Aurora Cannabis INC. Final EXAM Study 022820 PDF

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Aurora Cannabis Strategic Planning Model

Mission, Vision, Values & Goals 1. Application of Abell’s Model 

Who is being satisfied? (customer groups) 1. Domestic (Canadian) and International customers who use medical marijuana. 2. Canadian adult usage market-pending legalization though not a focus at this time.

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What is being satisfied? (customer needs) 1. The need for high quality and easily accessible medical marijuana that is affordable.

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How are customer needs being satisfied? (distinctive competencies) 1. Same or next day delivery for local customers 2. Mobile application for convenient ordering and real time communication with customers (customer responsiveness) 3. Quality control i.e. Recalled Organigram product when there were quality control issues by diligently contacting all customers. Then ceased using Organigram. 4. March 9, 2017 introduced the cannabis industry’s most comprehensive quality control and product testing disclosure to provide customers with secure knowledge that its products are up to standards. 5. Facility expansion to meet customer demands. 6. Maintains good standing with all its licensing requirements- Critcal 7. Economies of scale to keep product costs down 8. Differentiates its product offerings 9. Strong distribution network 10. Compassionate discounts 11. Counselling and outreach for marijuana users 12. Horizontal integration- Involves or controls all steps in the value chain creation to keep costs down and organizes its resources and activities 13. Tangible resources. Heavily invested in fixed capital- e.g. production facilities and capital 14. Intangible resources- Brand name, reputation, and intellectual property such as licenses and customer relationships (from acquired companies) 15. Coordination or resources by putting them into productive use. 1

Through Abell’s model, we are able to identify Aurora’s commitment to its customers by enhancing their experience and providing them easy access to low cost products. This links to their corporate strategy and vision to build a leading, integrated global cannabis company through construction of highly efficient and purpose built facilities that allow the company to produce significant volumes of low-cost, high quality cannabis, an aggressive and strategically focused international expansion, strong brand differentiation, and industry leading board, management and product teams. Aurora expects this to deliver strong shareholder value and the company gains and retains significant market share of the domestic and international medical cannabis markets, as well as the Canadian adult usage market. (page 19) SWOT Analysis

SWOT Analysis Internal Analysis Strengths

Weaknesses Over-reliance on debt to finance operations and buying assets Diluted shares from issuing too many stocks and using convertible debt for raising capital

Proper licenses are available Has eight, wholly-owned subsidiary companies

Goodwill write downs from all the acquisitions with the risk the companies they bought were overvalued

It is a public company with active financial muscle that could afford reverse takeover in December 2014 Has diversified products- dried cannabis, cannabis oil products, and counseling services

Has not yet realized a profit

Owns on-site lab, equipped with analytical tools for research, testing, and development of product Has a subsidiary, Aurora Sky, that is located in the airport, reducing the transportation costs The company has mastered the art of acquiring companies in other industries and converting its main business to be the production of clinical cannabis Large distribution and reach

Pursuing both a low cost and differentiation strategy Holding company- risk to losing assets

Agricultural failure risks Transportation disruptions Facility exapansion delays

External Analysis Opportunities Threats However, the factors that the company can access The Organigram recall availed reputational risk for unsecured loans is an opportunity for growth at a the company lower risk The company can access drawdown equity of up to Over-reliance on licensing to do business 2

$5,000,000 Change of laws and regulations MMPR to ACMPR

A joint venture with AJR is an opportunity to access new markets Investment in Cann Group provides an opportunity for accessing the Australian market for clinical cannabis Joint venture with Radient for research provides the opportunity for more business using the proposed technology of extracting cannabinoids Investment in Hempco, which is a food production industry will assist in accessing its supply chain and distribution The fact that CanvasRX that offers counseling services has the potential of expanding the market for clinical medicine on behalf of Aurora

Risk of delay for any regulatory approvals of the products Risks associated with early stages of a business cycle Uncertainty of the sustainability of the business Risk of realization of the targets at the growth stage of cannabis Risk of poor management Dividend risk Volatility of prices and stock market

Macro Analysis Macroeconomic Forces

Global Forces Falling barriers to trade allow the domestic market to enter foreign markers and vise versa. indoor growing facilities affect the environment negatively with increased used of electricity outdoor growing facilities may dry up some streams changes in climate can affect outdoor growing fields (seasonal changes) studies show commercial production can create forest fragmentation & soil erosion no current land-use policies to limit its environmental footprint

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black-market can still exist as a substitute for cheaper strains inflation can drive up costs for production thus increasing consumer prices during economic downturns/recessions, discount prices may have to be introduced which may result in losses can provide billions in tax revenue for the economy Market risk for securities Global economy risk for raising for capital

Technological Forces genetic advances can optimize growth techniques testing products with patients in established laboratories to ensure safety

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Demographic Forces -

1.2% annual population growth rate which can result to more users in the future

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marketing in the digital age can be beneficial to companies, but also negative from advertisers who attempt to reflect that industry technology services such as seed to sale can be beneficial e-commerce possibilities exist for online ordering Social Forces

