Waste Management Company Analysis

Waste Management Company Analysis 1

DEPARTMENT OF BUSINESS ADMINISTRATION TERM PAPER OF

ENVIORENMENT MANAGEMENT On

WASTE MANAGEMENT COMPANY ANALYSIS

SUBMITTED TO

DR. AJAI PRAKASH

SUBMITTED BY

ABHINAV PANDEY 2nd Sem(MBA e-B) Roll No. :01

Waste Management Company Analysis 2 Table of Contents Executive Summary Introduction Company Background Customers & Services Corporate Portfolio Segment Growth Rates Production Sales Data Regional Net Sales Revenue Net Income Expenses Stock Prices Market Share Current Strategies Corporate Business Functional Core Competencies Solid Waste Disposal Transfer Stations Landfills Recycling Waste-to-Energy Gas-to-Energy Competitive Environment Competitive Profile Revenue Net Income Sales Growth Revenue Per Employee Average Operating Income Net Profit Margin Return on Investment Net Income Per Employee Conclusion of Competitive Analysis Significant Competitors Allied Waste Industries Republic Services Competition Core Competencies Allied Waste Collection Transfer Stations Recycling Landfills Gas-to-Energy

14 15 15 18 19 21 22 23 24 25 26 27 28 28 28 30 31 32 32 33 34 34 35 35 36 36 37 38 40 41 42 43 44 45 46 47 48 48 51 51 51 51 51 52 52

Waste Management Company Analysis 3 Republic Services Collection Transfer Stations Landfills Recycling Summary of Core Competencies Key Factors of Competition Geographic Location Pricing Quality of Operations Increases in Recycling Cost Effectiveness Governmental Permits Competitive Summary Purpose of this analysis Corporate Profiles Waste Management Inc. Allied Waste Industries, Inc. Republic Services, Inc. Growth Analysis Revenue Net Income Market Value Analysis Earnings per Share (EPS) Price to Earnings (P/E) Price to Sales (P/S) Price to Book (P/B) Price to Cash Flow (P/CF) Stock Price Profitability Ratios Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Assets Return on Equity Return on Assets Trend Analysis Recommendations for Improvement Liquidity Ratios Current Ratio Quick Ratio Recommendations for Improvement Leverage Ratios Debt to Assets and Debt to Equity Interest Coverage (Times Interest Earned) Short-Term Debt Recommendations for Improvement Turnover Ratios (Asset Management)

52 52 53 53 53 53 55 55 55 56 56 56 57 57 58 59 60 62 63 64 65 66 69 69 69 70 70 70 72 73 73 74 75 76 77 78 79 82 83 84 85 86 86 87 88 89 90

Waste Management Company Analysis 4 Receivables Turnover Fixed Assets Turnover Total Assets Turnover Recommendations for Improvement Solvency Ratios Solvency Ratio Operating Cash Flow Recommendations for Improvement Financial Analysis Summary Revenue and Sales Company Growth Profit Margins Return on Assets & Velocity Cash Assets Cash Flow Competitive Analysis SWOT Analysis Strengths Technology Strategies Global Position Market Share Marketing Products/Services Licenses/Permits Assets Landfills Transfer Stations Trucking Fleet Weaknesses Leadership Financial Measures & Returns Size Dealing with Strengths and Weaknesses Opportunities Renewable Energy Sources Recycling Programs & Gas-to-Energy Threats Political & Governmental Legal Forces Economic Conditions & Complementors Competition Management of Opportunities and Threats Business Definition Evolution of the Industry The Future of Waste Management: New

90 92 92 93 94 95 96 97 98 102 103 105 107 108 108 111 112 112 112 112 113 113 113 113 114 114 114 114 114 115 115 115 117 117 120 120 121 121 121 122 122 123 124 128 128 129

Waste Management Company Analysis 5 Products/Services Future Customers Major Competitors Allied Waste Industries Republic Services Possible Mergers & Acquisitions Objectives Revenue/Sales Justification Net Income Justification Market Share Justification Alternatives Building Materials Solar Panels Windmill Energy Generation Alternative Pros & Cons Building Materials Solar Panels Windmill Energy Generation Recommendations Implementation Considerations Setting Unreasonable Expectations Elastic Business Definition A Cause, Not a Business New Voices Open Market for Capital & Talent Low Risk Experimentation Cellular Division References

130 130 131 131 132 133 133 133 134 134 135 135 136 138 139 140 141 141 142 142 143 145 145 146 146 147 147 148 148 150

Tables 1 Gross Segment Revenue 2 Net Sales by Product 3 Regional Net Sales 4 Revenues 5 Net Income 6 Stock Prices 7 Competitive Profile 8 Revenue 9 Net Income 10 Sales Growth Rate 11 Revenue Per Employee 12 Average Operating Margin 13 Net Profit Margin 14 Return on Investment

21 23 24 25 25 27 36 37 38 40 41 42 43 44

Table Table Table Table Table Table Table Table Table Table Table Table Table Table

Waste Management Company Analysis 6 Table Table Table Table Table Table Table Table Table

15 16 17 18 19 20 21 22 23

Analysis Table 24 Table 25 Table 26 Table 27 Table 28 Table 29 Table 30 Table 31 Table 32 Table 33 Table 34 Table 35 Table 36 Table 37 Table 38 Table 39 Table 40 Table 41 Table 42 Table 43 Table 44 Table 45 Table 46 Table 47 Table 48 Table 49 Table 50 Table 51 Table 52 Table 53 Table 54 Table 55

Net Income Per Employee Competitor Comparison Operating Revenue; WMI Revenue Sources; WMI, AW, RSG Revenue – Four-Year; WMI, AW, RSG Net Income; WMI, AW, RSG Company Ranking – Revenue Market Value Analysis Company Ranking – Market Value

45 49 62 64 66 68 68 71 72

Stock Prices – Highs and Lows Gross Profit Margin; WMI, AW, RSG Operating Profit Margin; WMI, AW, RSG Net Profit Margin; WMI, AW, RSG Return on Assets; WMI, AW, RSG Return on Equity; WMI, AW, RSG Company Ranking – Profitability Current Ratio; WMI, AW, RSG Quick Ratio; WMI, AW, RSG Company Ranking – Liquidity Ratios Debt Ratio; WMI, AW, RSG Debt to Equity; WMI, AW, RSG Times Interest Earned; WMI, AW, RSG Short-Term Debt; WMI, AW, RSG Company Ranking – Leverage Ratios Receivables Turnover Ratio; WMI, AW, RSG Fixed Assets Turnover Ratio; WMI, AW, RSG Total Assets Turnover Ratio; WMI, AW, RSG Company Ranking – Turnover Ratios Solvency Ratio; WMI, AW, RSG Operating Cash Flow Ratio; WMI, AW, RSG Company Ranking – Solvency Ratios Net Profit Margin Net Operating Cash Flow Net Financing Cash Flow Net Investing Cash Flow Return on Assets Return on Equity Company Ranked Profitability Ratios Strategy/SWOT Matrix Worksheet Projected Revenue/Sales Projected Net Income

73 74 75 76 77 78 80 84 85 85 87 87 88 89 89 91 92 93 94 95 96 97 105 110 110 111 116 116 116 125 134 135

Figures

Waste Management Company Analysis 7 Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure

1 Company Time Line 2 Segment Revenue by Percentage 3 Income from Operations 4 Revenue Sources 5 Operating Expenses 6 Five Year Total Return 7 Revenue 8 Net Income 9 Sales Growth Rate 10 Revenue Per Employee 11 Average Operating Margin 12 Net Profit Margin 13 Return on Investment 14 Net Income Per Employee 15 Industry Market Share, 16 Revenue Sources; WMI, 17 Revenue Sources; AW, 18 Revenue Sources; RSG, 19 Waste Management Revenue 2004-2007, 20 Waste Management Net Income 2004-2007, 21 Trend Analysis: Waste Management vs. Five

year Industry Average Figure 22 Net Profit Comparison Figure 23 Industry Market Share

18 21 22 24 26 28 38 39 40 41 42 43 45 46 60 61 63 64 66 67 79 107 131

Waste Management Company Analysis 8

Executive Summary This paper will discuss the history of Waste Management Incorporated. The current strategies, core competencies, industry segments, and major competitors of the company will also be discussed. In the competition section, this paper presents a competitive profile table, outlining key competitive measurements of their major competitors, Allied Waste and Republic Services. In that section, we also discuss current aspects of the competitive environment that are likely to affect Waste Management, namely recent merger talks between Allied and Republic. The next section is the financial section. The financial analysis section provides key ratios, such as profitability, liquidity, turnover, leverage, and solvency ratios for Waste

Waste Management Company Analysis 9 Management and their top two competitors over the past four years. A growth and market value analysis is presented, with information on the corporate profile of each firm. A cash flow discussion is also included for Waste Management. The next section examines and identifies the key strengths, weaknesses, opportunities, and threats of Waste Management. The strengths and weaknesses are discussed, along with how Waste Management can leverage their strengths, and overcome their weaknesses. The paper also discusses the opportunities and threats, of the external environment, and how Waste Management can take advantage of the opportunities and minimize the impact of threats. Forward-looking data is also included in this analysis. The paper discusses where we think the industry will be in ten years based on current trends, future customers, competitors, and future product offerings of Waste Management. The objectives that we feel are important to the future of the company are also discussed, along with viable alternatives for the future industry state. These alternatives are discussed, along with our recommendation and implementation issues. Introduction Company Background The company, Waste Management Ltd., was founded by Dean L. Buntrock and his cousin Wayne Huizenga in 1971 (Hoover’s, 2008).

Waste Management Company Analysis 10 Buntrock and CEO Phillip Rooney, depended mainly upon acquisitions to create a massive waste-disposal empire (Waste Management History, 2008). They acquired and consolidated many local haulers, including firms in Canada during the 1970’s (Hoover’s, 2008). As the company grew, they began to divide into specialty areas by forming Chemical Waste in 1975; ENRAC in 1980, which conducted site clean-ups; and servicing nuclear waste clients with Chem-Nuclear systems in 1982 (Hoover’s 2008). In 1988 Waste Management entered into a merger agreement with Wheelabrator, allowing WMI a 22% ownership interest. In 1990, Wheelabrator Technologies became a subsidiary of Waste Management Incorporated (Wheelabrator, 2004). The company grew at a phenomenal pace and in 1993 the company began to diversify. They also were renamed WMX during 1993. However, in 1997 they changed their name back to Waste Management (Hoover’s, 2008). That same year Dean Buntrock, and CEO Phillip Rooney left the company (Waste Management, 2008). After going through four different CEO’s over a period of eight months, the company brought in turnaround specialist, Steve Miller, to take on the role of CEO (Hoover’s, 2008). In 1998, the company merged with the Houston based company, USA Waste Services, in a deal that was worth around $25 billion (Waste Management, 2008). The management team of USA Waste took control over the business, with John Drury as CEO. In 1999, the

Waste Management Company Analysis 11 company acquired Eastern Environmental Services for $1.3 billion, and shortly after this acquisition, John Drury took leave due to medical reasons. It was during this time that shareholders filed an insider trading lawsuit against the firm. The acting CEO, Rodney Proto, was fired due to allegations of insider trading and was replaced with Maury Myers (Hoover’s, 2008). In 2000, Waste Management moved into a restructuring phase, selling off their operations in Europe, Asia, and South America. They hoped to concentrate on their core business. Along the same lines, in 2002, they began reorganizing operations by reducing their workforce by 57,000 employees. During this same time the SEC filed a lawsuit against six former Waste Management executives for fraud (Hoover’s, 2008). In 2003 the firm formed new recycling units and acquired Pelts group, the largest privately held recycling firm. They also went on to acquire 75 complementary collection business and divested operations (Hoover’s, 2008). Currently the Houston based company owns, 354 collection operations, 341 transfer stations, 277 active landfill disposal sites, 16 waste-to-energy plants, 105 recycling plants and 108 beneficial-use landfill gas projects. Such a diversified support structure, allows Waste Management to serve the various needs of over 21 million

Waste Management Company Analysis 12 customers (Waste Management History, 2008). In Figure 1 you will see the timeline for the company.

