When you read, “Porter’s Five Forces”, does it produce a Pavlovian response of simultaneous ecstasy and dread? Dread, in memory of those b-school exams where you had to figure out which of the five forces actually affected the company you were analyzing, and ecstacy from when you finally figured them out, and realized that they explained so much of how the business world worked?

If not, a quick primer: Porter’s Five Forces is a concept published in 1979 by Michael Porter, that lays out basic ways businesses compete. You don’t have to go to business school to understand them, this Wikipedia article is actually pretty good. They are magical because they are all encompassing.

Here’s why I bring it up: I think I’ve developed Fourcher’s Three Forces of Cannabiz. And I’m gonna take a stab at making this a thing.

No, really. Hear me out.

There are three forces pressuring every cannabis business in the United States. These three forces determine to what extent cannabis businesses can operate, how big they can get, and what size of a customer base they can obtain. The Three Forces can also impact one another.

The first, State Regulatory Environment, determines how many players can be in the market, as a limited or non-limited license state, but also how quickly the state government responds to make necessary changes to licenses and regulations.

Consider that Illinois and Missouri are both limited license states, but Missouri has a more responsive state regulatory environment as it works to get the market set up. Illinois was stuck in slow motion for most of 2020, keeping licenses restricted to a de facto small group of players. In contrast, Michigan has had a relatively responsive regulatory system, and a non-limited license system.

As a result, in Illinois, the vast majority of 2020’s billion dollars of cannabis revenue went to a handful of players. Whereas in Michigan, which had similar amounts of revenue statewide as Illinois, earnings were distributed between hundreds of players. In Michigan, even the largest cannabis companies don’t control nearly as much market share as in Illinois.

Then, for growth potential, there’s the force of Capital Market Maturity. This defines exactly how hard it is to raise capital for new and growing businesses that don’t have access to public markets or national private equity investors. 

As my colleague Brad Spirrison reported Monday, in Missouri, smaller cannabis businesses are having a hard time raising local capital because of the state’s 51% ownership requirement. Because there are so many new cannabis businesses simultaneously opening, business owners are having a hard time finding enough capital – in a state that tends to have most it’s business dominated by Kansas City and St. Louis. In contrast, Michigan and Illinois, states with numerous cities that house Fortune 500 companies, for example John Deere in Moline, and Kellogg’s in Battle Creek, cannabis businesses don’t seem to have problems obtaining capital to open. 

And then there’s potentially the most powerful, least examined, but also the least quantifiable Fourcher Force, Illegal Market Force. When strong, this force has the ability to drain potential customers from legal businesses, exhibit downward pressure on market prices, and foment social unrest, disturbing the State Regulatory Environment Force in unexpected ways. 

In Illinois, Chicago’s Black and Latino communities have strong illegal cannabis markets, to the degree, activists and even pastors tell me, that many community members resent majority white-owned cannabis companies and shop with their neighborhood weed guy instead. But these aren’t just fly by night operations run by a guy on a street corner. Illegal market customers have shown me long product lists including gummies, tinctures, and multiple strains, kept on private gDocs. Delivery services with product pictures run on the app Telegram. And two people have told me about physical, underground cannabis dispensaries where they can examine product and shop for what they like best. Some are now offering psilocybin as well.

Michigan has a continuing struggle with the grey market. For instance, registered caregivers can grow up to 12 plants for six patients simultaneously. I’ve been told about groups of caregivers banding together to run more efficient, and legal, grow operations. Five caregivers working together means 360 plants that don’t go into the seed-to-sale tracking system. Are all those plants going to serve patients? Hard to say.

In both of these cases, the Illegal Market Force is big enough to visibly impact the legal market. In Michigan, regulators cited the size of the illegal market as a reason to accelerate availability of recreational licenses. In Illinois, cannabis dispensaries are largely absent from Chicago’s Black and Latino neighborhoods. While there are other political reasons those stores haven’t opened, there’s no clamor and cry from community members for someone to open up a dispensary.

Correctly managed, the State Regulatory Environment Force can loosen up the Capital Market Force and mitigate the Illegal Market Force. The Capital Market Force can pressure states to change their Regulatory Environment, and the Illegal Market Force can scramble the Regulatory Environment Force, and reduce the strength of the Capital Market Force.

So, when you think about opening up or growing a cannabis business, consider the Three Fourcher Forces!

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Editor Mike is an itinerate reporter, recovering political consultant, and strategy game devotee.