WM 1 Stplace
WM 1 Stplace
WM 1 Stplace
Respectfully Submitted to: Dr. Jifu Wang By: Cliff Aseltine Danny McRea Tejal Modi Ajay Shukla Sean Sullivan S Se em miin na ar r iin nS St tr ra at te eg giic cM Ma an na ag ge em me en nt t
M Sp pr riin ng g2 20 00 06 6 Ma an na ag ge em me en nt t6 63 35 59 9-S Se ec ct tiio on n0 09 91 10 06 6-S
TABLE OF CONTENTS
1.0.0. Executive Summary4 2.0.0. Company History..4 2.1.0. Background.4 2.2.0. Purpose of this study.5 3.0.0. External Analysis.6 3.1.0. General Environmental Analysis..6 3.1.1. Demographic Segment..6 3.1.2. Economic Segment10 3.1.3. Political/Legal Segment12 3.1.4. Socio-Cultural Segment..14 3.1.5. Technological Segment15 3.1.6. Global Segment16 3.1.7. Summary of General Environment Analysis.17 3.2.0. Driving Forces.18 3.3.0. Industry Analysis20 3.3.1. Description of the Industry20 3.3.2. Industry Dominant Economic Features..23 3.3.3. Market Size24 3.3.4. Market Growth Rate.26 3.3.5. Industry Trends..28 3.4.0. Five Forces Competitive Analysis.31 3.4.1. Threat of New Entrants..31 3.4.2. Power of Suppliers.31 3.4.3. Power of Buyers....32 3.4.4. Power of Suppliers.32 3.4.5. Intensity of Rivalry.32 3.5.0. Summary of Industry Analysis33 3.6.0. Competitive Analysis33 3.6.1. Industry Competitors33 3.6.2. Rivals Anticipated Strategic Moves37 3.6.3. Summary of Competitive Analysis.39 3.7.0. Key Success Factors39 4.0.0. Internal Analysis41 4.1.0. Organizational Analysis..42 4.1.1. Corporate Mission..44 4.1.2. Products and Services.44 4.1.3. Leadership.48 4.1.4. Organizational Culture.49 4.1.5. Structure.50 4.1.6. Summary of Organizational Analysis53 2
4.2.0. Analysis of Firm Resources..54 4.2.1. Tangible Resources54 4.2.2. Intangible Resources55 4.2.3. Capabilities.57 4.2.4. Core Competencies and Sustainable Advantages.58 4.2.5. Summary of Firms Resources..58 4.3.0. Analysis of Objectives.59 4.3.1. Short-Term Objectives.60 4.3.2. Long-Term Objectives.61 4.3.3. Financial Objectives..62 4.4.0. Financial Analysis..63 4.4.1. Valuation Analysis..63 4.4.2. Growth Analysis..64 4.4.3. Profitability Analysis..65 4.4.4. Financial Strength Analysis66 4.4.5. Dividend Analysis67 4.4.6. Management Efficiency Analysis.68 4.4.7. Stock Price Analysis..69 4.4.8. Summary of Financial Analysis69 4.5.0. Strategic Analysis..71 4.5.1. Corporate-Level Strategy and International Strategy.71 4.5.2. Business-Level Strategy..73 4.5.3. Value Chain Analysis.74 4.5.4. Summary of Strategic Analysis75 4.6.0. SWOT Analysis Internal.75 4.6.1. Strengths75 4.6.2. Weaknesses..77 4.6.3. Opportunities78 4.6.4. Threats.79 5.0.0. Current Strategy and Alternatives..81 5.1.0. Current Strategy and Strategic Fit81 5.2.0. Alternatives..82 5.3.0. Recommendations83 5.3.1 Recommendation 1.83 5.3.2 Recommendation 2.94 6.0.0. References.103 7.0.0. Appendix I.107
which involved the consolidation of hundreds of local haulers. The companys acquisitions later grew to include; hazardous waste companies, chemical treatment firms, waste-to-energy incinerators and environmental engineering firms (Goliath).
Waste Management grew from annual revenues of $17 million dollars in 1971 to $9 billion dollars in 1998. The same year the company merged with Houston based USA Waste Services, in a deal valued at $25 billion. This merger followed a period in which Waste Management Inc was investigated for significant tax irregularities and accusations of fraud, forcing the resignation of the founder Dean Buntrock, and later his partner Phillip Rooney.
Today the Houston based company's operations include; 429 collection operations, 366 transfer stations, 289 active landfill disposal sites, 17 waste-to-energy plants, 138 recycling plants and 85 beneficial-use landfill gas projects. This impressive list of assets allows Waste Management to offer a wide range of services to 21 million customers, with annual revenue in excess of 13 billion dollars (2005 10K).
In order to isolate the driving forces of the industry a broad environmental study was conducted. The external environment was further explored through an investigation of five of Waste Managements biggest competitors. Several assessments were conducted including a full three-year ratio analysis, in order to isolate the key success factors, and identify what competitive advantage the firm had in todays market. This study is concluded with a review of the firms strategy and its strategic fit with the firm, as well as current alternatives available to the company. The final piece of the analysis includes recommendations offered as a result of the findings of the study.
market share. There are three key elements in the demographic segment significant to the industry. These elements include; population size, age structure, and ethnic mix. Population size Population growth and distribution can have a significant impact on the management of resources, as the number of people, as well as their lifestyle and consumption patterns directly affect the environment. It is also argued that there is a direct link between population growth and environmental degradation. Obviously, more people demand more resources and subsequently generate more waste. The largest challenge of a growing population is the strain that is placed on the environment. This situation becomes even more complicated when considering the variety of government policies, technologies, and consumption patterns worldwide. In order to develop a more relevant base of information the demographics presented in this study are limited to those of the United States. The proposed link between population growth and the environment is found in the view that population growth is solely responsible for all environmental ills; however, more people equates to faster development of new technologies used to overcome environmental problems (Human Populations). As populations grow, competition for fertile land and the use of limited resources increases. The people living in the poor countries are also moving toward highly developed countries for greater standard of living whose current consumption patterns and resource use are not necessarily sustainable.
The United States has one of the highest growth rates of any industrialized country in the world. The United States Census Bureau reports that the population is growing by approximately 3.2 million people each year. According to the Census Bureaus medium projections, the population is expected to grow to 400 million by the year 2050. Also, eight of the countrys fifty states have population growth rates in excess of 2.0 percent, which means that the population pf these states will double in less than 35 years (Human Populations). The United States also happens to be one of the most densely populated countries in the world, and the concern over potential landfills will continue to grow as the United States has converted more than 10 million acres of forest to suburban growth since 1990 (Geog). This certainly equates to an ever-increasing population, which will unquestionably yield a larger amount of waste requiring disposal. Age structure A slightly less relevant aspect of the demographic segment is the age structure of the population. Baby boomers (individuals born between 1946 and 1964) presently account for the majority of political, cultural, industrial and academic leadership positions in the United States. The fact that Baby Boomers are entering their fifties along with the increasing life expectancy of the population provides an interesting movement towards an increasingly older population. This may force the waste industry to seek creative ways to cater to a population that will become increasingly less mobile and potentially unable to make the trip down the driveway with those heavy trash containers (Wikipedia, boomer). Aside from this information, all age groups create waste that must be disposed of; therefore, additional detail regarding these groups was omitted due to irrelevancy.
Ethnic Mix Changes in ethnic mix are an interesting factor in the United States. Due to the fact that immigration accounts for a sizable part of growth, the population and labor force will continue to diversify, as one interesting projection released by the Department of Labor suggests that the Latino and Asian percentage of the population will increase to 34 percent by 2050. These Immigration trends, coupled with varied birth rates, will obviously bring more diversity to the American workforce. To further illustrate the impact of this change it is important to identify that in 1995, the United States was estimated to be 83 percent white, 13 percent black, 1 percent American Indian, Eskimo, and Aleut, and 4 percent Asian and Pacific Islander (US, Labor). As per these charts, the future racial and ethnic makeup of America will be considerably different than it was in the past. These trends show that whites will be a declining share of the future total population while the Hispanic share will grow faster than that of non-Hispanic blacks. By 2050, minorities are projected to rise from one in every four Americans to almost one in every two. Growth rates of both the Hispanic-origin and the Asian and Pacific Islander populations may exceed two percent per year until 2030. This is astonishing considering the fact that even at the peak of the baby-boom era, the total population never grew by two percent a year. By 2010, Hispanics are likely to become the largest minority group, as the
Hispanic population is projected to add more people to the United States every year than will all other groups combined. Hispanic and Asian populations tend to be more conservative in consumption patterns; therefore it is arguable that there is potential for decreased waste production with the shift in ethnic mix. Despite this possibility, the potential net change in the production of waste requiring disposal would be minimal. Also, as mentioned above this shift in the labor force can have an impact on the production of the economy.
10
to enter markets outside of the United Stated than outside countries do when entering the United States (CIA Fact book). Gas prices Despite the number of armed conflicts that the United States is engaged in, which many speculate is motivated by concerns over oil (despite terrorist attacks made against the country), the rise in GDP in 2004 and 2005 was helped along by substantial gains in labor productivity. The economy continues to suffer from a sharp increase in energy prices which many fear will lead to higher inflation; however, these increased prices yield significant tax revenue to the government as well as record breaking profits to oil companies. Although there are several global political issues that have motivated an increase in the price of oil, the United States has not constructed a new oil refinery for over thirty years to increase supply of gas (although it has increased capacity of existing refineries). The country has also recently suffered significant damage from a sever hurricane season, as Katrina caused extensive damage in the Gulf Coast region in 2005 including several of the countries largest refineries. Despite the enormous reconstruction costs and relief funds, the storms had a small impact on overall GDP growth for the year (RBZGroup). Interest rates Interest rates in the United States reached almost record lows in 2003 as the Federal Reserve worked carefully to bring the economy out of a mild recession. As the economy started recovering in 2004, the Fed began increasing interest rates and has not stopped doing so even as recent as now. The current Fed rate is 4.5%.
11
Government's role in the economy As previously mentioned, consumers and producers make most of the decisions that guide the economy; however, the governments efforts have a powerful effect on the economy as well. Listed below are four major areas where the governments decisions can be felt: 1. Stabilization and Growth. Through the use of fiscal and monetary policy, the federal government guides the overall pace of the economy. This is done in order to maintain steady growth, high levels of employment, and price stability. 2. Regulation and Control. The federal government also establishes agencies and offices, which provide establish control over certain activities that directly impact the safety of the nations citizens, such as environmental protection, food and drug administration, drug enforcement, etc. 3. Direct Services. These services include the military, infrastructure, transportation, etc. 4. Direct Assistance. Government also provides many kinds of help to businesses. It offers low-interest loans and technical assistance to small businesses. The economy of the United States is of significant importance to the waste industry, as an economic downturn will most certainly result in lower consumption among consumers. As, the government is responsible for regulation and control it can also have a significant impact on the requirements of the industry as the next segment explains.
12
market, but not so good for larger firms that have managed to gain a foothold over a potentially expansive piece of territory. The primary manner in which special interest groups and businesses attempt to shape the decisions of elected officials involves lobbying. The lobbying activities engaged in by environmental groups often results in influencing congress to pass environment friendly legislation. This in turn forces the waste management industry to navigate through new laws and regulations. One such piece of legislation is the Resource Conservation and Recovery Act (RCRA), which is the nation's primary law governing the disposal of solid and hazardous waste. The Act was passed in 1976 to address the problems the country faced with the growing volume of municipal and industrial waste. RCRA, which amended the Solid Waste Disposal Act of 1965, set several national goals including (EPA): Protecting human health and the environment from the potential hazards of waste disposal. Conserving energy and natural resources. Reducing the amount of waste generated. Ensuring that wastes are managed in an environmentally sound manner. Banning all open dumping of waste. Encouraging source reduction and recycling. Promoting the safe disposal of municipal waste. Mandating strict controls over the treatment, storage, and disposal of hazardous waste.
