Lanchester analytic techniques challenge Afghan opium production.
Afghan opium production has reached a historic high. Satisficing discoursive analytics failed to provide a warning about the unfolding of this scenario. This analytic fiasco calls for an application of a different set of analytic techniques.
Lanchester analytic techniques belong to the subdomain of econometric methods.
They are derived from Lanchester models of warfare and Lanchester market share strategy.
Despite a long record of amazing successes, the heritage of Lanchester remains little-known. That is, except in Japan, where the New Lanchester Strategy of Sales Battles and Market Combat has achieved a cult status.
Afghan opium production is one of international problems that have defied solution for decades.
This conundrum has a baffling complexity. Despite best efforts of scores of wise men, dynamics of this problem retain for us (Westerners) a high degree of opacity.
Efforts to resolve the issue of Afghan opium production command great attention and draw in big-time funding. But only modest short-term reductions in the areas under opium poppy cultivation could be recorded so far.
In the medium term, these have been canceled out a few times over by grave setbacks, as was the case in 2014.
Counting in the 2017 fiasco, in the long-term perspective things have only gotten worse.
Discursive analytics are of little practical help when attempting to explain such phenomena. Instead, let’s turn to some of Lanchester analytic techniques.
Why specifically Lanchester analytic techniques?
Because 1) they have not been applied before to the study of this phenomenon.
And 2) because those other techniques that have, have failed in helping us figure out what’s going on.
For proof, keep reading.
The data I use I extracted from Opium Poppy Surveys compiled and published annually by the UN Office on Drugs and Crime (UNODC). This is open source data.
The extent to which it is accurate can be debated. The method of its compilation rests on a number of assumptions and extrapolations that may be questioned. However, for my purposes that is beyond the point.
The main thing that matters for me is that this data is internally consistent. And comparable year-on-year since the start of times, which in my case is 2002.
DYNAMIC MARKET SHARE ANALYSIS OF OPIUM POPPY CULTIVATION AREAS IN HILMAND PROVINCE (AFGHANISTAN) (2002-2017)
Using New Lanchester Strategy of Sales Battles and Market Combat
1: STATEMENT OF THE PROBLEM
In 2017, over 90% of the world’s opium poppy cultivation areas were located in Afghanistan. During the past two decades, its share fluctuated a bit but never dipped below 75%. That is a very conservative estimate. In all probability , it was probably closer to 85% at the low end.
In 2017, the area under opium poppy cultivation in Afghanistan was estimated at 328,000 hectares. It represents a whopping 63% increase or 127,000 hectares up from the 2016 levels.
It exceeded by 46% the until-then record 224,000 hectares reported in 2014.
It means it reached a new ALL-TIME HIGH.
Since more than two decades, opium poppy cultivation was centred in Afghanistan’s Southern region (55-85%). And within that region, in Hilmand province.
A new development is a sudden sharp increase in opium poppy cultivation in Northern region bordering on Turkmenistan and Uzbekistan. In the course of only four years, it grew 40-fold. In 2017, it claimed 13% of the area under opium poppy cultivation country-wide.
Farm-gate value of the 2017 opium output is estimated at USD 1.5 billion.
Revenues obtained from sales of opium (2000 tons in 2017) sustain hundreds of thousands of Afghani farmers, opium collectors and their families. Opium moneys also fund militants, insurgencies and terrorism that every year kill and maim tens of thousands of people in a score of countries.
Revenues obtained from trafficking and sales of heroin (448 tons produced in 2017, USD 60 billion at street price) fund international criminal organizations (and terrorists) on a major scale.
Heroin addiction (17.7 million people in 2015) generates a massive volume of street crime and is a major channel for the spreading of AIDS.
During the past 30 years or so, hundreds of millions of dollars have been spent annually in bi- and multilateral cooperation programmes aimed at stabilising and hopefully shrinking opium poppy cultivation.
