dartmouth business journal: fall 2009

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DARTMOUTHBUSINESS JOURNAL

November 2009|Fall Issue

The Mexican Drug TradeA look at one of North Americas most profitable industries

MAIN FEATURE:


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Table of Contents

Transition in Tough Times - 3 Kunal Arya

Cheap Houses: Smart Investment or the Impatient Investors Trap - 5 Jun Liang

A New Automobile Market - 6 Daniel Rozenfeld

Interview with Valentina Rizzati - 7 GIulia Siccardo

The Common Agricultural Policy & the European Union - 9 Alex Lucey

Things are Heating Up at Jetboil - 11 Sarah Dowst and Alyssa Belisle

The Mexican Drug Trade - 12 David Rogg

Microfinancing is on the Rise - 14 RuDee Lipscomb


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LeadingTransitions inTough Time:Challenges Facinga New CEOKunal Arya

A change in top leadership, especially

a CEO, is never an easy time for an

organization. The transition is even

tougher when the new head executive

is an external hire, not an internal

promotion from within the executive

team, and is brought in specifically to

address the flaws in the company. As

tough economic conditions have

exposed the cracks in the bedrock of

many large American companies,

many of their boards have hired new

leadership, hoping that a

restructuring or downsizing to focus

on core competencies or profitable

business lines can fix those flaws

before the entire monolith crumbles.

However, organizational

transformations are notoriously

difficult, even for an entrenched

leader who is familiar with theworkings of the company and has the

respect of his subordinates.

The Journal of Organization

Change Management notes

that The conditions within

which they are enacted tend to

hinder the use of

organizational change

management practices

restructurings anddownsizings tend to be

mismanaged as a self-imposed

sense of urgencyprevail

over careful change

management planning and

implementation (Marks

2007).

The responsibility of fighting the

operational stresses placed by such a

transition on executives and

preventing this negative scenario

from unfolding generally falls upon

the CEO. A McKinsey Quarterly

article on leading transformation

assigns four leadership functions to

the CEO: making the transformation

meaningful, modeling the desired

mindsets and behavior, building a

strong and committed team, and

relentlessly pursuing impact. All of

these tasks are much harder for a new

CEO to carry out effectively, yet they

are absolutely critical to the success of

the transformation he or she was

hired to lead .

For a CEO that is new to the

company, the first function of making

the transformation meaningful is

much more difficult. Although a

competent CEO should be able to

articulate a clear vision for the

company after the restructuring or

downsizing, his or her lack of

understanding of the companys

culture can lead to a vision thatclashes with the culture, and thus

holds no meaning to the executive

team (if they are company insiders

and not the CEOs own people) and

certainly not to the rank and file

managers who must be brought on

board if the transformation is to

succeed. An example of such a

problem would be if a strategic CEO

is brought in to save a large company

that is floundering by refocusing on

profitable businesses and divesting the

rest. If the companys culture prides

its size, visibility, and the amount of

impact the corporations products

have on Americans daily lives, the

CEOs vision of a lean, flexible

company at the end of the

transformation will not resonate or be

meaningful at all. Thus, a new CEO

must be very careful that the result of

the vision he articulates to the

company holds matches its culture

and has meaning to its employees,

and is not only an embodiment of th

principles he holds dear.

The second function of a CEO

during transformative times is to

serve as a role model, so that

executives and managers will come toemulate the mind-set and behavior o

a CEO they respect. The behavioral

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and mind-set changes required

during a restructuring can be so

enormous that logical necessity alone

cannot change the way critical

members of the executive team think,

making them unable to lead the

change and possibly an obstacle to

the transformation. The loss of evenone key executive during a major

transformation can be problematic,

and the loss of several can doom the

program. A CEO that has a long

relationship of mutual trust and

respect from his subordinates in the

company can leverage it to get those

members that are rejecting the

transformation to come on board,

potentially saving the project.

However, a new CEO does not have

access to this reservoir of goodwill,

and may even face ill will if his

predecessor was fired, so even if he

acts according the principles of the

change, he may not be emulated.

Furthermore, symbolic actions or

praise that would hold great value

from an entrenched, respected leader

can seem empty from a new CEO;

however, these actions are extremely

important if the CEO is to convince

his subordinates to follow his good

example.

For similar reasons, it might be

difficult for a new top executive to

build a strong and committed

leadership team. Either he brings in

his own people, which creates

problems when they do notunderstand the culture of the

organization or lack institutional

knowledge that their predecessors

took with them, or he must work with

the previous CEOs senior

management team. If the latter

happens, the same lack of mutual

trust and respect will make it difficult

for the management team to emulate

the CEOs commitment and strength,

especially if his vision for the post-

transformation company does not

match their ideas about what it

means to restore the companys to

greatness. One of the best ways a

new CEO can overcome these

obstacles is to be extremely empathic

and try to understand the complex

emotions the executives are feeling

about his taking over and the

transformation he is leading, so that

he can sally their fears and mental

blocks to changing (Dean 2009).