RCRA was later amended and enhanced by Congress in 1984 with the passing of the Federal Hazardous and Solid Waste Amendments (HSWA), which required the phasing out land disposal of hazardous waste. The RCRA was amended on two occasions following HSWA; Federal Facility Compliance Act of 1992, which strengthened enforcement of RCRA at Federal facilities;
13
Land Disposal Program Flexibility Act of 1996 provided regulatory flexibility for land disposal of certain wastes. As is evident from the information provided above, the political and legal segment provides a strictly regulated environment for the waste management industry in the United States. Most companies operate as good corporate citizens and follow government regulations; however, government regulations make it more expensive to mange waste, and more difficult to make a profit.
14
15
related respiratory ailments. "By instituting a number of innovative measures, Waste Management has worked to reduce the impact of its facilities and operations on the surrounding community", said Tara Hemmer, Market Area Engineer, Waste Management. "This NOx reduction technology has the potential to enable us to retrofit existing diesel equipment in a minimum amount of time, cost-effectively and with little or no disruption to our operations." (Clean Air) Industry's capacity for inventing new chemicals has overwhelmed the regulatory system's ability to study the potential harms caused to the environment, as the chemical industry introduces at least 1700 new chemicals into commerce each year. To illustrate how far regulators have fallen behind, the National Toxicology Program is only able to conduct assessments on 10 to 20 substances per year; this means that the regulators fall at least 90 years behind in knowledge with each year that passes. Technological development brings opportunities as well as threats to this industry. New technology can help reduce costs through improving operational efficiency, and improve the level the environment through more advanced waste disposal methods. Unfortunately, new chemicals are created faster than they can be tested, which forces an unwanted delay in the implementation of newer technology.
16
time. It is reported that the aggregate output growth rate has steadily increased an average of more than 3.6 percent annually in the last 25 years. Waste management firms have had success in bringing new disposal and collection systems to the global markets. The global market for waste remediation technologies was worth about $10.7 billion in 2005, and is expected to rise to $11.4 billion in 2006, according to a new technical market research report. According to this report, hazardous waste containment technologies have been highlighted as the largest segment of the global hazardous waste remediation market in 2005, with over 25 percent of the market, followed by separation 19 percent, chemical treatment 18 per cent, and recycling 15 percent. However, recycling is the fastest-growing market segment, with a projected growth rate of 19 percent by 2011 (Solid Waste). The waste management industry outside the United States is growing rapidly. This offers opportunities for companies within the United States, and dilutes the available talent pool. On the other hand, global margins are lower than domestic commercial margins and companies are also slower to pay. These factors make safer for large companies to expand into new global markets, than small companies, where cash flow is a more imminent issue.
17
little relevance to our analysis. The population growth projections support an increasing demand for waste management worldwide and hence an expanding market size for waste management companies. Economically, speaking, the waste management industry table is not subject to wild swings with great depths of downside. The global recession does not affect this industry much due to the fact that waste is produced regardless of economic activities. As rapidly growing economies in Asia, Latin America, and Eastern Europe expand they provide more industrial and consumer waste. Our political and legal analysis presents a mixed outlook, as the domestic and international markets face increasing regulations. Socio-culturally speaking, the growing antipathy towards big waste companies within certain sections of the society, increasing environmental activism, and the perceived shift in consumers attitudes provides challenges for firms in the industry. Technologically speaking, there is a strong demand for electronic recycling, as millions of cell phones are discarded annually, and new environmental regulations force waste management firms to pursue innovative next generation technology. From a global perspective, there appears to be strong potential for new recycling programs in the domestic and international markets.
18
gasoline is a vital fluid that powers the economy. The United States alone consumes approximately 18.9 million barrels of oil a day, and since the beginning of 2005, retail gasoline prices have continued to increase, with the average price of regular gasoline rising from $1.78 per gallon on January 3, 2005 to as high as $3.07 per gallon on September 5, 2005. This was motivated by a damaging hurricane season along the United States Gulf Coast, growing tensions in the Middle East, Africa, and Venezuela, increase demand from the massive population of China, all further tightening gasoline supplies. Due to heavy reliance on waste hauling vehicles, the increasing fuel cost has become a burden to the waste management industry. Companies managing their fuel cost will do better in the long run, as economists forecast even higher costs in the future. Recycling a Growing Trend There is an ever-increasing trend for the collection of any and all types of materials for recycling. This process allows industries to often use waste as a means of energy, or alternative raw materials. In addition, the process preserves and protects the environment. More and more people are realizing that recycling is one way to minimize waste, and at the same time recycling can save energy and other precious resources. Recycling also saves money for communities across America. For example, the experience of Madison, Wisconsin (population 201,000), illustrates the economic benefits curbside recycling can provide to midsized cities. In 8 years, the city more than tripled its diversion of residential solid waste while also decreasing the net annual cost of solid waste services from $158 per household to $139 (EPA).
19
Demand for recycling is growing at a rapid rate, and firms that are able to increase capacity will be able to expand their business in an industry where growth is mostly obtained through acquisition.
20
The waste management industry includes the process of collecting, treating, and disposing of solid and hazardous waste, as well as the operation of landfills and incinerators. Firms within the industry also provide recycling and waste remediation services. There are essentially two forms of waste to be managed; Municipal Hazardous Waste (MHW) and Municipal Solid Waste. Municipal Hazardous waste contains toxic substances that threaten human health or the environment, and is subject to strict regulations. Whereas, non-hazardous waste, or municipal solid waste, commonly referred to as "garbage" involves less scrutiny. There are many niche waste management areas in which companies compete, such as the collection and recycling of electronic products, which has become a growing trend. Municipal Hazardous Waste (MHW) This segment includes the management of industrial hazardous waste, such as; medical waste, and nuclear waste. Industrial hazardous waste represents the largest component of this segment. The relative emphasis of the United States environmental policy regarding the regulation of hazardous waste, and remediation has clearly stimulated the creation of the worlds most technically competitive garbage persons. To date, little of this capacity has been exported as market demand has not been nearly as high as in other countries.
21
Considerable interest in United States remediation technology has recently emerged from numerous countries including Japan and Germany. These two nations in particular, have tended not to remediate contaminated property with as much vigor as the United States. Therefore, the United States has considerable potential to leverage its expertise in site remediation, hazardous waste management, and possibly nuclear waste management in the more advanced markets. Municipal Solid Waste (MSW) Municipal Solid wastes are more commonly referred to by laypersons as trash or garbage. These items consists of everyday waste such as; product packaging, grass clippings, furniture, clothing, bottles, food scraps, newspapers, appliances, paint, and batteries. In 2003, residents, businesses, and institutions of the United States produced more than 236 million tons of MSW, which is approximately 4.5 pounds of waste per person per day (EPA). Solid waste management firms in the United States have had much success in bringing state of the art disposal and collection systems to global solid waste markets, largely due to keen awareness that has developed in the privatized domestic market. Several MSW management practices, such as source reduction, recycling, and composting, reduce the ever growing heap
22
at the dump. Source reduction involves altering the design, manufacture, or use of products and materials to reduce the amount and toxicity of what gets thrown away. Recycling reintroduces items, such as paper, glass, plastic, and metals, from the monster pile, as these materials are sorted, collected, and processed and then manufactured, sold, and bought as new products. Recycling helps reduce greenhouse gas emissions that scientists believe affect the global climate. It is estimated that in 1996, recycling of solid waste in the United States prevented the release of 33 million tons of carbon into the air, this is roughly the amount emitted annually by 25 million cars.
23
Environmental regulation and other policies related to technology: Overall, current regulations and policies discourage the development and deployment of new technology based services that can strengthen the economy and benefit the industry. International waste management markets: U.S. companies face difficulties in a growing world market in which the nature of demand is significantly different than in the home market. In addition to that, regulatory and economic policies also vary.
24
Revenues In 2000 the solid waste industry generated an estimated total revenue, net of intra-industry payments, in the neighborhood of $43.3 billion. Approximately 76 percent of this amount was generated by the private sector. Excluding the segment of the industry that is primarily engaged in the operation of scrap metal yards and recycling operations, total industry revenue was equal to $39.8 billion. Relative Size of the Industry The solid waste industry directly accounted for roughly one-half of one percent of the nation's gross domestic product (GDP). However, the industry's industrial output and employment were larger than the individual economics of several states, including North Dakota, Vermont, and Wyoming (erefdn). Economic Impact The solid waste industry contributed over $96 billion, 948,000 jobs, and just over one percent of U.S. GDP to the nation's economy. This included all direct, indirect and induced effects resulting from solid waste industry activities. For every dollar of revenues generated by the industry, a total of $1.23 in additional revenue was generated in the economy through the multiplier effect. Similarly, for every job in the solid waste industry, the multiplier effect created an additional 1.58 jobs outside the industry (erefdn). Tax Impact The solid waste industry contributed a total of $14.1 billion in direct, indirect, and induced taxes to federal, state, and local governments. Employment and Compensation Total industry compensation, including benefits, was estimated at $10.0 billion. Based on these figures, employees in the solid waste industry were paid an average of $27,200 per year, including benefits.
25
Waste Quantities An estimated 544 million tons of solid waste were processed in the U.S. Approximately 370 million (68 percent) tons were land filled, 29 million tons (5 percent) were incinerated, and 146 million tons (27 percent) were recycled. EquipmentThe solid waste industry used approximately 206,000 pieces of motorized equipment in the U.S. This included approximately 148,000 vehicles dedicated to the collection and transfer of solid waste. The remainder of the vehicles included other mobile equipment, stationary and mobile compaction equipment, and other processing equipment (yahoo).
26
The Hazardous waste management segment continues its steady fall, from $5.7 billion in 1998, to $5.3 billion in 1999, $5.1 billion in 2000, and $4.9 billion in 2001. The total industry revenue attributed to hazardous waste management in 2001 is $12.8 billion or 6% of the $213.1 billion total environmental industry revenue.
