Main Case Study

Arauco (A): Forward Integration or Horizontal Expansion?

Ramon Casadesus-Masanell, Jorge Tarzijan, Jordan Mitchell

The Plant Comparison Chart in Exhibit 4 shows:

1. 		as plant capacity increases average total cost goes down
   		each plant has an optional capacity usage rate
   		there are economies of scale
   		all of the above

QUESTION 2

1. Exhibit 6 shows cost per metric ton of bleached softwood kraft pulp. Arauco has the lowest costs of

   		transportation, labor, and wood
   		labor, wood, and chemicals
   		of everything
   		only wood

QUESTION 3

1. Arauco

   		did not own any forests since trees are a commodity
   		owned all of the forests from which it got lumber
   		owned a substantial amount of forests but bought some lumber
   		owned a very small amount of forest

QUESTION 4

1. Why might Arauco want to own forests when they can buy lumber from the market?

   		to directly supervise the people working in the forests
   		to ensure they get enough lumber to reach efficient scale
   		to lower transportation costs
   		there is no good reason for them to own forests

QUESTION 5

1. Being in Chile, Arauco had an advantage over most pulp companies because

   		they're closer to customers
   		machinery is less expensive in Chile
   		pulp logs grow faster in Chile than in the northern hemisphere
   		none of the above

QUESTION 6

1. Exhibit 15 shows that December 02 International Paper had

   		revenue of $19.873 billion, operating income of $1.145 billion, and a net profit margin of 1.2%
   		revenue of $25.179 billion, operating income of $1.402 billion, and a net profit margin of 1.2%
   		revenue of $79 billion, operating income of $14 billion, and a net profit margin of 2%
   		revenue of $2.9 million, operating income of $402 thousand, and a net profit margin of 12%

QUESTION 7

1. Exhibit 15 shows that in Dec 2003,

   		Arauco's operating margin was about the same as International Paper's.
   		Arauco's operating margin was much lower than International Paper's.
   		Arauco's operating margin was almost six times higher than International Paper's.
   		Arauco's operating margin was about twice that of International Paper's.

QUESTION 8

1. Log merchandizing

   		was how Arauco displayed their products
   		was worth the $30 million investment because it benefited multiple lines of business
   		primarily helped the pulp business
   		was little help to Arauco given the expense

QUESTION 9

1. Arauco outsourced forest management, trucking, and ocean shipping

   True

   False

QUESTION 10

1. Arauco is considering integrating forward into paper manufacturing. This is probably a bad idea for because:

   		no major pulp manufacturer produced paper
   		they don't have the technology to intetgrate forward
   		another Chilean company, CMPC, is already the dominant player in Chile and Chile's market isn't large enough to support two companies.
   		all of the above are true