loyalty, violence, bribery: For two decades, that lethal mix gave the Medellín syndicate a stranglehold on nearly every aspect of the global cocaine trade, from coca farms in Colombia to street dealers in Chicago. The deft use of those tactics made the Medellín syndicate the world’s most ruthless, violent and financially successful criminal organization before it withdrew into the shadows following Escobar’s death in 1993.

Over thirty years later, Cocaine remains the third most popular illicit substance in America and is a $53bn/year industry– putting it above Nike, Coca-Cola and Capital One in revenue terms.

In the Shadow of a Giant: Post-Pablo Narcotics

The death of Pablo Escobar in 1993 marked a pivotal shift in the global narcotics industry. The once-dominant Medellín Cartel gave way to a fragmented, more competitive, and increasingly globalized cocaine trade. Each facet of the industry—from leadership to supply chains, pricing, and regional conflicts—transformed, creating a litany of explosive power struggles and opportunities for long subservient cartels.

After Escobar’s Medellín Cartel collapsed, the Cali Cartel emerged as the dominant force. Originally, the Cali Cartel and Medellín had an arrangement that resulted in Medellín controlling the cocaine trade in Los Angeles, Cali controlling New York City, while both of them agreed to share Miami and Houston. In 1988, a personal dispute between Escobar and one of the Cali Cartel leaders named Pacho Herrera surfaced over a disagreement on territory in one or more of these distribution hubs. This disagreement fractured all previously held partnerships and the Medellín and Cali organizations became perpetual enemies, a feud which continued until Medellín’s eventual demise in 1993.

Unlike Medellín, the Cali Cartel operated with a quieter, financially guided approach, relying on bribery rather than overt violence. At its peak in the mid-1990s, the Cali Cartel controlled an estimated 90% of the world’s cocaine market and was producing about 500–700 tons of cocaine annually.

When the Colombian government dismantled the Cali Cartel in the late 1990s, the vacuum was filled by smaller groups such as the Norte del Valle Cartel and later by paramilitary organizations like the Clan del Golfo (Gulf Clan). These groups shifted from centralized leadership to a networked model, a somewhat innocuous decision that ended up changing everything.

Transformation of the Cartel Org Chart

“We collectively, to get things done, work together as a team. Because the work really happens horizontally in our company, not vertically. Products are horizontal.” - Tim Cook

The Cali and Medellin cartels skillfully placed individuals in positions where they would be most effective. Like the vast majority of sophisticated drug cartels, they had a pyramidal structure with defined vertical authority. This allowed the cartels to avoid cross-organization communication roadblocks and maintain a clear chain of command. Within their structures, they promoted specialization that precluded multiple individuals performing the same task or responsibility. Every member devoted his or her attention to one task that would contribute to the overall performance of the cartel.

These vertically-integrated empires resembled the corporate conglomerates of the 1970s and 1980s—massive, hierarchical organizations that controlled every step of their value chain. Just as companies like General Electric or IBM maintained tight control over their numerous divisions, Medellín and Cali built monopolies. This structure provided tremendous power but also created critical vulnerabilities.

Law enforcement agencies could map these organizations and target their leadership. The capture or killing of key figures—particularly those at the top of the pyramid—could severely disrupt operations. The famous “kingpin strategy” employed by the DEA and Colombian authorities was devastatingly effective against these vertical hierarchies, as evidenced by the eventual collapse of both Medellín and Cali cartels following leadership decapitation.

The upstart cartels—Norte del Valle Cartel and Clan del Golfo—recognized the fundamental shortcomings of this vertical model. Their innovation wasn’t merely tactical; it represented an organizational shift that reflected broader changes happening across global technology businesses.

As a result, these new organizations abandoned ranked positions typical in vertical hierarchies. In this evolved structure, decision-making authority flowed across various components rather than moving downward in a formal chain of command. The Sinaloa cartel, which grew to become the most powerful drug cartel in the world, survived brutal attacks by rival cartels and even the capture of its most prominent leader, Joaquín “El Chapo” Guzmán, specifically because of this horizontal structure.

The parallels to legitimate business evolution are striking. Like many international corporations such as Walmart or McDonald’s, the Sinaloa cartel functioned like subsidiary-based companies with semi-autonomous components. However, it went further than most legitimate businesses, adopting what might be better understood as a platform or franchise model. Each cell operated with significant independence while leveraging the cartel’s brand, logistics expertise, and protection capabilities—similar to how tech platforms like Shopify provide infrastructure without directly controlling their service providers.

This structure offered three critical advantages:

-Resilience against law enforcement: When leaders were captured or killed, operations continued with minimal disruption. Unlike the collapse that followed Escobar’s death, the Sinaloa cartel barely faltered after El Chapo’s capture and extradition.

-Rapid adaptation to market opportunities: Semi-autonomous cells could quickly pivot to new products, territories, or methods without waiting for approval from a centralized authority.