Hazardous Waste Dollars (in billions) 5.8
The solid waste management industry continues its steady if not unremarkable growth, while recycling suffered in the slumping 2001 economy following strong growth in 2000. The solid waste management business is relatively resistant to fluctuations in the economy
5.6 5.4 5.2 5 4.8 4.6 4.4 1998
1999
2000
2001
and continues to grow steadily as a function of population and GDP growth. By contrast, the recent slump in the U.S. economy has had a strong effect on the resource recovery industry. Resource recovery is struggling through tough times caused by leveling off of community recycling rates and the fluctuations in commodity prices in response to a wide range of economic variables including virgin material costs, energy prices, and international economic conditions. The global market for hazardous waste remediation technologies was worth about $10.7-billion in 2005, and is expected to rise to $11.4-billion in 2006 and $16.6-billion by 2011, according to a new technical market research report (solid waste). The report, "The Global Market for Hazardous Waste Remediation (RE-152)" was released on March 21, 2006 by U.S.-based BCC Research. Hazardous waste containment technologies have been highlighted as the largest
27
segment of the global hazardous waste remediation market in 2005, with over 25 per cent of the market, followed by separation (19 per cent), chemical treatment (18 per cent), and recycling (15 per cent). However, recycling is the fastest-growing market segment, with a projected growth rate of 19 per cent by 2011
28
The 1998 Unites States Industry and Trade Outlook report published by McGraw-Hill/DRI in cooperation with the U.S. Department of Commerce/International Trade Administration notes that perhaps more than any other segment of the environmental industry; the solid waste business is driven by economic and social forces more than regulatory pressures. 2) Industry is evolving away from an orientation of pollution control to one of pollution prevention and waste minimization. Historically, environmental compliance efforts have focused primarily on treatment of waste once it has been released. This end-of-pipe approach looked at compliance as being a cost, with little emphasis focused on the opportunity for material and energy efficiency. Pollution prevention and on-site recovery systems can often not only lower energy and material usage but also reduce treatment costs and lower liability and insurance costs. Many companies are increasingly examining their raw material usage, waste management practices, manufacturing processes and products produced in a continuous effort to reduce environmental costs. Pollution prevention efforts by generators in certain industry sectors have led to a decline in the amount of as generated waste requiring third party management. This has contributed to industry consolidation and the emergence of niche players who provide specialized products and services to specific industry sectors (ene). A major study conducted for the United States Congress made the following points on pollution prevention (wws): Compared to conventional treatment alone, pollution prevention and recycling investments are usually more cost-effective, often resulting in reduced energy and
29
material usage and lower end-of pipe treatment costs. Pollution prevention can produce significant environmental benefits as well, including reduced cross-media transfers and reduces environmental impact from avoided energy and materials usage. While increased reliance on pollution prevention and recycling offers a means to reduce the conflict between environmental protection and industrial competitiveness, it does not eliminate it. While much pollution prevention and recycling options yield net positive rates of return equaling non-environmental investments, many others do not and often cost money. 3) Generators of waste are increasingly looking to outsource any environmental service that is not consistent with their core competencies. There are two main drivers: Global competitive pressures create a focus on cost-effectiveness. Outsourcing employs service specialists that reduce the cost of environmental compliance and improve overall profitability (ene). 4) The waste management supplier industry will continue to experience increasing consolidation As the waste management industry matures there is less demand for third party waste management due to prevention efforts. The industry will likely continue to be structured with a few very large companies and many smaller players addressing specific niches. Medium sized companies will be targets for acquisitions.
30
31
In affect, most firms must accept whatever price its fuel suppliers offer, regardless of how it affects its business.
32
markets. So while Waste Management currently enjoys market leadership in its industry, there are many competitors that are continuously looking to make inroads into its customer base through whatever means are necessary.
33
recent financial results for comparison. Allied Waste Industries Allied Waste Industries, Inc. operates as a non-hazardous solid waste management company in the United States. The company provides waste collection, transfer, recycling, and disposal services for residential, commercial, and industrial customers in the United States and Puerto Rico. Its collection operations include collecting and transporting non-hazardous waste from the point of generation to the site of disposal. The companys recycling collection services include curbside collection of recyclable materials for residential customers, as well as commercial and industrial collection of recyclable materials, including paper, glass, and plastics and reusable construction debris. Allied Waste also provides roll-off and customized consulting services. As of December 31, 2005, the company operated a network of 310 collection companies, 166 transfer stations, 169 landfills, and 57 recycling facilities. Allied Waste Industries was founded in 1987 and is headquartered in Scottsdale, Arizona (Biz.Yahoo).
$716.60 M
3.55%
$5.73 B
$141.8 M
5.90%
Republic Services Inc. Republic Services, Inc. engages in the collection, recycling, transfer, and disposal of nonhazardous solid waste for commercial, industrial, municipal, and residential customers in the United States. Its residential collection operations involve the curbside collection of refuse from small containers into collection vehicles for transport to transfer stations or directly to landfills. The company rents waste containers to construction sites, as well as provides waste collection services to industrial and construction facilities on a contractual basis. It also provides recycling
34
services, including the curbside collection of residential recyclable waste, and the provision of a variety of recycling services to commercial and industrial customers. As of December 31, 2005, the company owned and operated 92 transfer stations, 59 solid waste landfills, and 32 recycling facilities, as well as operated approximately 6,100 collection vehicles. Republic Services was incorporated in 1996 and is headquartered in Fort Lauderdale, Florida (Biz.Yahoo).
Stericycle, Inc. Stericycle, Inc., together with its subsidiaries, provides medical waste management services, infection control, and pharmaceutical returns and related compliance services. Its products and services offerings include medical waste management services; bio systems sharps management services that reduce the risk of needle sticks in hospitals; products for infection control; and pharmaceutical returns and product recall management services. As of December 31, 2005, Stericycle operated 45 treatment and 105 additional transfer and collection facilities in the United States, Puerto Rico, Canada, Mexico, and the United Kingdom. In addition, the company offers occupational safety and health administration and HIPPA consulting and regulatory compliance services. Stericycles customers include medical waste generators, such as outpatient clinics, medical and dental offices, and long-term and sub acute care facilities, as well as hospitals, blood banks, and pharmaceutical manufacturers. The company was incorporated in 1989 and is based in Lake Forest, Illinois (Biz.Yahoo).
35
Waste Connections, Inc. Waste Connections, Inc., an integrated solid waste services company, provides solid waste collection, transfer, disposal, and recycling services to the commercial, industrial, and residential customers in secondary markets in the western and southern United States. As of December 31, 2005, it served approximately 1 million commercial, industrial, and residential customers in 23 states. The company owned or operated a network of 114 solid waste collection operations, 36 transfer stations, 26 recycling operations, and 33 active landfills, as of the above date. Its transfer stations receive, compact, and load solid waste onto larger vehicles to be transported to landfills. The company offers municipal, commercial, industrial, and residential customers recycling services for various recyclable materials, including cardboard, office paper, plastic containers, glass bottles, and ferrous and aluminum metals. Waste Connections was founded in 1997 and is based in Folsom, California (Biz.Yahoo).
Clean Harbors, Inc. Clean Harbors, Inc. (CHI), through its subsidiaries, provides environmental and hazardous waste management services in the United States, Puerto Rico, Mexico, and Canada. It operates in two segments, Technical Services and Site Services. The Technical Services segment collects, transports, treats, and disposes hazardous and non-hazardous wastes; and offers physical treatment, resource recovery, fuels blending, incineration, landfill disposal, wastewater treatment, lab chemical disposal, and explosives management services. Its CleanPack services include the collection, identification, packaging, transportation, and disposal of laboratory chemicals and household hazardous wastes. The Site Services segment provide confined space
36
entry for tank cleaning, site decontamination, remediation projects, demolition, spill cleanup, railcar cleaning, product recovery and transfer, scarifying and media-blasting, and vacuum services, as well as used oil and oil products recycling, and polychlorinated biphenyls management and disposal services. Its industrial services include management of hazardous, non-hazardous, and wet and dry materials; chemical cleaning, hydro blasting, liquid/dry vacuuming, sodium bicarbonate blasting, boiler cleanouts, and steam cleaning ; and video inspection, dewatering, and onsite material processing. CHI markets its services through its internal sales organizations and through a network of service centers. It serves utility, chemical, petroleum, pharmaceutical, transportation, and industrial firms, as well as educational institutions, other environmental service companies, health care providers, and government agencies. As of December 31, 2005, CHI operated 48 hazardous waste management properties, including 5 incineration, 9 landfills, 7 wastewater treatment plants, and 20 transportation, storage, and disposal facilities, as well as 7 PCB management facilities. The company was founded by Alan S. McKim in 1980 and is based in Braintree, Massachusetts (Biz.Yahoo).
37
specialized services or servicing local markets exclusively. The key to the larger companies is to have efficiency of scale for their operations. The current trends amongst the rival companies currently are improving their vertical integration along the value chain. The majority of waste management companies, either own the collection process, or the disposable process, rarely do companies posses both, as does Waste Management. This vertical integration is a key component to sustaining competitive advantage, and increasing its customer base while at the same eliminating additional cost that would exist otherwise. A few of the smaller competitors, Waste Connections for example, chooses to shy away from competitive areas. Instead they chose to focus on suburban or rural areas where they can create their own competitive advantage by exclusive arrangements with each municipality they are involved with. This model may work for some companies, but will limit its long term growth potential, since the majority of these markets are extremely small in size. Improved Customer Service is the final area where the industry is seeing a trend amongst its rivals. Normally customer service in the waste management industry involves answering complaints or handling bill collection. However Stericycle has recently introduced a new service to its operation, similar to that of a consulting service. Part of their collection process will involve consultants to monitor and suggest improvements and best practices to its customers to either inform them of new technologies and regulations that may exist, or offer alternatives that the customers may not already be aware of when it come to disposal and recycling.
38
39
Many firms have made significant strides in this area through the implementation of new systems which result in savings in fleet routing costs and capital savings due to fleet reduction. Other systems include pricing tools that allow firms to increase monthly revenues through revenue management systems, and fleet maintenance management system. All of these systems work to maximize profitability by maximizing revenues and minimizing expenses. The implementation of these management systems is evidence that firms place a significant emphasis on decreasing costs in response to the driving forces in the industry. As stated earlier, not complying with governmental regulations is no longer an option for waste management companies. Companies that fail to comply will leave themselves vulnerable to stiff penalties that could result in financial hardship and loss of reputation. If companies are to prosper in the current environment, they must find a way to comply with current and evolving regulations in a manner that does not damage profitability. The trend of increasingly stringent regulations is expected to continue into the future. As this occurs, companies must be able to off-set the additional compliance costs that will be incurred through increased revenues and cost savings in other areas of the business. Most firms make a significant effort to comply with governmental regulations, and in areas such as safety, they remain even more resolved. Continuous efforts to reduce costs will place firms in a good position to meet new regulations in the future in a cost effective manner. The future success of waste management firms will be largely reliant on their ability to manage costs associated with the fuel on which their trucking fleet relies. Their collection of waste materials for all of the disposal and recycling operations is dependant on this fleet. In order for
40
firms to operate, they must have the fuel on which they so heavily rely. Minimizing the effects of fluctuating fuel costs to the firms bottom line will be a key success factor in the future. Meeting Recycling Demand In recent years, the public has put increasing pressure on federal, state, and local governments to enact regulations and restrictions that mitigate the adverse effects of environmental pollution. Firms in the industry are vulnerable to trends such as this due to the large number of landfills that they operate. These landfills provide a potential source of environmental pollution. One of the trends in the current environment is the increased use of recycling as an environmentally friendly alternative to standard waster disposal. In the current recycling industry, demand far exceeds supply for recycling services. This represents a significant opportunity for firms as there are prospects for rapid growth in this market segment due to an increasing environmental awareness in the general public. Increasing investment in recycling capacity will be a key success factor in the future. In addition to presenting a provocative business opportunity, further investment into recycling activities would reduce firms reliance on landfills and the inherent vulnerabilities that are introduce in the way of environmental pollution. Firms will be in a good position if they act quickly to increase recycling operations in the future.
41
complex process that takes a critical look at every level of the organization from its guiding principals, mission and vision statements to its capabilities, all the way through the firms current and long-term objectives and core competencies. This section systematically studies the firms leadership, organizational structure, resources, financial health, and the strategies the organization employs to differentiate it self from competitors. Based on all this information, a SWOT analysis is conducted. The SWOT analysis combines the external and internal analysis information and maps the companys activities with the internal and external environment. Strengths and Weakness of SWOT are derived from the internal analysis, and the internal challenges that the company is prepared for are categorized as Strengths. On the other hand, a challenge the company is not yet ready for will fall in the category of potential Weakness. Similarly from the external analysis section we will define the challenges posed to company from any external sources. Any of the challenges that company is prepared for will fall in the category of Opportunities and the ones the company is not prepared for will fall in the category of Threats.
