Journal of Business Research 66 (2013) 1728–1735

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Journal of Business Research

The emergence of world-class companies in Chile: Analysis of cases and

a framework to assess integration decisions☆
Jorge Tarziján
Pontificia Universidad Catolica de Chile, Casilla 76, Correo 17, Santiago, Chile

a r t i c l e i n f o a b s t r a c t

Article history: This study discusses important corporate strategy decisions made by some of the most prosperous companies
Accepted 8 January 2013 in Chile within an environment of deregulation and openness to international trade. The study uses a case
Available online 19 February 2013 analysis and develops a basic framework that facilitates the understanding of some of those decisions. The
findings contradict, in part, the view that liberalization might favor an entrepreneurial focus and might pro-
Keywords:
mote the emergence of intermediaries. The cases in this study show that, despite being in an environment of
Corporate strategy
Multi-business companies
deregulation and openness, these companies have become world-class through the integration of their busi-
Rapid growth ness activities.
© 2013 Published by Elsevier Inc.

1. Introduction
The Chilean economy over the last three decades has been a source
of continuous interest to scholars and practitioners (see, e.g., Bosworth,
Dornbush, & Laban, 1994; Walziang & Horn, 2008). In the past, Chile
followed significant protectionist policies. However, the Chilean econ-
omy is now very open, embraces free-trade reforms, and negotiates
multilateral and bilateral agreements (see, e.g., Cato Institute, 2009).
According to its macroeconomic indicators, the economy is prospering.
Despite of the success of its economic trends, much less has been said
about the specific strategies that successful Chilean companies use to
drive growth in a privately driven economic system.
The main objective of this study is to describe important corporate
strategy decisions made by some of the most prosperous Chilean com-
panies in an environment of deregulation and openness to international
trade. These decisions are associated with the integration of related ac-
tivities, given rise to multi-business companies. The world-class compa-
nies analyzed in this article (LAN, Falabella, and Arauco) have grown
phenomenally in the last decades and have some of the highest market
capitalizations in their industries worldwide. The study complements
the case analysis with the development of a basic framework that
facilitates the understanding of some of the conditions under which
a multi-business company is better able to allocate resources than a
single-business company. As such, this study adds to the knowledge
☆ The author thanks the seminar participants at the David Rockefeller Center for Latin
American Studies—Harvard University, the SMLA Conference held at Bogota—Colombia,
the School of Management—Universidad Adolfo Ibañez, Babson College, and the School
of Management—Universidad Catolica de Chile. I also thank comments from Ramon
Casadesus-Masanell, Fernando Suarez and Jon Martinez. I am also grateful to two anony-
mous reviewers and especially to the editor of this special issue for very helpful and in-
sightful comments.
E-mail address: jtarzija@uc.cl.
on strategic management by being one of the very few that analyzes
the behavior of some of the world-class Chilean companies that have
emerged alongside of economic liberalization.
According to the observations in this study, the integration of these
companies increased during the last few decades, and country and
company characteristics might explain this phenomenon. This finding
is interesting given that most of the literature argues that trade liber-
alization is an influence for disintegration. For example, in Grossman
and Helpman (2002), trade openness increases the incentives to out-
source by thickening the secondary market, which lowers the cost of
matching suppliers and producers. Alongside the same lines, Pascali
(2009) shows that vertical integration is less likely when asset speci-
ficity associates with trade openness.
This work also relates to the theory of diversification based on the ex-
cess capacity of productive factors (see, e.g., Penrose, 1959; Wernerfelt,
1984, 1995; Montgomery & Wernerfelt, 1988; Kor & Mahoney, 2004).
This theory argues that diversification can be an efficient choice if
failures exist in the market for resources. Therefore, this study looks
mainly at companies in terms of their resources. However, differently
from Montgomery and Wernerfelt (1988), this analysis does not con-
clude that large companies earn decreasing average rents when they
pursue related diversification. When interactions/complementarities
exist among business units of the same organization, the participation
in new business units might add to the profitability of the original
business unit.
The study chooses to focus on only a few companies, rather than
on a wider sample, in order to have a more comprehensive examina-
tion of top management teams' responses to changes in the business
environment. Relying on large samples of companies is not applicable
to the study of a small cluster of companies, which is the most com-
mon situation in Latin American countries (Anand, Brenes, Karnani, &
Rodriguez, 2006). Building a theory based on case studies is a research

0148-2963/$ – see front matter © 2013 Published by Elsevier Inc.