-Internal competition driving innovation: Much like the “pod” structure in modern hedge funds where teams compete for capital allocation, cartel cells compete for resources and territory, creating internal market pressures that drive efficiency and innovation.

This decentralization of decision-making has become a staple of modern day narcotics operations.

Farm to Table: Cocaine

“Second key to success in this racket is this little baby right here. It’s called cocaine. It’ll keep you sharp between the ears. It’ll also help your fingers dial faster.”- Mark Hanna

Cocaine starts as a plant in the Andes and ends as residue in the $100 note of the worst person you know.

Cocaine is cultivated by nearly 250,000 families across Colombia, Peru, and Bolivia in the impoverished Andean region. Farmers harvest coca leaves up to six times per year, earning just $0.80–$5 per kilogram—translating to roughly $800 for the raw material needed to produce one kilogram of cocaine, a minuscule fraction of its street value.

Turning coca leaf into cocaine hydrochloride involves two main steps – first, processing leaf into coca paste/base, then refining into pure cocaine HCl. Transforming coca leaves into paste involves rudimentary paste labs, where workers stomp leaves soaked in gasoline and acids, earning around $30 a day. Production costs at this stage are modest. In Bolivia’s Chapare region, it costs about $1,500 in inputs (leaf, chemicals, labor, etc.) to produce 1 kg of cocaine paste, netting local producers slim margins of roughly 10%. Margins are largely constrained by intermittent production (due to chemical shortages, security crackdowns, and the need to lie low). By the time refined cocaine hydrochloride leaves Colombia’s labs, its value rises modestly to about $2,000 per kilogram.

The journey from Colombia to street corners in New York City or Antwerp multiplies cocaine’s value exponentially. Moving cocaine from production zones to consumer markets incurs major costs in logistics and corruption. Traffickers use multiple transport modes – from trucks and boats to clandestine aircraft, container ships, and even custom-built submarines. Each step involves paying drivers/pilots, fuel, and often bribes to officials or payments to criminal groups controlling territory. Yet, relative to final profits, these costs are often modest. A notorious example is the use of narco-submarines: A custom low-profile semisubmersible might cost $1–2 million to build, but can carry 2–6 tons of cocaine per trip. Even if a sub carrying 6,000 kg is seized, the financial hit can be offset by other loads – and a successful run can net >$120 million worth of cocaine, paying for the sub ~100 times over in one journey. Bribery is an intrinsic part of cost structure: officials either accept the payoff or face violence. Precise bribe expenditures are secret, but cases suggest traffickers may spend hundreds of thousands per large shipment greasing palms along a route.

By the time cocaine reaches American streets, a kilogram initially worth $2,000 can sell wholesale for $25,000–$35,000, before finally fetching upward of $78,000 in gram-level sales. The profit margins at each distribution stage are immense, fueling intense competition and violence among street-level dealers.

This elaborate supply chain presents significant operational challenges:

-Capital intensity: Requires massive upfront investment in farming, processing, and transportation infrastructure

-Scale requirements: Only profitable at large volumes due to thin margins in early production stages

-Vulnerability to disruption: Each physical step introduces risk of interdiction or theft

-Lengthy production cycle: From planting to street sale can take 12+ months

These aspects made cocaine an ideal product for vertically integrated cartels that could control the entire value chain, absorb losses at certain points, and capture margins across the system. However, for smaller, more agile competitors, these same characteristics presented significant barriers to entry.

Lab to Casket: Fentanyl

Fentanyl’s supply chain begins with acquiring precursor chemicals—primarily from loosely regulated suppliers in China and increasingly from India. Traffickers exploit legal loopholes, purchasing precursors like 4-ANPP or NPP at minimal costs, often $2,500-$3000 per kilogram. A single 25-kg drum of precursors, deceptively labeled as “industrial solvents” or “makeup,” can yield millions of pills worth tens of millions of dollars on American streets.

Production occurs in clandestine labs, usually run by cartels in Mexico. Unlike cocaine, fentanyl synthesis requires minimal equipment—a basic laboratory setup can produce kilos daily. Lab workers, often poorly paid locals or chemists recruited for short-term contracts, mix toxic chemicals with minimal safety precautions, risking accidental poisoning. Production costs for one kilogram of fentanyl, including labor and chemicals, rarely exceed $4,000.

Transporting fentanyl into the U.S. is remarkably cost-efficient due to its potency. Smugglers conceal small, immensely valuable quantities in hidden vehicle compartments or among legitimate cargo. Couriers, often desperate for cash, are paid as little as $1,000 per trip to carry shipments worth tens or even hundreds of thousands of dollars. Trafficking methods also include shipping small packages via mail, exploiting global postal services to minimize risk and cost. Compared to cocaine’s bulky loads, fentanyl’s compactness significantly reduces logistical costs and simplifies bribery.