42
Geographic operating groups are Eastern, Midwest, Southern, Western and Canadian groups. These groups are designed and defined by the area of North America where WMI has a presence. In terms of functional division the two groups are Recycling and Weehabrator groups. As the Key success factors in the industry analysis identified, recycling is likely to be a dominant force in the future. RECYCLY America group, a subsidiary of WMI, manages the recycling facility as an independent group and coordinates efforts with each geographical location. Recycle America, also a subsidiary of WMI, is the largest collector of recyclable materials from businesses and households in North America with more than 3000 employees. It operates 160 material recovery facilities that process more than five million tons of recyclable commodities each year. From the Wheelabrator group comes the responsibility of the use of municipal solid waste for fuel in the generation of electrical power. The Wheelabrator group manages the technology for waste to fuel and provide support and expertise to organization. This group is currently responsible for 17 plants that convert solid waste into energy.
In terms of collection services, Waste Management operates the sixth largest trucking fleet in North America. Solid waste collection services are performed for municipal, commercial, industrial, and residential customers across North America. For commercial and industrial collection services, the company operates one to three year service agreements. Collection fees are a function of many factors including collection frequency, type and volume or weight of the waste collected and labor costs. Residential collection is done in coordination with local franchising or thru local municipalities.
43
44
businesses with efficient, dependable, and responsive waste disposal service that supports helps bottom line of all types of organizations. For Industry Waste Management's Landfill & Industrial Services (LIS) Group has the knowledge, resources and expertise to help the industry manage its waste streams. The group has both cost-effective and environmentally responsible ways to collect and dispose solid waste. WMIs clients include factories, refineries, and chemical plants with various hazardous and toxic wastes. For National Accounts The WMI National Accounts Sales and Service team provides comprehensive waste and recycling services for national and regional multi location companies requiring services as simple as solid waste removal and as complex as hazardous waste disposal. WMI has developed this National Accounts staff to services customers in various industries. For Homes With more than 25 million satisfied residential customers, WMI is a leader in providing curbside collection and recycling services to homes all across the United States, Canada and Puerto Rico. Most of staff in curbside operations and its support customer services is trained to manage their jobs very effectively and efficiently. For the Public Sector Many clients of WMI include cities, towns, villages, parishes, counties, and solid waste management districts. From dependable collection to permanent landfill disposal, WMI
45
For Disposal Waste disposal challenges of businesses, manufacturers, and municipalities are unique and growing as technologies and regulations continue to change. With the industry's largest network of Subtitle C and Subtitle D disposal facilities, WMI has acquired capabilities of disposing any kind of waste - municipal, industrial or hazardous - in a way that is permanent, environmentally responsible, and economical. For Waste-to-Energy WMI has pioneered in creating alternative energy solutions. Through the network of waste-to-energy facilities developed first by its subsidiary, Wheelabrator division, and breakthrough landfill gas-to-energy projects, WMI is creating a sustainable energy system. These technologies are processing 110 million tons of municipal solid waste into energy, saving more than 160 million barrels of oil while generating nearly 60 billion kilowatt hours of electricity.
For Safe Needle Disposal WMIs partnership with Sharps Compliance, Inc. provides individuals, companies, and institutions with a way of disposing of used hypodermic needles, lancets, test strips and other small quantities of medical waste safely and economically. Fluorescent lamps Disposal Fluorescent lamps contain mercury, which is a regulated waste at the Federal and State levels of government. When lamps are broken during handling and storage, they
46
release mercury and may put the companys employees as well as the company itself at risk. When even a single green-tipped low mercury lamp is broken, the resulting level of mercury in the air may exceed occupational-exposure limits. The Lamptracker recycling program available to WMI customers is safe and cost-effective. Self-sealing containers are provided to reduce the risk of mercury exposure for employees and carriers during collection, storage, and shipment, thus reducing customers liability. National Accounts Waste Management's National Account Sales and Service team provides streamlined waste services for national and regional multi-location companies, with customers in industries that vary from retail to petrochemical. As a provider of comprehensive waste management services, WMI has generated methods and means to provide multi-location accounts with service that are claimed to be easy to use and unified.
While customers' needs range from conventional containers to complex industrial wastestream management, WMIs National Account team provides a single point-of-contact, dedicated account and experienced with customers industry needs. WMIs professional team has access to the resources and local specialists within North America's largest integrated network of hauling, recycling, and disposal sites, all of which operate with the industry's only national service standard. With special services such as full-time In-Plant Services to manage environmental audits and reporting and Third Party Management agreements, Waste Management National Sales and Service can provide the special level of service that builds long-term relationships.
47
Third Party Management Waste Management can handle most national service contracts within their own system due to a large network of hauling, recycling and disposal operations in North America. When clients have a location or a specific service need that cannot be accommodated within the Waste Management systems, it can contract and manage relationships with third party suppliers to fill in the gap seamlessly. Streamlined billing and reporting offers the same single point-of-contact to manage all waste needs, and makes these operations simple to use for its wide range of customers.
4.1.3. Leadership
Waste managements key leadership team consists of a diverse group by business professionals from a variety of backgrounds. The company believes in strong leadership and dedication to its vision and mission. In its 2004 annual report, WMIs CEO Mr. Steiner mentioned his belief and dedication to putting right people to right place (www.wm.com). Management leadership sets the tone for rest of the company, and provides the framework for the company culture. WMI leadership is working hard to promote an open channel of communication and a culture of innovation at every level. The company has selected top leaders in the key policy forming position and has very good communication system to communicate its policies, values, and ideas throughout the company. The open communication in the company helps promote idea development and fuels innovation within the company. WMI has taken initiative to promote independent thinking within the culture. It has created a think tank of the top 200 leaders to come up with a framework and management structure to facilitate better decision making and open new avenues of communication. The management team travels to various customers, employees, operations,
48
and line-mangers in order to continue the flow of communication and generate newer, better ideas. The management team also creates small teams to tackle the ideas generated in the process. Recommendations from all teams are evaluated and if selected, implemented. This practice is incorporated into the culture by various orientations and promotional events in the company. The new programs are instituted for employees whose ideas are selected and implemented.
49
purchasers, as each site was independently responsible for finding its own suppliers and negotiating individual prices for goods and services. As a result, the company was conducting business with more than 500,000 suppliers. WMI has sense incorporates a one-company, collaborative approach to procurement. The company has invested nearly $5 billion in goods and services, which translates into a buyers advantage. WMI leverages this position to pick and choose its suppliers and implement uniform standards for procurement throughout the company. This translates into significant savings and cost control for the company. "We pick our suppliers on purpose," as WMI executives like to say (www.wm.com). Responsibility of the Procurement organization is to ensure that company gets its supplies regularly and consistently. The overall organization culture is to provide services in the most economical and customer specific manner. Innovation and alliance are essential parts of the underlying work ethic principles.
4.1.5. Structure
Structure of the firm is constructed through three internal structures, namely Infrastructure, Social Structure, and Superstructure. Infrastructure is defined by the organizations framework. This can be investigated by studying the companys organizational chart and chain of command. This structure defines how the company has been set up by its leaders and how the values and culture of the company is designed and communicated to everyone in the company. Looking at the organizational chart, we can easily see that WMI wants to strengthen its geographical diversity while maintaining a centralized management style.
50
In addition, the organizational chart of operations sheds light on the importance of operations management with WMIs overall strategy. As WMI aligns its operations with new strategies, it is important to cover all bases of operational management such as; site monitoring, safety, fleet operations, compliance, and environment management.
51
The two organizational charts above show that chain of command and strength of operation are the key factors in managements point of view. However, WMI is also committed to its geographical operations and consider this a core strategy as well. The social structure of the company is how its human interactions are devised and implemented. WMI stresses its human resources as a valuable ingredient of the company, hence management has an open interaction between the teams and across the various groups. Formal communication structures are lowered to allow free interactions and the generation of new ideas as well as innovation and communication.
52
The third and most important part of the overall structure of firm is its culture or value guiding system. The culture within WMI is driven by its upper management which guides the whole company through its mission statement. Customer centric culture has taken over the every aspect of daily operations and functioning is driven towards total customer satisfaction. Organization structure is still emerging after the restructuring efforts which have occurred for the last 5 years. Currently the structure of the company consists of centralized governance as the company wants to keep uniformity in service and dose not want to dilute its service quality by too much decentralization. In fact, the organizational structure is gravitating towards meeting financial strategies. As the waste management industry attempts to swap assets in order to achieve alignment and yield mutually complimentary balance, WMI is also moving its operations based on its assets and strengths.
53
54
Organizational: MODERATELY STRONG The firms organizational structure is flexible in order to meet future challenges. Most of the business units are focused on the day-to-day business efficiencies; however, planning, procurement, billing, and reporting have been streamlined allowing the organizations outside contacts to be a single point. With asset swapping, as well as buying and selling assets, the company has modified the organization to achieve better organizational fit. Physical: MODERATELY STRONG The physical resources of the company include landfill sites, operating trucks, recycling facilities, incinerators, and waste to gas facilities. With 432 vehicles now converted from diesel fuel to clean-burning natural gas, the company operates one of the nation's largest fleets of heavyduty trucks powered exclusively by natural gas. Through its waste-to-energy plants, WMI uses solid municipal waste to generate power. This reduces the volume of the waste by 90 percent and saves space in local landfills while providing an economical alternative to the use of fossil and nuclear fuels. WMI has improved its physical resources that complement its operations. Technological: MODERATE Technological resources include waste to energy resources, Information Technology, and a clean burning fuel fleet of trucks. These represent a good source for the business operations and provide WMI with a competitive edge. However the competition knocking at the backdoor as they are catching up to these technologies.
55
type of resource develops over time and is deeply embedded in an organizations history and culture. Because of its uniqueness, intangible assets are relied upon more so than tangible assets as the groundwork for core competencies. Human resources, innovation resources, and reputation resources are the three types of intangible resources. Human Resources: STRONG Waste Management Inc. has a very well trained and motivated workforce that work in tandem with its assets and business plan. The employees are also well compensated by industry standards. Innovation Resources: MODERATELY STRONG WMI has innovative ways of managing its operations and solving problems. In last few years it has implemented solutions to almost all aspects of business. From IT solutions, procurement, and business plans the company aligns collection and disposal operations. These innovative resources are the companys core strength. Reputation Resources: MODERATE WMI is associated with an industry that is continuously monitored and criticized by environmental organizations. As such, any mistake the company makes becomes a negative media exposure risk. However, WMI is actively working with all of its stakeholders to promote a healthy and environmentally friendly image. The company has initiated partnerships with big media events to promote its image and reputation. WMI has a reputation of getting things done in innovative ways.
56
4.2.3. Capabilities
WMI has very strong capabilities of achieving its corporate goals and successes with its business operations. The firms physical assets and intangible assets are well matched for forward-looking prospects of the company. These capabilities include; managing various sizes of operations, specialized solutions for waste management in various industries, the capability to charge a premium on specialized services, and its single point customer contact and billing information, as well as integrated supply chain systems and underlying IT systems.
57
Rare: YES Rare capabilities are characteristics that are unique to an organization and are not possessed by many others. WMIs Information technology, single point customer support, and streamlined billing ad reporting are unique and rare in the industry. Costly to Imitate: YES Costly-to-imitate capabilities are not easily developed by other firms. This type of capability is a result of unique historical conditions, ambiguous causes, and social complexities. For WMI, these capabilities are its IT solutions and comprehensive integration of various operations resulting from years of preparations and implementations. The companys central billing systems, supply chain system, and waste to energy programs are costly to imitate. Non-substitutable: MODERATE YES Non-substitutable capabilities or those which have no strategically equivalent valuable resources that are either common or easy to imitate. Again, these items include; operations management, Fleet routing, IT solutions, and landfill to energy program. All of which are non substitutable within the communities the company serves.