The last part of the CEOs role in a

corporate transformation, be itrestructuring, refocusing, or

downsizing, is to relentlessly pursue

impact. This may be the one area in

which a new CEO from outside the

company has an advantage. The

tough decisions of reviewing the roles

of various executives in the

organization and holding these

leaders accountable for their

decisions before and during the

transformation are probably best

fulfilled by someone who does not

have deep personal relationship with

their subordinates. However, simply

reviewing everything is not an

effective way for new CEOs to lead

the transformations. They must roll

their sleeves up and get their hands

dirty. If the new CEO is from within

the same industry, showing

operational knowledge is a great way

to start winning the respect that is so

critical to the transformations success

and energize the troops fighting for

change. If not, focusing on an easy

victory, a key area where they canquickly make a huge impact, might

be the push the rest of the

organization needs to truly get on

board and power a successful

transformation.

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Cheap Houses:Smart Investmentor the ImpatientInvestors TrapBy Jun Liang

When is it over? Whether it isgovernment policy makers, factory

workers, or fledging college

graduates, this economic crisis has

been painful to say the least. Many

people are beginning to see the end of

tunnel, and market optimism has led

to more liberal spending. However,

investment has not experienced a

speedy recovery. The housing market,

which helped cause the economic

downturn, is still seeing slipping

prices.

According to Zillows home value

index, house prices fell by 9.9% in

July compared to same time last year.

Although it is an improvement over

the 10.5% drop in June, it also shows

that recent increases in home sales

are not enough to offset the effects of

foreclosures, which are still plaguing

the market. Economists are

expecting a meaningful rise in

foreclosure filings over the nextseveral years due to planned rate

resets on option adjustable rate

mortgages (ARM) and interest-only

mortgage loans. A rise in foreclosurespromises to increase the supply of

existing homes which, in turn, exerts

downward pressure on home prices.

ARMs can force more foreclosures if

the interest rate on the loans rises.

Interest rate-only mortgages allow the

borrower to pay only the interest for

the first 60 months or 120 months,

depending on the length of the loan.

Many of the interest only loans that

were issued during the peak of the

housing market boom are due to full

amortizing payments in 2010, when

economists predict a drastic rise in

foreclosures.

What does this mean? Should

investors begin preparing down

payments to clean up these cheap

properties? Fannie Mae CEO

Michael Williams warns, Investors

and borrowers should

remain cautious. It

appears that one of the

companies hit hardest

by the economic

downturn is taking

very little chances with

financing mortgages inthe housing market.

The U.S. government

echoes Williams

concern as well. In the

July 2009 Economic

Letter by the Federal

Reserve Bank of San

Francisco, Janet Yellen,

the President of the FRBSF, says,

The stock market has rallied and

investor appetite for corporate bonds

and other assets has rebounded,restoring access to capital for healthy

companies. Even so, I am concerned

that mortgage rates, which have risen

of late, could

place a drag on

a still very sick

housing market,

potentially

driving home

prices still lower

and pushing

more borrowers into foreclosure.

This poses an unfortunate paradox

for American homebuyers. If

investors are not expected to

participate in the housing market,

how can we see the economy recover?

While housing prices still have not

recovered, purchase and construction

of new homes seem to have reached

the bottom and are on the way back

up. This recovery is due to other

areas of growth in our economy.

Government stimulus packages gave

consumers more money and

confidence to spend, and this has led

to the slowing of job loss and

reinstatement of laid off workers.

The restructuring of less competitive

companies such as the General

Motor Company increased their

stability and has led to new sectors of

technological development in order

to compete with foreign companies.

Stricter government regulations in

risky investment and lending (i.e.government control of Freddy Mac

and Fannie Mae) are restoring

balance in the economy.

The lesson for anyone looking to turn

a quick profit is that the housing

market is probably not the place to

do it, at least not yet. People who are

waiting to buy homes should seize the

current market conditions as prices

are nearing an all time low. For

current homeowners, the worst isalmost over. With increased

government spending and consumer

confidence, it wont be long before

prices turn the corner. especially in

light of the changing nature of the

economy in light of consumer and

corporate deleveraging.

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The housing market, which helped

cause the economic downturn, is

still seeing slipping prices.


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In the past year, international media

has been saturated with news of

automakers struggling with

overproduction in a climate ofdeclining demand. This problem

has been largely created by what

was, until now, the accepted

industry paradigm: making cars

increasingly bigger, more powerful,

and more luxurious.

Today, marks of the Green

movement are readily visible in

countless new and conceptual

automobiles from BMWs

hydrogen-powered 7 Series to theHonda FCX, which recently won

the World Green Car award.

However, this innovation doesnt come cheap. In fact, it

seems that the salvation of the major automakers may

come in a different form, that of small, cheap, no-

nonsense cars targeted at emerging markets. The 2008

Winter issue of the DBJ featured the Tata Nano, the

worlds cheapest car, which is produced in India. While

the Nano is groundbreaking, it is not alone in its class.

According to Strategy Consultants GmBhs Roland

Berger, the worldwide market for vehicles priced under

euro 10,000 ($14,500) will grow by 22 percent to reach 18

million vehicles. If this prediction holds true, dirt-cheap

cars will account for one fifth of all automotive sales in

the coming years. Major automakers are well aware of

this growing market. Toyota, which has struggled with

stagnant sales in China due to a failure to anticipate the

demand for affordable, no-frill cars and a product line

focused on larger cars, is planning to ramp up its

production of smaller vehicles, according to spokesman

Niu Yu in Beijing.

