Arauco Case study - Research Paper Example

The overall contribution made by the new proposed pulp manufacturing facility will result into the expansion of the production capacity of the firm by more than 3 millions. This increase in capacity will therefore make the firm one of the leading manufacturers of pulp in the world in terms of overall production capacity. With an estimated investment of $1 Billion, the new project is estimated to produce sales of $350million per year. Since the overall estimated economic life of the plant would be 30 to 40 years therefore overall revenues will be equal to $14.

00 Billions over the period of 40 years thus contributing significantly to the value of the firm. Though no specific discount rate is given however, given the sales generating capacity of the proposed project suggest that it will add significant value to the firm and firm’s shareholders will gain value from the proposed investment. Any organization willing to make its strategic move therefore has to look into its core competencies and must examine its core strengths. In past firms have made forward integration moves however, such moves proved fatal because of the integrated nature of the process.

(Hitt, Ireland and Hoskisson). Suppressed demand for paper can seriously damage the profitability of the pulp business also because of the integrated nature of both the processes. It therefore becomes more critical to look into those aspects of the strategy where they can offer an insight into the ability of the firm to actually utilize its existing strengths in more effective manner rather than spending its energies on the development of new set of skills and competencies in order to compete in a market which has remained relatively untapped by the firm.

Firm’s decision to move away from Pulp only could also be the direct result of its decision to diversify the business in other segments. Though the firm has expanded into related businesses however, diversifying from pulp business can be mostly a result of capitalizing on firm’s core competencies in manufacturing pulp at relatively low cost. It is also important to understand that the pulp sales of the firm have increased over the period of time suggesting that due to high demand and better cost efficiency, firm is able to sell its pulp products at relatively premium prices in the market.

Such acceptability in the export markets therefore indicates that the firm has already established itself in international market in this segment of the business. Pulp is used for just 50% of the paper manufacturing therefore firm will have to acquire new set of skills and efficiency with which to use other remaining material and ingredients to produce better quality and low cost products. This would therefore invariably put the firm on a new learning curve thus slowing down its progress to become the market leader in the business.

Recommendations Firm derives its competitive advantage from its low cost production and market reputation in the international market. Since firm is already backward integrated with access to high quality wood to manufacture pulp and other allied products therefore it is recommended that the firm should take the decision of horizontal expansion rather than engaging into forward integration. The proposed move will increase the production capacity of the firm by large