http://dx.doi.org/10.1016/j.jbusres.2013.01.005
 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735
strategy that involves using one or more cases to create theoretical
constructs, propositions, and/or midrange theory from case-based
empirical evidence (Eisenhardt, 1989; Eisenhardt & Graebner, 2007).
Consistent with Woodside (2010), this research involves direct obser-
vation within the environments of the case by asking case participants
for explanations and interpretations of data, and analyses of written
documents and natural sites.
This study also relates to the literature that analyzes the relation
between institutional context and company diversification. Econo-
mists have tended to view institutional contexts primarily in terms
of the extent to which the presence of specialized intermediaries
characterize the contexts (Spulber, 1996). Khanna and Palepu (2011)
argue that intermediaries are important for companies because they
might raise the willingness to pay (WTP) of consumers and lower com-
panies' costs, whereas Williamson (1985) suggests that the optimal
scope of a company is a function of ambient transaction costs and,
therefore, of the extent of specialized intermediation.
Khanna and Palepu (2000) argue that the gradual emergence of
intermediaries will characterize the Chilean economy. This study's
findings contradict this view in part. The companies analyzed in this
study show that, despite being in an environment of deregulation
and openness, they have become world-class through the integration
of their business activities. This integration has allowed the compa-
nies to better allocate and leverage their key resources. The first pos-
sible explanation for this finding is that integration is an example of
a suboptimal strategy arising from an inefficient market for corporate
control, whereas the second explanation is that the deregulation of
markets that are intrinsically small does not necessarily motivate the
development of relevant intermediaries for companies that need to be
large in order to compete internationally, encouraging company inte-
gration. The profitability of the companies analyzed here and the close
monitoring of them by many institutional and private investors tend
to argue against the first hypothesis.
The organization of this study is as follows. After this introduction,
the second section presents a basic framework to analyze the scope
decisions. In the third section, we introduce the case analysis and
apply the framework developed in the second section to the cases.
In this section we also present a summary of the chronology of trade
liberalization. Conclusions are presented in the fourth section of the
article.
2. Corporate strategy and optimization in the use of resources:
A simple framework
The strategic management agenda has discussed the relation
between resources and integration decisions for several decades
(see, e.g., Penrose, 1959; Wernerfelt, 1984, 1995; Montgomery &
Wernerfelt, 1988; Doving & Goodeman, 2008). Although the frame-
work for this analysis has roots in the earlier work done in strategic
management by authors such as the aforementioned, the analysis
presented in this article is different in that a company can either
use its resource in its own production or the company can sell the un-
used portion of the resource in the market. As a result, the company
optimizes a two-part function where one part relates to the value
the company gets from using the resource internally (e.g., to expand
current activities) and the other part relates to the value the company
obtains by selling the unused portion of the resource in the market.
Decisions about the uses of a resource are interdependent, because
greater internal use creates less availability to sell the resource in
the market, and vice-versa.
The concept of value function is the focus of this discussion.
Specifically, v(N) is defined as the value function to be maximized
where N shows the set of choices made by the company. The concept
of value function has been used to analyze different strategic manage-
ment decisions in which the issues of value creation and/or value ap-
propriation arise (Brandenburger & Stuart, 1996; Chatain & Zemsky,
1729
2007; Lippman & Rumelt, 2003). To illustrate the concept of value
function and the concept's relation with the choices of the businesses
undertaken by a company, let bi be business i, Ii be a resource (or vector
of resources) required to participate in that business, and Ii…m be a
vector of resources required to participate in businesses i to m. Thus,
our study defines the following: v(Ii, bi) equals the value of the com-
pany by participating in a single business bi; and v(Ii…m, bi,…bm)
equals the value of the company by participating in businesses bi to
bm (m ≠ i).The company might also choose to use only part of the re-
source I due to, for example, restrictions associated with the size of the
market. In this case, the value of a single-business company is:
   
S CS
v Ii ; bi þ v Ii ¼ value of the single‐business company ð1Þ
where IiS is the portion of the resource used by the company in busi-
ness i and v(IiCS) is the value obtained by selling the remainder of
the resource in the market. The resource can be sold to intermediaries
or to producers of other goods. The value of v(IiCS) is zero when the re-
source is exhausted by its use in business i or when the resource is not
exhausted but is no longer able to get any further value in the market.
On the other hand, the value of the multi-business company is:
   
M
v Ii…m ; bi ; …bm þ v Ii…m
CM
¼ value of the multi‐business company
ð2Þ
M
where Ii…m is the resource actually used in the multi-business case, and
CM
v(Ii…m) is the value obtained by selling the unused part of the resource
in the market. Eqs. (1) and (2) show that a multi-business company
outperforms a single-business company as long as:
       
M CM S CS
v Ii…m ; bi ; …bm þ v Ii…m > v Ii ; bi þ v Ii : ð3Þ
The assumption here is that the use of the resource is exhausted
when the company participates in multi-businesses. As such, a company
prefers to be a multi-business organization as long as the inequality (4)
is satisfied:
     