Ratan Tata, chairman of the makers of the Nano, touted

his car as revolutionary and humanitarian in nature.

According to Tata, we need to think about the masses.

Should they be denied the right to an individual form of

transport? The fact of the matter is that the financial

viability of automakers will depend on their ability to

capitalize on the demand for these cars.

While a humanitarian claim can be made for the Tata

and its competitors, empowering individuals aside, they

may do more harm than good. GreenPeace as well as the

Delhis Center for Science and Environment have

protested the Nano. Michael Walsh, a pollution

consultant for the EPA has stated that such a car lacks th

technology necessary to keep its emissions stable over

time and could be producing four to five times its initial

pollution level within a few years. Furthermore, the pric

of such cars will result in consumption levels that will far

outweigh any fuel efficiency they may have as a result of

their small size.

Another major concern is safety. In order to make a car

extremely cheap, manufactures must cut corners on

materials, resulting in much lighter and more dangerous

vehicles. The harsh road conditions in rural areas that

make up a large proportion of the vehicles target

consumers further exacerbate this issue.

Whether dirt-cheap cars will go mainstream in Europe

Japan, or the United States is up for debate, but the

demand in the emerging markets, including India and

China, will be unprecedented, and this demand will be

the lifeline that international automakers so desperately

need. At the same time, this will be an enormous step

backwards in sustainability. Small, cheap cars may be an

easy and seemingly humanitarian fix for the problems of

automakers and inhabitants of developing countries alike

but individual transportation as we now know it, no

matter how cheap, is not a viable option for the future. A

sustainable future lies in prevalent, efficient, and

convenient public transportation systems, not in millions

of tiny gas guzzlers.

A New Automobile MarketBy Daniel Rozenfeld

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This issue, the DBJ was able to interviewone of the five exchange students oncampus from Bocconi University in

Milan, Italy. Bocconi, a top Europeaneconomics university, runs an exchangeprogram with Dartmouth during Fallterm. This term, Dartmouth has thepleasure of hosting Nicol Fiaschetti,Camilla Gai, Cristina La Marca, MilosMilovanovic and Valentina Rizzati. Ispoke with Rizzati and learned about herexperiences thus far.DBJ:What was the reason you decided to spend a

term at Dartmouth? Rizzati: I decided to spend a term at Dartmouthbecause of the great reputation that

this college has around the whole world. Moreover, I was

surprised by the striking and very positive opinions shared

by all the Italian exchange students who came to

Dartmouth in past years.

DBJ:How competitive is the process for applying to the

Dartmouth program?

Rizzati:It is very competitive. Apart from the

complexity of the procedure regarding

the Exchange Program per se, I think it is appropriate topoint out that a GPA

greater than 29.00 on a scale of 30.00 was needed in

order to be admitted to Dartmouth.

DBJ:How do you compare Bocconi and Dartmouth from an

academic perspective?

Rizzati: The Bocconi system, which reflects the Italian

one, is founded largely on attending lectures in

quantitative terms (with a greater number of total hours

of lecture). Moreover, even though assignments and researchwork are required in most courses, they are not supposed

to be handed in during the course, but only at the end of

it, on the exam's date. In fact, the Italian system gives

more weight to the exam per se. Each midterm grade is

worth 50 % of the total grade; the final grade is a

weighted average between the two midterm grades. On the contrary, the Dartmouth system, requiresa much greater workload by the student, who not only

has to study for the exam but also get prepared for each

Interview with Valentina RizzatiAn Economics Exchange Student from Italy

By Giulia Siccardo

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and every lesson and work on assignments and papers

to be handed in during the course. Obviously, the great

advantage is that a diligent student will be able to study

everything well in advance of the exam date. However,

the student has to bear a great burden in terms of stress

and risks of not being able to handle all other campus

activities.

DBJ:Are there major differences in student life between

Bocconi and Dartmouth?

Rizzati:Actually, for what concerns the life in college,

I absolutely prefer Dartmouth. In fact, I particularly

appreciate the "campus-life" because it

enables students to interact more efficiently and to feel

like part of a social network that strengthens

relationships within the entire community. Still, I want

to stress that from the academic point of view, I

consider both schools to be at a very high caliber.

DBJ: What is your most favorite aspect of Bocconi

University?

Rizzati: My favorite aspect of Bocconi University is

that it allows the student to independently organize

ones time, not mandating any fixed requirement during

the course schedule.

DBJ: What is your most favorite aspect of Dartmouth

College?

Rizzati: My favorite aspect of Dartmouth college isdefinitely the Dartmouth community, a social network

that protects students and enriches them culturally,

favoring useful social interactions between its members.

DBJ: What do you expect to gain from your study experience

abroad?