Waste Management Company Analysis 13 Time Line of Waste Management Incorporated

1982 Chem Nuclear

1971 WMI Est.. 1975 Chemical Waste

1999 Acquired Eastern Recycling 1997 Change Name Back 2002 Began to Waste ReManagement organization

1980 1998 ENRAC 1990 Acquired Merger with USA Wheelabrator Waste During the 1993 1970’s made Change acquisitions name to WMX

Figure 1

Acquired Pelts Group

2002 Insider trading allegations 2000 Sold Asian, South American, & European Operations

Customers and Services

Waste Management services over 20 million municipal, commercial, industrial, and residential customers. For their bigger customers, they also utilize their “Upstream Group” to

Waste Management Company Analysis 14 provide a full range of services and waste strategies. They provide waste and energy resource services to their customers through their 354 disposal operations, 341 transfer stations, 277 active landfills, 16 waste-to-energy sites, 105 recycling facilities, and 108 landfill gas sites. They operate in Puerto Rico, Canada, and in every state in the United States except, two. The firm continues to pursue the standardization of best practices and individual customer pricing initiatives, to provide customers with better service. Waste Management has also updated and consolidated service call centers in an effort to provide representatives will real-time solutions for customers. They handle around 20 million phone calls a year for the company. Waste Management continues to strive to be first in the minds of customers (Waste Management Annual Reports, 2007). Corporate Portfolio Waste Management owns a portfolio of business functions including collection, transfer, disposal, recycling, waste-toenergy, and gas-to-energy segments. In the United States and Internationally, Waste management Inc. supplies incorporated services. The company also offers extra waste management services, such as on-site service, methane gas recovery, and third-party subcontracted and administrative services. It services commercial, industrial, municipal, and residential customers, as well as other waste management companies, electric

Waste Management Company Analysis 15 utilities, and governmental bodies. It is at present, the biggest waste disposal company in North America (www.finance.yahoo.com/q?s=WMI). They divide their business into the following operating segments: Eastern, Midwest, Southern, Western, Wheelabrator, WMRA and other. During the 2007 operating year, these operating groups provided gross revenue totaling $15.6 billion. Table 1 compares the individual segment revenue for the years 2005 through 2006 and was pulled from the financial statements of Waste Management. As of 2005 the Canadian operation’s revenues were allocated between the Midwest and Eastern Groups. Revenue from the operations in Puerto Rico operations is included in the other category (Waste Management Annual Report, 2007). During the 2007 operating year, substantial growth was achieved through pricing initiatives. During 2007, Waste Management saw increases in revenue in the Eastern and Western segments, through transfer station savings. The Southern and Eastern segments had growth provided by municipal solid waste revenue. The Western segment had growth from special waste revenue. However, all of these revenues were offset by lower waste volumes. In Figure 2 the revenue percentages are broken down into the operating segments (Waste Management Annual Report, 2007).

Waste Management Company Analysis 16

Table1 Gross Segment Revenue (millions) Eastern Midwest Southern Western Wheelabrator WMRA & Other

2007 3281 2983 3681 3508 868 1260

2006 3614 3003 3759 3511 902 1023

Segment Revenue Percentages

6%

8%

Eastern Group 21%

Midwest Group Southern Group

23% 19%

Western Group Wheelbrator

23%

Recycling and Other

2005 3632 2922 3590 3416 879 1101

Waste Management Company Analysis 17 Figure 2 Segment Growth Rates Looking at gross revenue, the segment that is growing is the recycling segment. It had a 23% revenue increase from 2006 to 2007. The rest of the segments are actually declining. This is due to the economic downturn affecting the volume of waste. Most of the increases in the other segments are related to price increases, but were offset with the volume declines. Figure 3 was taken from the financial statement presentation of Waste Management Incorporated, and shows the income from operations growth over the past three years. Over the 2006 and 2007 year the company experienced 11% growth in operating income. Over the 2005 to 2006 year the company had 19% growth (Waste Management Investor Presentation, 2007).

Income from Operations Growth (In Millions)

$2,254

Income from Operations

$2,400 $2,029 $1,950

$1,710

$1,500 2005

Figure 3

2006

2007

Waste Management Company Analysis 18

Product Sales Data In Table 2 the net sales by product are presented for Waste Management Incorporated. Their biggest revenue comes from their collection services division. Collection of waste makes up 55% of the entire net sales, and its’ value is $3300 million. Landfill service revenue makes up 20% of the entire net sales, bringing in revenue of $1200 million. Transfer of waste makes up $660 million, recycling $480 million, and waste-to-energy $360 million (www.finance.yahoo.com/q?s=WMI). Table 2 Net Sales by Products Collection

$3300

Landfill

$1200

Transfer

$660

Recycling

$480

Waste-to-energy

$360

Note: Currency is in Millions Regional Net Sales Regional net sales are shown in Table 3 for Waste Management. During the 2007 operating year the Southern and Western divisions brought in the most net sales revenue. This was in large part due to special waste service charges in the Western division and the amount of waste collections in the

Waste Management Company Analysis 19 Southern division. This trend can also be seen during the 2006 and 2005 operating years, as well (Waste Management Annual Report, 2007).

Table 3 Regional Net Sales (millions) Eastern Midwest Southern Western Wheelabrator WMRA & Other

2007 2650 2491 3141 3064 797 1167

2006 2875 2487 3191 3046 831 933

2005 2848 2414 3034 2969 817 992

Revenue

RevenueSourcesWaste ManagementInc. $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500

Revenue SourcesWaste Management Inc.

$0

Figure 4 Retrieved from: Waste Management, Inc. (WMI)

Waste Management Company Analysis 20

Table 4 Revenue 2003 2004 2005 2006 2007 WMI 11,648.0 12,516.0 13,074.0 13,363.0 13,310.0 www.wastemanagement.com

In Table 4 the revenue for Waste Management is shown for the last five years in millions. As of December 2007, revenues at WMI were 13.31B; down .37% from 2006 (13.36B). Revenue has steadily been climbing for the company until 2007. This was in large part due to volume declines, and will be discussed in further detail in the financial section. A visual representation the breakdown of revenues by services is presented in Figure 4. Collection makes up the largest portion of the company’s revenue sources, followed by landfills, transfer stations, recycling, and last waste-to-energy operations. Net Income Table 5 Net Income 2003 2004 WMI 630.0 939.0 www.wastemanagement.com

2005 2006 2007 1,182.0 1,149.0 1,163.0

Waste Management Company Analysis 21 Table 5 shows the net income for Waste Management for the past five years in millions. Net income rose at WMI Company during 2007 by $14 million. This is in large part due to cost savings initiatives the company has instigated. This will also be discussed in the financial section in more detail. Expenses

Operating Costs as a % of Revenue

Operating Costs as a Percent of Revenue

68% 66%

66.0% 64.3% 63.1%

64% 62% 60% 2005

2006

2007

Figure 5 Figure 5, which was obtained from the investor presentation of Waste Management, shows the operating costs over the past three years as a percent of revenue. The chart depicts the increased cost savings initiatives Waste Management has put into place to lower operating costs. These include an updated mapping system for truck routes, improvements in safety programs, and a

Waste Management Company Analysis 22 reduction in administrative staff (Waste Management Annual Reports, 2007).

Stock Prices Table 6 Stock Prices 2003 2004 WMI 29.600 29.940 www.wastemanagement.com

2005 30.350

2006 36.770

2007 32.670

In the Table 6, we can see that the stock prices have steadily increased until 2007. This is largely due to the economic downturn, divestures, and the potential losses associated with decreased waste volumes. The ratios that affect stock price will be discussed in more detail in the financial section (Waste Management, 2007). In Figure 6 the comparison of cumulative five year returns is depicted. From this graph you can see that Waste Management has returns in line with both the Dow Jones industry averages and the S&P 500 index. This data was pulled from the financial statements of Waste Management (Waste Management Annual Report, 2007).

Waste Management Company Analysis 23 Comparison of Cumulative Five Year Total Return WMI

200 $ Return

150 S&P 500

100 50 0 2002

2003

2004

2005

2006

2007

Year

Dow Jones Waste & Disposal Services

Figure 6 Market Share As for market share, Waste Management Inc. holds the biggest share with a 28.5% share, Allied Waste controls around 13% of the market, and Republic Services has 6.6% of the market share (Scharf, 2008). Past the point of these three competitors, there is a highly fragmented market with many competitors (Hoover’s, 2008). Each firm has similar strategies, but different financial data based on their share of the market, price structure, and cost savings initiatives. Current Strategies Corporate Strategy In this part, an analysis of the present national and international business stratagems followed at WMI will be

Waste Management Company Analysis 24 studied. Waste Management’s corporate strategy is to grow revenue through pricing; and continue efforts to lower operating, selling, general, and administrative costs through process standardization and productivity improvements. They want to continue to improve their business units through their “fix or seek exit” strategy and generate strong and consistent cash flows from operations for shareholders. Waste Management is also continuing to divest underperforming operations (Waste Management Annual Report, 2007). The company continues to grow their business units and look for synergistic acquisitions. They are concentrating particularly in the areas of energy generation and recycling. Their strategy is to service the waste needs of customers, by providing environmentally friendly and sustainable solutions to satisfy current and future customers. Waste Management is dedicated to producing the highest level of client support and services. They also want to achieve high returns for shareholders (Waste Management Annual Report, 2007). Waste Management is also devoted to the continual improvement of safeguards for the environment. These efforts distinguish Waste Management as an ecologically friendly company that will be able to continue to meet increased environmental regulations.

Waste Management Company Analysis 25

Business Strategy Waste Management adapts its business to serve the unique requirements of each of its consumer clusters. The firm has decreased their focus on combinations and attainments, and in there place, the firm relies on increasing their resources and growing services. Through WMI’s fiscal resources, the company is able to construct and attain valuable assets that allow them to attain fiscal objectives. They work together with the different administrations, educational associations, and support departments, of the geographic regions they conduct business within, to obtain access to the most cost efficient techniques of waste management that are accessible. One of their chief strategies is to increase investor prosperity by belonging to organizations in every geographic region that the company conducts business within. It is their goal to maintain facilities and community faith in their continued presence within the geographic regions they compete in. They compete among other competitors in the waste industry on price, services, and availability. They are currently implementing cost saving programs to reduce the amount of operating cost passed on to customers. They continue to look for ways to improve operating efficiency and customer service. They recently centralized call centers to provide better information

Waste Management Company Analysis 26 and service to customers. They also service more geographical regions than their competitors. Waste Management seeks to be the first in the minds of customers on waste services (Waste Management, 2007). Functional Strategy The company’s functional strategy is to shift to extra profitable procedures, like expanding their environmental operations and cost savings initiatives. One of their initiatives is to focus on improving the fuel efficiency of their operating fleet. They are planning on expanding their research and development of alternative fuel sources, for vehicles. They are expecting to invest around $500 million toward increasing the fuel efficiency of their fleet over the next ten years. They also plan to continue their environmentally friendly marketing campaign, under the “Think Green” slogan (Waste Management, 2007). In the human resource area, Waste Management seeks to improve the safety record of the company. This will aid them in financial strategies to reduce costs and improve operating income. This strategy also promotes employee welfare. The company is seeking to imbed safety into the everyday operations. It is a way of life that is imbedded in the way they work, the judgments they formulate, and the measures they acquire. WMI aims to accomplish outstanding protection and be the safest

Waste Management Company Analysis 27 company in the industry. The strategy is known as Mission to Zero (M2Z). The company plans to support this plan to reduce the amount of hazardous decisions, dangerous conditions, perilous tools, and unsafe approaches that employees might take. The foundation of M2Z is well documented, and each employee goes through the safety training process. This program actively enhances employee happiness and superior consumer contentment (Waste Management, 2008). Core Competencies Waste Management specializes in handling, collecting, treating, transferring, and disposing of solid and hazardous waste. The firm also holds core competencies in the industry segments of recycling, waste-to-energy, and gas-to-energy generation. All of these core business processes derive off of the company’s ability to provide effective customer services. Solid Waste Disposal Waste Management provides solid waste pickup and disposal. This waste includes, food items, furniture, newspapers, and so on. In 2003, the US produced more than 236 million tons of solid waste. This equates to around 4.5 pounds of waste per person, per day (Municipal Solid Waste, 2008). Waste Management collects waste for nearly 20 million residential, commercial, and industrial customers. They have an extensive area they can service, since they are in all states except two in the United

Waste Management Company Analysis 28 States. They also have the largest fleet of trucks to serve customers needs (Waste Management Annual Report, 2007). They provide curbside service, and contract terms of three years for industrial or commercial accounts. For residential services they contract with municipalities for one to five years, to provide services. They process the waste down two paths. They either haul it directly to the landfill, or collect it and take it to a transfer station to be compacted. Once the waste has been compacted it is hauled to the closest landfill, via Waste Management’s trucks or their railcar system (Waste Management, 2007). Waste management also treats hazardous waste. This kind of waste includes hazardous waste items such as, medical and nuclear waste. Waste in this segment is largely generated by industrial manufacturers (Hazardous Waste, 2008). They operate several hazardous waste landfill sites, and meet necessary EPA regulations to operate them (Waste Management Annual Report, 2007). Transfer Stations WMI owns and operates 341 transfer stations that serve as efficient way stations between collection points and landfill disposal. At these stations waste is consolidated and compacted for eventual transport to landfills. They own more transfer stations than their major competitors. This enables them to be

Waste Management Company Analysis 29 more efficient in the transportation and disposal of waste (Waste Management, 2007). Landfills WMI owns and operates the largest network of landfills in the industry. As of December 31, 2007, WMI owned or operated 271 solid waste and six hazardous waste landfills. In addition, it managed 187 closed landfills. WMI utilizes Next Generation Technology that accelerates the decomposition of waste in landfills so that decomposition time is reduced from decades to years (Waste Management, 2007). Recycling Recycling has enabled Waste Management to process newly manufactured products, and in addition it saves valuable landfill space. Waste is sorted out that can be recycled and new products are manufactured from this waste (Municipal Solid Waste, 2008). WMI processes more recyclables than any other company in North America. Through its subsidiary, WM Recycle America, WMI partners with the local community to process more than 5.5 million tons of recyclable materials each year through its 109 material recovery facilities. For commercial accounts, WMI offers easy and cost-effective recycling through its singlestream recycling, eCycling, or shredding, to regional and national bale routes (Waste Management, 2007).