Political and Legal Forces government can deny companies cannabis growth locations may be heavily taxed in the next election, another political party can make marijuana illegal again if voted in, although there would be huge ramifications if done so may only allow marijuana to be distributed by government invested retail chain like LCBO if growing abroad, tariffs can affect costs can provides billions in tax revenue legalization concerns, another elected official in the next vote can overturn marijuana being legal, thus cutting sales laws placed for limited use of electricity bill C-45 has left to respective provinces & territories to determine how marijuana is sole and used. therefore, making it difficult for companies to sell/produce in different areas some provinces will opt for publicly owned shops, cutting retail revenue to companies landlords are allowed to restrict cannabis use of their properties in some provinces

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properly informed can promote use of medical/recreational use Canada being multicultural, it will be difficult as marijuana is against some religious beliefs depending on industries professionals work in, drug tests may be required therefore limiting use for those individuals huge health benefits such as chronic pain, & muscle spasms. stigma still associates with the elder population more the Opioid crisis has helped to contribute to a shift in patients finding alternative treatments for paid relief

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Porter’s 5 Forces: Threat of entrants (high) Industry is in the embryonic stage, therefore there are many companies currently not competing that have the potential to do so. Economies of scale- Not yet achieved by any of the current competitors therefore provides little advantage to current firms in the industry Brand loyalty- Not yet achieved by any competitors due to stage of industry. Absolute cost advantage- Not yet achieved by existing firms in industry Switching costs- Nonexistent therefore high threat. Government regulations- Falling barriers in regulations resulting in high risk of new entrants. Rivalry (moderate) Industry competitive structure- fragmented with relatively limited number of companies from small to large Demand conditions- Increasing demand moderates the competition because there are more customers to compete for. Cost conditions- High fixed costs therefore profitability is highly leveraged to sales volume. Exit barriers- High due to the capital investment required. Bargaining power of buyers (high) Black market prices are lower therefore buyers can bargain down prices and demand better quality and service There is not a limited number of buyers therefore low. There are no switching costs so buyers can pit companies against each other Threat of buyers entering the industry and producing the product. Could be argued either way that products are standardized and undifferentiated depending on how much of a connoisseur the buyer is. If standardized and undifferentiated buyer power is high. Bargaining power of suppliers (high) Product has no substitutes and is essential to the buyer (high) Supplier is dependent on this industry for sales (low) Switching costs to move to new supplier. Could be high if contracts exist. Threat of entering the customers’ industry (high). Acquiring suppliers prevents this threat but not all suppliers can be acquired. The product being offered by the suppliers are highly differentiated (high). 5

And when there is no close substitute available for the products being supplied by the suppliers (high). Substitute Products (low) Substitute products exist in the terms of alternative pain medication and therapy such as opioids. However, due to the addictive nature of opioids they are being prescribed less often and therefore do not have high impact on the price the company could charge. Strong complementors (internationally with E-Commerce)- E.g. marijuana tools (grinders, pipes. Papers etc.). This provides an increased opportunity to create value. Weak complementors- Do not exist. If they did this would slow industry growth and limit profitability. Industry life cycle: In embryonic stage or development stage. Grow is slow to due buyer’s unfamiliarity with the product and poor distribution channels. Prices are high due to the company’s inability to achieve economies of scale. Barriers to entry are based on access to technological expertise.

Competitive Advantage is achieved by: (Efficiency, Quality, Innovation & Customer Responsiveness) Aurora intends to achieve a competitive advantage with a generic low cost and differentiation strategy. Efficiency- Competitive advantage through a lower cost structure Quality- Superior quality to convince customers that Aurora’s products provide higher utility than a competitor Innovation- Product innovation of new strains that are superior to existing products or have THC and CHD profiles that customers can select specific to their unique needs. Customer responsiveness- Superior sales and delivery and real time customer response time. Value chain- Primary activities relate to design, creation, delivery, marketing support and after sales service and support activities: materials management, human resources, information systems and company infrastructure. Aurora controls all stages in the value chain, and such is able to turn this into a competitive advantage by focusing the four competitive building blocks in each stage; efficiency, quality, innovation and customer responsiveness. Avoid failure by focusing on building blocks of competitive analysis, institute continuous improvement and learning, track best industrial practice and use benchmarking, overcome inertia and the role of luck.  

management is both growth and efficiency-oriented- An example of Aurora Cannabis being growth-oriented is how the company acquires other cannabis companies Aurora is building a diversified and vertically integrated company to seize the opportunity to establish a deep footprint in the global cannabis markets 6

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first-mover advantages in global markets through several strategic acquisitions and investment opportunities The company is also extremely focused on being efficiency oriented. The company “expects that cannabis production costs will continue to decline and improve as efficiencies from automation, scale and yield expertise are realized across all Aurora facilities To offset further margin compression, Aurora continues to expand its product portfolio and explore new extract-based products which command higher margins.” When addressing Aurora’s short-term planning horizon, one must look at the company’s strategy. The company’s strategy is to acquire smaller cannabis companies specifying in building, cultivation & extraction, plant/medical science & product R&D, distribution, and consumer engagement & brands (see appendix V). This short-term planning horizon will assist in the company’s long-term planning horizon. Aurora Cannabis’ long-term planning horizon is to have low production cost and profitable revenue. The MD&A suggests that “with ultra-low production costs comes the ability to maintain strong, healthy gross margins in a value-added supply and demand environment. As many other producers become economically unviable, controlled costs will allow us to continue to have low cost inputs for current and future value-added products.”

