When recreational cannabis was legalized in Oregon in 2015, there was already an extensive network of black-market industry players catering to a large, established consumer demand. As those operators sought legitimacy, new entrants also jostled for market share. The market was crowded, fast-changing and uncertain.
Portland State University business faculty Daniel Krause and Madeleine Pullman wanted to know how businesses would perform in this complex environment. They conducted a longitudinal case study over three years with key supply chain managers at nine Value Added Producers (VAPs). Unlike cannabis growers or retailers, VAPs are businesses that process cannabis into new products, like edibles and topical salves. Since VAPs are highly regulated, Krause and Pullman hypothesized that decision-makers would need a unique set of dynamic managerial capabilities to survive.
The researchers found that the highest-performing VAPs were serious about compliance. They thought beyond building relationships with customers and suppliers, developing positive relationships with regulators in Oregon to help shape future regulations. Mindful to stay flexible in the rapidly changing environment, savvy managers invested in sufficient production infrastructure without tying up too much cash.
What set these successful VAP managers apart was the ability to efficiently make strategic decisions. Managers must constantly scan their environment for risks, correctly interpret the realities of the business landscape and build relationships with the stakeholders that matter most. These capabilities help companies succeed, regardless of the particulars.
Dynamic managerial capabilities
In a traditional resource-based view, a company is a bundle of resources that can be leveraged for competitive advantage. “However, this breaks down in high-velocity markets: ones in which market boundaries are blurred, successful business models are unclear, market players are ambiguous and shifting, overall industry structure is unclear,” Krause and Pullman write.
Cannabis is a prime example of a high-velocity market, as the years following legalization were characterized by what Krause and Pullman described as “nonstop rulemaking.” VAPs had to constantly reinvent themselves and shift their strategies.
In these uncertain landscapes, businesses can either try to predict the future or attempt to respond rapidly to change. Extensive prior research has found that comprehensive planning efforts tend to fail in unstable environments. Dynamic managerial capabilities guide decision-makers to adapt to their environment to survive, grow and maximize financial performance.
Krause and Pullman broke down dynamic managerial capabilities into three categories:
- Cognitive capital: managers’ mental models, beliefs and cognitive capabilities. The best managers thought constantly about risks and realities in the cannabis ecosystem.
- Human capital: skills and knowledge managers obtain through experience and education. In this study, the managers who performed best tended to have non-corporate business experience, and they prioritized innovation and flexibility.
- Social capital: relationship-derived goodwill used to acquire resources and access information. Top-performing managers understood they must build trust with all key stakeholders, including regulators and advocacy groups.
Over time, these capabilities converge. “As years of business experience accumulate, cognitive maps of business success and failures are formed, and business contacts are developed,” write Krause and Pullman.
A national leader for new cannabis markets
In this industry, regulatory compliance is high-stakes. Federal law still classifies cannabis as a Schedule 1 drug, meaning that it has no accepted medical application. Individuals are jailed for growing, possessing or transporting it interstate. A simple error in routing a supply truck can lead to federal prosecution. Because of this federal regulation, cannabis businesses were not eligible for the Paycheck Protection Program and other federal coronavirus relief measures.
Oregon is on the cutting edge of legalizing cannabis. Now, recreational cannabis is legal in 11 states, with medical marijuiana legal in 34. As cannabis is legalized more broadly, growers, VAPs and retailers will continue to have major obstacles to navigate with little precedent. But they also have potential to achieve transformative growth.
In documenting the triumphs and missteps of pioneering VAPs in Oregon, Krause and Pullman’s research can directly influence fledgling cannabis businesses and their ability to thrive. These case studies can also be applied to other high-velocity, highly regulated industries.
This study was co-authored by Daniel Krause and Madeleine Pullman, faculty members and researchers in Portland State’s Supply & Logistics Management Group.