The unexpected and unforecast record growth in the area under opium poppy cultivation observed in 2017 was a “black swan”, a tsunami rising from calm waters. A perfect fat-tail event. A classic.
Hopefully, it will have a devastating impact on credibility of analytic methods used in the past and assessments of effectiveness of strategies based on theose. The 2017 opium cornucopia means that the cumulative international investment of at least USD 15 billion to prevent it had – in the long term – brought little meaningful result.
One can argue, of course, that if it were not for these 15 billion, things would have gotten much worse much faster. I am not inclined to buy this argument. After 2017, things don’t need to get much worse to become the worst-case scenario.
And things will get worse if no adjustments to control strategies are made. The first step towards making adjustments to strategies involves conducting analysis. A different kind of analysis. Analysis aimed at getting some clues about who make the opim poppy cultivation market tick.
From today’s perspective, I’d say the next jump in cultivation area is scheduled for 2020. Or 2021, at the latest. Makes sense to make good use of the time that’s left until then. And don’t tell me you haven’t been warned.
2: DESCRIPTION OF THE ANALYTIC METHOD – Lanchester analytic techniques
The New Lanchester Strategy of Sales and Marketing – Historic Background and Summary of its Essentials
Lanchester analytic techniques are loosely based on Lanchester Laws, discovered by the late British aeronautical engineer, Frederick W. Lanchester (1868-1946).
At the age of 28, he built England’s first gasoline-powered automobile. At 31, he founded the Lanchester Car Company. It proved responsible for such inventions in the automobile industry as disc brakes, power steering, four wheel drive, and fuel injection.
After the outbreak of World War I, Lanchester became engrossed in the subject of air warfare. He focused on formulating the rules of its effectiveness. By doing some quantitative studies, he arrived at the Lanchester laws of combat. His findings are recorded in “Aircraft in Warfare: the Dawn of the Fourth Arm ”. Lanchester published it in 1916.
Lanchester’s resulting suggestions were adopted to the effect that the British Royal Air Force and the Air Ministry were established.
At some time after Pearl Harbour, US military researchers picked Lanchester theory up. Lanchester laws were applied with overwhelming success in the latter stages of World War II, including in operations in the Central Pacific.
After World War II, Morse and Kimball transferred Lanchester laws to operations research theory intended for use in business situations (“Methods of Operations Research“). In the 1950s, W. Edward Deming introduced this concept into Japan. Here, Lanchester thinking took root like a weed.
Dr. Nobuo Taoka, a business consultant, acquired fame by developing Lanchester Laws and their derivative Operations Research strategies into a novel marketing and sales strategy (1962-1984) steeped in conflict and strategic thinking.
During the subsequent decades it grew into a cornerstone of the Japanese business philosophy.
For now well over half a century, Lanchester analytic techniques have been used to define sales strategies aimed at growing market share. It remains as valid as ever, both inside Japan and out.
New Lanchester Strategy rules for understanding markets and competitor behaviour
- An actor with 73.9% or greater market share occupies the monopoly position.
- The market is held by a duopoly if:
- the combined market share for the market leader and second-ranking company (F+S) is greater than 73.9%,
- and the first company (F) is within 1.7 times the share of the second (S).
- If an actor has at least 41,7% market share and at least 1.71 times the market share of the next largest company, it will be able to control the market.
- If the biggest actor in a market has between 26,12% and 41,6% market share, the market can remain stable only through a coalition of F+S.
- If the biggest actor has less than 26.12% market share, market is fragmented and unstable with a strong possibility of abrupt shifts in market shares.
Applying these rules allows to distinguish between the following five market types (Taikobo Onoda). To grow market share, in different types of markets players will revert to different strategies.
1. Monopoly Market – the leading actor (F) has at least 73.88% of the market.
2. Premium Market – F has between 41.7-73.87% of the market, and has at least 1.71 times the market share of S.
3. Duopoly (Dual Oligopoly) Market – the combined market share for F+S is at least 73.88%, F is within 1.7 times the share of S.