Rizzati: I expect to gain a great experience, both from

an academic and personal point of view. It is certain

that a study abroad experience always enriches a person

and broadens ones perspective of the world. In

particular, I believe that I will benefit from a new life

experience in this environment, so different with respect

to the one I am used to; I will appreciate all the positive

aspects this life can offer me, and learn to cope with

new difficulties and problems.

DBJ: Would you have any advice on how to improve this

program in the future?

Rizzati: I think that taking three Economics

courses is very demanding from an academic point

of view. It requires an excessive workload on the

part of the student. I would suggest that in the

future students be advised to balance the level of

difficulty of the courses they choose to take at

Dartmouth. This will enable the student to enjoy the

"campus-life" I mentioned earlier a bit more.

Also, it would be wonderful if Bocconi University

recognized more courses available at Dartmouth instead

of exclusively those in the Economics Department

recognized. That way, Bocconi exchange students would

be able to explore different, less intensive subjects as

well.

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[T]hree Economics courses is very

demanding from an academic point

of view. It requires an excessive

workload on the part of the

student.


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Among claims of developed-world hypocrisy over free

trade policy, the European Unions Common

Agricultural Policy is likely the example most frequently

pointed to as protectionist and harmful to developing

world economies. Economists and INGOs argue that,

by providing more-than-generous subsidies andimplementing production quotas, the EU is stifling

developing countries capacity to compete in global

agriculture trade. The EU (and many of its allies) have

stood fast in claiming that their policy encourages the

production of extra food, which can be provided as aid

or cheaply-sold sustenance to the poor of developing

countries. Whether or not EU policymakers believe in

the legitimacy of this claim, the CAP is one of the main

policies of the Union, eating up 40% of its 100B Euro

annual budget. The devotion of such a large portion of

its budget implies widespread benefits for all 27 member-

states, but the assistance provided by the CAP is veryunequally distributed. Tension inspired by these

inequalities has largely been swept under the rug, but

with budgetary meetings coming up for the 2014-2020

fiscal period, they are becoming just as contentious within

the EU as outside of it.The CAP is paid from the budget of the European

Union, which consists of taxes on imports, a value-added

tax, and a proportional payment of gross national income

(GNI). The largest contributors to the budget, therefore,

are Germany, France, Italy, and the U.K. When it comes

to agriculture, however, only two of theseItaly and

Francehave large industries, and therefore receive a

disproportionately large payout when compared with

what they pay in. This has led to a divide within the EU

between economies with major agriculture sectorsin

addition to France and Italy, Spain, Ireland, and Greece

and manufacturing- or service-based economies such

as the U.K., Germany, and the Netherlands.

This divide came to an impasse when, in 2003, an EU

panel reviewed and dismissed the CAP as an ineffective

and anachronistic policy. The focus of the review was to

emphasize the need for more spending on technology andwealth creation in the EU, which would require money

currently being spent on the CAP. The report also

suggested that agricultural supports be administered on a

country-by-country basis. France immediately opposed

these recommendations, citing the importance of food

security and the livelihood of its constituency. In August

of 2009, France admitted that between 1992 and 2002 it

had been privately subsidizing French farmers,

supplementing EU subsidies in order to ensure the

continued survival of its unsystematic agriculture sector.

Eliminating Union-provided subsidies would have

increased the French governments obligations to itsfarmers to an unsustainable level.Luckily for France, Germanyone of the CAPs most

outspoken opponents at the timewas willing to

negotiate. While Germany was the largest net contributor

to the CAP budget (the difference between what it paid to

the budget and what it received in agriculture subsidies

was the largest of any European Union member-state),

but France was a net recipient and the number-one gross

How is the Common

Agricultural Policy Played

Out in the European

Union?What implications does its recent history

and overall effectiveness have for the

2014-2020 budget meeting?

B AlexLuce

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beneficiary of the CAP. When subsidies are included in

the calculation, Germany was contributing 112E percapita to the overall budget, while France was

contributing 20E. President Jacques Chirac and

Chancellor Gerhard Schroeder, however, met in 2003

and agreed upon maintaining the structure of the CAP

through 2013. In return for German cooperation, the

leaders agreed that CAP payments to the new members

of the EU (the Republics of Hungary, Latvia, and

Lithuania, among others) would come from eliminating

inefficiencies in the current budget, not from increasing

the budget size. In addition, Germany would gain

favorable access to French markets for its manufactured

goods.The other large contributor and minor beneficiary of the

CAP, the UK, was not as acquiescent, and continues its

push for the reform or abolition of the current CAP

today. Because its agriculture sector was (and still is) a

small part of its economy, the UK arranged a tax rebate

in 1984 to ensure that they did not contribute

significantly to the CAP. They then relaxed that rebate by

20%, contingent upon the condition that the extra

revenue would not be used

for CAP funding. Now,

however, the UK is at the

forefront of the push for an

overhaul of EU spending

and the CAP is first on

the list to go. Several EU

member-states are intent

on transforming the EUinto the innovation and

knowledge capital of the

world, which would require

large-scale budget

reallocation towards

funding for research

projects and higher

education.Both various INGOs and

EU member-states agree

that budget overhaul is thebest policy, though for

different reasons. However,

their consensus faces more than just stubborn French

President Nicolas Sarkozy. Joining the French are the

Germans and Angela Merkel, who have shown signs of

uniting to redefine the balance of power within the EU.