M S
v Ii…m ; bi ; …bm > v Ii ; bi þ v Ii
CS
ð4Þ
where business i corresponds to the single business that maximizes the
value of (v(IiS, bi) + v(IiCS)), and businesses i…m corresponds to the
M
combination of businesses that maximizes v(Ii…m , bi,…bm).
The fulfillment of expression (4) depends, among other variables,
on:
i. The degree of development of the market for intermediaries
(buyers) for that resource. A higher development of this market
increases the value of v(IiCS) and the likelihood of observing a
single-business type of company.
ii Economies of scope. Larger economies of scope increase the value
M
of v(Ii…m , bi,…,bm), favoring a multi-business type of organization.
iii Economies of scale. Larger economies of scale increase v(IiS, bi),
favoring specialization and the single-business organization.
3. Case analyses
This section reviews the cases of three Chilean companies that,
despite being in competitive sectors and in an environment of dereg-
ulation and openness to international trade, have become world-class
companies through the integration of their business activities. This
integration allows these companies to better allocate and leverage
their key resources and to take advantage of different types of syner-
gies, such as economies of scope. The analysis follows the suggestions
of Pettigrew (1988) and constrains the variation due to size differ-
ences among the companies by only selecting large companies in
1730 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735
which the process of interest is transparently observable. The compa-
nies that the study analyzes are LAN, Falabella, and Arauco. The primary
data are gathered through interviews with senior executives and board
members of the three companies. Besides interviews, the analysis also
uses websites, documents, and corporate presentations.
3.1. LAN
LAN Airlines uses a business model based on a mixture of passen-
gers and cargo. The cargo is transported either in the belly of the pas-
senger aircrafts or in specialized freighters. LAN, along with Korean
Air and Cathay Pacific Airways, tends to be the passenger airlines
with the largest percentage of revenues from cargo operations. In
2010, LAN's cargo revenues represented 29.2% of the company's
total annual revenues, but in the first two quarters of 2011 revenues
from cargo operations rose to approximately 31% of total revenues.
Figures from 2010 show that cargo revenues for Korean Air and Cathay
Airways were 33% and 29%, respectively. From these airlines, LAN is
the company with the largest percentage of the total cargo that is
transported in the belly of the passenger aircrafts (approximately 35%).
LAN's business model is fundamentally different from the model
used by the main passenger airlines. In 2010, cargo revenues were
13% of the total revenues of the worldwide airline industry. For
instance, the percentage of revenues from cargo for the three main
worldwide airlines, Delta Airlines, American Airlines, and United
Airlines, in terms of passenger-kilometers flown (WATS, 2010) was
less than 5%. The percentage of cargo revenues for the three main
European Airlines, Lufthansa, Air-France-KLM, and British Airways
(WATS, 2010), was 11%, 13%, and 8% respectively. Furthermore, the
two main worldwide cargo carriers were specialized cargo airlines:
FedEx and UPS. Therefore, the weight of the total cargo revenues to
the total revenues of the passenger airlines' might be substantially
lower than 13%.
LAN's results have been impressive. From 1993 to 2010, LAN's
revenues grew from $318 million to $4.52 billion, net profits surged
from zero to $420 million (Table 1) and its share price (adjusted for
dividends) increased more than 1500% between 1998 and 2010. The
Global 2000 leading companies (Forbes, 2011) ranks LAN as the
eighth airline in the world in terms of market capitalization and the
top airline in Latin America (Table 2).
LAN's history dates back to 1929, when the Chilean government
established LAN Chile S.A. as the country's first airline. In 1994 the
company was completely privatized and in 1997 LAN was listed on
the New York Stock Exchange, becoming the first Latin American air-
line to trade its ADRs on that financial market. As of March 2011, the
controlling shareholders (the Cueto family) held 34% of the company's
capital stock.
The company started operations as a dual passenger-cargo busi-
ness model in the mid 1990s. A few years later, LAN established affil-
iates to focus on passenger services in Peru, Ecuador, the Dominican
Republic, and Argentina. LAN also established cargo operations in