Waste Management Company Analysis 30 Waste-to-energy Waste Management, through their subsidiary Wheelabrator, is able to process garbage into energy resources. This is one of Waste Management’s strongest core competencies. In fact none of their immediate competitors, mentioned in this paper, have that capability. Wheelabrator’s waste-to-energy plants have the capabilities of producing 609 megawatts of power, enough to power over 900,000 homes (Wheelabrator, 2004). The added benefits of converting waste-to-energy, is that it reduces the waste going to landfills by 90%. The process has also been approved by the Environmental Protection Agency as having one of the lowest environmental impacts in the generation of electricity (Waste Management Annual Report, 2007). Gas-to-Energy As of December 31, 2007, WMI was producing commercial quantities of methane gas at 108 of it solid waste landfills, where it is either sold to electricity utilities or to natural gas suppliers. Waste Management leads the industry in the building and operations of methane gas plants. During the 2007 year alone, they built seven new operations. These operations supply enough energy to power around 400,000 homes and enable the company to gain renewable energy credits for greenhouse gas emissions (Waste Management, 2007).

Waste Management Company Analysis 31 All of these competencies give Waste Management the potential to dominate the waste industry. However, they are not without competitors. The next section will discuss the competitive environment Waste Management faces, the top two competitors, and discuss the core competencies of the top two competitors against Waste Management. Competitive Environment Competitive Profile The competitive environment in the waste industry is highly fragmented past the top three competitors (Hoovers, 2008). In Table 7 the comparative competitive profile of companies in the waste industry are presented. These areas will be discussed in the sections below. Table 7 Competitive profile of the companies under the waste management Industries 2007 WMI ALLIED REPUBLIC WASTE STERICYCLE SERVICES CONNECTION Revenues (Millions) Net Income (Millions) Sales Growth Rate (20032007) Revenue Per Employee

$13,310

$6,068.7

$3,176.2

$958.5

$932.8

$1,630

$ 273.6

$290.2

$99.1

$118.4

3.49%

3.17%

$282,477

$267,908

6.07%

$245,369

14.69%

18.36%

$198,773

$160,345

Waste Management Company Analysis 32 Average Operating Margin (20032007) Average Net Profit Margin (20032007) Return On Investment (20032007)

14.45%

16.40%

16.72%

22.98%

25.75%

8.05%

2.89%

8.91%

10.90%

13.17%

6.00%

1.36%

6.57%

5.59%

9.53%

Net Income Per Employee

$24,599

$15,311

$24,031

$20,044

$19,812

Data for Table obtained from: http://www.reuters.com/finance/stocks/ratios?symbol=RSG.N http://www.reuters.com/finance/stocks/ratios?symbol=AW.N http://www.reuters.com/finance/stocks/ratios?symbol=WMI.N Revenue Table 8 Revenue WMI Revenues (Millions)

$13,310

ALLIED $6,068.7

REPUBLIC SERVICES $3,176.2

WASTE STERICYCLE CONNECTION $958.5

$932.8

Waste Management Company Analysis 33

Figure 7 In Figure 7, the graph shows the revenue in millions for five firms in the waste industry. Waste Management’s revenue is higher than all other competitors depicted, combined. The other four together have earned around $11,000 million, whereas WMI alone has earned $13,310 Million. The area that seems to be growing the most rapidly is the recycling segment of the industry. This segment will play an important role in the continued success of revenue growth for Waste Management. Last year alone, they recycled 8 Million tons. Net Income Table 9 Net Income WMI Net Income (Millions)

$1,630

ALLIED $ 273.6

REPUBLIC SERVICES $290.2

WASTE STERICYCLE CONNECTION $99.1

$118.4

Waste Management Company Analysis 34

Figure 8 In Table 9 you can see that Waste Management has more net income than other competitors, $1,630 million. This can be attributed to their large market share and varied geographical presence. They are followed by Republic Services at $290.2 million and Allied Waste at $273.60 million. Stericycle and Waste connection have a relatively small portion of the net income presented. In Figure 8 the graphical representation of Table 9 is presented.

Waste Management Company Analysis 35 Sales Growth Table 10 Sales Growth Rate WMI Sales Growth Rate(20032007)

3.49%

ALLIED 3.17%

REPUBLIC SERVICES 6.07%

WASTE STERICYCLE CONNECTION 14.69%

18.36%

Figure 9 Waste Management Inc. has lower sales growth rates than all other competitors, except Allied Waste. In Table 10 and Figure 9, these trends can be observed. The top two competitors of Waste Management, Allied and Republic, have growth rates of 3.17% and 6.07% respectively. These trends signal that the smaller firms in the industry are rapidly acquiring new customers. This explains the higher sales growth of the smaller firms. Waste Management is so geographically diversified that they are struggling to create sales growth. They are

Waste Management Company Analysis 36 concentrated on growth through acquisitions, new technologies, and maintaining their market share. Revenue Per Employee Table 11 Revenue Per Employee WMI Revenue Per Employee

$282,477

ALLIED $267,908

REPUBLIC SERVICES $245,369

WASTE STERICYCLE CONNECTION $198,773

$160,345

Figure 10 In Table 11 and Figure 10, data shows that Waste Management has the highest return per employee. The firm is showing a return of $282,477 per employee, which is more than their top two competitors, Allied Waste and Republic Services. Their return per employee is $267,908 and $245,369 respectively. Generally, the more employees a company has the less the per

Waste Management Company Analysis 37 head revenue. However, Waste Management has the highest number of employees, and still has a higher return. They are utilizing their workforce efficiently to create value for the company. Average Operating Income Table 12 Average Operating Margin WMI Average Operating Margin (20032007)

14.45%

ALLIED 16.40%

REPUBLIC SERVICES 16.72%

WASTE CONNECTION 22.98%

STERICYCLE 25.75%

Figure 11 In Table 12 and Figure 11 the operating margins are presented. Operating margin is calculated by dividing operating income by the net sales. This calculation shows how much money the firm is actually generating for each dollar of sales. This calculation can show efficiency issues. Investors would like to see this margin increasing over time. Waste Management has the

Waste Management Company Analysis 38 lowest operating margin, 14.45%. Allied has 16.40% and Republic has 16.72%. Stericycle and Waste Connection are actually generating more dollars of sales and have better operating expenses than the three largest firms in the industry. Net Profit Margin Table 13 Net Profit Margin WMI Average Net Profit Margin (20032007)

8.05%

ALLIED 2.89%

REPUBLIC SERVICES 8.91%

WASTE CONNECTION 10.90%

STERICYCLE 13.17%

Figure 12 In Figure 12 the last five year average for net profit margin is presented. The numbers are also shown in Table 13. For

Waste Management Company Analysis 39 Waste Management their average net profit margin is 8.05%, which is only one above the lowest in the industry competitors presented. This should come as no surprise, since they are the lowest in the average operating margin, as well. Again, Waste Connection and Stericycle have better net profit returns over the past five years than the top three competitors. Return on Investment Table 14 Return on Investment WMI Return On Investment (20032007)

Figure 13

6.00%

ALLIED 1.36%

REPUBLIC SERVICES 6.57%

WASTE STERICYCLE CONNECTION 5.59%

9.53%

Waste Management Company Analysis 40 Table 14 and Figure 13 show the return on investment for the firms over the past five years. Figure 13 visually depicts the return on investment Waste Management had over the five year average, 6%. Republic has provided a return on investment of 6.57%, and Stericycle has the biggest return on investment of 9.53%. Allied Waste has the worst return on investment. Net Income Per Employee Table 15 Net Income Per Employee

Net Income Per Employee

WMI

ALLIED

REPUBLIC SERVICES

$24,599

$15,311

$24,031

WASTE CONNECTION

STERICYCLE

$20,044

$19,812

Figure 14 Figure 14 and Table 15 represents net income per employee. Again, Waste Management has the highest net income for employee

Waste Management Company Analysis 41 at $24,599. So Waste Management, while having a lower operating and net profit margin, actually get more revenue per employee than their competitors. This is in large part due to recent restructuring strategies the firm has undertaken. They have dismissed many of their administrative employees in order to reduce overhead costs. These figures denote that Waste Management is efficient in generating revenue through their employees. Conclusion of competitive analysis Waste Management is certainly the biggest in the industry. They outrank their competitors in revenue, net income, revenue per employee, return on investments, and net income per employee. However, they do not lead in every measurement contained in Table 7, the competitive analysis. They need to evaluate their sales growth, average operating margin, and average net profit margins. The only real threat to Waste Management is the possibility of a loss of market share, or the merger of their next two largest competitors. Stericycle and Waste Connection have the potential to be an attractive acquisition target for Waste Management or the other firms. They have high sales growth and operating profit margins. Significant Competitors The waste management industry deals with five different categories of waste, created by individuals or organizations.

Waste Management Company Analysis 42 Most of the firms competing within the industry provide similar services. This is why in large part a firms’ competitive advantage depends on its number of geographic locations, resources, services, and price. Since Waste Management has such geographically diversified holdings they able to service more people, than any of their competitors. The next two competitors, based on market share are Allied Waste, with 13%, and Republic Services, with 6.6% (Scharf, 2008). These are the two major competitors that Waste Management must contend with. Given the fact that these two have started recent merger talks, Waste Management should be watching their moves very carefully. A brief description of these two competitors is discussed below.

Allied Waste Industries Allied Waste Industries is headquartered in Phoenix, AZ. They also have locations in 37 states in the United States and Puerto Rico. They also deal with non-hazardous solid waste management, waste collection, recycling, and disposal services to individual and industrial clients. Their services start from door-to-door collection through the end process of disposal. They have over 8 million residential, commercial and industrial customers in over 100 major markets. They employ 23,000 employees and own 291 collection companies, 161 transfer station, 161 active landfills, and 53 recycling facilities.

Waste Management Company Analysis 43 During the 2007 operating year they also expanded their methane gas collection projects (Allied Waste Annual Report, 2007). Allied Waste’s business strategy encompasses the following: vertical integration of waste services, improving operating efficiencies through the implementation of best practices, focusing on improved customer service, improving and maintaining market position, and to provide financial and system support to the ongoing operations of the organization (Allied Waste Annual Report, 2007). Republic Services Inc. RSI is the second major competitor of Waste Management Industries. Their corporate office is at Florida and they operate in 21 states. The company provides services to commercial, industrial, municipal, and residential customers. They have 136 collection facilities, 94 transfer station, 58 solid waste landfills, and 33 recycling facilities. Their strategy is to focus on high growth markets (Republic Services Annual Report, 2007). Republic seeks to manage their free cash flow to maximize shareholder value by reinvesting in the existing fleet, equipment, and landfill facilities. Their goal is to provide higher levels of customer service and to seek growth of revenue. Their growth strategy is to increase market share through internal growth or acquisitions. They also hope to improve

Waste Management Company Analysis 44 margins through the acquirement of economies of scale and scope, cost efficiency, and asset utilization. They are striving to acquire more commercial, residential, and industrial customer contracts through sales and marketing strategies (Republic Services Annual Report, 2007). In Table 16 the growth rate for sales is presented, along with net income and revenue for each company. Table 16 Competitor Comparison Organization WMI AW RSG

Relative Market Growth Rate Share 28.5% 2.2% 13% 5.1% 6.6% 7.2%

This shows that Waste Management should be particularly concerned with the growth strategies of both Allied Waste and Republic services. The sales growth of Waste Management is only 2.2%, while Allied Waste has a 5.1% growth rate, and Republic has a 7.2% growth rate (Scharf, 2008). The growth strategies of both companies are a direct threat to Waste Management. Allied and Republic are considering acquisitions to gain even more market share, and focusing on the high growth arenas. They could very easily take over Waste Management’s market share. Given that Allied and Republic are considering a merger, Waste Management will need to react quickly. If those two

Waste Management Company Analysis 45 companies merge then they will have locations in predominantly the same geographic regions as Waste Management. This will cause both companies to compete over customers. This will also give the new combined companies around the same asset quantities as Waste Management. This would take away Waste Management’s strength in landfill sites, transfer stations, and the size of their trucking fleet. If the merger were to happen, this would move the importance on to strategies focusing on increased efficiencies, customer service, and price.