Sarkozy and Merkel are focused on bringing the center

of politics and economic policy-making back to

continental Europe, instead of its traditional home in

the UK. They have decided on establishing a separate

headquarters for EU defense, and (with special

importance to Germany) on support to Europesindustrial champions.While it is clear that dispute over the CAP exists not only

between developed and developing governments, but also

between the countries of the EU itself, the new Paris-

Berlin alliance may prolong its existence. The UK has

shown its willingness to contribute more to the EU budge

to fund the growth in knowledge creation and innovation,

but the commercial interests of France (farm subsidies)

and Germany (manufacturing support) may prove to

outweigh Britains vision of the EU as the world center

for high-skill labor and innovative technology. Britain

may get a boost, however, from the revival of the Doha

talks, where attendees are stressing the importance of

putting agricultural subsidies in both the EU and the US

on the table. It will largely come down to timing: whether

or not the Doha talks can make significant progress

towards phasing out subsidies in developing countries

before the EU meets in late 2010 to map out its budget

for the 2014-2021 fiscal period.

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[T]he CAP is one of the main

policies of the [European] Union,

eating up 40% of its 100B Euro

annual budget.


11/1611

Things areHeating Up atJetboilBy Sarah Dowst and Alyssa Belisle

We got the chance to speak with Philip

Tabor, Dartmouth 04 and Thayer 05,who now works as a design engineer atJetboil, Inc. in Manchester, NH. Sincethe company was co-founded byDwight Aspinwall, Dartmouth 84,Jetboil has established their productline of high-efficiency camping stovesand accessories as one of the leadingproducers within their niche in theoutdoor industry. Our conservationwith Philip illustrated that design isespecially crucial for start-upcompanies in order to take an idea and

turn it into a company that isprofitable.

DBJ: What made you decide to work

for Jetboil?

Tabor: I was looking for an

internship in the summer of 2004

when I got a mass blitz from Thayer

about Jetboil recruiting. Jetboil

looked like a really interesting

companytheir product, high-

efficiency camping stoves appealed tome personally because of my interest

in backpacking. I was given the

responsibility of spearheading the

design of a coffee press to accompany

the stove that summer. Then, in

December of 2005, Jetboil offered

me a job while I was finishing my

Bachelor of Engineering at Thayer

School.

DBJ: What are the main challenges

specific to being an engineer at astart-up company?

Tabor:Jetboil is a small company, so

I wear a lot of hats to fulfill multiple

rolls. I see the whole process through,

from initial conception to prototyping

to production. I also get involved in

marketing and getting reviews back

from end usersa somewhat non-

traditional role for an engineer,

but one that I have enjoyed.

Working for a smaller company

allows me to define certain

aspects of my position in a way

that I would not be able to at a

larger company.

DBJ: What are the challenges unique

to a smaller company?

Tabor: Patience is a virtue when it

comes to smaller companies because

small companies do not have all the

resources of larger companies. We

face the challenge of creating a

product that is a solution to an

existing problem or shortcoming of

existing similar products. Our

philosophy is that quality starts with

the end user, and part of that involveshaving a design that is simple for the

end user. Quite a bit of thinking that

goes into finding that design, and we

work every day to repeat what we

have already done successfully.

DBJ: When it comes to

manufacturing, what are the crucial

elements to have a good relationship

with your supplier?

Tabor: The key to building a goodmanufacturing system is building

good relationships with the supply

partners. Both companies business

models have to fit with one another

our expectations of what we need

must align with their ability to meet

these expectations. At Jetboil, we

have a specific idea of what we want

for our product. It cannot just look

right, it has to be right, and getting

what we need from our suppliers is

crucial to this.

DBJ: Do you deal with any

international suppliers or do you

remain domestic?

Tabor:We currently deal with

suppliers in the United States as well

as in China. However, we cannot

assume in China what we assume in

the USA. Pictures and sketches

become crucial because of thelanguage barrier, which translators

cannot always bridge because they

lack the technical background.

International manufacturing

definitely requires more work and

clearer procedures. There is no

substitute for face time with the

vendors in order to ensure they have

the compatibility to make parts at

Jetboils quality level. In the end, it

all boils down to good

communication.

DBJ: The Dartmouth network

helped you find your career path.

Does Jetboil have an ongoing

relationship with the network?

Tabor:We use the Dartmouth

network in recruiting for research and

design positions. We have a whole

series of interns and we sponsor

engineering 190 and 290 class levelstudent projects.

DBJ: What is your advice to

Dartmouth students and young

engineers?

Tabor: There are three keys to

engineering: one, keep track of your

units, two, think about how

something will break and how it will

fail, three, how are you going to make

it and how are you going to make itprofitably. Businesses fail when they

run out of money, and if you cannot

make the product reliably and

profitably, the product is not going to

make a business.

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12/1612

If you have been reading the paper in the last year,

you are probably aware of a little industry south of

the border known as the Mexican drug trade.