countries such as Argentina, Brazil, Ecuador, Mexico, and the US. In
2010, LAN had a 48.7% share of the market in international flights
from Santiago's airport (several international companies explain the
other 51.3%) and a 75% share of the Chilean domestic market (Junta
Aeronautica Civil, 2010).
Table 1
LAN: selected financial figures (in millions of dollars).
1993 1995 1997 1999 2001 2003 2005 2007 2009 2010
Operating 318 600 972 1237 1428 1639 2506 3525 3656 4520
revenues
Net profits 0 25 64 48 11 84 147 308 231 420
Source: LAN Airlines. Corporate update May, 2011. http://www.lan.com/files/about_us/
lanchile/actualizacion_coprorativa_mayo_2011.pdf.
Table 2
Top ten airlines in terms of market capitalization (closing prices as of March, 11, 2011).
Airline Country Market capitalization
(U$ billions)
Singapore Airlines Singapore 12.9
China Southern Airlines Comp China 10.4
Southwest Airlines Co USA 9.5
Cathay Pacific Hong Kong - China 9.5
Deutsche Lufthansa Germany 9.5
Delta Air Lines Inc. USA 9.4
China Easter Airlines Corp China 9.2
LAN Airlines Chile 8.9
All Nippon Japan 8.6
United-Continental USA 8.1
Source: Global 2000 leading companies (Forbes, 2011). http://www.forbes.com/
global2000/#p_1_s_acompanyRankOverall_Airline_All_All.
LAN's cargo and passenger businesses generally operate on the same
route network. LAN's international cargo operations are headquartered
in Miami, whose geographical location positions the city as the natural
gateway for Latin American imports and exports to and from the US.
Recently, LAN has continued expanding operations into other countries,
such as Colombia, where the airline bought Aires Airlines. Additionally,
in 2010, LAN signed an agreement to acquire and then to merge with
the Brazilian based TAM airlines.
Because most of LAN's aircrafts are used for dual (cargo and
passenger) purposes, the airline realizes economies of scale with the
consequent reduction in the break-even load factor (BELF) for a flight
to a certain city. As an example, in 2010, the average BELF for the
Santiago–Miami route was 68% if the aircraft flew only with passen-
gers but only 50% if cargo was added. An example of the ability to
serve more destinations by combining passenger and cargo opera-
tions is the Santiago–Madrid–Frankfurt route. If LAN only transports
passengers, the flight has to terminate at Madrid, because the Madrid–
Frankfurt leg is not profitable with passengers alone. However, due to
the importance of Frankfurt as a cargo destination, the flight to that
city becomes profitable, improving the profitability of the Santiago–
Madrid route as well. As the BELF decreases, more routes become
attractive.
Another consequence of the capacity to serve more destinations is
the higher WTP for both passenger and cargo that arises from being
able to offer greater flight frequency and more routes: many compa-
nies are willing to pay a premium to a carrier that can deliver its cargo
to several destinations, and passengers might be willing to pay more
if the same airline can satisfy their different transportation needs.
Besides a low correlation between the passenger and cargo de-
mands, a fundamental difference exists between the cargo and the pas-
senger businesses that make LAN's business model difficult to imitate:
while passenger activity is a two-way business, cargo is a one-way
activity. Because of this difference, LAN has to make a number of stra-
tegic commitments. As an example, the airline has major investments
in commercial and operational structures, such as warehouses and
freezers, in several countries to handle cargo operations. The airline
must also invest in freighters, both to transport cargo that cannot be
transported in passenger aircrafts, such as big animals or heavy equip-
ment, and to reinforce cargo operations in passenger seasons with
high demand. Furthermore, because of the flexibility needed to oper-
ate in cargo, LAN needs to be able to change service at short notice,
which requires treating pilots and other key employees differently.
Some special country-level characteristics exist that might justify
running a multi-business model. Some of these characteristics include
the small population, Chile is a country of 17 million inhabitants; the
penetration of regular fliers is much lower than in the US or Europe;
the high value of long-range planes; and the demand conditions for
goods. Chile has a supply of fruits, vegetables, livestock, and fish that
many other countries want to import, while the country does not man-
ufacture the electronics products that come from the US, Europe, or Asia.
 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735 1731