Competition Core Competencies Allied Waste Allied Waste Industries, Inc. provides solid waste collection, transfer, recycling and disposal services for more than 8 million customers. Collection Allied Waste provides collection services under four service lines:

commercial, residential, roll-off and recycling

collection. They service residential, commercial, and municipal customers. They have 300 collection locations that provide curbside pick-up and transportation directly to the landfill or

Waste Management Company Analysis 46 transfer station. They service over 10 million customers and like Waste Management, they also use trucks and rail systems to transport waste (Allied Waste Annual Report, 2007). Transfer Stations Allied serves its customers through its use of transfer stations to effectively consolidate solid waste before transport to landfill facilities. On December 31, 2007 Allied Waste owned or operated 161 transfer stations. These stations help to reduce costs by compacting waste material prior to transportation (Allied Waste Annual Report, 2007). Recycling Allied Waste operates 53 recycling facilities. These facilities sort, and process paper, cardboard, aluminum, and other metals. They sell the resulting recycled products at the current commodity prices. Landfills To service its customers Allied Waste owns or operates landfills for its solid waste collection. At the end of 2007, the company had a network of 161 active landfills. They do not possess any hazardous landfill site permits, like Waste Management (Allied Waste Annual Report, 2007). Gas-to-Energy Allied Waste also has 50 gas-to-energy sites for the collection of methane gas in the production of energy. Waste

Waste Management Company Analysis 47 Management also has this core competency (Allied Waste Annual Report, 2007). Republic Services, Inc. Republic Services operations include the collection, transfer, and disposal of solid waste. Collection Republic Services provides non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 136 collection companies located in 21 states. Again, they provide curbside service for their residential customers. They also service commercial, industrial, and municipal customers. They do not possess hazardous waste landfill sites (Republic Services, Annual Report, 2007). Transfer Stations As of December 31, 2007, Republic Services owned or operated 94 transfer stations. Waste at these facilities is compacted and transferred to trailers for transport to landfills or recycling facilities. Unlike Waste Management and Allied they do not have rail systems to transport waste on (Republic Services, Annual Report, 2007). Landfills Republic Services operates 58 landfills, some of which accept non-hazardous special waste, including utility ash,

Waste Management Company Analysis 48 asbestos and contaminated soil (Republic Services, Annual Report, 2007). Recycling In addition, Republic Services has 33 recycling facilities and other recycling operations. Recycled materials are salvaged and sold to third parties (Republic Services, Annual Report, 2007). Summary of Core Competencies It is easy to see from the listing of the core competencies of Waste Management, Allied Waste, and Republic Services that each has similar core competencies. They all have landfills, transfer stations, and recycling centers. Allied Waste and Waste Management both process methane gas into energy, while only Waste Management has the capability to transfer waste into energy. This is why we have identified waste-to-energy as their most important core competency. This is not to say that this cannot be copied by their competitors in the future, but presently, it is their unique competency. In addition each firm has managerial knowledge competencies. These firms all have industry experience in the various competencies listed above, with the exception of the gas and waste-to-energy areas. All the firms seem to pursue the same cost saving initiatives and customer service improvements.

Waste Management Company Analysis 49 Due to Waste Management’s geographic presence, size, and asset base they are not particularly vulnerable to the competition, as it stands. Waste Management has the resources to continue advanced research in energy generation alternatives. They also have locations in more states than their other two competitors. Their most vulnerable point would be a loss of market share, since most of their revenues come from their collection services. Participants in the waste industry tend to follow the trends and do not pursue direct attacks on one another. This might be due to Waste Management’s size, because quite frankly, neither of Waste Management’s competitors has had the geographic presence to give them a run for their money. However, this just might happen if Allied and Republic merge.

Key Factors of Competition Companies in the waste management industry compete mainly on geographic location, pricing, and quality of operations (Republic Services Annual Report, 2007). Other factors that can be considered as factors to competition include market trends toward recycling, cost efficiencies, and regulatory licensing. Geographic Location Geographic location plays a major role in a firms’ ability to compete in this industry. Waste Management has more locations

Waste Management Company Analysis 50 than either Allied or Republic. This gives Waste Management a competitive advantage over their rivals. This is one reason Allied and Republic are considering a merger (Waste Management Annual Report, 2007). Pricing With volumes declining, firms in this industry are instead turning to organic growth to support operations, in the form of price increases. It is important for firms’ to control costs and minimize the amount of cost passed on to customers. If competitors are in the same geographic region, but one has higher pricing, it is likely they will lose customers. The industry trends say that it is unlikely the price structure will differ drastically between firms, because the bigger firms are hesitant about going into a price war (Value Line Republic Services, 2008). Quality of Operations Firms are competing more and more on customer service. Since each provide relatively the same services, and have the same pricing structure, firms must improve customer service. This includes “right price” strategies by Waste Management and similar pricing strategies from Republic and Allied (Waste Management Annual Report, 2007). Increases in Recycling

Waste Management Company Analysis 51 Trends in the industry are also moving toward an increased focus on recycling and environmentally friendly programs. Environmental pollution is one of the biggest problems that this industry has to solve. Increased demand from customers and government regulators for environmentally friendly solutions is driving the competition in the recyclable commodities arena. Firms are increasingly competing on their ability to perform tasks in an environmentally friendly manner, and reduce their dependence on new landfills for sustainability. Cost Effectiveness With decreases in volumes, all the firms in the industry are working on cost efficiency programs. This enables the firms to reduce the amount of cost it passes on to the customer. This is very important in the geographic locations that have more than one competitor. It also has added benefits to the company of increasing profits, the utilization less resources, and the potential to earn more return. One of the main factors in the waste industry is fuel. Fuel is one of the most important factors, because of collection trucks. Firms have thousands of trucks, which use millions of gallons of fuel for collection from door to door. Waste Management has recently started to explore alternative fuel usage in their fleet (Waste Management, 2008). Governmental Permits

Waste Management Company Analysis 52 One of the other key factors to competition is the ability of the firms to obtain and maintain government permits for operations. They also have to ensure compliance with local and federal regulatory laws that could close them down. Those companies that can obtain the required permits have a competitive advantage over those firms that cannot. Competitive Summary In the waste industry individuals, municipalities, commercial, and industrial organizations define customer expectations. With the government regulations in the industry firms are rule takers. They have very little lead-way to be a rule breaker. If they do not follow set industry regulations they can be fined or shutdown. Prices remain relatively in-line among competitors. There have not been any price wars in the waste industry. Waste Management, as well as, Allied and Republic have largely grown organically over the past year. With increased fuel prices and operational costs, the cost advantages Waste Management has seen in the past has been eroded. The competition is becoming increasingly dependent on cost savings, to generate higher returns. Waste Management is positioned well within the growth segments of recycling and energy generation. They have unique operations in the waste-to-energy and more recycling operations than their competitors. They are strong in every segment they

Waste Management Company Analysis 53 participate in due to their geographic locations, resources, and abilities. However, Allied is quickly moving into the gas-toenergy segment, and if they merge with Republic they will have nearly the same asset strength as Waste Management. Right now Allied Waste and Republic are positioned as the number two and three competitor in disposal, transfer, and recycling segments (Waste Management, 2008). In the next section we will review key ratios of Waste Management and their key competitors. There will also be discussions on how Waste Management can improve these ratios against their competitors. Financial Analysis Financial Analysis: Waste Management, Inc. This analysis will focus on the financial performance of Waste Management, Inc. and its top two competitors in the solid waste industry, Allied Waste and Republic Services for the years 2004 through 2007. It is hoped that through this analysis the financial strengths and weaknesses of Waste Management and its major competitors will be recognized; strengths can be exploited and weaknesses can be improved. The financial data presented in this analysis was compiled from each company’s 2007 annual report and form 10K, Morningstar, and Yahoo Finance. The majority of the ratios were calculated independently.

Waste Management Company Analysis 54 The financial analysis includes revenue and income analysis, market value analysis, and financial ratios. The ratios are compared with Allied Waste and Republic Services, and are presented in the following segments:

profitability ratios,

liquidity ratios, leverage ratios, turnover ratios, and solvency ratios. In addition, under each ratio segment, recommendations for improvement are presented. Corporate Profiles The waste management industry is made up primarily of three companies; Waste Management Inc., Allied Waste Industries, and Republic Services. Waste Management has the largest market share at 29%, followed by Allied Waste at 13%, and Republic Services at 7% market share. The remaining 51% of the industry is highly fragmented among many smaller competitors.

Waste Management Company Analysis 55

Industry Market Share

29% 51% 13%

WMI AW RSG Others

7%

Figure 15 Industry Market Share Waste Management, Inc. (WMI) Waste Management, Inc. provides integrated waste services in the United States, Puerto Rico, and Canada. It offers collection, transfer, recycling, disposal, and waste-to-energy services. The company also provides additional waste management services, such as on-site services, methane gas recovery, and third-party subcontracted and administrative services. It services commercial, industrial, municipal, and residential customers, as well as other waste management companies, electric utilities, and governmental entities. It is currently the largest waste disposal company in North America, and is based in Houston, Texas (www.finance.yahoo.com/q?s=WMI). The revenue of Waste Management can be broken into six segments that include: collection, landfills, transfer stations,

Waste Management Company Analysis 56 recycling, and waste-to-energy. Waste Management receives 56% of its revenue from collection services, 20% from landfill, 11% from transfer, 8.3% from recycling, and 6% from waste-to-energy. Figure 16 shows the breakout of these revenues for the 2007 year. Revenue Sources Waste Management, Inc.

8%

Collection

6%

Landfill 11%

Transfer

55%

Recycling

20%

Waste-toEnergy

Figure 16 Revenue Sources WMI

Data: Annual Report, WMI

The mix of operating revenues from Waste Management’s different services is reflected in the Table 17. Recycling showed an increase of $224 million for 2007, while the rest of the services showed decreases. These decreases were due to lower volumes, as a result of significant slowdown in residential construction (Annual Report, WMI, 2007).

Table 17

Waste Management Company Analysis 57 Operating Revenues - WMI 2007 Collection 8,714 Landfill 3,047 Transfer 1,654 Wheelabrator 868 Recycling and other 1,298 Intercompany -2,271 Total 13,310 Data: www.wastemanagement.com

2006 8,837 3,197 1,802 902 1,074 -2,449 13,363

2005 8,633 3,089 1,756 879 1,183 -2,466 13,074

Allied Waste Industries, Inc. (AW) Allied Waste Industries, Inc. operates as a non-hazardous solid waste management company in the United States and Puerto Rico. The company provides collection, transfer, recycling, and disposal services for residential, commercial, and industrial customers. Allied Waste Industries is currently the number two waste management company and is headquartered in Phoenix, Arizona(www.finance.yahoo.com/q?s=AW). In Figure 17 the revenue sources for Allied Waste are presented for 2007.

Waste Management Company Analysis 58

Revenue Sources - Allied Waste 7% 4% 5% 14% 70%

Figure 17 Revenue Sources, AW

Collection Landfill Transfer Recycling Other

Data: Annual Report, AW

Republic Services, Inc. (RSG) Republic Services, Inc. provides non-hazardous solid waste collection and disposal services for commercial, industrial, municipal, and residential customers in the United States. It is currently ranked as the number three waste management company in the United States. Republic Services, Inc. was founded in 1996 and is headquartered in Fort Lauderdale, Florida (www.finance.yahoo.com/q?s/RSG). In Figure 18 the revenue sources for Republic Services are presented by percentage for 2007.

Waste Management Company Analysis 59

Revenue Sources - Republic Services

9%

6% Collection

9%

76%

Figure 18 Revenue Sources, RSG

Landfill Transfer Recycling

Data: Annual Report, RSG

Table 18 summarizes the revenue sources for all companies in percentages for 2007.