Headlines have been filled with bloody accounts ofmurder and torture, and each day it seems that

more soldiers and police

are dispersed to fight the

rising tide of drug dealers

and pushers. There has to

be a reason for the

explosive growth of this

industry, and that reason is

pure economics.The Mexican drug

industry is one of thelargest and most

established industries in

North America. The

United Nations has

estimated that Mexican

cartels move roughly

$14.2 billion per year of

cocaine, heroin,

marijuana, meth-

amphetamines, and other

illegal drugs. Mexico is a

middleman for 70-90% of

the cocaine entering the

United States each year.

In fact, drug lord Joaqun

Guzmn, a gangster

affectionately known as

El Chapo, sits at

number 701 onForbes

listing of the worlds

richest people with a net

worth near $1 billion.

The drug industry has had such explosive growth

due to the highly beneficial profit structure of the

business. The cartels are able to grow one pound of

marijuana for roughly $25 on a hidden farm in

Mexico and then sell it in Phoenix for at least $550.

While marijuana was one of the founding forces

behind the drug industry, the industry has

expanded widely as other drugs have become more

popular.

Who are the producers in this deadly industry and

how do they organize their businesses? Theseproducers take the form of drug cartels that, like in

any good oligarchic system, have fought each other

for a greater share in the Mexican drug industry

over the past several years. One of the largest of

the cartels is the Sinaloa Cartel. This cartel supplies

Colombian cocaine, Mexican marijuana,

methamphetamines, and heroine imported from

Southeast Asia to the United States. Sinaloas

The United States accounts

for over 60% of the demand for

illegal drugs.

The Mexican Drug TradeBy David Rogg

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business model utilizes various local gangs in a

number of states to distribute its goods.

Another important drug cartel is the Gulf Cartel. This

cartel traffics cocaine and marijuana from South

America and across the border between Texas and

Mexico, dominating the drug trade of eastern Mexico.

The Gulf Cartel also works in tandem with the Los

Zetas Cartel, which functions as a paramilitary force.

This cartel works as a conglomerate of drug gangs

that supplies narcotics to Mexicos east coast. All of

these cartels have gained power as they have taken

over a large part of the Colombian drug trade and

have begun their own production of heroin and

methamphetamines.

These cartels have been able to reach such a

developed state due to the incredible level of demand

for their goods. Not surprisingly, in the words ofSecretary of State Hilary Clinton, [Americas]

insatiable demand for illegal drugs fuels the drug

trade. The United States accounts for over 60% of

the demand for illegal drugs and, in a 2005 study,

nearly 20 million American citizens reported the use

of illegal drugs. In order to satisfy this incredibly high

demand, Americans trade weapons for drugs,

providing the drug cartels with the armaments

needed to make these groups so dangerous. It is

estimated that 90% of the weapons used by these

cartels comes from the United States.

Despite their well-designed business models, Mexican

drug cartels face serious obstacles to their operations.

As would be expected, the powerful cartels are

confronted with the continual risks of public

condemnation and military assault. Various forms of

legislation have been passed to inhibit the operations

of the cartels in both Mexico and America, including

the Merida Initiative, with the stated purpose To

confront criminal organizations whose illicit actions

undermine public safety, erode the rule of law, and

threaten the national security of the United States.

Even more of a threat to these cartels, though, is the

increasing power of the United States homegrown

marijuana industry. The passage of a number of state

laws allowing for the production and use of

marijuana for medical reasons is providing American

growers with a competitive advantage over their

Mexican counterparts. Nearly half of the marijuana

consumed in the United States is now produced

domestically by minor growers who use greenhouses

and indoor gardens to produce high-end marijuana

varietals. The cartels have responded with changes to

their business model, now cultivating marijuana on

public land in the United States that gives them easy

access to their demanding consumers.

While this industry and its characteristics may seem

far removed from life at Dartmouth, the Mexican drugtrade has quite a few implications. Whether ones

interest in the subject is economic, moral, or just

factual curiosity, this industry provides a unique

perspective into a booming illicit trade. There is much

to learn about operations on a large scale and how a

firm can conduct a multinational business, especially

while avoiding oversight and confrontation. This all

just goes to show what can happen when a Dartmouth

economics education goes bad.

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Despite the global financial meltdown, microfinance is

booming. From its roots as a social experiment in

Bangladesh to new research led by Dartmouths own

Paganucci Fellows, the practice is quickly emerging as a

promising new asset class for debt and equity investors

worldwide. According to the World Bank website, nearly

three billion people in developing countries have little or

no access to formal financial services (World Bank

Online). After microfinance pioneer Mohammad Yunus

was awarded the Nobel Peace Peace in 2006, the practice

of providing nominal amounts of money through low

interest, short-term loans to individuals otherwise

ineligible for bank funding has drawn media attention

and gained credibility as a tool in alleviating global

poverty.

A few social entrepreneurs have taken this concept to a

new level and work to provide loans to citizens living

under governments with notoriously complicated

relationships with US fiscal and political policy. Whethe

on an individual, corporate, or diplomatic level, these

groups overcome significant obstacles to provide financia

options to citizens of Nigeria, Afghanistan and The Gaza

Strip.