58
59
In terms of market business strategy the company has identified many business units that are under performing financially and many that are too geographically segregated to achieve any synergy with the core operations. The company needs to implement the process of continuously evaluating their business strategy and making alliances wherever there is an opportunity. The objective of service machine is key for this success. WMI is deriving big business from its own customer service due to strong institutional knowledge in terms of waste disposal. This factor combined with its waste recycling and recovery knowledge puts WMI in a position of leveraging better business and better prices thus acting as a product differentiator. In terms of procurement purchasing practices, these initiatives were previously fragmented and un-leveraged. Over six hundred operating divisions had their own methods of buying everything, and each of them used their own favorite suppliers. Thats where making money comes into play. It was estimated in 2000 that WMI spent between $4 and $5 billion each year with suppliers, and it set a goal of reducing supply costs by $350 million. Information systems were so poor that the company did not know how many trucks or containers they had. At one point in time the firm issued 10,000 incorrect paychecks. In order to improve these areas, WMI appointed Brad Holcomb, who had been an accomplished procurement executive at Eastman Kodak, Praxair and American Precision Industries. Brad joined the company in September of 2000. The first order of business was to conduct a detailed spend analysis to determine how much the company spent, and where. After the determination of expenses and procurement process the WMI procurement team established procurements vision that still drives the program today: goal is to have a focused, world-class supply base firmly in place and readily accessible producing a sustainable competitive advantage in every corner of the business. WMI also established Guiding Principles that included
60
(1) Using competition to drive results, (2) Leveraging spending by dramatically reducing the supply base, (3) Consistently applying cross-functional teamwork, and (4) Having suppliers drive toward what we call Total Customer Satisfaction.
61
Operational effectiveness has been underway for the last 5 years, the results of which have begun to materialize. The procedures to better manage supply chain through a highly integrated supply chain management system, as well as a standard procurement philosophy, and operational efficiencies through the use of programs, has cut costs and wastage in numerous places. Total Customer Satisfaction is a long-term objective that will lead the company to long-term sustainability. This objective will help improve the visibility and demand for WMIs services thereby improving profitability. Innovation of waste disposal includes investing in newer technologies for waste disposal, recovery and recycling. This is accomplished through the use of landfill gases for energy, recycling paper and plastic for industrial usage, and the technologies which will pay dividends in coming years. Apart from investing in technologies WMI also needs to manage regulatory agencies and scan the external environment for further regulation changes.
62
63
makes the stock of WMI very attractive in comparison. The Price-to-sales ratio is slightly less useful than the P/E ratio, but is a good tool to compare firms among the same industry, yet it is also necessary to include the review of the profit margins of the firm at the same time. Typically a P/S of less than 1 identifies a good opportunity, and to get the full affect, a company with a low P/S and a high profit margin is very attractive. The Price/Book ratio simply compares the firms stock market price to the total assets less liabilities (book value) of the firm, and in this case the lower the ratio the better. The Value/EBITDA ratio compares the firms market value to the purified earnings of the firm.
2005 Valuation Ratios Price/Earnings Price/Sales Price/Book Value/EBITDA Republic Services 25.07 2.10 3.77 9.76 Allied Waste 30.22 0.78 1.76 8.63 Stericycle 43.73 4.69 5.50 16.76 Waste Connection 22.61 2.51 2.52 10.34 Clean Harbors 20.07 0.80 4.88 7.46 Waste Management 17.50 1.55 3.32 9.06
64
Presented below is the change in sales, gross profit, and net income for WMI from 2003 to 2005. WMIs revenues increased by 4 percent from 2004 to 2005. Although this is relatively normal for a mature firm, the companys net income increased 26 percent to $1.18 billion. The company claims that their current success lies in internal revenue growth. To elaborate, rather than focusing on market growth the company is looking at ways to increase revenues from its existing customer base, and also reduce costs and improve operational efficiencies.
65
company claims that cost reductions will be more evident in 2006, due to these initiatives as well as its divestiture program. It is not until we review the net profit margin that we see the accomplishments that WMI has been able to accomplish over the past three years. Despite the less than stellar performance with the other margins WMI has not only been able to increase net profit year over year, it has almost doubled this percentage since 2003. This is important as net profit is the most significant margin to investors, because it represents the percentage of sales that remains for the shareholders of the firm after all expenses have been paid. This would also indicate that the firms stock price has most likely increased over the past few years.
2005 Profitability Ratios Gross Profit Margin Operating Profit Margin Net Profit Margin Republic Services 37.01% 16.66% 8.86% Allied Waste 34.68% 15.96% 3.55% Stericycle 43.98% 27.62% 11.02% Waste Connection 42.25% 23.28% 11.63% Clean Harbors 27.92% 7.21% 3.60%
2003
66
Leverage allows a firm to multiply the impact of increased revenue into net income. The more debt the firm uses the more leveraged it is. This can ultimately become a concern to creditors as they fear the firm may eventually be unable to repay its creditors. Leverage ratios identify how much debt the firm uses in its capital structure. WMI is clearly not the highest leveraged firm among its competitors and has also taken steps to improve its debt position over the past three years. The ratios below associated with leverage include; Debt to Equity, LTD to Equity, Total Debt Ratio, Long-term Debt Ratio, and LTD to Total Capitalization. The coverage ratios identify a firms ability to meet its interest requirements. A high ratio is favorable; however, a ratio that is too high may indicate a position in which a firm is underutilizing its debt capacity. The calculation simply involves comparing EBITDA to interest expense. WMI fluctuates in this area and appears to be slightly below the industry average.
2005 Financial Strength Ratios Current Ratio Quick Ratio Debt to Equity LTD to Equity Total Debt Ratio Long-term Debt Ratio LTD to Total Capitalization Times Interest Earned Republic Services 0.72 0.72 1.83 0.92 0.65 0.32 0.92 5.89 x Allied Waste 0.58 0.58 2.96 1.99 0.75 0.50 1.86 1.56 x Stericycle 1.46 1.41 1.01 0.67 0.50 0.33 0.65 12.94 x Waste Connection 0.83 0.83 1.33 0.82 0.57 0.35 0.80 7.15 x Clean Harbors 1.45 1.36 4.31 0.86 0.81 0.16 0.59 2.25 x
2004 Waste Management 1.06 1.03 2.45 1.33 0.71 0.39 1.23 3.45 x 0.88 0.85 2.50 1.37 0.71 0.39 1.29 3.73 x
2003
67
current stock price. The payout ratio is the proportion of earnings paid to the shareholders as dividends.
2005 Dividend Analysis Dividend Yield Dividend/Per Share Payout Ratio Republic Services 1.20 0.54 29% Allied Waste 0% Stericycle 0% Waste Connection 0% Clean Harbors 69% Waste Management 2.20 0.82 38%
2005 Management Efficiency Return on Total Assets Return on Equity Return on Common Equity Inventory Turnover A/R Turnover Average Collection Period Fixed Assets Turnover Total Asset Turnover Republic Services 5.58% 15.80% 15.80% 9.91 36.32 days 0.70 0.63 Allied Waste 1.50% 5.93% 5.93% 7.32 49.20 days 0.45 0.42 Stericycle 6.41% 12.87% 12.87% 64.87 5.07 71.07 days 0.67 0.58 Waste Connection 5.01% 11.69% 11.69% 7.25 49.66 days 0.47 0.43 Clean Harbors 4.17% 22.15% 22.15% 25.14 4.55 79.17 days 2.45 1.16
2004 Waste Management 5.59% 19.31% 19.31% 87.18 6.23 57.77 days 0.74 0.62 4.49% 15.73% 15.73% 91.42 6.24 57.73 days 0.69 0.60
2003
68
The results of this improvement are reflected in the stock price as indicated in the chart below. The stock price of WMI has almost doubled over the past three years.
69
The company has launched initiatives towards reducing costs and improving operational efficiency. Some of the initiatives translated into increased costs in the first half of 2005; therefore, the improvement will most likely be recognized in 2006, through an increase in its operating profit margin. Through focusing on internal revenue growth the company has also made huge gains in its net profit margin. The company has improved it position with respect to its financial strength over the past three years through a relatively aggressive use of debt. In 2005, the company borrowed $365 million dollars which were mostly related to the companys Canadian Credit Facility, and had to do with repatriation of accumulated earnings. The company has also announced that it was increasing its quarterly dividend payments to $.22 per share in 2005. The first increased dividend payment was made on December 15, 2005, which allowed the company to pay a total of $449 million in dividends for the year. Efficiency rations indicate an effectively run business as the company makes great use of its assets in order to generate cash. The company also holds minimal amounts of inventory which greatly improves its liquidity ratios and overall management of assets. It was clear and has been confirmed that the company had a few issues with managing receivables and credit collections, this issue has been addressed, and this position is expected to improve in 2006. Finally the company has continued to increase its earnings per share which are reflected is reflected in the companys ever increasing stock price. With all of this being said, it is clear that WMI has made significant strides towards improving profitability, which is clearly the result of a well planned and executed strategy.
70
71
M2Z seeks to enhance understanding, change behaviors, and develop company leaders who can make a difference and train and lead others.
M2Z does not seek to find fault or punish people, as M2Z is about being hard on facts and easy on people.
WMI sites monitor and measure safety performance on a continuing basis. These measures reflect the reduced frequency and severity of safety incidents, improved employee satisfaction, and improved customer satisfaction. Through the established Health and Safety processes and procedures, the goal of zero accidents and injuries is transformed into measurable results that have a positive impact on thousands of people. Environment Waste Management is committed to ensuring advanced protection of the environment, compliance with governmental regulations and implementation of state-of-the-art technology. These efforts distinguish WMI as the foremost leader in environmental protection and solid waste management excellence. The Environmental Management System (EMS) reflects the Company's emphasis on continuous improvement in operations by measuring and evaluating its environmental performance. WMI's Environmental Management System (EMS) is comprised of five integrated components including:
Policy Planning
72
These components work in a continuous improvement cycle in order to achieve superior environmental performance. WMI also incorporates its Think Green program, which is a national program amongst its employees to continually remind them of the importance of the environment.
73
landfill, waste disposable and removal, and continues to take measures to ensure to its shareholders and employees that it will remain in that position for years to come.
74
4.6.1 Strengths
Waste Managements primary strengths include its vast resources, a progressive fleet routing system, and the development of new sales and pricing systems. Vast Resources Waste Management is the largest waste materials company in the world. It is a Fortune 200 company that brings in over $11.5 billion in annual revenues and has over $20
75
billion in total assets. The firms size and financial position are comparatively large with respect to most of its competitors. The companys sound financial position brings many benefits including cost reductions through economies of scale. This also allows WMI to attract personnel with highly specialized skills. Additionally, WMIs large size and financial resources provide a significant deterrent entry into the market by new competitors. WMI has a vast network of assets that includes, 429 collection operations, 366 transfer stations, 289 active landfill disposal sites, 17 waste-to-energy plants, 138 recycling plants, and 85 beneficial-use landfill gas projects. (Waste Management, Inc., 2005) Its large network of resources enables the company to offer the full range of waste management services to its 21 million residential, commercial, and governmental customers. Progressive Fleet Routing System WMI has a truck routing system, Fleet Route, which it uses to improve route density and eliminate redundant truck routes. Currently, the company operates 15,000 routes costing $120,000 each annually. Fleet Route should allow the company to reduce the number of routes to around 13,500 for a savings of $180 million. In addition to reducing the number of routes, the routing system will allow for the reduction of the number of trucks in its fleet by 1,500 which will result in $240 million in capital savings. The turnover rate of truck drivers should allow WMI to implement these changes without having to terminate any drivers. While the implementation costs of this routing system are high, $20 million, this expense should be off-set by savings of $40 million in the first year of implementation.
