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Forward Integration or Horizontal Expansion?

In early March 2004, Alejandro Perez, president and CEO of Chilean forestry company, Arauco, was about to present his recommendations to the board of directors as to whether the company should invest US$1 billion to construct a new state-of-the-art chemical pulp plant. The plant, part of a multiphase project called Nueva Aldea, would increase Arauco’s capacity by approximately 800,000 tons to 3. 2 million tons, placing the company as the largest producer of market pulp, just ahead of Aracruz in Brazil. Two years earlier, Arauco’s board approved the first phase of the Nueva Aldea project for US$150 million, which consisted of building a sawmill, plywood mill, and energy complex. The second phase involved constructing a pulp mill following the inauguration…