Functional Level Strategies (directed at improving the effectiveness of operations): SUPERIOR EFFICIENCY Infrastructure- Provide companywide commitment to efficiency and cooperation among functions. Production: Aurora is working to achieve economies of scale through increased capacity and learning effects as it moves down the experience curve. Management should avoid becoming complacent about efficiency- based cost advantages derived from experience. Should implement flexible manufacturing systems. Flexible production technology to lower costs at all stages of production and improve quality and enable better customization of product offerings Marketing- Adopt aggressive marketing to ride down the experience curve and limit customer defection by increasing brand loyalty. Materials Management- Just in time inventory system to minimize inventory holding and maximize inventory turnover. Implement supply chain coordination. R&D- Design products for ease of manufacturing and seek process innovations. Information systems- Use information systems to automate processes and reduce the costs or coordination. Human resources- Institute training programs to build skills, implement self-managing team and pay for performance. TOTAL QUALITY MANAGEMENT (decreases costs, higher market share, can raise prices, create more jobs)

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Infrastructure- Provide leadership and commitment to quality (shown in vision statement). Find ways to measure quality (industry leader on this). Set goals and create incentives. Solicit input from employees. Encourage cooperation among functions. Production: Shorten production runs and trace defects back to the source. Marketing- Focus on the customers and provide customer feedback on quality. Materials Management-Rationalize suppliers. Help suppliers implement quality improvements and methodologies. Trace defects back to suppliers. R&D- Design products that are easy to manufacture. Information systems- Use information systems to monitor defect rates. Human resources- Institute quality improvements training programs. Identify training black belts. Organize employees into quality teams. INNOVATION (most important source of competitive advantage) Infrastructure- Manage the development function and facilitate cross-functional cooperation. Production- Cooperate with R&D on designing products that are easy to manufacture. Work with R& D to develop process innovations. Marketing- Provide market information to R&D. Work with R&D to develop new products/ Materials Management-No primary responsibility. R&D- Develop new products and processes. Cooperate with other functions, particularly marketing and manufacturing, in the development process. Information systems- Use information systems to coordinate cross-functional, cross-company product development. Human resources- Hire talented scientists and engineers. CUSTOMER RESPONSIVENESS Infrastructure- Through leadership by example, build a companywide commitment to responsiveness to customers. Production – Achieve customization through implementation of flexible manufacturing. Achieve rapid response through flexible manufacturing. Marketing- Know the customer. Communicate customer feedback to appropriate functions. Materials Management-. Develop logistics systems capable of responding quickly to unanticipated customer demands (JIT) R&D- Bring customers into the product development process. Information systems- Use Web-based information systems to increase responsiveness to customers (Aurora is doing this with their mobile app). Human resources- Develop training programs that get employees to think like customers. 8

Business Level Strategies (encompass business’s overall competitive theme): Lowering Costs- Gain a competitive advantage in the commodity markets. Undercut rivals on price. Gain market share. Maintain or increase profitability. Differentiation- Distinguish company from rivals by creating something that is hard to match. Achieved through superior reliability, functions and features, better design, branding, POS service, after sales service and support. A company can either increase the price or exploit the demand to increase profits and growth. Aurora is primarily pursuing a generic low-cost strategy with value innovation and differentiation as a secondary strategy. Market segmentation- Aurora is pursuing a standardization strategy which is associated with lower costs than a segmented strategy and attempts to attain economies of scale through high sales volumes. The market segment primarily served is medical marijuana users. Positioning strategy in market based on strategic group. Other companies in the strategic group are the highest rivals. Product Quality Distribution channels: Market segments served: Technological leadership: Customer Service: Pricing and advertising: Promotions offered: Compassionate discounts. Fragmented industry- small and medium sized companies. Lack of scale economies, brand loyalty is primarily local resulting in low entry barriers. Aurora is using value innovation to consolidate the fragmented industry by:  

offering lower cost through the creation of scale economies and; chaining- obtaining the advantage of cost leadership by establishing a network of linked merchandising outlets. All interconnected by information technology that functions as one large company. Aids in building a national brand.

Additionally, it could enter into franchising to finance the growth of the system, resulting in rapid expansion. Aurora- horizontal mergers by acquiring competitors. Aurora needs to be careful crossing the competitive chasm as the industry transitions from the embryonic market to the mass market aka growth stage. New strategies may be needed as the market develops because the customers in each segment have very different needs. 9