Going back to the framework presented in Section 2, in LAN's case I Table 4

associates with the aircraft, and bi and bj associate with the passenger Falabella: evolution of revenues and EBITDA (millions of dollars).

and cargo businesses respectively. The main factors in this case that
incentivize a multi-business organization are the following.
First, in a single-business scenario many routes might exist that
are not profitable due to the small size of the local market, the low
penetration of regular fliers, and Chile's geographical location. These
factors are especially detrimental for value creation in a scenario
where a customer's WTP depends, at least partially, on the route net-
work offered by the company. Thus, an organization will favor the
M
value of a multi-business structure (v(Ii…m , bi,…bm)) because of the
economies of scope and the positive interdependencies between the
cargo and passenger activities.
Second, the large size of the company relative to the size of the
local market affects the development of a market for intermediaries
that might buy the free space for cargo needs available in the passenger
aircrafts, which lowers the value of v(IiCS). LAN might face a hold-up
risk if the airline sells the available space to large independent cargo
companies, because very few of these might exist (e.g., because of the
size of the economy). And, potentially large buyers of free space might
be dis-incentivized to invest in commercial structures, facilities, and
the other items necessary to handle cargo operations if they perceived
a high risk of being held up by LAN once investments are made. On
the other hand, there may be inefficiencies if the airline trades its free
space with many small intermediaries because of coordination and
transaction costs. Although an argument can be made that contracts
can solve the problem of opportunistic behavior between trading part-
ners (Williamson, 1985), in LAN's case these contracts might be quite
incomplete, mainly because the airline might not know the amount of
free space available on each route until a few minutes before takeoff.
Third, information asymmetries and coordination costs exist that
M
increase the value of v(Ii…m , bi,…bm). LAN knows in real time the
demand for passengers and for cargo for each possible destination,
while third parties, specializing either in cargo or in passenger trans-
portation, do not know both demands. As the demands for cargo and
passengers are different and not perfectly correlated for distinct routes
and times of the day, LAN can perform a value-enhancing reallocation
of the aircraft space from cargo to passengers (and vice-versa).
3.2. Falabella
By the beginning of 2011, Falabella ranked 586 in Forbes' (2011)
list of the top 2000 Global companies, was the sixth leading depart-
ment store in the world, and was the department store with the largest
market capitalization worldwide (Table 3). Between 1998 and 2010,
Falabella's revenues and EBITDA increased by more than 11 and 20
times respectively (Table 4), and the market capitalization of the com-
pany increased from approximately US$1.6 billion in 1996 (when the
company went public) to more than US$22 billion at the beginning of
1998 2000 2002 2004 2006 2008 2009 2010
Revenues 851 1514 1921 3511 4706 6583 6950 9467
EBITDA 73 186 282 425 548 758 910 1505
Source: Company's financial statements.
2011. The company, headquartered in Santiago, Chile, operates more
than 210 stores in 4 countries. The success of Falabella is intriguing,
mainly because important international department stores (e.g., Muricy,
JC Penney), home improvement chains (e.g., Home Depot), and super-
market chains (e.g., Carrefour and Disco Ahold) entered the Chilean
market but then exited after a short time. Most of the explanations for
these exits are associated with the lower level of integration achieved
by foreign competitors, for example, with the financial and the shop-
ping mall businesses.
A striking feature of Falabella's business model is the continuous
expansion of its operations at the horizontal, vertical, and geographical
levels. According to the company profile in Forbes's ranking, Falabella's
activities comprise a network of department stores, home centers, su-
permarkets, shopping centers, and financial and insurance businesses
established in Chile, Argentina, Colombia, and Peru. Differently from
Falabella, the other companies listed in the same top-ten department
store category are more focused. For example, PPR designs, manufac-
tures and markets high-end luxury items; Kohl's operates family-
oriented department stores; and Macy's is a retail organization that
operates retail stores under two brands (Macy's and Bloomingdale's).
Falabella was founded in 1889 when Salvatore Falabella, an Italian
immigrant, opened the first large tailor shop in Chile. In 1958,
Falabella evolved into a department store and in 1980 introduced
its own credit card. In 1990 the company entered the shopping mall
business, and in 1997 the company started a travel agency and an
insurance brokerage. In 1998, Falabella Bank was created, while in
2001 the company purchased 100% of The Home Depot Chile; thus
confirming its entrance into the home improvement market. In 2002,
the company entered the supermarket industry. The internationaliza-
tion of the company began in 1993, when Falabella opened its first
department store in Argentina. In 1995, Falabella entered Peru and in
2006 started operations in Colombia.
A key driver of Falabella's business model is its credit business. The
integration of stores with financing began in the 1980s as a natural
response to the low level of banks' penetration. As a result, the offer
of funding attracted an important number of customers to the store,
enjoying a virtuous cycle between the extension of credit and the
sales of different product categories. The proprietary information
gathered by Falabella about the customers' financial and purchasing
behavior reinforced the benefits from the integration between the
retail and the credit businesses. The proprietary information is a

Table 3
Main department stores worldwide.

Ranking Company Country Ranking Company Market cap (billions of US$,

(market cap) March 11, 2011)

1 (336) PPR France 1 Falabella 22.1

2 (496) Kohl's US 2 TJX 19.7
3 (505) Macy's US 3 PPR 19.0
4 (541) Aeon Japan 4 Kohl's 15.9
5 (556) TJX US 5 Lotte shopping 11.0
6 (586) Lotte Shopping S. Korea 6 Macy's 10.0
7 (586) Falabella Chile 7 Puerto de Liverpool (Mex) 10.0
8 (725) Marks&Spencer U.K. 8 Nordstrom 9.7
9 (775) JC Penney US 9 Aeon 9.3
10 (779) Sears Holding US 10 Sears Holding 9.2

