Arauco(a): Forward Integration or Horizontal Expansion.

Summary: Arauco(A): Forward Integration or Horizontal Expansion.

Conclusion

There is an obvious need for transformation in this company to protect its debt holders, shareholders, and employees. Concentrating on products that will have a growing demand such as toilet paper, tissue paper, and magazine paper would aid in stabilizing the company’s earnings.

Having over 50% of revenues derive from pulp sales increases risk of instability. Attempting to first reduce costs and pay outstanding debts should be Celulosa-Arauco’s primary goals. Eventually there will be restrictions placed on these companies causing them to rely solely on their plantations. The slow inventory production and turnover could cause significant problems for Celulosa-Arauco. Celulosa-Arauco should seek to limit risks that they have incurred by operating in a better planned and more organized manner.

Arauco should consider greater positioning in China as it will be the world’s largest paper consumer. This is evident from the increase in educational spending but lack of functional computer software for students. The immense amount of Chinese characters creates great constraints on using non-paper educational tools. The fact that Chinese characters are not standardized across the different provinces should also add to a long-term consumption of paper. Cutting the current dividend and transforming the company into lean, efficient, well-managed segments with appropriate oversight is crucial at this point.

Here are possible transformations that Arauco could proceed with:

 Change the product / services portfolio

 Change operations

With a threat on Celulosa-Arauco’s core competence, pursuing a transformation on the first option could result in a transformation that is more drastic than Celulosa-Arauco can sustain. Second, Celulosa-Arauco can proceed by changing operations. One alternative to proceed with this transformation would be to migrate out of the political and legal