“Arauco (A): Forward Integration or Horizontal Expansion?”
Arauco is an important Chilean forestry company formed in 1979. The company has three main product segments which are wood products, pulp products and forestry products. In 2004 the CEO was experiencing a decisional problem concerning whether it was better for shareholders to develop a horizontal structure already existing by building a new pulp plant, or to focus on a vertical integration and enter into the paper production. The approach to the issue will consist in the analysis of the strengths and weakness present in Arauco, second in the evaluation of the opportunities and threats involving both decisions, last in the recommendation of the best choice.
Arauco’s expansion plan started in the 1980s with the purchasing of plantation and building of several mills. The many product lines leaded to broad market coverage giving the company cost of differentiation advantage, due also to low cost production capabilities, and cross- selling benefits since all the products were from forestry. A good material management system called “log merchandizing” helped reducing cost and waste while the R&D done by Bioforest increase the quality of the plantations. All this helped the expansion of exportation in foreign markets like Asia. Arauco was the largest producer of softwood kraft pulp but it didn’t produce hardwood, in fact the company wanted the pulp production by planting eucalyptus trees.
By building the second phase of the Nueva Aldea plant, Arauco would enter in a new potential business since in Chile the harvesting of pulp logs take short time compared to northern hemisphere. All this would make Arauco the market largest producer of market pulp. On the other hand it would require a large resource commitment and the trend in market pulp prices is downward. It also has to be taken in consideration that the main buyers of pulp are paper companies and the mayor ones are fully integrated.
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