76
New sales and pricing systems WMI is also implementing a new pricing tool that it intends to use to target and capture new commercial sales. Another pricing tool was also recently implemented that allows the company to analyze each customer account individually. Using this tool WMI has been able to increase monthly revenues by $9.8 million.
4.6.2 Weaknesses
WMIs primary weaknesses include fluctuating fuel costs and difficulty with driving volume growth in the waste materials industry. Fluctuating Fuel Costs WMI is highly dependant on petroleum fuels to operate its large fleet of motorized vehicles. The price and supply of fuel in the current economy is unpredictable and is largely determined by factors outside of the companys realm of control, including geopolitical developments, supply/demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest, regional political patterns, and increasing environmental concerns. In this environment, WMIs reliance on its fuel suppliers is a decided weakness as their actions can have a significant impact on companys bottom line. Difficultly with Driving Volume Growth The current economy in the United States has been improving in recent years. However, it is still recovering from the recession that began in 2000. In this environment, WMI has had difficulty driving volume growth, and this trend is likely to
77
continue unless the economy fully recovers. WMI will likely focus on growth in the industrial business sector, as growth in this area is critical to its long-term success.
4.6.3 Opportunities
WMI has several opportunities that it can pursue including new management systems, increasing demand for recycling, and its focus on safety. New Management Systems WMI has several management systems that it hopes to implement in the near future in order to improve business efficiencies. One of these is its new revenue management system that is currently in the pilot stage. This system should help waste management to more effectively manage and grow its revenue streams in response to arising market forces. Additionally, WMI has implemented its new fleet maintenance management system, Compass. This system should further enable the company to reduce inefficient maintenance spending. Together these systems are working towards maximizing profitability by maximizing revenues and minimizing expenses. Increasing Demand for Recycling In the current recycling industry in the United States, demand far exceeds supply for recycling services. This represents a potential golden opportunity for WMI in the form of an industry segment that has not yet matured. There are prospects for rapid growth in the recycling industry. The company is well positioned to take advantage of this opportunity as it already owns the largest recycling company in the United States, Recycle America Alliance. This company was created when WMI combined its recycling assets with key domestic recycling processors with the goal of optimizing capacity and
78
improving profitability. The fact that most of the competition in the recycling industry is highly fragmented makes the prospects even brighter for the company. Focus on Safety Mission to Zero is a safety program that has been implemented by WMI with the goal of improving the companys OSHA safety performance. This is one area in which the company hopes to excel in the realm of regulatory compliance. To this point, the program has yielded impressive results with a reduction of its OSHA recordable rate by 60%. Future plans for the program include the focusing on improving safety performance within specific business units.
4.6.4 Threats
WMI also has several threats that it must contend with including the seasonality of its business, governmental regulation, and strong competition. Seasonality of Business WMIs business is highly seasonal, as revenues typically take a significant dip in the winter. This is primarily due to decreased construction and demolition activity in the colder winter months, which results in a lower volume of wastes from these activities. In certain regions, residential and commercial waste volumes also decrease in the winter. The fact that many of its revenues are dependant on the activities of other industries represents a significant threat to the firm.
79
Governmental Regulation The waste materials industry is often at the mercy of extensive and ever-changing regulatory pressures by federal, state, and local governments. Regulations range from those involving environmental concerns, safety concerns, and transportation concerns. Regulatory agencies often monitor companies to which the regulations apply, and in many cases they have the power to force compliance on the companies. Compliance with new regulations can be costly to the companies in the waste materials industry, and in some cases the additional expense to comply can affect the bottom line. In addition, enforcement of these regulations can include civil and criminal penalties that can also adversely affect the company. Strong Competition WMI faces intense competition with from commercial, governmental, and quasigovernmental competitors. It faces competition from large national companies that a looking to compete on a national level, as well as smaller companies that are looking to compete on a more regional or local level. Price-cutting techniques are always a threat from these private companies. In addition to these private companies, WMI must compete with local governments that maintain their own waste collection and disposal operations. In some cases, WMI is at a decided disadvantage with these local governments due to the fact that tax revenues and tax-exempt financing are at their disposal. Governmental competitors also have an advantage in that they can impose regulatory controls and restrictions that further their advantage in their region.
80
81
procurement systems, single point of customer contact, equipment maintenance systems, truck routing and performance improvement systems are some of the key steps towards improving the operation costs. As this internal arrangement of organizational structures towards its strategic goal of aligning with the external environment (competition/regulation/customers demand) progressing the financial results are reflecting the importance of the strategy and strategic fit of company.
5.2.0. Alternatives
Through reviewing WMIs current strategic initiatives and potential market opportunities, our team identified several alternatives that would improve the current performance of the company, as is illustrated in the chart below:
Current Product/Service
MARKET PENETRATION
New Product/Service
PRODUCT DEVELOPMENT ? Extend existing product line ? Produce energy from waste ? Waste Management Consulting
New Market
? Expand existing service to new markets ? Build New Recycling Facilities ? Acquire Competitors Recycling Facilities
MARKET DEVELOPMENT
DIVERSIFICATION ? Improve alliances with competitors ? Acquire Stericycle ? Develop Nuclear Waste Management
Current Market
? Focus on internal revenue ? Improve existing services ? Hedge with heating oil futures ? Implement alternative fuel sources ? Upgrade existing recycling capacity
As WMI takes an aggressive approach toward sharing ideas and developing innovative new solutions, many of the alternatives identified above are already being pursued by WMI. After
82
significant discussion and deliberation, the team was able to isolate two alternatives that appeared to hold more weight than any of the others; expediting the use of alternative fuel with its existing trucks, and increasing the firms recycling capacity. Both of these alternatives will not only improve the performance of WMI financially, but they will improve how the firm is viewed in the marketplace as well. We begin our recommendations with the latter.
5.3.0. Recommendations
Again, to reiterate the importance of the selections recommended by our team, two of the many alternatives were consistently revisited out of interest and overall impact. With the increasing scrutiny imposed by the government regarding regulation over the industry, increasing recycling capacity and taking a more aggressive approach towards implementing alternative fuels were selected as our recommendations. Aside from the overall feasibility of these alternatives, they are appealing due to the positive impact they have on the overall environment and will naturally increase how Waste Management Inc is perceived by its customers and the general public.
83
Recycling at Waste Management Currently, WMIs wholly owned subsidiary, Waste Management Recycle America (commonly referred to as Recycle America), is the largest recycler in the United States. It markets recycling services to 27 million commercial, industrial, and residential customers. Overall, Recycle America currently operates 80 recycling plants and provides services for more than 140 locations in the U.S. and Canada. Additionally, it operates 11 container processing facilities, 1 plastics recycling facility, and 3 electronics recycling facilities. A map of recycling locations is shown in the figure below.
WMI has led the way in developing new technologies to improve the convenience and efficiency of its recycling operations. In 2001, Waste Management became the first major solid waste company to focus on residential single-stream recycling, which allows customers to mix recyclable paper, plastic and glass in one bin. Residential single stream programs have greatly increased the recycling rates, recovering as much as three times the amount of recyclable materials. (Waste Management Recycle America, 2006) This innovation has allowed WMI to process a greater volume of recyclable materials in an effort to meet the growing demand.
84
Objective To increase recycling capacity of the company by building three new recycling plants, with an estimated initial capital outlay of $45MM. The economics for this project were developed bearing a 10 year project timeline, the first two years of which involve the construction of the new plants. The project will provide a $30MM NPV, 5.3 year payback, and 25% IRR. Justification Currently in the United States, demand for recycling is much larger than the available supply of recycling services. While overall growth of waste recovery demand is unlikely to grow at an exceptional rate in the near future, recycling is an industry in which companies can more easily drive up volume. This can be accomplished by positioning recycling services to meet the currently unsatisfied demand. Additionally, demand for recycling is likely to grow in the future as new environmental regulations are put into place demanding more environmentally friendly operations. Recycling is generally seen to be an environmentally friendly alternative to traditional waste disposal, as it does not involve the creation or filling of landfills. For example, in 1999 recycling activities prevented approximately 64 million tons of material from ending up in landfills. The lack of landfills also makes companies involved in recycling less vulnerable to environmental
85
concerns that are inherent with landfills. Finally, in general the American population is becoming gradually more and more environmentally conscious. More people are recycling each year in an effort to do their part for environmental conservation. This trend towards a more environmentally conscious population is likely to continue to drive the demand for recycling services. As the Environmental Protection Agency (EPA) website states, today, this country recycles 28 percent of its waste, a rate that has almost doubled during the past 15 years (Recycling, 2006). The growth rates of recycling for specific materials are even more impressive. Currently, 42 percent of all paper, 40 percent of all plastic soft drink bottles, 55 percent of all aluminum beer and soft drink cans, 57 percent of all steel packaging, and 52 percent of all major appliances are now recycled (Recycling, 2006). Of the people that do not currently use recycling services, many do not do so because of the lack of availability of those services. It is likely that more and more people will use these services as they become available, which should further increase the demand for recycling. While the current size of the customer market for recycling services is large, the potential market is even larger. For WMI, overall recycling volumes increased by 36% between 2004 and 2005. This trend is expected to continue into the future. Total operating revenues for WMIs recycling operations totaled $833 million in 2005. This accounted for 6.37% of Waste Managements total operating revenues.
86
87
faster rate. For this reason, WMI should put effort into growing its recycling capacity in order to meet the current demand, and the demand forecasted for the future. Deliverables The construction of the three proposed recycling facilities in Atlanta, Seattle, and San Antonio should add $45 million to Recycle Americas revenue stream, which should equate to an additional gross income of approximately $15 million after operating expenses are accounted for during the first year of operations following start-up of the three facilities. Revenues are forecasted to increase by an additional 3% each year following start-up in response to general population growth in the three markets and operational efficiencies that are expected to occur as a result of more experienced management with each successive year. At the end of the 10th year following the project start date (the end of the 8th year following the startup of the facilities), the revenue generated by each individual facility will have increased to $18.45 million, resulting in total revenues of $55.35 million between the three facilities. After operating expenses are accounted for, the combined gross income for all three facilities at the end of the 10th year should be $18.45 million. Implementation In order to increase its recycling capacity, WMI can either build new recycling facilities, acquire existing companies that own recycling facilities, or it can expand its current operations at its existing recycling facilities. It is recommended that of these options, WMI should pursue a strategy of building new recycling facilities. Building new facilities would serve the goal of increasing capacity in two ways.
