Hank Ketcham, CEO of West Fraser Timber Co. Ltd., said that lumber producers will have to further reduce capacity because of low product prices. He said that to determine the right operating strategy, “we’re looking at our operations daily.” West Fraser’s output has already been cut “by 13 percent during the long recession in the forest industry.” Because of the collapse in the housing market, the industry has gone through “extensive suffering”, and has worsened by the credit crisis “which could hurt customers and their ability to by products.” The benchmark price of lumber is now around $190, down more than 25 per cent. West Fraser third-quarter results showed that “sales rose 2.5 per cent to $848-million from $827-million a year earlier” and compared with a $40-million loss a year ago, “operating profit was $8-million.” But RBC Capital Markets Analyst Paul Quinn said that “although West Fraser’s results were good given the weak forestry market, investors should avoid the company’s stock because there is no expectation for an immediate improvement.” Mr. Ketcham said “the industry has to reduce the amount of wood it is producing because this is going to be a long downturn.”
The external threats faced by the forestry industry as a result of the downfall in the housing market and credit crisis also presents internal problems for the company such as decrease in product prices, decrease in sales thereby forcing a cutback in production, and lower stock prices with the advice that investors should avoid the company’s stock as “no immediate improvement is expected”. In this industry downturn, how can West Frazer maintain its competitive advantage? Even though sales rose by 2.5%, the “long downturn” is still expected. The company must recognize and take advantage of distinctive competencies if any, revisit its long-term objectives and come up with strategies to improve on their internal problems and reduce the effects of the economical threats posed to avoid falling into a bad financial position.
West Fraser has been able to recognize the threats that confront it and is trying to determine the right operating strategies as the CEO said. Strategies that can be considered at this time include related or unrelated diversification, and/or joint venture/partnering. By focusing on diversification strategy, the company can spread business risk across different products or industries that can yield high returns greater than what the company might be able to achieve alone, thereby creating synergy. The joint venture strategy can benefit the company partnering with another company to globalize its operations and decrease risks. This will help sustain the company’s competitive advantage when it is not able to do it alone. By globalizing operations, the company might be able to increase market share which will make up for the lost domestic sales.