Table 18 Revenue Sources Revenue Sources WMI AW RSG Collection 56% 70% 76% Landfill 20% 14% 9% Transfer 11.0% 7% 9% Recycling 8.3% 4% 6% Waste-to-Energy 6% 0% 0% Other 0% 5% 0% Data: Annual Report, 2008 www.wastemanagement.com, www.awin.com, www.republicservices.com Growth Analysis Given the fact that 51% of the market is controlled by many small firms, growth is a vital opportunity for firms in the

Waste Management Company Analysis 60 waste industry. The growth analysis section includes data and comments covering the areas of revenue (sales) and income. Revenue (sales) As of December 2007, revenues at Waste Management were $13.31 billion, down .37% from 2006 ($13.36 billion). Allied Waste had 2007 revenues of $6.1 billion, up 2.5% from 2006 ($5.9 billion). Republic Services revenue for 2007 was $3.19 billion, up 3.9% from 2006 ($3.07 billion). The revenues for Waste Management were lower by $53 million in 2007, primarily as a result of volume declines and divestitures and offset largely by increased yields from the base business and higher recycling commodity prices (Annual Report, WMI, 2007). Divestures included underperforming and nonstrategic operations. The operations divested were mainly collection services, and a few recycling and transfer stations. The revenues for Allied Waste increased 2.5% in 2007; $160.2 million primarily as a continued result of price growth from a 6% price increase in 2005 (Annual Report, AW, 2007). Republic Services had an increase of 3.9%, with revenues increasing $105.6 million, primarily due to a pricing initiative instituted in 2003 (Annual Report, RSG, 2007). Figure 19 reflects revenue results for Waste Management from 2004 through 2007:

Waste Management Company Analysis 61

Waste Management Revenue 13,600.0 13,400.0 13,200.0 13,000.0 12,800.0 12,600.0 12,400.0

Revenue

12,200.0 12,000.0 2004

2005

2006

Figure 19 Waste Management Revenue

2007 Data: www.morningstar.com

The Table 19 summarizes the four-year revenues for each company: Table 19 Revenue Revenue 4year 2004 12,516.0

2005 13,074.0

2006 13,363.0

2007 13,310.0

5,362.0

5,612.2

5,908.5

6,068.7

Republic 2,708.1 2,863.9 Services Data: www.morningstar.com

3,070.6

3,176.2

Waste Management Allied Waste

Net Income Net income is determined by subtracting cost of goods sold, depreciation, taxes, interest, and other expenses from revenue.

Waste Management Company Analysis 62 Although Waste Management’s revenue was down, the company’s net income was up 1.2%, or $14 million, primarily from decreases in operating expenses, as well as significant returns provided by its recycling operations (Annual Report, WMI, 2007). Figure 20 shows the net income trend for Waste Management in millions, from 2004 through 2007:

Waste Management Net Income 1400.0 1200.0 1000.0 800.0

Net Income

600.0 400.0 200.0 0.0 2004

Figure 20

2005

2006

2007

Waste Management Net Income Data: www.morningstar.com

Allied Waste had a significant net income increase in 2007 of 70% or $112.7 million over 2006 net income. This is attributable to revenue increases of 6% during 2007 and a decrease in operating expenses of 1.7% from 2006 to 2007 (Annual Report, AW, 2007).

Waste Management Company Analysis 63 Republic Waste had a moderate net income increase of 3.8% or $10.6 million, the continued result of price initiatives in 2003 (Annual Report, RSG, 2007). Table 20 summarizes the four-year net income amounts for each company: Table 20 Net Income Net Income 4 Yr. 2004 2005 2006 2007 939.0 1,182.0 1,149.0 1,163.0

Waste Management Allied Waste 49.3 203.8 Republic 237.9 253.7 Services Data: www.morningstar.com

160.9 279.6

273.6 290.2

Table 21 ranks the revenue and net income for the three companies for the year 2007. It is clear that Waste Management has over double the revenue of Allied Waste, and over quadruple the revenue of Republic Services. Waste Management also has four times the net income of Allied and Republic. Table 21 Company Rank – Revenue for year 2007 Company Rank – Revenue - 2007 Revenue

Highest

WMI $13,310 Net Income WMI $1,163 Data: www.morningstar.com

Middle

Lowest

AW – 6,068.7 RSG – 290.2

RSG – 3,176.2 AW – 273.6

Waste Management Company Analysis 64 Market Value Analysis In this section, will be presented several ratios used in determining the value of a company’s stock. It is important to note that none of these ratios should be used by themselves in trying to determine whether a stock is over or undervalued by the market. These ratios include earnings per share, price earnings, price to sales, price to book, and price to cash flow. Each one will be explained and then shown in Table 6. Earnings per Share The earnings per share, represents the amount of net income that a company makes per share of stock that is available on the market (Business Ratios, 2008). Companies calculate the earnings per share by dividing the total earnings by the number of shares outstanding. All of the companies reported an increase for 2007 over 2006 numbers. Price to Earnings (P/E) The price/earnings (P/E) ratio is determined by dividing the market value per share of stock by the earnings per share of stock. This ratio gives the company an idea of what the public is willing to pay per share of stock, based on the company’s earnings (Business Ratios, 2008). The Table 6 shows that Waste Management has the lowest P/E ratio among its competitors. So, investors are only willing to pay $15.80 per $1 of earnings.

Waste Management Company Analysis 65 Price to Sales (P/S) The Price to Sales, or P/S ratio, is determined by dividing the market capitalization of the stock by the total revenues of the company. Like price earnings, the P/S reflects the value placed on the sales by the market. It is desired to have a lower the price to sales ratio because the investor is paying less for each $1 of sales (Business Ratios, 2008). Price to Book (P/B) The Price to Book looks at market value of stock compared to the book value of the stock. It is calculated by taking the current price per share and dividing by the book value per share. As with the price to sales, a lower price to book ratio can signal a good investment for investors (Business Ratios, 2008). Price to Cash Flow The Price to Cash Flow is determined by dividing the stock’s price by the cash flow per share. Lower numbers, relative to the industry and competitors, suggests the market has undervalued the stock (Business Ratios, 2008). Waste Management’s price to cash flow is under the industry average of 14.0%. Table 22 organizes all of these ratios and compares the three companies.

Waste Management Company Analysis 66 Table 22 Market Value Analysis 2004 Earnings per share Waste Management Allied Waste Republic Services

$1.61 $0.11 $1.08

2005 $2.09 $0.42 $1.20

2006 $2.10 $0.32 $1.39

2007 $2.23 $0.71 $1.51

Price/Earnings Waste Management Allied Waste Republic Services S&P 500

18.7 84.0 21.9 19.0

14.5 20.3 21.5 17.3

17.5 37.2 19.7 16.8

15.8 24.5 22.2 16.5

Price/Sales Waste Management Allied Waste Republic Services S&P 500

1.4 0.6 1.9 1.6

1.4 0.5 2.0 1.5

1.5 0.7 1.9 1.6

1.3 0.7 2.0 1.5

Price/Book Waste Management Allied Waste Republic Services S&P 500

2.9 1.3 3.0 3.0

2.7 1.1 2.8 2.8

3.2 1.5 2.9 2.9

2.8 1.3 2.7 2.7

Price/Cash Flow Waste Management 7.9 Allied Waste 4.6 Republic Services 7.7 S&P 500 11.5 Data: www.morningstar.com

7.4 3.9 7.5 10.8

8.0 4.5 11.0 11.1

7.0 3.9 9.3 11.6

Waste Management Company Analysis 67 Table 23 ranks each company in the market value analysis. Table 23 Company Rank – Market Value Analysis Earnings per Share

WMI - $2.23 RSG $1.51 Price/Earnings WMI – 15.80 RSG 22.20 Price/Sales AW – 0.70 WMI - 1.30 Price/Book WMI - 2.80 RSG - 2.70 Price/Cash Flow RSG - 9.3 WMI - 7.0 Data: www.morningstar.com

AW - $0.71 AW – 24.50 RSG – 2.0 AW - 1.30 AW - 3.9

Waste Management has the highest earnings per share and price to book of $2.23 and $2.80 respectively. They have the lowest price to earnings, $15.80, perhaps signaling a good investment opportunity. However it is in the middle for price/sales and price/cash flow. Stock Prices The stock price, in Table 8, shows the high and lowest stock price for each company for the years 2004 through 2007. Because of Republic Services’ lower debt and high net profit margin the market has rewarded it with a steady increase in its high market price. Likewise, the market has rewarded WMI with a consistent increase in stock price. The market has not yet recognized Allied Waste’s efforts in decreasing its debt and increasing its net profit. Table 24 records the stock high-andlow prices for each company.

Waste Management Company Analysis 68 Table 24 Stock Prices – Highs and Lows 2004 31.1

2005 30.71

2006 38.35

2007 40.38

26.56

27.21

33.28

32.67

Allied Waste - High Allied Waste - Low

14.28 8.2

13.5 9.78

9.13 6.98

13.99 9.3

Republic Services High Republic Services Low Data: www.financeYahoo!

22.36

25.39

28.66

34.85

16.63

20.23

25.3

26.61

Waste Management High Waste Management Low

Profitability Ratios Profitability ratios show the combined effects of liquidity, asset management, and debt on operating results.

The

profitability ratios discussed in this section are the gross profit margin, operating profit margin, net profit margin, return on assets, and return on equity. Gross Profit Margin The gross profit margin is calculated by dividing the gross profit by revenue (Brigham, 2004). Gross profit is the amount of revenue dollars remaining after the cost of goods sold has been deducted. If the gross profit margin is declining over time, it may indicate that your inventory management needs to be improved, or that your prices are not rising as fast as the cost of goods (Business Ratios, 2008).

Waste Management Company Analysis 69 Waste Management increased its gross profit margin 1.1% primarily through a decrease in its operating expenses of $185 million (Annual Report, WMI, 2007). Allied Waste increased its gross profit margin by almost 2% in 2007, primarily a result of revenue gains of $160 million (Annual Report, AW, 2007). Although Republic Services reported an increase of revenue of $105.9 million, its gross profit margin decreased by .2% due to a $72.9 million increase in the cost of goods sold (Annual Report, RSG, 2007). Table 25 reflects the gross profit margins for each company. Table 25 Gross Profit Margin Gross Profit 2004 2005 2006 2007 Margin Waste 34.20% 33.90% 35.70% 36.80% Management Allied Waste 37.10% 34.70% 35.70% 37.60% Republic 36.70% 37.00% 37.30% 37.10% Services Data: www.wastemanagement.com , www.awin.com , www.republicservices.com Operating Profit Margin The operating profit margin is also known as coverage ratio and measures company’s earnings before interest and taxes (Business Ratios, 2008). It is determined by dividing the operating income by revenue. This ratio indicates how much money the company is making on its primary business operations. It

Waste Management Company Analysis 70 shows the percentage of each sales dollar remaining after all normal costs of operations, and indicates whether the overall costs are trending up or down (Business Ratios, 2008). Waste Management posted an increase in operating profit margin of 1.7% primarily from realizing a deduction in depreciation and amortization of $75 million from 2006 to 2007(Annual Reports, WMI, 2007). Allied Waste saw an increase of 1.4%, primarily from a decrease in the cost of goods sold of $87.2 million (Morningstar, 2008). Republic Services’ operating profit margin remained unchanged from 2006 at 16.9%. Table 26 summarizes the operating profit margins for each company. Table 26 Operating Profit Margin Operating Profit 2004 Margin Waste Management 13.60% Allied Waste 16.50% Republic 16.70% Services Data: www.morningstar.com

2005

2006

2007

13.10% 16.00% 16.70%

15.20% 16.00% 16.90%

16.90% 17.40% 16.90%

Net Profit Margin The net profit margin is calculated by dividing the net profit by revenues. This shows you how much money the company has left after it has deducted all expenses. Waste Management’s net profit margin increased 0.15% for 2007. Waste Management’s net profit margin shows that it made a

Waste Management Company Analysis 71 profit of 8.74% on each dollar of sales in 2007. Allied Waste’s net profit margin gained 1.8%, due to increased revenue, and decreased COGS of $87.2 million (Annual Report, AW, 2007). Republic Services net profit margin increased slightly as a result of increased revenue from pricing. Table 27 summarizes the net profit margins for each company. Table 27 Net Profit Margin Net Profit 2004 Margin Waste Management 7.50% Allied Waste 0.92% Republic 8.78% Services Data: www.morningstar.com

2005

2006

2007

9.04% 3.55% 8.86%

8.59% 2.67% 9.10%

8.74% 4.51% 9.13%

Return on Assets The return of assets ratio gives an indication as to how effective a company is using its assets to generate earnings. Return on assets is made up of two components: net margin and asset turnover. Net margin is found by dividing net income by sales. It reveals what percentage of each dollar in sales a company retains. Asset turnover is found by dividing sales by assets. It reveals how well a company does in producing sales from its assets. You multiply the two components to determine return on assets. Companies with high return on assets, compared to their peers, are more efficient at using assets to generate profits (Stock.about.com, 2008).

Waste Management Company Analysis 72 In 2007 Waste Management’s return on assets was 5.70% which means that WMI made 5.70% on each dollar of assets. This is a . 2% increase from 2006. Allied Waste increased its return on assets by .8%, from 1.17% in 2006 to 1.97% in 2007. This was a result of Allied increasing its net profit by price increases and decreases in interest expense (Annual Report, AW, 2007). Republic Services increased its return on assets by .29% due to increases in net margin, through price increases (Annual Report, RSG, 2007). Table 28 shows the return on assets for each company. Table 28 Return on Assets Return on 2004 Assets Waste 4.52% Management Allied Waste 0.36% Republic 5.28% Services Data: www.morningstar.com

2005

2006

2007

5.62%

5.51%

5.70%

1.50% 5.63%

1.17% 6.23%

1.97% 6.52%

Return on Equity The return on equity measures how well the company did earning money for its investors. The return on equity is the ratio of net income to stockholders’ equity. The calculation is determined by dividing net income earned by the company by the total shareholders’ equity (Business Ratios, 2008).

