Arauco “forward Integration or Horizontal Expansion?”

Supply Chain Management – Case Analysis

Case: Arauco “Forward Integration or Horizontal Expansion?”

Carla Gaitán

Arauco is a company dedicated to produced pulp products, such as bleached and unbleached kraft pulp, they also make forestry products like pulpwood, saw logs, and wood products. They started buying high technology, more lands to make the forestry industry bigger and to get a good positioning in the market. They bought in Chile, Argentina and Uruguay, this make them own their production process. Arauco has such capacity that they could do the conversion of their raw material to produce other sub products. It is important to mention that with this high technology Arauco through sensors analyze each part of the trees they plant.  Arauco plant hardwood and softwood trees, such as eucalypt among other.They analyze these trees from the top to the roots to use it for producing different products such as electricity, wood for the pulp, and others. Arauco does not waste raw materials.

Arauco not only have been involve in the forestry industry but they figure that they were generating electricity and this could help them get more income by selling it to Chile. They create two electricity generators turbines in Chile and they became the only manufacturer to trade electricity, their revenues go up to $100 million by selling electricity.  Arauco has a competitive advantage among others and not only that but a good strategy. Their competitive advantage is high because they as a strategy started with an expansion that consists on an acquisition of lands and plantations on Chile and Argentina. They used all part of the tree to make different products and do not lose anything from it.

The Problem of Arauco

The major problems identified in the case is that from the last 3 years the prices on the paper market have been decreasing globally and they need to take a decision for the growth of the company. This decision has two parts taking the right decision on setting the same strategy that have been working for several years (Horizontal Expansion) or get into the paper market (Forward Integration) could cost them a lot more. Giving a preview of the company, as I already mention there are two focus strategies on this case; the Horizontal expansion and Forward integration.

Merging with other companies to have more control in your supply chain to get your final product is horizontal expansion. Forward Integration is to purchase and have control of the distributors on a different market to satisfy a demand.

Do you think it is a good idea for Arauco to build the Nueva Aldea Project?

The Nueva Aldea Project consist in two phases: the first phase is to build a sawmill, plywood mill and an energy complex. The second phase is to involve the construction of the pulp mill following the inauguration of the Valdivia plant. They have two options to take the decision they are horizontal expansion and forward integration.  I will explain both and I will conclude with my opinion.