4. Relative Oligopoly Market – the combined market share of F+S+T is greater than 73.88% and the combined market share of S+T is greater than that of the market leader. Market stability is achieved with 40-21-12 market share distribution – the exchange rate for all is close to 1.7.
5. Polyopoly Market – the market leader has less than 26.12% of the market and each actor is within 1.7 times the market share of its nearest rival. The number of “battles” is the only variable that can lead to the change in power relation, and with a 1-3% difference between the market leader and runners-up, the number of “battles” required to get out of the shooting range make it prohibitive. The only way out is co-operation.
The above typology of markets arises from Koopman’s and Onoda’s equations and the reliance on the 3:1 law.
Of the many relationships that have been developed during the years, none is more arcane than this 3:1 rule. It harkens back to the initial research by Lanchester. He asserted that that in order to vanquish an enemy that has established a defensive position, the attacker must have three times as many troops.
In the same key, the figure of merit of 1.7 comes about as it is the square root of 3. In Lanchester strategy it defines the “shooting range” or “hitting range”.
First Lanchester Law – the Law of Single Battle.
When two market actors have together more than 73.88% of the market – a perfect dual oligopoly – the focus of competition moves to the concentrated competition between them. When their sales/marketing strategies are equally effective, the side with the largest sales force will win.
Second Lanchester Law – the Law of Effects of Concentration
In markets where no actor has a clear leadership, the one with the highest market share will have an advantage.
The law of market share expansion is the law of bullying the weak.
Market share is expanded by taking over part of the market share of the weaker competitors, NOT part of the share of the market leader.
Analysis of market share and market targets is paramount to the game of business. Market share provides the capital resources with which to defend position or attempt to expand it.
In any given industry, profitability increases in a linear relation to growth in market share.
Round 3 – APPLICATION OF THE METHOD TO THE PROBLEM
General trend since 2015 – increase in areas under cultivation in ALL regions (with one mild exception).
SOUTHERN REGION MARKET
General trend in 2017 – cultivation increasing in ALL provinces.
2003-2006 Type 2
F (Hilmand) ≥ 41.7% and ≤ 73.87%: 54,68% – 60,69% – 57,43% – 68,03%
F/S ≥ 1,71 reflecting secure market leadership : 3,27 – 3,99 – 2,04 – 5,49
2007-2008 Type 1
F (Hilmand) ≥ 73,88%: 76,95 – 78,03%
2009-2017 Type 2 Stable (61,82%-73,03%)
HILMAND PROVINCE MARKET
General trend in 2017 – cultivation increasing in ALL districts, all-time highs recorded in all districts.
2006-2017 Type 5
At the level of individual actors the market is highly unstable. However, at the aggregated level of F+S+T it becomes a Type 2 market, allowing for collective market control, albeit at the lower threshold, i.e. vulnerable to shifts in market share distribution.
A key feature of the Hilmand province market is highlighted by the amazing performance of only two districts – Nad Ali and Naher-i-Saraj. Between them they hold the largest and the second-largest share of the market for more than a decade.
This circumstance means in turn that in recent history (since 2013), the kingmaker role that allows the F+S+T group to control the market belongs to third-ranking districts – in particular, Nowzad, Kajaki and Garm Ser.
SUMMARY OF KEY TRENDS
There is a clearly observable prevalence of the stable Type 2 market – Premium Market, particularly in Southern region at regional level and in Hilmand province for the group of F+S+T districts.
This market type implies presence of one very strong actor that imposes stability. In a rare case when this actor loses its supremacy, the market can be expected to quickly degenerate all the way to Type 4, at least temporarily. Longer-term outcomes of this turbulence are unpredictable.
Because Type 2 market is so popular in Afghanistan, it is a good idea to have a closer look at its sub-types. There, a key difference between the market in Southern region and that in Hilmand province becomes obvious.