Organizations such as the United Nations Relief and

Work Agency (UNRWA), headquartered in New Yor

City, offer loans specifically to women and low-income

professionals in the West Bank region. The agency has

worked in the Gaza Strip since 1991 and recently

incorporated microfinance as part of a comprehensive

community development program. In many cases

The Rise of MicrofinancingBy RuDee Lipscomb

Realize that right now, you can

make a significant impact through

your work and life.

-David Stone 76, Founder of FIrst Rate

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15/1615

women use the funding to learn new trades or create

small sales and service business to better support their

families. To date, URNWA has provided $70 million loans

to more than fifty thousand businesses in the industrial,

service, trade and commercial sectors.

From Dartmouth, David Stone 76 has led major

innovations in providing microfinance and education

resources in Afghanistan. As an undergraduate, hisdreams of mission work in the country were derailed by

the Soviet invasion. After building his company, First

Rate, into a multi-million dollar technology and finance

hub, he was finally able to schedule a philanthropic visit--

just two months after September 11th. Stone and his

company have invested heavily in microfinance projects

through HOPE International and technology outreach,

particularly teaching computer science skills to local

women and teens. Stone says his goal in Afghanistan is to

help the countrys people create an independent and self-

sustaining infrastructure through education and direct

investment.

Accin International, a prominent US-basedmicrofinance company, has recently taken a more overtly

diplomatic approach and partnered directly with the

Central Bank of Nigeria. Accin licensed themselves as a

unit bank under Nigerian financial laws, which allows

Accin to leverage government support as they work

throughout the country. This direct link to Nigeras

government also offers Accin a rare opportunity to offer

input as the country establishes more functional rules of

financial transparency and compliance.

Dartmouth is also making substantial research

contributions to the field. The annual PaganucciFellowship program sees both students from the Tuck

School of Business and Dartmouth undergraduates work

as a consulting team though the academic year on data

synthesis and research. In summer, these students road

test their theories with a hands-on project. Traditionally,

economic data has cited the creation of local, self-

contained financial markets as an effective means to

create tangible community improvement. However, as

James Wang 10 commented on the Paganucci Project

blog, the larger purpose of their research is to find out

what services are truly helpful to individual communitie

and to move past assumptions of what global poverty

relief looks like. He writes that the current work of many

wealthy nations and their aid agencies is often

compromised by preconceived or assumed expectations

about what services will provide the most value. The

reality is, no one knows what provides the most value

We muddle through and learn as we go along. Part o

this learning process is dealing with the significandifficulties inherent in any developing social or financia

system. A report from MITs Poverty Action Lab shows

that worldwide, a significant number of borrowers spend

their microfinance loans on personal purchases and

family celebrations, or to pay down personal debts

Additionally, UNRWA often struggles with both the US

and Israeli governments to obtain import clearances on

items like textbooks, broom handles, and instruments to

support their loan holders in the Gaza Strip. One o

David Stones pilot investment programs, a textiles

training and marketing project for Afghan women, was

shut down within two years after on-the-ground suppor

faltered. While public opinion greatly favors

microfinance as a far-reaching solution, the realities and

methods of successful implementation are far from

perfect. At a recent Tuck forum, Stone acknowledged

that these obstacles are part of any internationa

endeavor and challenged students with a desire to

impact global poverty to get started as soon as possible

Realize that right now, you can make a significan

impact through your work and life. He urged the lecture

participants to consider both short and long term

projects, saying, You dont have to have a majorcompany established to offer your skills..

A recent study conducted by JP Morgan Glob

Research shows that microfinance is on the right track

The loans frequently outperform traditional banks in

terms of successful return on investment and boas

stronger asset utility than traditional loans. This

successful combination of idealism and capitalism i

bridging gaps in policy, distance and political ideology to

make an impact on business and financial security

worldwide.

For interested readers, an immediate, easy way to get

involved is through Kiva.org. This website features

hundreds of microfinance entrepreneur profiles and

allows users to contribute to existing projects or to

sponsor new borrowers. On campus, the Tucker

Foundation and Dickey Center have supported severa

interns and provide grants specifically for students

working on domestic and international microfinance

with companies of all sizes.

DARTMOUTH

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JOURNALFall2009

While public opinion greatly

favors microfinance...

implementation [is] far from

perfect.


16/16

Works Cited

Current Officers Contributors

President: J. Alexander Gonzalez

Treasurer: David Kellenberger

Secretary: Alexander Villar

Layout Editor: Ellena Kim

Head of Finance: Alexander Villar

Head of International Business: Giulia Siccardo

Head of Domestic Business: Kunal AryaHead of Editorial: Kedar Malpuri

Head of Interviews: J. Alexander Gonzalez

Alex Lucey

Daniel Rozenfeld

Sarah Dowst

Alyssa Belisle

Kunal Arya

Jun Liang

Giulia Siccardo

David Gonzalez

RuDee Lipscomb

Transition in Tough Timeshttps://www.mckinseyquarterly.com/Organization/Change_Management/

