Arauco: Forward Integration or Horizontal Expansion?
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Published: Wed, 13 Sep 2017
The two growth options that Arauco face have an added advantage of the market share and the economies of scale. However, considering the market trend in terms of prices of pulp which are moving down, the most viable and most competitive move would be the horizontal expansion of its production of pulp. In the horizontal expansion, Arauco will have more production outlets for pulp and its related wood products.
There are various key points and competencies that Arauco presently has that will make it most appropriate and efficient to go forward with the horizontal expansion. Firstly, Arauco has enough primary resources for the production of its core product which is pulp. This is supported by the fact that by the year 2003 it had an extensive tree plantation of up to 1.2 million hectares of forestry (Ramon et al. 2). This provides the company with the required raw material for pulp manufacturing. As a result, Arauco is seen to have the ability to sustain its production through the adequate raw material. Secondly, the company is the only one in the market with the lowest production cost in the market. This is also supported by the idea that it does little outsourcing for its inventory, it also has a self-sustaining steam energy production that runs the company’s manufacturing process. This puts the company at a high-end cost competitive advantage (Vikram n.p). Therefore, the declining pulp prices are to their advantage since it will allow Arauco to gain control of the market through the price lowering.
Nevertheless, the company already has an established market share in the pulp production industry. Despite competitors such as Weyerheaser and Aracruz, the company already has developed a brand position in its pulp production (Ramon et al. 4). Therefore, its horizontal expansion is the recommended strategy. While presently, it may seem attractive for the company to enter a new product line of paper production since pulp prices fluctuate and their competitor companies are already firmly established. The company should still venture into horizontal expansion by investing US$1 billion to construct a new state-of-the-art chemical pulp plant. The plant would increase Aracuco’s capacity by approximately 800,000 tons to 3.2 million tons, placing company as the largest producer of market pulp. (Ramon et al. 4). This will ultimately lead to further lowering the prices to their advantage, because it will allow Arauco to gain the cost and prize competitive advantage over the likes of Weyerheaser and Aracruz (Vikram n.p). It will then allow them to become the market leader. The advantages of being a market leader are that by controlling the largest share of the market, the company will have the powers to lower the prices for their benefit and even increase them to their advantage. Arauco will achieve this through controlling the supply of pulp which will also control the demand (Vikram n.p); these are the two price determinants in the market.
If Arauco decides to forward integrate into paper making, it will achieve the model of resource sharing since its current operation provides all the necessary resources for paper manufacturing. This will only have one advantage which is the cost of production. However, their disadvantage is that they do not have any base in the market share for paper making (Vikram n.p). Furthermore, its current brand position on pulp may potentially lead to a controversial critique in its expansion to a new line of production. The cost of engaging in this venture, the initial cost, may be higher and yield little long-term returns with risk. Therefore, the recommended strategy is for Arauco to venture into is horizontal expansion given that it already has a solidly established market share.
- Ramon Casadeuss-Masanell, Jorge Tarzijan, and Jordan Mitchell. Arauco (A): Forward Integration or Horizontal Expansion. (1-34): Harvard Business School, 2009. Print.
- Vikram Dahiya, Business Development Manager at Vikilinks Softwares Pvt Ltd Follow. “Arauco ltd – forward integration or horizontal expansion.” LinkedIn SlideShare. N.p., 23 Jan. 2012. Web. 27 Mar. 2017.
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