Arauco (A): Forward Integration or Horizontal Expansion Harvard Case Solution & Analysis

Celulosa Arauco is a major Chilean producer of market pulp and wood products. Possession of more than 1.2 million hectares of forest in Chile, Argentina and Uruguay, the main advantage is the ideal growing conditions of the forest, in which the companies are located. As of early 2004, Arauco is the third largest producer of market pulp (pulp sold on the open market) and is considering increasing its capacity, tying it with Brazilian competitor Aracruz world's largest producer. The first phase of the project was approved by the board of directors and includes a sawmill, plywood mill, and energy complex is estimated at $ 120 million. Now, Alejandro Perez, Arauco president and chief executive officer, seeking permission for the second phase of the project, which will include six companies in the market pulp mill's $ 1.2 billion. Peres problems of volatility of market prices over the past three years led the company to diversify into wood products, such as panels, fibreboard and other reconstituted wood products. These units are very successful, and now accounts for about 50% of Arauco's revenues. Peres debating whether the company and its shareholders would be better integrated in the front in the paper business instead of increasing the capacity of the company in the market pulp.
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by Ramon Casadesus-Masanell, Jorge Tarzijan, Jordan Mitchell Source: HBS Premier Case Collection 34 pages. Publication Date: February 15, 2005. Prod. #: 705474-PDF-ENG

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