Arauco has several sources of competitive advantage, including geographical advantages from Chile's optimal climate for growing trees faster than other regions. It also benefits from economies of scale as one of the largest pulp producers. While geographical advantages and scale are sustainable, government support and technological advantages may not be as they can be replicated by competitors. Arauco has pursued horizontal and backward integration but has not moved into forward integration into paper production, though it is considering this. It has diversified into new wood products to mitigate volatility in pulp prices and optimize tree use.

1. Arauco

2. Q1. What are the sources of competitive advantage for
Celulosa Arauco?
• Geographical Advantage
- Trees growing faster in Chile because of an optimal climate & good soil conditions
(e.g.) for Pulp logs, in Chile growing requirments = 16 to 18 years
in Northern hemisphere growing requirements = 18 to 45 years
• Economic of Scale ( Cost Advantage )
- Low cost production capabilities of pulp production
(e.g.) Less than $300/ton of softwood kraft
• Goverment Support
- Forestry development helping in negotiations & partnerships w/ nations for the rate exchange
(e.g.) European zone & USA
- Goverment policy for forest industry as one of the country growing measure
• Using the advanced technologies & techniques in production
process
- Increasing the efficiency of Arauco compare to its competitors
(e.g.) Log Merchandizing, Bioforest
① Competitive Advantage compared to global companies
② Competitive Advantage compared to local and global companies
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2

3. Q2. Is Arauco’s advantage sustainable?
• Geographical Advantage
- SUSTAINABLE
-> Natural resources (facing no issues as of now), difficult to get control over it
• Economic of Scale ( Cost Advantage )
- NOT SUSTAINABLE BUT BTE IS HIGH
-> High capital requirements, market is already dominated by 2 major companies
• Goverment Support
- NOT SUSTAINABLE BECAUSE THEIR SUPPORT COULD BE ABOLISHED
-> However, forest industry remain as significant for Chile, so support could be received
• Using the advanced technologies & techniques in
production process
- NOT SUSTAINABLE
-> Competitors are also trying to develop their technologies & techniques, so could
bypass Arauco on this level someday (or could be easily)

4. “5 Activities of Global Pulp & Paper Industry”
-> Forestry, Pulp production, paper & board production, and converting
• Arauco hasn’t done forward integration
- Still under consideration of investing in paper manufacturing
-> Going on fully integrated in the future?
They are backward integrated
= PURSUE “VERTICAL INTEGRATION” ??
• Arauco is for the moment following horizontal integration by
expanding their business through;
- New acquisitions (e.g.) acquired Alto Parana
- Increasing their forestry plantations
- Increasing their mills capacities (e.g.) building a new mill named Valdivia allowing an
increase capacity of 700,000 tons of pulps
Q3. How would you assess the degree of integration
within company?

5. • Arauco is getting involved in new businesses;
(1) Forests (e.g.) pulpwoods & sawlogs products
(2) Wood products (e.g.) fiber panels, lumbers, remanufactured woods & flitches
• Differenciation in new products because;
- By developing in new businesses, it allows Arauco to optimize the use of the tree as
following;
- Downward trend of the global “pulp alone” market over the last 3 years
- To minimize the impact of the volatility of pulp prices (High fluctuation of the pulp’s
price)
-> Overall stabilization of company/control of the market
Q4. Why has Arauco moved away from its traditional
“pulp alone” strategy?
Pulp log
Saw timber
Clearwood
(saw timber, plywood)

6. “YES”
- The company could reduce its transaction costs (operational effectiveness)
- Having a higher control over its global industry & becoming a bigger
decision-maker
- It could generate high profits in the near future as the paper demand is
increasing according with economic growth
“NO”
- Arauco is already involved in various projects for expansion (e.g.) pulp
mills, sawmill, panel & wood processing facilities building projects over
several years
Hence, it might require too many investments at the same time
Q5. Do you recommend Arauco to integrate to the
paper business?