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Horizontal Expansion Versus Vertical Integration

In: Business and Management

Submitted By sabinou
Words 1032
Pages 5
In reviewing the facts presented to me it is my opinion, along with those of my colleagues at WIF Consulting, that your recommendation to horizontally expand the production of market pulp is the better decision when weighing it against the prospect of forward integrating into paper production. After doing an initial calculation, the net present value of the Valdivia project is roughly $3.7 billion (see Exhibit A), which yields a gain of almost $2.6 billion. Below are the key points we’ve identified to support this figure.

Existing Competencies Within Arauco’s Contracted Workforce
Because Arauco already has over 10,000 employees aiding in forestry and transportation operations under roughly 300 subcontracts, along with a workforce of independent workers operating all of Arauco’s sawmills, it becomes clear that several relationships are already being managed in order to ensure efficiency and effectiveness. By adding another workforce entirely dedicated to the production of paper, Arauco is taking on even more workers that are performing a series of operations that Arauco is not familiar with. Because of this, enforcement costs will be incurred to simply oversee the workforce’s numbers. Additionally, upper management will either need to be trained in a whole new set of competencies, or new employees must be taken on to optimize production performance. Additionally, to take full advantage of the potential sharing activities, will require an unknown amount of resources to coordinate interactions between the various functions of the company. If phase two of the Nueva Aldea project were to go through, Arauco would increase its pulp capacity and avoid the risk of undertaking a process it is unfamiliar with.

Arauco’s Superior Forestry
33% of Chile’s radiata pines are produced in Arauco owned that are notorious for having especially fertile soils and favorable…...

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