Once in the U.S., fentanyl distribution networks cut and press the drug into counterfeit prescription pills or blend it with heroin and other substances. A kilo of pure fentanyl—originally costing $4,000 to produce—can wholesale for $50,000–$80,000 and ultimately generate street revenues exceeding $1 million after dilution. Pills are sold cheaply—often just $5 each—making them dangerously accessible.

Cartelative Advantages

The explosive proliferation of fentanyl is fundamentally a story of economics and organizational innovation—Cartels are businesses, adapting to shifting markets and searching for a competitive edge. Historically, cartels like Medellín and Cali operated through rigid, vertical hierarchies. These traditional structures had massive distribution and production advantages in Cocaine but top-down command made them vulnerable to disruption from targeted law enforcement and internal power struggles. When these giants fell, successor organizations like Mexico’s Sinaloa and CJNG realized survival depended on adopting a horizontal, networked model—reaping the benefits of their subsidiaries’ success without the risk of ruin that comes with a predefined hierarchical chain of command. Sinaloa and CJNG could still own the Cocaine market, but smaller affiliates of these Cartels would be able to expand across borders and products to target new markets.

Cali and Medellín had significant capital investment in operations that were optimized for cocaine’s larger-scale production and distribution. They had internalized (either operationally or financially controlled) sprawling coca plantations, fleets of trafficking vehicles, and established bribery networks in order to dominate a high-volume, high-demand market.

In contrast, fentanyl’s emerging market was initially smaller, riskier, and more specialized, making it unattractive to traditional cartel giants that thrived on massive volume and entrenched networks. However, the rise of horizontally structured cartels composed of semi-autonomous two-pizza teams changed this dynamic.

Sinaloa and CJNG already operated highly profitable cocaine businesses, run by multiple semi-autonomous cells within each organization. But the cocaine trade was brutally competitive—profits were constantly under threat, either from internal rivals within the same cartel or from external enemies. Success was often short-lived. When a team was pushed out—whether through violence, financial losses, or strategic missteps—it was naturally driven to explore new opportunities. Their comparative advantage was speed, execution and a deep understanding of the market. Fentanyl just happened to be cheap to produce, easy to transport and implausibly addictive. A sub-cartel could enter and rapidly grow the fentanyl market without fear of being priced out or crushed by larger cocaine producers.

Sand Pill Road

This structural pivot fundamentally changed the competitive dynamics. Aside from being unencumbered by direct oversight, these semi-autonomous cells within broader cartels now compete directly with each other—each cell with a separate balance sheet and team.

The incentive structure within these organizations has striking parallels to the Valley’s approach to innovation:

-Internal competition driving efficiency: Cells within cartels like Sinaloa compete for territory, resources, and recognition of competency from the core organization. This internal market creates powerful incentives to maximize profitability.

-Venture capital-like resource allocation: The core cartel leadership allocates resources to cells showing the greatest profit potential, similar to how VC firms distribute capital among portfolio companies.

-Failure tolerance with rapid iteration: Failed initiatives (whether new trafficking routes, product formulations, or distribution methods) are quickly abandoned without threatening the overall organization, allowing for rapid experimentation.

Cells could either swim against the current to compete with better equipped teams in the capital and labor intensive cocaine industry or for as little as a few thousand dollars’ worth of chemical precursors they could synthesize millions of dollars’ worth of the most addictive substance known to mankind and ship it via UPS to their distribution partners.

Concluding Thoughts

Traditional cocaine trafficking resembles the hardware business model: capital-intensive, physically constrained, with relatively thin margins that depend on volume. The elaborate infrastructure required massive investment and created significant barriers to both entry and exit. Not to mention, the core business of most cartels is still Cocaine- making it a highly saturated market.

Fentanyl, by contrast, operates more like a software business: minimal physical infrastructure, extremely high margins, and the ability to scale production almost infinitely once the initial development (synthesis process) is established. A fentanyl lab requires minimal equipment, modest space, and relatively little specialized expertise—yet generates exponentially higher profits than cocaine operations.

Transporting fentanyl is equally advantageous; unlike cocaine, fentanyl’s extraordinary potency means traffickers only need tiny quantities to generate the same or greater revenue. Why risk smuggling 50 kilograms of cocaine across heavily guarded borders when a kilogram of fentanyl hidden in a spare tire or under a floorboard can yield similar or greater returns? The risk-reward calculus is clear.

Cocaine suddenly only made economic sense if you owned the entire system, from farm to table. Fentanyl, by contrast, offered extraordinary returns at every segment of its much shorter supply chain.

In short, the proliferation of fentanyl isn’t a result of drug dealers wanting to do the most harm possible; it is a rational economic and organizational response. Horizontal, competitive cartel structures—driven by a startup-like agility—found in fentanyl a product whose low barriers to entry and massive profit potential far outweighed the traditional complexities of cocaine trafficking. This structural and economic evolution has transformed illicit narcotics markets, and tragically, its consequences have reshaped societies far beyond cartel cookouts.

(nothing in this piece is meant to condone drug use. Fentanyl has taken far too many lives.)