Note: The number in parenthesis in the first column shows the ranking considering the universe of world's companies (not only department stores).
Source: Global 2000 leading companies (Forbes, 2011). (http://www.forbes.com/global2000/#p_1_s_acompanyRankOverall_DepartmentStores_All_All).
1732 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735
valuable asset because the information facilitates risk assessment,
new allocations of funding, and the cross selling of different products
(e.g. credit with insurance and travel).
The entry into the shopping mall business is another key driver of
Falabella's success in the department store business because the entry
granted flexibility, independency, and speed to expansion decisions.
Dependency on third party shopping mall developers might be espe-
cially dangerous in a market structure where very few independent de-
velopers exist that have either the size or expansion plans consistent
with Falabella's growing demands. The situation is different in bigger
countries such as in the US where the high penetration of shopping
malls, the existence of many different independent operators, and the
variety of different anchor stores precludes the integration between de-
partment stores and shopping mall operators.
The Falabella's market share in the department store market in
Chile was 38.9% at the end of 2009, and the company's main compet-
itors were Paris, Ripley, and La Polar with market shares of 25.2%,
23.3%, and 12.7% respectively. In 2010, Falabella's market share in
shopping malls and credit cards was 31% and 26% respectively.
Regarding the framework presented in Section 2, a major feature
of Falabella's business model relates to the complementarities and
economies of scope among the different businesses, which incen-
M
tivizes a positive difference between v(Ii…m , bi,…bm) and v(IiS, bi).
Falabella's participation in the shopping mall business is a good
example of the importance of a country's characteristics for a
corporation's strategic management decisions. Because Falabella
needed shopping malls to expand operations to different cities and
very few independent shopping mall developers existed, the compa-
ny had two major options: either to participate directly in the owner-
ship of shopping malls or to wait for the entry decisions of the main
independent developers. Falabella's choice was to enter into the
shopping mall business by acquiring an important stake in one of
the two main shopping mall developers in the country. Since then,
the expansion of the department store business parallels the expan-
sion of the shopping mall business.
Linking the shopping mall to a large department store can be an
effective way to reduce the risk that real-estate developers face in
having to plan a shopping mall without an anchor store such as
Falabella. The fact that few important department stores exist in the
country due to the size of the country reinforces this point. Falabella's
ownership of home improvement and supermarket chains that are
also very attractive for shopping malls increases the hold-up risk for
independent shopping mall developers who, as a result, might not
have the incentives to invest in the number of quality shopping malls
desired by Falabella. On the other hand, Falabella faces the risk of
having to trade with one or very few possible large independent mall
developers. These developers might try to appropriate the quasi-rents
available in the relation.
Falabella's participation in the credit business is another good
example of the complementarities of the multi-business organization
in a country such as Chile. Falabella's offer of funding attracts many
customers to the store because that offer is unavailable for a vast per-
centage of the population because of the lower penetration of the
banking system. The company also enjoys a virtuous cycle between
the extension of credit and the sales of different product categories.
In Falabella's case, the bis associates with the different businesses in
which the company participates, and the I with the different resources
Table 5
Arauco: selected financial figures (in millions of dollars).
1993 1995 1997
Operating revenues 318 600 972
Net profits 0 25 64
Source: Company's financial statements.
the company uses to manage those businesses, such as knowledge and
proprietary customers' information.
3.3. Arauco
Owning over 1.2 million hectares of forests in Chile, Argentina,
Brazil, and Uruguay, Arauco is one of the world's two largest pro-
ducers of pulp sold in the open market (the other is the Brazilian
company Aracruz). The company is also an important producer of
other wood products such as panels, sawn timber, and remanufactured
products.
The growth of Arauco is impressive. In ten years, the company's
revenues and net profits have increased more than 3 and 14 times
respectively, and the share price of its holding company has returned
more than 1800% from 1994 to 2010. Arauco's shares are not traded
on the public market. The share that is traded is Copec that is the parent
company of Arauco. However, Arauco accounts for approximately 90%
of Copec's revenues and operational income. Arauco's performance
cannot be ascribed to either a general rise in the stock market over
the same time period or to the systematic risk of Arauco. The accumu-
lated return of Arauco's stock outperformed the accumulated return of
the main Chilean stock market indexes by almost ten times during
the same period of time, and the systematic risk of Arauco's shares is
similar to the risk of any of the main Chilean stock indexes (the excess
return, adjusted by systematic risk, is available from the author upon
request). Arauco's stock-price performance has also been extremely
good when compared with the performance of the stock price of other
important companies with strong participation in the pulp industry
such as Aracruz, Weyerhaeuser, International Paper, and MeadWestvaco
(information available from the author upon request). Table 5 summa-
rizes Arauco's financial information over time, and Table 6 shows that
Arauco is one of the main actors in the competitive global forest and
paper industry.
Arauco was formed through a merger between Industrias Arauco
and Celulosa Constitución in 1979. After starting as a forest and pulp
company, Arauco soon began its expansion plan in the 1980s. This
plan involved purchasing land and plantations, and installing new
technology. Throughout the 1990s, the company increased its pro-
duction capacity by constructing a second pulp mill and entering new
product lines. In 1990, Arauco started Bioforest, an R&D company that
is the most advance and specialized forestry research center in Chile
and whose main goal is to optimize the use of the tree. In 1993, Arauco
began producing sawn timber; in 1994, Arauco started operations to
produce energy through biomass coming from the company's forest;
and in 1995, Arauco started the production of plywood. In the 2000s,
Arauco aggressively increased its capacity by purchasing new pulp
mills and entering into the medium-density fiberboard and hardboard
markets through stakes in sawmills and panel plants.
The starting point in Arauco's vertical value chain is the forest.
A key aspect of Arauco's strategy is to take advantage of economies
of scale by using the tree to make multiple products—the top part
of the tree is used for pulp logs and the lower half is used for sawn
timber. The company is integrated into a process called log merchan-
dizing that involves the use of a computer-driven scanner that identifies
the log's diameter, the shape of the knots, and the optimal points for
the cuts. After a log is cut, it is automatically grouped and then sent
to one of three destinations: sawmills for timber and remanufactured
1999 2001 2003 2005 2007 2009 2010
1237 1428 1639 2374 3576 3113 3788
48 11 84 438 696 305 701
 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735 1733

Table 6
Arauco is a world-class forest products company (numbers in millions of U$).

