Arauco Case Essay

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A. B. Freeman School of Business Tulane University GMBA 726: Global Supply Chains Professor: James W. McFarland Team 4 Julian Aude Frank Letellier Lucas Iglesias Jaime Salamanca Javier Silva Maria (Maricruz) Torres Team Case Assignment Arauco (A): Forward Integration or Horizontal Expansion? January 6-9, 2009 Introduction The case is set in March 2004, Alejandro Pérez, President and CEO of Arauco, a very successful Chilean forestry company, was about to present his recommendations to the Board of Directors as to whether or not the company should invest US$1 billion to construct a new state-of-the-art chemical pulp plant. This plant would increase Arauco´s capacity by approximately 850,000 tons to 3.2 million tons, placing the company as the largest producer of market pulp. The plan to build this plant was part of a project called “Nueva Aldea”, whose first phase was approved by the board in 2002. Pérez was concerned about the downward trend in market pulp prices over the last 3 years. He was confident, however, that the board would trust his judgment given Arauco’s tremendous success in recent ventures. So, Arauco, a world class organization, placed in a very good environment, Chile, both economically and socially, with low cost of capital, will have to decide what growth strategy should be best: a forward integration into paper manufacturing or horizontal growth? The global pulp and paper industry consisted of 5 main activities, in which Arauco was a main player in the first two: Decision Options There are 2 growth options for Arauco: • Operate an integrated structure that includes the ownership of forests, pulp mills, with paper manufacturing facilities (and maybe later distribution and converting capabilities). In this way, they can leverage its low cost advantage in pulp production and have greater negotiation

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