Arauco (A): Forward Integration or Horizontal Expansion?

Submitted by: Hamza Ahmad 5055-FMS/MBA/S11

After analyzing the market dynamics it would be preferred to have company growth through horizontal expansion. To have a new pulp mill makes the company to become the largest producer of pulp. By becoming the market leader the company could manage the volume of pulp and consequently it would be able to dictate the pulp prices. The top management of company is facing the problem to make strategic decision to grow company by having vertical integration that is in to paper manufacturing or horizontally that is to expand the operations. Through horizontal expansion Arauco would have better negotiation power over the suppliers, such as the third-party forest owners, and it would further help to leverage its large volume production against downstream channels. This is the core business and that will ultimately help in enhancing the economies of scale. Arauco should not indulge in paper production because it generates its 85% of its revenues from foreign market. The vertical integration also creates the customer of Arauco to become its competitors that will weaken the relationship with customers. This activity is the new one for the company that will create risk and potentially larger investment. .