Rank Company Net income 2010 Sales 2010 Rank Company Market cap (12-31-2010)

1 Kimberly Clark 1843 19,746 1 Kimberly Clark 25,707

2 Weyerhauser 1281 6552 2 Copec (1) 19,540
3 Stora Enso 1017 13,660 3 International Paper 11,916
4 Svenska Cellulose 774 15,186 4 CMPC 11,701
5 Arauco 701 3788 5 Svenska Cellulosa 11,067
6 International Paper 644 25,179 6 Weyerhaeuser 10,145
7 CMPC 638 4219 7 Stora Enso 8097
8 Fibria 344 3574 8 Fibria 7461
9 Kimberly Mexico 335 2075 9 Kimberly Mexico 6473
10 Temple-Inland 168 3799 10 Temple-Inland 2290

1. Copec is the parent company of Arauco.

Sources: Company's annual report, PricewaterhouseCoopers, and Bloomberg.

products, panel production, or to the chip plant for pulp production.
Mills are located close to the forest and to the log merchandizing pro-
cess to save on transportation and logistical costs.
Arauco partially owns the main ports used to transport its cargo
to international destinations. The company's management points out
that ports work as a strategic asset to hedge against unforeseen events
such as work stoppages and the threats of strikes because of the low
number of ports available in the country to export such large amounts
of goods (see Fig. 1 for a detailed value chain of the company).
The four international companies that are ahead of Arauco in
terms of net income (Table 6) tend to be integrated companies but
with a different set of business units. Kimberly Clark is a global health
and hygiene company focused on personal care, consumer tissue, and
other health care brands. Weyerhaeuser Timber is principally engaged
in growing and harvesting timber, manufacturing, distributing, and
selling forest products. Stora Enso's principal activity is the production
of paper, packaging, and wood products; and Svenska Cellulosa is
a global hygiene and paper company that develops and produces per-
sonal care products, tissue, packaging solutions, and forest products.
Consequently, most of these companies, as opposed to Arauco, have
a strong participation in the retail business. Another difference is
that they are not integrated into activities such as ports. Although
Chile has no important independent pulp producers, the situation
is different in other countries such as the US where independent pro-
ducers exist (Smith, Rice, & Ince, 2003).
In Arauco, I associates with the forest and the bis with pulp, panel,
sawn timber, remanufactured products, and energy. If a single and a
multi-business company use the forest equally both in terms of volume
and efficiency, then no advantage would exist for a multi-business or-
ganization from the point of view of the resource. However, because
using the forest entirely in a single business (e.g., pulp) is not optimal
(i.e. because of the opportunity cost of wood it is possible to capture
more value from the tree devoting it to different uses), the company
should either go to a multi-business scenario or sell the remainder of
the resource in the market.
Location specificity and the lack of potential buyers of forests of a
size big enough inhibit the development of a market of intermediaries
relevant for a company such as Arauco. Intermediaries might face
hold-up risks when installing their plants close to Arauco's forest holdings
that might decrease the value of v(IiCS) and incentivize a multi-business
operation. At the same time, Arauco might be dis-incentivized to invest
in good quality forests if the company perceives a high risk of being
held up by the few potential buyers, further raising the attractiveness of
a multi-business organization to avoid the expropriation of quasi-rents.
The relation between the development of a market for intermediaries
and the specificity of an asset is even closer when considering, ceteris
paribus, that a non-international tradable asset might be more specific
in a smaller economy where fewer potential counterparts for any given
transaction tend to exist. Economies of scope at the tree and the R&D
levels favor a multi-business organization.
The quality of institutions also matters for the development of a
market for intermediaries (North, 1990). For example, enforcement
costs—partially related to a rather poor application of the rule of
law (La Porta, Lopez-de-Silanes, Shleifer & Vishny, 1998)—explain
Arauco's participation in the port business.
3.4. A brief note on the chronology of trade liberalization
Concurrently with the growth of these world-class companies, Chile
has undergone an intense process of trade liberalization. During the
1974 to 1979 period, the country implemented a large liberalization
program that eliminated most of its nontariff barriers and reduced
tariff rates, which often surpassed 100% in 1974, to a uniform 10% ad
valorem tariff in 1979 (Dornbush & Edwards, 1994). Chile's commit-
ment to free trade persisted during the 1980s and 1990s as the agree-
ments signed mostly with neighboring countries during the second
half of the 1990s indicate. Between 1998 and 2002, Chile gradually
reduced its import tariff rate to 6% and signed a number of additional
trade agreements. On January 1, 2004, Chile and the US became free-
trade partners. Chile also signed free-trade pacts with the European

-Pulp
-Panels
Log -Saw Timber International
Wood Log Ports
Merchand -Remanufactured Shipping Distribution
Supply Transport
ising products