In Southern region, mid- and more recently higher-range Type 2 market prevails reflecting market consolidation around growing supremacy of the principal actor.
In Hilmand province, at the same time and regardless of the above trend, the market remains a rather volatile Type 2 lower-range at the level of F+S+T group and a highly unstable Type 5 at the level of individual districts.
It is nothing short of amazing that under such turbulent conditions two districts – Nad Ali and Naher-i-Saraj – have for over a decade managed to maintain first and second places. In my view, they are certainly worth a closer look.
SUMMARY OF KEY FINDINGS
At the national level, the current trend indicates a shift from Type 1 market to stable (mid-range) Type 2.
- The market share of the Southern region has been continuously eroding from the high of 84,42% in 2008 to 60,09% in 2017.
- A major reason is doubling of area under cultivation in Western region, a 20-fold increase in Eastern region and a 40-fold increase in Northern region.
- Regardless of this slow transition, Southern region remains firmly in control of the national market.
In Southern region, precisely the opposite trend is being observed within the same time period (since 2012).
- There is a clear transition from a stable (mid-range) Type 2 market towards a Type 1 one. It bears some similarity to the 2004-2009 cycle.
- Hilmand leads the regional market with a fairly unshakeable margin. Since 2006 (with the sole exception of 2016), Hilmand PROVINCE has had a market share of > 41,7% of the NATIONAL market. According to New Lanchester Strategy this position gives it a possibility of single-handed control over the former.
- Opium poppy cultivation area in Hilmand province is growing at an accelerated rate. The highly unstable and dynamic market in this province may explain this phenomenon.. It encourages competition that serves as a key driver of growth. Precisely this expansion drives transition from Type 2 to Type 1 market in Southern region.
At the district level in Hilmand, Nad Ali + Naher-i-Saraj + Alternating Third-ranking districts have as a group control of the market, albeit at its lower threshold.
- Due to this last circumstance, while the Hilmand province as a whole can claim control over the national market, the combined share of three top-ranking Hilmand districts does not suffice to allow them to exercise this direct controlling influence.
- National market in opium poppy cultivation areas is thus effectively controlled by fluid dynamics involving multiple actors and multiple factors present in Hilmand province. It is thus here where the strategic analysts could direct their attention.
- A study of actors involved – not as abstract notions or territorial divisions but rather as people and groups of people – in the context of their rivalries and colaborations could be a logical next step.
- Taking a deeper look into economic, political and tribal alliances at work in Nad Ali, Naher-i-Saraj, Garn Ser, Gowzad and Kajaki districts would be a good start in this direction.
4: A FOOTNOTE
The present analysis looked at the market for areas under opium poppy cultivation.
Arguably, it could me more useful for practical purposes to focus instead on the market for opium.
In 2017, the average opium yield amounted to 27.3 kilograms per hectare, which was 15% higher than in 2016.
- in Southern region average yield increased by 19% (from 22.0 kilograms per hectare in 2016 to 26.2 kilograms per hectare in 2017).
- In North-eastern region the increase of 14% (from 31.2 to 35.4 kilograms per hectare).
- In Eastern region – of 8% (from 32.4 to 34.9 kilograms per hectare).
- In Central and Northern regions, average yield decreased by 5% and 6% respectively.
- In Western region the yield remained unchanged.
2017 ranking by opium production:
- Southern region – 57.85% (share of opium poppy cultivation area – 60,09%)
- Northern region – 15,79% (area share 13,10%)
- Western region – 13,57% (area share 16,57%)
- Eastern region – 9,39% (area share 7,26)
I am not inclined to attempt extracting some deeper meaning from this data.
For my purposes it suffices to observe that in the case of Southern region, which represents the crux of the problem, in 2017 there is no observable contradiction between the share of opium poppy cultivation and that of opium production.
It means at least on this level there is nothing wrong with using area under cultivation as a proxy for opium production.