88
First, WMI would be able to install the latest recycling technology at its new facilities. Waste Management has been the leader in technological innovations in the recycling industry. It was the first to introduce the single stream system of recycling through which it was able to increase recycled material volumes three-fold. By building new facilities, WMI will incur the cost of implementing the new technologies with its initial capital expenditures. Were it to acquire existing facilities, it is likely that the acquired facilities would not have the same level of technology. To bring the acquired facilities up to the latest standard, Waste Management would have to incur an additional upgrade cost on top of the acquisition cost. Also, in building new facilities Waste Management would be able to position itself in profitable markets in which it does not currently compete. While Waste Management Recycle America has obtained a solid foothold throughout much of the country, there are still regions and major population centers in which it does not have facilities. These new markets offer a slightly better opportunity for immediate volume growth than do those in which Recycle America already exists, since the markets there are untouched. By building new facilities, rather than upgrading existing facilities, WMI will be able to tap into new markets and set up a base of operations for future growth in those regions. For these reasons, building new facilities is the best option for WMI as it allows the company to install the latest technology for optimum efficiency, and it allows the company to tap into markets in which it currently does not compete. WMI typically spends between $1.2 billion to $1.5 billion a year in capital expenditures and acquisitions. A portion of this should directed towards building new recycling facilities. Within 2 years, WMI should build new recycling facilities in Atlanta, Seattle, and San Antonio. These are
89
three of the major population centers in the United States in which there are currently no Recycle America facilities. The population figures reveal while these specific locations are so enticing. Atlanta currently has a population of 419,122, but if the population of the surrounding areas are included the population spikes up to 4,708,297. Seattle (population 571,480) also has a large metropolitan area with a population totaling 3,810,856. San Antonio has a population of 1,236,149 that becomes 1,854,080 if the surrounding areas are included. These locations are enormous markets in which there is likely to be recycling demand far in excess of what is currently being provided which is what makes them attractive geographical locations. The opening of new facilities with the latest technologies would allow Waste Management to tap into this demand. Milestones New plant construction projects should be initiated immediately for each of the three locations. All design, procurement, construction, and start-up activities should be completed for each plant within two years (24 months) of the project start date. It is the recommendation of this analysis that all 3 plants be identical in design and engineering, and that all three projects begin simultaneously. 00 Months Project Start Date Begin contract negotiations which local authorities in Atlanta, Seattle, and San Antonio
09 Months Finalize contracts with local authorities Begin facility design and engineering (3rd Party) Begin site acquisition process, permitting, etc. in Atlanta, Seattle, and San Antonio Begin facility manager hiring process for the three facilities
90
Begin procurement of facility processing equipment and trucking All permitting is completed or otherwise addressed
15 Months Break ground at new facility site 16 Months Complete equipment procurement activities All equipment must be onsite or otherwise addressed
18 Months Begin facility employee and driver hiring process 23 Months Complete construction and facility staffing activities Complete any necessary final measures prior to start-up
24 Months Start-up Date (Project Completion Date) Begin facility operations in Atlanta, Seattle, and San Antonio
The milestones shown are based on an estimated time needed to complete each step. Milestones completed prior to the estimated time will result in a start-up date that occurs prior to the estimated start-up date by an equal amount of time. Likewise, milestones completed after the estimated completion time will cause the start-up date to begin at an equally late time. The lone exception to this is the completion of the hiring of facility employees and truck drivers, as it will be possible to begin some facility operations even if facilities are not completely staffed.
91
Long-Term Consequences Each plant will cost approximately $15 million to build and equip with processing equipment and trucking. Therefore the total cost to build these three plant will be approximately $45 million. Average revenues for Recycle America facilities are approximately $10 million per year for each facility ($833 million in total revenues for 80 facilities). Forecasted revenues in the first year of operations for the new facilities are $15 million each due to the new technology that will be installed in the facilities, and due to the fact that the locations are in new markets. From a long-term financial perspective, the project justifies itself. For accounting purposes, the construction of the three new facilities in Atlanta, Seattle, and San Antonio will be a 10 year project. The first two years of the project will be the design and construction phase, and the final eight years will be those in which the facilities are in operation. This is a 10 year project because a major overhaul of facility operating equipment and trucking will be required at each facility following the 8th year of operation. After an initial capital outlay of $45 million for the three facilities, operating revenues totaling $15 million will begin at Year 2 and increase at a rate of 3% with each successive year. For the purpose of financial analysis, cost of capital is 15%. Taking this into account, the project has a Net Present Value (NPV) of $30.1 million and an Internal Rate of Return (IRR) of 25%. Overall, the project has a payback of 5.31 years. In addition to gaining a foothold in new markets, this action plan will give Waste Management Recycle America a base from which to grow operations in these regions in the future. Once the facilities are built, WMI can always expand the facilities to meet rising population and the corresponding rise in demand for recycling in those markets.
92
A potential negative consequence of pursuing the construction of new facilities is that it will take resources away from other initiatives, including recycling plant upgrades at existing facilities, acquisition of competitors facilities, and other project involving capital expenditures. However, while some capital spending will have to be put on hold to fund the new ventures, the upside to the new facilities should outweigh this opportunity cost. Risk Analysis The construction of new recycling facilities is based on the assumption that demand for recycling will not decrease from its current level in the near future, and that demand for recycling will rise in the coming years. This forecasted rise in demand is expected to coincide with the rising environmental consciousness in the general public. With most recycling facilities currently running at full capacity, there is solid basis on which to believe that recycling facilities in major population centers such as Atlanta, Seattle, and San Antonio will be successful. The primary risk involved in the commissioning of new facilities is that they will not pay themselves back within a period of time that justifies the capital expenditure. The current estimate for the facilities to break even is 5.31 years. This is an acceptable period of time for such an investment. However, should there be a sudden decrease in the demand for recycling services this interval may turn out to be a longer period of time. Additionally, factors such as fluctuating fuel costs, global politics, and local economies can have a significant impact on the construction costs of new buildings. Should events occur on one of these fronts that affect the cost of building materials, the cost to transport materials or equipment, or the cost of labor, it could have a significant impact on the final construction cost of the new facilities. An increase in construction cost, assuming the same level of revenue, would mean that the facility may not pay itself back in an acceptable period of time.
93
Conclusion As discussed earlier, the total amount of $45 million that it will take to build new facilities in Atlanta, Seattle, and San Antonio is a small fraction of WMIs total capital expenditure each year. The facilities should add $15 million to Recycle Americas gross income following start-up, a figure that should increase to $18.45 million in the projects 10th year. By constructing new recycling facilities, WMI would be investing in the side of its business that is in the most rapid stage of growth. This makes it likely that the facilities will not only be profitable ventures in the near term, but that they will also be lucrative profit centers for Recycle America into the future.
94
the second five years (6-10). Although the company will increase annual capital spending by approximately $550 million dollars per year throughout the project, the company will reduce capital spending ($31 million) after the project is implemented due to the useful life of the new trucks extending the required replacement time by 2 years. Justification Currently in the United States the demand for alternative fuel sources is at an all time high. The recent economic conditions with respect to the price of oil, have taken a negative impact on WMI most recent operating expenses. In an effort to re-shape their costs, and help control the current dependency of oil by US corporations, a large scale effort must be taken to convert their existing diesel powered fleet to utilize Liquid Natural Gas. Liquefied Natural Gas is a naturally occurring mixture of hydrocarbons (usually methane) that has been purified and condensed to a liquid form by cooling cryogenically to -260F. At normal atmospheric pressure, it occupies only 1/600th the volume of natural gas in vapor form. Its primary purpose is as a long term transportation alternative to imported natural gas. Because of its volume reduction capabilities, its transportability makes it very economical to ship overseas before its de-liquefied and sent through the regular US pipeline system. Since LNG is imported from other countries it must be received at one of 5 US receiving ports. At that time it can be either de-liquefied or stored on tankers and delivered to LNG distribution centers used for alternative purposes. They centers are where it can be purchased and delivered to Waste Managements new LNG fueling stations. Compared to conventional fuel sources, LNGs flammability is limited. It is nontoxic, odorless, non-corrosive, and noncarcinogenic. It presents no threat to soil, surface water, or groundwater.
95
The purpose of undertaking this project has many two main benefits. First, it will ultimately lower the firms operating costs by replacing their need for costlier oil based diesel fuel. Second, it will fall into line with recently discussed federal regulation to support alternative fuel sources for major US corporations. Tax incentives will be given to companies that can use alternative fuel sources, while at the same lower the amount of emissions being produced. This will result in additional income in respect to their tax relief, while at the same time lower their overall operating costs.
Deliverables The deliverables for this project will include a conversion of approximately of their 22,000 truck fleet by the year 2011. Included in this conversion are the following detailed items: 22,000 new LNG fueled trucks within 10 years. 100 regionally located LNG pumping stations used for refueling. A Partnership with existing natural gas pipelines to receive the gas wherever its imported.
Implementation In order for Waste Management to better manage some of its operating costs, they must implement a massive conversion of their line of diesel fuel trucks. In order to operate these alternatively fueled vehicles, they must also build LNG pumping stations, and build networks for distribution across the country. The first step in the implementation would be to begin purchasing the new LNG fueled trucks. The plan would be to convert 22,000 in 10 years across the country, so each year they expect
96
to successfully convert 2,200. This modest approach, will allow them time to correct any errors or procedural problems they have within the first year, to correct for the following years. The estimated cost of a new LNG fueled truck costs about $200,000. The 2nd phase of the project would involve the building of 100 LNG pumping, or refueling stations regionally located across the country. These stations are what stores the LNG fuel, keeps it cool and protected, and allows extremely fast refueling to either tanker trucks for transport, or to the operating vehicles themselves. These stations also provide the means to store large amounts of LNG, to keep in reserve, in case of times where economic conditions do not warrant frequent purchases on the open market. The estimated cost of each LNG pumping station ranges from $300,000 to $500,000 depending on its size, and storage capacity. The plan is to begin building 10 immediately in the first year, with an estimated 11 month construction time for completion. The plan will be to continue 10 per year for the remaining 9 years of the project. The 3rd phase of the project involves logistics and distribution of the supply for the LNG stations developed in Phase II. A cooperative partnership agreement will be created with Columbia Natural Gas Pipeline Company where as they will be responsible for receiving the LNG from overseas and transportation to the various regional LNG stations Waste Management will be constructing. The implementation of this project will involve a substantial financial investment at the beginning. Each year an investment of $45 million will be required to construct that years phase of the project. The project timeline, long term effects, and risk associated with this project will be discussed in the later sections.
97
550,000,000 $ 25,000 $
605,000,000 27,500 $
665,500,000 30,250 $
732,050,000 33,275 $
805,255,000 36,603 $
885,780,500 40,263 $
974,358,550 44,289 $
1,071,794,405 48,718 $
1,178,973,846 53,590
6,563 $ 15% 2 2,200 4,400 17,600 28,875,000 440,000,000 468,875,000 81,125,000 61,342,155 3
6,891 $
7,235 $
7,597 $
7,977 $
8,376 $
8,794 $
9,234 $
9,696
4 2,200 6,600 15,400 2,200 8,800 13,200 63,669,375 399,300,000 462,969,375 202,530,625 115,797,542
Savings
Milestones The project timeline is constructed based on the assumption that all necessary contracts have been signed, engineering specs have been developed and approved, and any necessary construction sites have been decided on. This project begins at year 1 when ground breaking begins, and when the first inventory is purchased. Year 1 Project Start Date Initial purchase of 2,200 LNG trucks begins. Location of the 10 US locations where these trucks will operate begins Ground Breaking on the first 10 LNG stations Logistics and negotiations with Pipeline Company begin.
98
2,200 LNG trucks are up and running on normal business routes. Begin purchase of next 2,200 LNG trucks Begin ground breaking on next 10 LNG stations
Year 3-10 Phase III -X Remaining 8 years repeats the same operation as Phase II End of year 10 all 22,000 trucks are in operation End of year 10 all 100 stations are fully operational
This timeline is a very high level estimate used to show a standard schedule that can be used as a guide for the project overall. Deviations in supply or materials, weather, or other unknown factors could delay certain sections of this project. Part of the yearly time table for each phase of the project will also involve training drivers and maintenance workers to care for the new LNG vehicles.