Energy

Research and Development

Fig. 1. From wood supply to international distribution. Note: Arauco outsources the log transportation and shipping activities. Other activities are integrated.
1734 J. Tarziján / Journal of Business Research 66 (2013) 1728–1735
Union in 2002, with China in 2005, with Australia in 2008, and with
Malaysia in 2010. As a consequence of these trade agreements, Chile
achieved an effective tariff rate of 2%, and the share of trade covered
by the trade agreements jumped from 25% at the end of 2002 to 83%
by the end of 2007 (Monfort, 2008).
3.5. Other common characteristics of the companies analyzed
Besides being some of the main Chilean companies, LAN, Falabella,
and Arauco share another characteristic: they are family controlled.
LAN is controlled by the Cueto family; Falabella by the Solari, Cúneo,
and Del Río families; and Arauco (through Copec) by the Angelini
family. The shares and bonds of these companies are traded on in the
stock exchange and pension funds and other institutional investors
are some of their important shareholders and bondholders.
Abundant literature exists that analyzes the behavior of family
owned companies. However, research about family business is in its
infancy and the diversity of theories and perspectives represented in
the literature does not give definitive results (Schulze & Gedajlovic,
2010). A usual conclusion of that literature is that family owned compa-
nies might behave differently from open capital companies (e.g. Johnson,
La Porta, Lopez-De-Silanes, & Shleifer, 2000; La Porta, Lopez-de-Silanes, &
Shleifer, 1999).
Johnson et al. (2000) use the concept of tunneling to refer to the
transfer of resources out of a company to its controlling shareholder.
Although this analysis can't rule out tunneling for the companies con-
sidered in this study, LAN, Falabella, and Arauco are continuously under
close examination from both private investors (including many institu-
tional investors) and regulators. Of interest is how the boost in the per-
formance of these three companies mainly associates with a period in
which the shares of these companies have been publicly traded.
4. Conclusions
Significant changes in the business environment of Chile have
inspired important transformations in local companies. Some of the
companies that previously operated in less competitive environments
have responded remarkably well and have adopted strategic actions
aimed at sharpening their ability to compete in the international
markets or to export their business models. One key strategic decision
relates to the continuous search for the optimal scope of the compa-
ny. Partly as a result of their changes in scope, many local companies
have become stronger competitors as business liberalization has ad-
vanced. This study presents the case of three important Chilean com-
panies that have become world-class players in their industries. In all
the cases, these companies have grown by adopting a multi-business
approach that tries to take advantage of country characteristics.
The study's findings in part contradict the view that liberalization
favors entrepreneurial focus and promotes the emergence of intermedi-
aries that dis-incentivizes multi-business organizations. LAN, Falabella,
and Arauco are examples of companies that, despite being in compet-
itive sectors and in an environment of deregulation and openness to
international trade, have succeeded through the integration of busi-
ness activities that allow the companies better allocations of their key
resources. The degree of success of these companies would have been
highly doubtful if they had not adopted multi-business approaches.
The lack of deep markets for intermediaries helps to explain their hor-
izontal and vertical integration decisions to create and capture as much
value as possible from the company's resources.
There are some country characteristics that have supported the
emergence of these world-class companies in Chile. Deregulation
and openness to international trade have prepared them to compete
without government subsidies and other types of external support.
The small population has also obliged the companies to go interna-
tional to seek different types of synergies and complementarities to
be successful. But the lack of a relevant market for intermediaries
for companies of such a large size has incentivized the companies to
develop the needed capabilities internally through integration. As
such, a number of factors exist that explain the integration decisions
of these companies whose mission is to create and capture as much
value as possible from their resources. These factors also partially ex-
plain why a massive emergence of this type of world-class companies
does not exist in other Latin American countries.
Even though in our case studies integration seems an adequate
strategy to become more competitive, this study does not conclude
that integration and multi-business operations are adequate corpo-
rate strategies for any company that wants to be global. Issues such
as the quality and quantity of resources, the development of the mar-
ket for intermediaries, the degree of information asymmetries, the
size of the market, the quality of institutions, and the economies of
scale and scope at the input and at the final product level are impor-
tant to assess the appropriateness of a multi-business organization.
There are some clear limitations to this article. First, we have used
the case study approach to discuss some conceptual managerial is-
sues. However, further research needs to be done to show whether
a wider selection of companies (hopefully from other Latin American
countries) confirms the main findings of this study. Secondly, the
context (economic, social, and environmental) might vary significantly
across companies, industries, and countries. As such, studies that per-
form more comparisons will provide deeper insight into the deter-
minants of entrepreneurial success and its relation to countrywide
effects. Our final thought is that, in terms of global expansion, numer-
ous possibilities for growth still exist that Chilean companies have yet
to seize. The companies analyzed in these articles show that the possi-
bility exists for Chilean companies to become world-class players in
competitive global industries but that to do so they need to have a
business model that overcomes potential restrictions.
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