Waste Management Company Analysis 73 In 2007, Waste Management’s return on equity was 19.36% which means that Waste Management made 19.36% on each dollar of shareholders’ equity (Morningstar, 2008). Allied Waste earned 8.36% on each dollar of shareholders’ equity, an increase of 2.83%. This was primarily due to a $112.7 million increase in its net income (Morningstar, 2008). Republic Services reported a return on equity of 21.29%. This means that it made 21.29% on each dollar of shareholders’ equity. This was the result of lower shareholder equity, in combination with a higher net income for 2007 (Morningstar, 2008). Table 29 shows the return on equity for each company. Table 29 Return on Equity Return on Equity 2004 Waste Management 16.28% Allied Waste 2.21% Republic 12.60% Services Data: www.morningstar.com

2005 19.55% 8.50% 14.59%

2006 18.62% 5.80% 18.47%

2007 19.36% 8.63% 21.29%

Return on Assets Trend Analysis Waste Management’s return on assets has trailed the industry five-year average of 5.71% from 2004 to 2006, but was very close to matching the average in 2007. Figure 21 is a trend analysis depicting WMI return on assets compared against the industry five-year average.

Waste Management Company Analysis 74

Ret urn Per cen tag e

Waste Management Return on Assets 6 5 4

WMI Return on Assets Industry 5 yr average

3 2 1 0 2004

2005

2006

2007

Figure 21 Trend Analysis: Waste Management ROA vs. Industry Data: www.reuters.com

Recommendations for Improvement

Waste Management Company Analysis 75 Table 30 summarizes the profitability ratios for the three companies.

Table 30 Company Rank – Profitability Ratios Company Rank Gross Profit Margin

Highest AW - 37.6%

Operating Profit Margin Net Profit Margin

AW - 17.4%

Return on Assets

RSG - 6.52%

Return on Equity

RSG - 9.13%

RSG 21.29% Data: www.morningstar.com

Middle RSG 37.1% WMI 16.9% WMI 8.74% WMI 5.70% WMI 19.4%

Lowest WMI - 36.8% RSG - 16.9% AW – 4.51% AW - 1.97% AW - 8.63%

To improve its gross profit margin ratio, net profit margin, return on assets, and return on equity, Waste Management should increase its revenue through pricing, and/or decrease its cost of doing business. Increasing prices could cause sales to fall as the pricing environment is very competitive. Price increases require a careful reading of inflation rates, competitive factors, and basic supply and demand of the services

Waste Management Company Analysis 76 (Entrepreneur, 2008). Where feasible, Waste Management should continue to increase pricing through analyzing each customer account individually (called right-pricing). Specific decisions on pricing, cost control, efficiency, containing interest expenses, and productivity will affect net income. Controlling variable costs will improve the gross profit margin because variable expenses are recorded as operating costs or cost of goods sold (Business Ratios, 2008). Variable costs can be decreased by managing labor, maintenance and repair, subcontractor costs, supplies, utilities, fuel, and transfer and disposal costs. For supplies, (containers and equipment) the company can explore the option of buying in bulk and eliminating wasteful spending in areas of packaging and shipping fees. Maintenance and repair costs can be reduced by keeping up-todate maintenance systems in place. For labor, utilities, and subcontractor costs, the company needs to evaluate the current routes they have for efficiency. Once efficiencies have been evaluated they can take corrective actions to help reduce these costs. It might be cheaper for them to outsource some of their services or modify pickup schedules. Additionally, Waste Management recognized a decrease in its risk management cost of $74 million, a 25.4% change from 2006 to 2007. This was accomplished by focusing on safety, and reducing

Waste Management Company Analysis 77 accident and injury rates. Waste Management should continue their efforts in this area. Fuel costs were significantly higher, especially in the fourth quarter.

Waste Management received $29 million in 2007

from fuel surcharges. However, total fuel expenses for the year was $581 million (Annual Report, WMI, 2007). Waste Management should investigate alternative fuel sources for its fleet, continue to monitor its fleet routes to reduce mileage and maintenance costs, and continue conversion of its truck fleet from diesel to natural gas. The operating profit margin includes cost of goods sold, selling, general, and administrative costs. In 2007 Waste Management had an increase in its SG&A costs of 3.2%. This is in large part due to the strategic initiatives the firm is taking to improve operations and processes in the future. To improve this area Waste Management should monitor its work force compensation, professional fees, and higher sales/marketing costs (Annual Report, WMI, 2007). They should also evaluate the path their strategic initiatives are taking to ensure they are creating value. While Waste Management’s returns on assets and equity are less than Republic Services’, they are higher than the industry average of 3.0% and 13.9% respectively (MSN Money, 2008). The company needs to improve the way it utilizes its assets to

Waste Management Company Analysis 78 generate revenue. There could be obsolete assets, or assets that are not operating efficiently in there inventory. These assets should be evaluated for possible disposal. Liquidity Ratios These ratios measure the amount of liquidity that a company has to cover its short-term debt obligations. In general, the greater coverage of liquid assets to short-term liabilities, the better the signal that a company can pay its short term debt obligations and still fund its ongoing operations (Business Ratios, 2008). Current Ratio The current ratio (also called the working capital ratio) measures the company’s ability to generate cash to meet shortterm obligations (less than 12 months). It is determined by dividing the current assets by the current liabilities. A decline in this ratio can be attributed to an increase in shortterm debt, a decrease in current assets, or a combination of both (Business Ratios, 2008). Waste Management’s ratio fell slightly in 2007, due to a reduction of current assets by $702 million in the area of cash, cash equivalents, and other current assets (Morningstar, 2008). Waste Management’s current ratio of .95 means that for every dollar of debt they have $.95 cents of assets (Business Ratios, 2008). Allied Waste saw its ratio fall from .68 to .52, due to a

Waste Management Company Analysis 79 $714.4 million increase in current liabilities, mainly in the area of short-term debt and accrued liabilities (Morningstar, 2008). Republic Services had a slight increase in its current ratio due to an increase of its current assets by $20.4 million in the area of other current assets (Morningstar, 2008). Table 31 reflects the current ratio values for each company.

Table 31 Current Ratio Current Ratio 2004 Waste Management 0.88 Allied Waste 0.53 Republic 1.11 Services Data: www.morningstar.com

2005 1.06 0.58 0.72

2006 0.97 0.68 0.65

2007 0.95 0.52 0.66

Quick Ratio The quick ratio, also known as the acid test, serves a function that is similar to that of the current ratio. The difference is that the quick ratio subtracts inventory from current assets and compares the resulting figure to current liabilities. This calculation includes only cash on hand or cash already due from accounts receivable (Business Ratios, 2008). In 2007 WMI increased its quick ratio to 0.86, which means that Waste Management has $0.86 of quick assets for every $1 of current liabilities. These quick assets are considered easily

Waste Management Company Analysis 80 transferable into cash. Allied Waste reported a drop in its quick ratio to 0.41. Republic Services also had a drop in its quick ratio to 0.51. Table 32 reflects the quick ratio of each company.

Table 32 Quick Ratio Quick Ratio 2004 Waste Management 0.75 Allied Waste 0.42 Republic 0.92 Services Data: www.morningstar.com

2005 0.82 0.47 0.62

2006 0.76 0.52 0.54

2007 0.86 0.41 0.51

Recommendations for Improvement In Table 33 Waste Management is the leader in both the current and quick ratios. However, the company’s ratio values are less than the industry averages of 1.1 and 1.0 respectively (MSN Money, 2008). Table 33 Company Rank – Liquidity Ratios Highest Current Ratio WMI - 0.95 Quick Ratio WMI - 0.86 Data: www.morningstar.com

Middle RSG - 0.66 RSG - 0.51

Lowest AW - 0.52 AW - 0.41

Waste Management Company Analysis 81 To improve these ratios Waste Management can pay off current liabilities or current bills, delay purchases, or consider long-term loans to repay short-term debt. Waste Management could also decrease its’ account receivable turnover by reducing the time it takes to collect receivables (Business Ratios, 2008).

Leverage Ratios (Debt Management) These ratios measure the extent to which the companies use debt financing. The ratios discussed in this section are the debt ratio, the debt to equity ratio, interest coverage, and short-term debt ratio. Debt Ratio (Debt-to-Assets) and Debt to Equity The debt ratio measures the percentage of a company’s assets that are financed by creditors. It is calculated by taking the total debt and dividing it by the total assets.

A

higher ratio indicates a possible overuse of leverage, so a lower ratio is preferred (Business Ratios, 2008). The debt to equity ratio indicates the degree of financial debt or leverage that a company is using to enhance its return. The formula is total debt divided by owners’ equity. It is preferred that companies have a falling trend because this

Waste Management Company Analysis 82 indicates they have greater equity and less debt (Business Ratios, 2008). In 2007, Waste Management’s debt ratio increased 1.5% and its debt to equity increased 0.18 as a result of a $513 million increase in long-term debt and decreases of $493 million in short-term debt (Annual Report, WMI, 2007). Allied Waste improved its debt ratio by 1.6% and debt to equity ratio 0.38. This was primarily due to a $167.6 million reduction in total debt (Morningstar, 2008). Republic Services’ debt to assets increased 3% and its debt to equity increased 0.11 as a result of additional long-term liabilities of $169 million in 2007 (Morningstar, 2008). Table 34 reflects the debt ratio (total debt to total assets), and Table 35 shows the debt to equity of all three companies. Table 34 Debt Ratio Debt Ratio 2004 Waste 71.4% Management Allied Waste 80.0% Republic 58.3% Services Data: www.morningstar.com

2005 71.0%

2006 69.8%

2007 71.3%

75.7% 65.4%

73.8% 67.8%

72.2% 70.8%

2006 1.20

2007 1.38

Table 35 Debt Ratio and Debt to Equity Ratio Debt to Equity Waste Management

2004 1.37

2005 1.33

Waste Management Company Analysis 83 Allied Waste 3.56 Republic 0.72 Services Data: www.morningstar.com

2.97 0.92

2.21 1.09

1.83 1.20

Interest Coverage Interest coverage is also known as “times interest earned ratio.” The formula is operating income divided by the interest expense. This is a measure of how many times your interest obligations are covered by earnings from operations. If this ratio is declining over time, it is a clear indication that your financial risk is increasing (Business Ratios, 2008). A higher ratio indicates increased solvency. For 2007 all of the companies improved on their interest coverage. Waste Management improved its interest coverage as a result of increased operating income of $225 million and a $24 million reduction in interest expense (Annual Report, WMI, 2007). Allied Waste improved its interest coverage due to increased operating income of $88.3 million, while reducing its interest expense by $25 million (Annual Report, AW, 2007). Republic Services improved its interest coverage from increasing its operating income 16.5 million and lowering its interest expense by $1 million (Annual Report, RSG, 2007). Table 36 shows the interest coverage for all companies for 2004 through 2007. Table 36 Times Interest Earned

Waste Management Company Analysis 84 Times Interest 2004 2005 2006 Earned Waste Management 3.73x 3.45x 3.72x Allied Waste 1.16X 1.56X 1.7X Republic Services 6.59X 7.02X 6.85X Data: www.wastemanagement.com , www.awin.com ,

2007 4.32x 1.96X 7.89X

www.republicservices.com Short-Term Debt Ratio Short-Term Debt is a ratio of short-term debt to total liability and equity. Short term debt is payable within 12 months (Business Ratios, 2008). Waste Management decreased its short-term debt ratio 2.4%, primarily a result of reducing its short-term debt by $493 million. Allied Waste increased its short-term debt ratio due to a $320.7 million increase in short-term debt obligations (Morningstar, 2008). Republic Services short-term debt ratio remained below 1%. Table 37 reflects the short-term debt ratio for each company. Table 37 Short-Term Debt Short-Term Debt 2004 Waste Management 1.80% Allied Waste 2.40% Republic 0.10% Services Data: www.morningstar.com Recommendations for Improvement

2005 2.50% 1.80% 0.10%

2006 4.00% 1.70% 0.10%

2007 1.60% 4.00% 0.10%

Waste Management Company Analysis 85 Table 38 summarizes the company positions for all of the leverage ratios. Table 38 Company Rank Leverage Ratios Debt Ratio

Highest AW - 72.2%

Debt to Equity

AW – 1.83

Interest Coverage

RSG - 7.89x

Short-Term Debt

AW - 4.00%

Middle WMI 71.3% WMI – 1.38

Lowest RSG - 70.8%

WMI 4.32x WMI 1.60%

AW - 1.96x

RSG - 1.20

RSG - .10%

Data: www.morningstar.com Waste Management can improve its leverage ratios by decreasing its debt. In 2007, Waste Management increased its long-term debt by $513 million. This increase is part of Waste Management’s strategy to grow and support their business (Annual Report, WMI, 2007). Waste Management needs to find other ways to finance operations, if it wishes to improve the leverage ratio. Waste Management’s debt/equity is at 1.38, which means it has $1.38 of long term debt to each dollar of shareholder equity. To improve its debt to equity ratio, it needs to continue to use its free cash flow to pay off debt. The interest coverage can be improved by decreasing debt, and securing lower interest rates on long term obligations. During 2007 Waste Management took steps to pay down its short-term debt, decreasing it by $493 million (Annual Report,

Waste Management Company Analysis 86 WMI, 2007). They need to continue this trend of paying off short-term debt, but need to evaluate how they are doing this. If they are borrowing long-term funds to do this, then they are not helping their total leverage position. Turnover Ratios (Asset Management Ratios) The asset management ratios measure how effectively the firm is managing its assets. In this section three ratios are discussed: receivables turnover, fixed assets turnover, and total assets turnover.

