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Arauco A Forward Integration or Horizontal Expansion

Solution Id Length Case Author Case Publisher
2645 1350 Words (7 Pages) Ramon Casadesus Masanell, Jorge Tarzijan, Jordan Mitchell Harvard Business School : 705474
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A significant manufacturer of market pulp and wood goods in Chile is Celulosa Arauco. The industry's major benefit is the optimal growing circumstances in which the firm's woods are located, with more than 1.2 million hectares of forests across Chile, Argentina, and Uruguay. Early in 2004, Arauco was the third in the world commercial pulp (pulp marketed on the free exchange) producer; it is now thinking about expanding its capacity to overtake Brazilian rival Aracruz as the top producer. The board of directors has authorized the development's first phase, which consists of a sawmill, a plywood factory, and an energy complex, for $120 million. 

Currently, Alejandro Perez, president, and chief executive officer of Arauco, is looking for clearance for the project's second phase, which will cost $1.2 billion and feature the firm's sixth commercial pulp facility. Perez's concerns about the general market price volatility over the preceding three years led the company to diversify into wood products such as panels, modest fibre-glass, and other restored wood items. Roughly 50% of Arauco's current income comes from these extremely profitable segments. Perez is contemplating whether expanding the company's market pulp capability would be more advantageous for the business and its investors than a forward integration into the paper company.

Following questions are answered in this case study solution:

  1. Should Arauco build the Nueva Aldea project? 

  2. What are the sources of Arauco’s competitive advantage? 

  3. Should Arauco own both forests and pulp production facilities? Does the Alto Parana project help you answer this question?

Case Study Questions Answers

1. Should Arauco build the Nueva Aldea project?

Nueva Aldea's project should be built by the corporation Arauco for various factors, including production, effectiveness, access to cheaper costs, and its global expansion. 

  • Arauco will be positioned in a specific area closer to the port facilities of San Vicente, Coronel, and Lirquén in order to find the most productive plants and where this positioning strategy will indeed favour the involvement of processed materials, an important point of assessment to publicize the progression and accessibility of a business of this scale.

  • This is one of the causes that endorse the development of the new plant. It also has a perfect connection to the main power grid, which would greatly cut the cost of transferring electricity. 

  • Furthermore, the strategic location would have advantages for cross-disciplinary work across several plants. Benefits from constant efficiency improvements, cross-information sharing, promoting learning, technological exchanges, and reduced bureaucracy, all of which improve the effectiveness and efficiency of manufacturing processes. 

  • Regarding the economics of scale, this new project will accomplish diversification of pulping activities by utilizing cutting-edge computational methods geared toward growing other industries. Likewise, with the aid of Aracruz, this innovative facility will permit Arauco to experience horizontal development, elevating Arauco to the position of the top producer in Latin America.

There are some more following justifies Arauco's decision to move forward with the Nueva Aldea project:

  • Growing markets in emerging nations: From 2001 to 2003, net exports accounted for the majority (about 85%) of Arauco's sales. Additionally, the use of paper products has increased in emerging nations in Eastern Europe, Asia, and Latin America. Constructing additional mills to boost production in order to meet the rising demand in emerging regions is therefore essential. 

  • Leverage additional economies of scale: By expanding the size of its facilities, Arauco will be able to take advantage of economies of scale to cut costs and increase efficiency. 

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