Long Term Effects Considering that each trucks costs $200,000, and each LNG station costs $400,000 to build, WMI is looking at a total cost of capital to pursue this operation at around $1.2 billion per year; however, the company currently spends $660 million in capital replacement of their existing trucks, and will receive grants due to the emission reductions. Considering this large of an
99
investment, WMI does not expect to recognize a return on this investment immediately. The long term effects of this vehicle conversion reaches far beyond financial improvements.
Lesson Oil Dependency The return on this investment comes in different forms. First, obviously WMI will lesson its dependency on oil. This eliminates one of the key economic conditions that drive their cost of operations. Current industry trends and federal government regulations are making it more difficult for many companies to continue operating in their current form. While the price of oil continues to rise affecting the price of diesel fuel, the federal government is also placing restrictions on suppliers to use new, less pollutant additives. These additives are difficult to find, and will eventually exhaust the supply to a point where the price of a single gallon of diesel fuel could be 3 times as much as current prices. Cleaner Burning LNG fueled vehicles produce potentially 1/6th the emissions that standard oil based fuel engines produce. This has an obvious benefit to the environment. In addition, the federal government has begun a program of offering incentives, and possibly tax credits to companies who can exceed emissions limits that are soon to be imposed. When Waste Management implements this plan, they will far and away exceed all governmental regulations on producing emissions. Because of the clean burning fuel, drivers, maintenance workers and customers alike, will comment on the low noise factor and lack of odor from these vehicles while in operation. Reduce Operational Costs It is estimated that Waste Management spent over $500 million in diesel fuel last year alone in order to operate their trucks that recover and transport waste products. As the price of oil, and
100
thus diesel fuel continues to rise, companies will most likely see the affects on their overall bottom line. Those companies, such as Waste Management, that act quickly and prepare for such an economic situation will most likely prosper. Considering that on average the cost per gallon of LNG is 25% less than that of diesel fuel, Waste Management expects to see a similar increase to their net income as a result of this project. Risk Analysis The suggestion for this conversion away from diesel fuel is based on the assumption that oil prices will continue to be high or potential rise higher for the next 3 to 5 years. One risk is that the oil market may adjust itself or crash to a point where Waste Management would be paying more for LNG then it would have paid for diesel fuel. Another risk is that delays and problems may exist that would extend the duration of the construction of the LNG pumping stations. If these stations are not operational when they are ready to roll out the new fleet, the trucks would have to wait until such time they are ready since they are the primary source of fuel being provided to these new vehicles. A final risk is of course financial. Considering the substantial financial investment required for this project, and that the returns are based on the result of a speculative commodity market, the estimated reduction in operating expense may not be as significant as expected. As with all investing there is always risk, and careful consideration and planning must be taken to make sure most risk is eliminated. Watching the project plan carefully, and making adjustments early enough as to not postpone key milestones is very important. Risk analysts should be employed to monitor the oil markets and natural gas markets to make sure prices are still in line with their proposed strategy.
101
If changes in any of these conditions do occur, the project can always be stopped or postponed, that is the reason for the phased approach, instead of the all at once approach.
102
103
Hater, Gary; Green, Roger; Orlett, Frank. BioCycle , CONVERSION FACILITY CHOSEN FOR PALM DESERT, CALIFORNIA. , Jul2005, Vol. 46 Issue 7, p63-66, 4p; (AN 17724831) Hazardous Waste Remediation Market To Reach $11.4 Billion By 2001. Retrieved on April 17, 2006 from http://www.solidwaste.com/content/news/article.asp?docid={28BA22DC-5936-41B29793-93F4B231B7A8} Hitt, M., Duane, R., & Hoskisson, R. (2005). Strategic Management: Competitiveness and Globalization. Mason, Ohio: Thomson South-Western. Hitt, M., Ireland, R.Hoskisson, R. (2005). Strategic Management (6th ed.). Mason, OH: SouthWestern. Human Population: Fundamentals of Growth Environmental Relationships Retrived on April 20, 2006 from http://www.prb.org/Content/NavigationMenu/PRB/Educators/Human_Population/Environment4/ Environmental_Relationships1.htm Innovative projects http://www.wm.com/wm/environmental/InnovativeProjects.asp Interview with Mr. A. Ponia, WMI by Ajay Shukla on April 20 and 22, 2006. Introduction To The Human Geography Of The Us Retrived on Apr 18, 2006 from http://www.geog.nau.edu/courses/alew/ggr346/text/chapters/ch3.html Isnt it time we regulate chemicals? (2005). Retrived on April 13, 2006 from http://www.rachel.org/bulletin/index.cfm?issue_ID=2502 List of United States Cities by Population. (2006). Retrieved April 26, 2006 from http://en.wikipedia.org/wiki/Largest_cities_of_the_United_States Municipal Solid Waste Generation, Recycling, and Disposal in the United States: Facts and Figures for 2003. Retrieved on April 12, 2006 from http://www.epa.gov/epaoswer/non-hw/muncpl/pubs/msw05rpt.pdf NAICS Definition. Retrieved on April 16, 2006 from http://www.census.gov/epcd/naics02/def/NDEF221.HTM O'Leary, Rosemary; Koenig, Heidi, Trash Talk: The Supreme Court and the Interstate Transportation of Waste., Public Administration Review, Jul/Aug97, Vol. 57 Issue 4, p281-284, 4p; (AN 1785421) Pecoraro, Mike, Waste management, inc. gets a real workout. ,Journal for Quality & Participation, Nov/Dec98, Vol. 21 Issue 6, p24, 5p, 1 diagram; (AN 1742446) People Going Global. Rwetrived on April 17, 2006 from http://www.peoplegoingglobal.com/Americas/United_States.htm
104
Power Point Presentation of WMI Organization from WMI. Prager, Allan J.; Cala, John J., Coexisting With Regulators. Journal of Business Strategy, Jan/Feb90, Vol. 11 Issue 1, p22, 4p; (AN 5714725) Press Releases for 2005 http://www.wm.com/WM/press/thisyr.asp Rasmussen, Sarah. BioCycle, PRODUCING ELECTRICITY FROM METHANE IN IOWA. ,Nov2005, Vol. 46 Issue 11, p37-39, 3p, 4bw; (AN 19003874) Recycling to conserve remaining capacity. BioCycle, Dec96, Vol. 37 Issue 12, p24, 1/7p; (AN 9701051474) Recycling. (2006). Retrieved April 26, 2006 from http://www.epa.gov/epaoswer/nonhw/muncpl/recycle.htm. Regulation and Control in U.S. Economy(2006). Retrived on April 19, 2006 from http://economics.about.com/od/howtheuseconomyworks/a/regulation.htm?terms=1990s+drug +in+war Republic Service Inc. Data (2006) retrived on April 15, 2006 from Republic services http://www.hoovers.com/republic-services/--ID__57152--/free-co-factsheet.xhtml Safety-kleen Systems http://www.hoovers.com/safety-kleen/--ID__11287--/free-cofactsheet.xhtml Sahoo, Surya; Kim, Seongbae; Byung-In Kim; Kraas, Bob; Popov Jr., Alexander, Interfaces, Routing Optimization for Waste Management. , Jan/Feb2005, Vol. 35 Issue 1, p24-36, 13p, 1 chart, 4 diagrams; DOI: 10.1287/inte.1040.0109; (AN 16387920) Sheehan, Bill; McNelly, Jim. BioCycle (2003)AUTHORS RESPOND TO WASTE MANAGEMENT, INC. By, May2003, Vol. 44 Issue 5, p39, 1p; (AN 9859469) Skernolis, Ed; Hater, Gary. BioCycle, WASTE MANAGEMENT, INC. RESPONSE. ,May2003, Vol. 44 Issue 5, p38, 1p; (AN 9859467) Steuteville, Robert, Keys to curbside efficiency and performance.BioCycle, Jul96, Vol. 37 Issue 7, p38, 4p, 2bw; (AN 9608060316) Stewart, David O., Green Law: Supreme Court's environmental law docket blossoms., ABA Journal, Aug92, Vol. 78 Issue 8, p46, 2p; (AN 4790751) Stock Information http://www.wm.com/wm/investor/stock/index.asp The Economics of Recycling. (2006). Retrieved April 26, 2006 from http://www.econedlink.org/lessons/index.cfm?lesson=EM218&page=teacher. The Workforce retrieved on April 19, 2006 from http://www.dol.gov/asp/programs/history/herman/reports/futurework/report/pdf/ch1.pdf#searc
105
h='Immigration%20trends%2C%20coupled%20with%20varied%20birth%20rates%2C%20will %20bring%20more%20diversity The World Fact Book retrieved on April 19, 2006 from http://www.cia.gov/cia/publications/factbook/print/us.html Urban NOX reducing partenership, Retrived on April 17, 2006 from http://www.cleanaircommunities.org/newsroom/pr050504nox.html Vision and Mission of Waste Management http://www.wm.com/wm/procurement/VisionMission.asp Waste Management, Inc.. (2005). Company Profile. New York, NY: Datamonitor. Waste Management, Inc.. (2006). 2005Annual Report. Houston, TX: Author. Waste Management Recycle America. (2006). Retrieved April 26, 2006 from http://www.recycleamerica.com/. Waste Management, Inc.. (2005). Company Profile. New York, NY: Datamonitor. West Hauler Trashes the old Information week, December o2, 2002 http://www.informationweek.com/showArticle.jhtml;jsessionid=CTKWUYZTPDYEQQSNDBECKHS CJUMEKJVN?articleID=6503967 WMI: A Culture of Fraud and Dishonesty July 24, 1997 Rachels Democracy and Health News http://www.rachel.org/bulletin/index.cfm?issue_ID=567 WMI Gets a New Head Office. Treasury & Risk Management, Apr 2004, Vol. 14 Issue 4, p12-12, 3/4p; (AN 12699658) Waste Management History and Record. Retrieved on April 12, 2006 from http://www.ebic.org/pubs/wmx.html WINNING CORPORATE STRATEGIES September 5, 1998. Environmental Research Foundation (Electronic Edition) http://www.ejnet.org/rachel/rhwn093.htm WM Green Energy, Retrieved on Mar 26, 2006 from http://www.wm.com/WM/ThinkGreen/greenenergy.asp WM Leadership. Retrieved on Mar 22, 2006 from http://www.wm.com/wm/about/Leadership.asp?id=sub1 WM Management Environmental Management System. Retrieved on April 12, 2006 from http://www.wm.com/wm/environmental/EMS.asp
106
Total Revenue Cost of Revenue Gross Profit Operating Expense Research and Development SG&A Other Depreciation Expense Total Earnings Before Interest and Taxes Total Other Income Interest Expense Earnings Before Taxes Taxes Net Income
Balance Sheet 2005 Assets Cash Short Term Investments Accounts Receivable Other Current Assets Inventory Total Current Assets Long Term Investments Deffered long term asset charges Buildings and Equipment Goodwill & Intangibles Accumulated Amoritization Total Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable Short-term Bank Notes Total Current Liabilities Long-term Debt Other Liabilities Common Stock Retained Earnings & Other Equity Total Liabilities and Owner's Equity 666,000 2,098,000 588,000 99,000 3,451,000 11,221,000 5,514,000 17,684,000 21,135,000 2004 443,000 2,007,000 279,000 90,000 2,819,000 11,476,000 5,453,000 18,086,000 20,905,000 2003 135,000 2,232,000 139,000 82,000 2,588,000 11,411,000 5,422,000 18,068,000 20,656,000
107