Receivables Turnover Ratio The accounts receivable turnover ratio measures the effectiveness of the company’s credit policy. It is determined by dividing the revenue by the average accounts receivable. If the turnover is too low, it may indicate the company is being too generous granting credit or is having difficulty collecting from its customers. A high receivable turnover ratio is wanted, because money is flowing into the company faster (Morningstar, 2008). For 2007, Waste Management’s accounts receivable, net of the allowance for doubtful accounts of $97 million, was $1,674. This is an increase of $24 million over 2006 (Annual Report, WMI, 2007). Both Allied Waste and Republic Services had no

Waste Management Company Analysis 87 change in their receivables turnover ratio. Table 39 reflects the receivable turnover for each company. Table 39 Receivables Turnover Receivables Turnover Waste Management

2004

2005

2006

2007

6.7

6.6

7.2

7.1

8.1

8.4

8.7

8.7

Republic 10.5 Services Data: www.morningstar.com

10.4

10.7

10.7

Allied Waste

Fixed Assets Turnover Ratio The fixed assets turnover measures how effective the firm uses its plant and equipment to generate sales. It is determined by dividing the revenue by the value of the fixed assets. Generally it is desirable to have a higher ratio, because it indicates that more money is being earned per dollar of fixed assets. If the ratio is high, it is a good indicator the assets of the company are being used efficiently and effectively. A declining ratio may indicate excess investments in plant, machinery and equipment, or other fixed assets (Business Ratios, 2008). It could also indicate the firm is not operating at the minimum efficient scale. In Table 40 you can observe that

Waste Management Company Analysis 88 Waste Management and Allied Waste were unchanged from 2006 to 2007, but Republic Services had a slight increase. Table 40 Fixed Assets Turnover Fixed Assets Turnover Waste Management

2004

2005

2006

2007

1.1

1.2

1.2

1.2

1.3

1.4

1.4

1.4

Republic Service 1.4 Data: www.morningstar.com

1.4

1.4

1.5

Allied Waste

Total Assets Turnover Ratio The total assets turnover ratio measures the turnover of all the firm’s assets and indicates how well a firm is using all of its assets to generate revenue (Business Ratios, 2008; Stock Information, 2008). The ratio is determined by dividing revenue by total assets. It is desired to have a higher ratio (Business Ratios, 2008). Due to rounding in Table 25 it appears that Waste Management had a slight improvement of its ratio, while both Allied Waste and Republic Services were unchanged. In actuality if you calculate these figures out to four places, you can observe that each of these companies had a slight increase in this ratio for 2007. These changes were due to small increases in both assets and revenue for Republic and Allied Waste. Waste Management’s increase was actually reflective of less revenue

Waste Management Company Analysis 89 and assets during 2007. Table 41 summarizes the total assets turnover for each company. Table 41 Total Assets Turnover Total Assets Turnover Waste Management

2004

2005

2006

2007

0.6

0.6

0.6

0.7

0.4

0.4

0.4

0.4

Republic 0.6 Services Data: www.morningstar.com

0.6

0.7

0.7

Allied Waste

Recommendations for Improvement Table 42 summarizes the company positions for all turnover ratios.

Table 42 Company Rank Turnover Ratios Company Rank - Turnover Ratios 2007 Receivables RSG – 10.7

AW - 8.7

WMI – 7.1

Fixed Assets

RSG - 1.5

AW - 1.4

WMI - 1.2

Total Assets

WMI - 0.7

RSG - 0.7

AW - 0.4

Data: www.morningstar.com To improve its receivables, Waste Management could take the following actions: increase collection efforts, reduce credit terms, shorten the billing process, reduce billing errors, and

Waste Management Company Analysis 90 train its credit and collections personnel in proper collection procedures. To improve its fixed and total assets Waste Management should continue to focus on the superior maintenance program it has recently implemented. This will help keep new purchases at a minimum. In addition, leasing should be pursued as an alternative to equipment purchasing. All purchases should show an expected increase in profitability before closing any deal (Business Ratios, 2008). Solvency Ratios Solvency ratios are measures to assess a company’s ability to meet its long-term obligations and remain solvent.

Two

general, overall solvency ratios are presented below.

Solvency Ratio The general solvency ratio is determined by taking the company’s total assets divided by the total liabilities.

All of

the companies have more assets than liabilities using this ratio (Business Ratios, 2008). Waste Management’s solvency ratio fell in 2007. The primary reason for this was total assets decreased by $425 million due to lower current assets (Morningstar, 2008). Allied Waste raised its solvency ratio by increasing its total assets by $137.7 million and through reducing its total liabilities $167.6

Waste Management Company Analysis 91 million (Morningstar, 2008). Republic Services increased their total assets by $38.4 million in 2007 but still fell in solvency. The total liabilities for Republic Services increased $156.7 million, primarily due to long-term debt liabilities (Morningstar, 2008). In Table 43 the solvency ratios for each company are presented. Table 43 Solvency Ratio Solvency Ratio

2004

2005

2006

2007

Waste Management

1.39

1.41

1.43

1.40

Allied Waste

1.24

1.34

1.35

1.39

Republic 1.72 1.54 1.47 Services Data: www.wastemanagement.com , www.awin.com ,

1.41

www.republicservices.com Operating Cash Flow Ratio The operating cash flow ratio measures how well current liabilities are covered by the cash flow generated from a company’s operations. The OCF Ratio is determined by dividing the cash flow from operations by the current liabilities. It is desired to have a rising operating cash flow ratio (Business Ratios, 2008). Waste Management increased its operating cash flow ratio as a result of reducing its current liabilities, short-term debt, by $493 million. Allied Waste had a falling operating cash flow

Waste Management Company Analysis 92 ratio, as a result of increased accrued current liabilities in the amount of $394.1 million (Morningstar, 2008). Republic Services increased their operating cash flow during 2007, primarily from a reduction in the area of federal income taxes payable (Annual Report, RSG, 2007). Table 44 shows the operating cash flow ratios for each company. Table 44 Operating Cash Flow Ratio Operating Cash Flow Ratio Waste Management

2004

2005

2006

2007

0.69

0.73

0.78

0.94

Allied Waste

0.37

0.45

0.60

0.47

Republic Services 1.49 Data: www.morningstar.com

1.15

0.86

1.05

Recommendations for Improvement Table 45 ranks the company positions for all of the solvency ratios. Table 45 Company Rank – Solvency Ratios Highest RSG 1.41 Operating Cash Flow RSG 1.05 Data: www.morningstar.com Solvency Ratio

Middle WMI - 1.40

Lowest AW - 1.39

WMI - 0.94

AW - 0.47

To improve its solvency ratios, Waste Management should increase the value of its assets, decrease liabilities, and

Waste Management Company Analysis 93 improve operating cash flow. This is achieved through managing fixed costs, reducing variable costs, increasing revenue inflows, and growing revenue through pricing and market expansion (Business Ratios, 2008). In the waste industry, pricing is very competitive and there is the propensity for losing customers to competitors in overlapping territories. Waste Management introduced individual customer pricing in 2003 and is in-place across all operating groups (Annual Report, WMI, 2005). Waste Management is mostly concerned with reducing its variable costs. Through its truck routing system, “Fleet Route”, it has improved route density and eliminated redundant truck routes. In addition, Waste Management uses a fleet maintenance system that automates shop functions and track repairs. In 2007 the company realized a savings of $74 million from its risk management component. This was the result of Waste Management’s continued focus on safety. Financial Analysis Summary In summary, various financial ratios have been presented for Waste Management and its two competitors. In each section, the ratios and their values were given followed by recommendations to improve each ratio. In addition, a ranking table for 2007 values showed the position of Waste Management in comparison with Allied Waste and Republic Services.

Waste Management Company Analysis 94 Waste Management’s strengths lie in the following ratios and figures: revenue, gross and net income, total assets turnover, earnings per share, price per earnings, price per book, and the liquidity ratios. Waste Management is in the middle with net profit margin, operating profit margin, return on assets, return on equity, price per sale, and price per cash flow. It ranks last among its competitors in accounts receivable turnover, fixed asset turnover, operating profit, and gross profit margin. The company experienced a decrease in revenue of $53 million in 2007, or 0.4%. This was primarily due to volume declines in the economic slowdown of residential and commercial building and price competition. Waste Management’s revenue growth for 2007 was primarily a result of increased yield on the base business from pricing. In addition steps were taken to try and control company variable costs. These variable costs include: maintenance and repair, labor, fuel, subcontractor costs, transfer and disposal costs, and risk management costs. Waste Management is growing its net income through its efforts to improve operating efficiency and get rid of unprofitable segments. One of the financial challenges for Waste Management is finding sources of growth from its current market and in seeking revenue growth from new markets. It is their current goal to

Waste Management Company Analysis 95 explore the opportunity of acquisitions to assist them in their growth goals (Annual Report, WMI, 2007). In order to improve their financial situation, it is going to be imperative that they carefully evaluate all expenditures, and look for ways to strengthen and expand their market share. Waste Management currently has the largest market share, yet they are behind their two competitors on operating profit, gross profit, receivable turnover, and fixed asset turnover. Correcting the efficiencies in operating and gross profit is very much reliant on revenue generation and cost reductions. In fact, Allied Waste has even started streamlining their operations to reduce costs. Waste Management is well on their way to developing significant cost savings and revenue generation. They have implemented a better maintenance and repair system, a tailored pricing system, safety improvements, routing evaluations, and a restructuring effort for their organization and management structure. However, they are going to have to do more. An impending merger between Allied Waste and Republic Services will bring Waste Management’s two biggest competitors up to their market share and resource level. Waste Management needs to start looking at possible acquisition targets that will strengthen the core business and possibly give them an edge over the competition. They will need

Waste Management Company Analysis 96 to continue their focus on energy generation and recycling. This will include working closely with governmental authorities to choose locations where the company will benefit most by expanding into. They will need to continue there research in alternative fuel sources, but in the meantime, the company needs to evaluate the possibility of route changes. This might include a different time to pick-up garbage containers in high traffic, urban areas. They need to explore alternative bin sizes for their industrial clients. Research needs to be conducted on the possibility of expanding the bin size to lengthen the time between pick-ups. The cost of the bins would need to be evaluated against the savings to see if this is a feasible alternative. Both of these would reduce the amount of fuel being spent by the company. Labor cuts could be another option, if the garbage trucks could be mainly automated, so one person could run them. This again would need to be evaluated against the additional costs and the potential cost savings. The company should also explore the possibility of finding new customers to purchase the products of their recycling operations. Revenue growth opportunities exist for Waste Management in the recycling sector. Recycling services for 2007 increased revenue by $224 million. Waste Management could invest in building new recycling facilities or expanding existing ones. Currently Waste Management operates 99 recycling locations for

Waste Management Company Analysis 97 paper, glass, metal, and plastics are processed for resale. They also have six secondary recycling locations that sell the recycled material as raw material for manufacturing and consumer use. Waste Management also recycles rubber, electronics, and commodities (Annual Report, WMI, 2007). With stricter regulations being enacted recycling is a strong growth opportunity for Waste Management. To improve in accounts receivable turnover, the firm needs to evaluate their current pricing policies. Changes might include discounts for those that pay early, or changing to a pay-up-front method for problem accounts. The aging of accounts receivable would need to be evaluated to determine what type of credit terms the firm is offering. It may be fixed by just a simple change in the credit policies of the firm. For fixed asset turnover improvements the firm needs to evaluate the age and condition of their current fixed assets. It could be that these assets are not running at optimal speed and need to be replaced or disposed of. It could also be that the firm has assets that are not earning the firm money and that could be disposed of. This would be something the firm needs to look into immediately. It may be that they are overpaying for the assets and could get a cheaper price somewhere else. These are all considerations the firm must take into account when evaluating ways to improve this ratio.