Creating_organizational_transformations_McKinsey_Global_Survey_results_2195?pagenum=3https://www.mckinseyquarterly.com/ghost.aspx?ID=/Organization/Talent/A_CEOs_guide_to_reenergizing_the_senior_team_2444https://www.mckinseyquarterly.com/ghost.aspx?ID=/Organization/Talent/The_CEOs_role_in_leading_transformation_1912Mitchell Lee

Marks. 2007.A framework for facilitating adaptation to organizational transition.Journal ofOrganizational Change Management20,no.5,(September1):721-739. http://www.proquest.com/(accessed October 14, 2009).http://www.mckinseyquarterly.com/The_economic_impact_of_increased_US_savings_2327

Cheap HousesHarris, Tim. "Fannie Mae CEO Speaks About Housing: Real Estate Market Predictions2010-2011." Sep 10, 2009.http://timandjulieharris.com/2009/09/10/fannie-mae-ceo-realestate-market-predictions/ (accessed Oct 1, 2009)."Home Prices Continue to Decline but at a Slower Pace." Sep 22,2009.http://www.upi.com/Real-Estate/2009/09/22/Home-Prices-Continue-to-Declinebut-at-a-Slower-Pace/9761253616401/ (accessed Sep 29, 2009).Howley, Kathleen M. "Housing Risking Relapse Confronts Bernanke Conundrum." Sep21, 2009.http://www.bloomberg.com/apps/news?pid=email_en&sid=aaa2I0OKLe1I&ref=patrick.et (accessed Sep 29, 2009).Yellen, Janet L. "A View of the Economic Crisis and the Federal Reserves Response."FRBSF Economic Letter 2009-22, no. (2009): 1-9.

New Automobile Market1 http://www.allbusiness.com/automotive/motor-vehicle-models-sport-utilitys/10595082-1.html2 http://online.wsj.com/article/SB125419981482348535.html?mod=googlenews_wsj3 http://www.timesonline.co.uk/tol/driving/article3164205.ece4 http://www.nytimes.com/2008/01/08/business/worldbusiness/08indiacar.html?_r=1&pagewanted=2

Common Agricultural Policy"About the IMF." International Monetary Fund. 1 May 2009

Mexican Drug Trade1 http://www.latimes.com/news/nationworld/nation/la-na-mexico-drug-war21-2009jul21,0,1531532.story2 http://www.nytimes.com/2009/03/26/world/americas/26mexico.html3 http://www.berkeleydaily.org/issue/2008-11-20/article/31663?headline=The-Mexican-Drug-4 http://www.state.gov/p/inl/merida/5 http://www.washingtonpost.com/wp-dyn/content/article/2009/10/06/AR2009100603847.html

Microfinancing

News & Broadcast: Microfinance. Microfinance at a Glance Evanston Public Library World Bank

Online, 20022009: A Decade of Outreach. http://go.worldbank.org/XZS4R3M2S0 (accessedOctober 19, 2009).

Pictures

http://www.flickr.com/photos/lecercle/2873995521/sizes/m/

http://www.flickr.com/photos/attator/3565669047/

http://www.flickr.com/photos/acalabrese/2447001523/sizes/l/

http://www.flickr.com/photos/7969902@N07/2947382571/sizes/m/

http://www.flickr.com/photos/ingridbd/3992893569/sizes/m/

http://www.flickr.com/photos/nicocavallotto/3961052907/sizes/m/

http://www.flickr.com/photos/xaf/2289377358/sizes/l/

http://www.flickr.com/photos/gepat/3516125033/sizes/m/

http://www.flickr.com/photos/nzdave/454873387/sizes/m/

http://www.flickr.com/photos/truthout/4037933538/sizes/m/

http://www.flickr.com/photos/grufnik/2390171915/sizes/s/

http://www.)lickr.com/photos/tofsrud/3447080264/sizes/s/

DARTMOUTH

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OURNALFall2009
http://www.nytimes.com/2008/01/08/business/worldbusiness/08indiacar.html?_r=1&pagewanted=2http://www.allbusiness.com/automotive/motor-vehicle-models-sport-utilitys/10595082-1.htmlhttp://www.nytimes.com/2008/01/08/business/worldbusiness/08indiacar.html?_r=1&pagewanted=2http://www.nytimes.com/2008/01/08/business/worldbusiness/08indiacar.html?_r=1&pagewanted=2http://www.timesonline.co.uk/tol/driving/article3164205.ecehttp://www.timesonline.co.uk/tol/driving/article3164205.ecehttp://online.wsj.com/article/SB125419981482348535.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB125419981482348535.html?mod=googlenews_wsjhttp://www.allbusiness.com/automotive/motor-vehicle-models-sport-utilitys/10595082-1.htmlhttp://www.allbusiness.com/automotive/motor-vehicle-models-sport-utilitys/10595082-1.htmlhttp://www.bloomberg.com/apps/news?pid=email_en&sid=aaa2I0OKLe1I&ref=patrickhttp://www.bloomberg.com/apps/news?pid=email_en&sid=aaa2I0OKLe1I&ref=patrickhttp://www.upi.com/Real-Estate/2009/09/22/Home-Prices-Continue-to-Declinehttp://www.upi.com/Real-Estate/2009/09/22/Home-Prices-Continue-to-Decline

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