Waste Management Company Analysis 98 While Waste Management has the largest market share, that does not guarantee them a larger profit. They must continually improve and respond to the actions in the market. This includes staying on top of regulatory and competitive changes. If the company will continue their initiatives to improve services, decrease costs, and gain market share they can remain competitive. Revenue and Sales During the 2007 operating year, Waste Management had sales of $13.31 billion (Waste Management, 2007). The public sector, including franchises and municipal contracts provided for $3.6 billion of this amount. Waste Management breaks their revenue recognition into the different market segments they serve. Based on the 2007 gross revenue, revenue earnings can be allocated between the following segments: Wheelabrator, 6%; WMRA & Other, 8%; Eastern Group, 21%; Midwest Group, 19%; Southern Group 23%; and the Western Group 23% (Waste Management, 2007). Company Growth The waste industry is experiencing flat volume and weak pricing (Hoover’s, 2008). This is in large part due to the weakening construction industry. Construction waste can impact waste volume by as much as 15% to 20%. However, other trends in the industry itself, such as recycling and energy generation efforts help to offset this for Waste Management Incorporated.

Waste Management Company Analysis 99 Sustainable growth goals discussed in October 2007, by CEO David Steiner, include goals aimed at sustaining the company from now until 2020. These goals include: the doubling of wastebased energy production, increase he volume of recyclable material processed, investment in cleaner technologies, and the preservation of additional wildlife habitat across North America (Waste Management, 2007). These strategies are aimed at leveraging the company’s core business strengths and taking advantage of their expertise in organic growth (Waste Management, 2007). During the 2006 operating year revenue growth was a modest 2.2%, and was mainly composed of price hikes. During 2007 revenue growth was 3.3%, attributable to more price hikes and efficiency boosting programs such as, operating unit consolidation, staff reduction, and a new fleet maintenance system (Waste Management Value Line, 2008). However, even these cost initiatives did not offset the impact of declining volumes and company divestments during 2007. It is projected by Value Line that in 2008 Waste Management will increase service fees by 2.5% to 3.0% over 2007. Standard and Poor’s projects that during the 2008 operating year there will be low single-digit organic growth stemming from such prices hikes as these. This should help the company average close to 10% earnings growth over 2008 (Standard & Poor’s, 2007).

Waste Management Company Analysis 100 Is this growth picture good enough? Declining volumes in the waste industry are forcing firms to cut costs and raise prices. There are also high start-up costs to contend with in the industry. For new firms considering market entrance, the growth rate is probably not enough to entice them to enter given the high costs and moderate-to-low growth rate. Existing firms will continue to promote cost savings initiatives and pass costs to customers. This will generate low organic growth for the firm temporarily. Waste Management Incorporated’s management recognize the need to continue efforts on lowering operating, general, and administrative costs, with standardized processes and productivity improvements (Waste Management, 2007). The goal for Waste Management will be to keep customers by remaining the lower priced competitor. While growth may not be as high as a few years prior, there are still growth opportunities for Waste Management. These include growth opportunities and their recycling, waste-toenergy, and gas-to-energy operations. The company is positioned well to pull through the slow growth period, as long as it continues its’ focus on innovative projects and controls costs. Profit Margins Waste Management had a net profit margin in 2007 of 8.74%. In Table 46 you can see the net profit margin for the years 2004 through 2007. You will observe that profit margins have remained

Waste Management Company Analysis 101 relatively flat for Waste Management. There were declines in net profit from 2005 to 2006 of .81%, and an increase in 2007 over 2006 profits of .15%. Observing the top competitors of Waste Management, you will notice the same trend, with relatively flat profit changes in from 2004-2007 for Republic. Allied Waste seems to be the only one with wide swings in net profit. Table 46 Net Profit Margin 2004

2005

2006

2007

Waste Management

7.50% 9.04% 8.59% 8.74%

Allied Waste

0.92% 3.55% 2.67% 5.11%

Republic Services 8.78% 8.86% 9.10% 9.13%

In related areas net profits of Stericycle, a medical waste disposal company, show a different trend. In 2004 they had net profits of 15.1%, in 2005 it was 15.3%, in 2006 it was 13.6%, and in 2007 it was 13.9% (Stericycle, 2008). In the hazardous waste segment, Clean Harbors profit ratios were as follows: in 2004 1.1%, in 2005 3.6%, in 2006 6.3%, and a decline in 2007 to 4.7% (Clean Harbors, 2008). In the building industry, which largely affects waste volumes, there have been significant declines in net profit margins during the 2006 and 2007 operating years. There trends were rising during 2004 and 2005, only to plummet during the housing bubble bust in 2006. For

Waste Management Company Analysis 102 example, Champion builders had net profit margins of 3.3% during 2005, but only .6% in 2007 (Champion Builders International, 2008). In the net profit comparison figure, Figure 22, you can see the relative changes between net profit for Waste Management and the other industries discussed previously. Net Profit Comparison 18.0%

Stericycle

Net Profit

16.0% 14.0% 12.0%

Clean Harbors

10.0% 8.0%

Champion

6.0% 4.0%

WMI

2.0% 0.0%

2004

2005

Year

2006

2007

Figure 22 Return on Assets and Velocity The return of assets ratio, gives an indication as to how effective a company is using its’ assets to generate earnings. For 2007, Waste management had a return on assets of 5.7%, as calculated using 2007 financial statements. This was up from the 2006 number by .19%. They have been steadily improving each year. In 2004 they only achieved a return of 4.52% and in 2005 they had moved up to a 5.62% return (Waste Management Annual Report, 2007).

Waste Management Company Analysis 103 Inventory Turnover was 81.3 and asset turnover was .7% for 2007 (Hoover’s, 2008). The total asset turnover ratio measures how much in sales revenue is generated per dollar of assets. The company’s turnover ratio of .70, denotes that for every 1.42 dollars in assets they can generate one dollar worth of sales (Morningstar WMI, 2008). The inventory turnover ratio can help the firm identify how efficiently inventory quantities are being managed. Low turnover can mean the company is carrying obsolete inventories or that the company is carrying too much or too little inventory. These figures are important to the inventory costs of carrying too much inventory, or the cost of running out of inventory (Wiley, 2008). Cash Assets For Waste Management, Value Line lists cash assets as $666 million in 2005, $614 million in 2006, and $348 million in 2007. The most logical explanation for these decreases is the continued focus of Waste Management on paying off existing debt. Since the market they participate in is entering the mature stage, they are focusing on paying off existing debts that may have been from start-up or incremental improvement costs. This can be seen in the same Value Line report, by examining the debt due. The debt due was $522 million in 2005, $822 million in 2006, and $329 million in 2007(Waste Management Value Line, 2008).

Waste Management Company Analysis 104 Cash Flow Cash flow results shows whether the cash generated from operations is enough to cover investing. If it is then the company has a healthy flow of cash. If not, then the company may have to finance their operations by selling stock (Money Chimp, nd). Net operating cash flow has been increasing each year from 2003 until 2006. There was a slight decrease in 2007 cash flows of $101 million (Hoover’s, 2008). These changes are in large part due to the economic downturn and declining volumes of waste. Waste Management is combating these issues by reducing operating costs and increasing their service fees. They have also started to reduce their overseas operations and administrative staff (Waste Management Value Line, 2008). Items that significantly affected their cash flows from 2006 to 2007 were as follows: changes in tax benefit recognition under SFAS No. 123(R); operating income improvements, net of depreciation of $150 million, a reduction during 2007 of risk management liabilities by $80 million, increased bonus payments, increased payments for liabilities, and more trade receivables than in 2005. Net cash flows for Republic Services and Allied Waste have been improving, with Republic having a slight dip between 2005 and 2006. The dip in Republic’s cash flow between 2005 and 2006 was due, in large part, to an $83 million tax deferral for the

Waste Management Company Analysis 105 2005 operating year based on the IRS’ response to Hurricane Katrina. The net operating cash flow can be observed in Table 47.

Table 47 Net Operating Cash Flow 2004 2005 2006 2007 WMI 2,218.0 2,391.0 2,540.0 2,439.0 Allied 650.4 716.6 921.6 1,057.0 Republic 666.3 767.5 522.1 661.3 For Waste Management their net financing cash outflow has increased (Hoover’s, 2008). The numbers that affect the financing aspect include the repurchase of 40 million shares of stock during 2007, at cost of $1.4 billion. They also paid out $495 million of cash dividends in 2007 compared to $476 million in 2006 (Waste Management Annual Report, 2007). In Table 48 the net financing cash flow is shown for Waste Management, Republic, and Allied Waste. Republic actually decreased their cash outflow between 2006 and 2007. Allied Waste increased their cash outflow significantly between 2006 and 2007. Data for the prior years are also provided to show trends prior to the current year. Table 48 Net Financing Cash Flow (millions) WMI

2004 2005 2006 2007 (1,130.0) (1,090.0) (1,803.0) (1,946.0)

Waste Management Company Analysis 106 Allied Republic

(489.2) (437.3)

(45.5) (480.0)

(274.8) (409.4)

(334.8) (408.3)

Net investing over the past year has decreased from 2006 numbers for all three competitors, except Republic. For Waste Management their net investing cash flow has decreased over the past year from $788 million in 2006 to $761 million in 2007 (Hoover’s, 2008). Allied’s investment fell from $609 million in 2006 to $585 million in 2007 (Hoover’s, 2008). In Table 49 the net investing cash flows of all three competitors over the past four years has been presented so you can observe the different company trends. Decreases are most likely the result of continual cost savings initiatives during the lower growth period. Table 49 Net Investing Cash Flow (millions) WMI Allied Republic

2004 2005 (863.0) (1,062.0) (537.9) (683.0) (206.7) (297.2)

2006 (788.0) (608.8) (215.4)

2007 (761.0) (585.4) (260.3)

Competitive Analysis From figures presented in the financial section, it is easy to see that Waste Management does dominate the market. They do have this advantage over competitors. They also have a larger share of revenues because of this. However, they often rank in

Waste Management Company Analysis 107 between their competitors on financial indicators. It is clear that they seem to be quite stagnant, due to the fact that they are so large. However with merger talks, it is clear that Allied Waste and Republic Services may be gaining ground quickly. It will be up to Waste Management to respond quickly to their need for improvements and how to maintain their market share. One tool that can help management analyze the current conditions within the market and organization is a SWOT analysis. SWOT Analysis Now after looking at the company structure and key financial measurements a SWOT analysis can be conducted. The purpose of this analysis is to provide managers an understanding of the forces that impact company. Once these forces have been effectively identified managers can come up with plans to strategically combat these forces. Strengths Technology Waste Management has current technologies utilizing wasteto-energy and gas-to-energy processes. Out of the top three competitors: Allied, Waste Management, and Republic Services, Waste Management is the only one with this technology know-how. Strategies Strategies already focused on utilizing alternative energy sources to fuel delivery trucks. Other strategies by Waste

Waste Management Company Analysis 108 Management focus on expanding the waste-to-energy and gas-toenergy plants.

Global Position Waste Management has operations in the United States, Puerto Rico, and Canada. Only allied has operations in another country, Puerto Rico. Market Share Waste Management serves nearly 20 million customers (Waste Management, 2007). They therefore have a larger market share than Allied Waste or Republic services. Marketing Waste Management’s continued focus on the environment gives them an advantage over Allied Waste or Republic Services. Waste Management focuses on displaying an environmentally friendly image. They have the “think green” slogan on the side of their trucks and the use of their old landfills for protected wildlife habitats (Waste Management, 2007). They also focus on the creation of green energy, currently producing 450 megawatts of green energy from their methane gas collection programs. Through their recycling programs they recycle over 3.5 million tons of paper and cardboard; more than 25,000 tons of aluminum; and

Waste Management Company Analysis 109 processed more than 214,000 tons of metals in 2007 thereby reducing greenhouse gas emissions (Waste Management, 2007). Products/Services Waste Management has waste-to-energy and gas-to-electricity capabilities that other competitors do not possess. Licenses/Permits Waste Management Incorporated has more government permits for solid waste landfills than its’ three closest rivals combines (Leckey, 2007). Assets Landfills Waste Management owns 277 active landfill sights, more than any of their competitors (Waste Management, 2007). Even if Republic and Allied Waste combine, Waste Management will still own 49 more landfills. Transfer Stations Waste Management currently operates 341 transfer stations (Waste Management, 2007). Given the long distances to some of the landfills, the use of transfer stations makes it more economical for the company. The transfer stations can compact the waste and then transport it to the landfill or waste-toenergy facility. Allied Waste only has 164 transfer stations (Allied Waste, 2007). Republic Services only has 93 transfer stations (Republic Services, 2007).

Waste Management Company Analysis 110 Trucking Fleets Waste Management Incorporated has one of the largest trucking fleets in collection services (Hoover’s, 2008).

Weaknesses Leadership Waste Management has a centralized structure.

Under

corporate management, there are six operating groups, of which four are organized by geographic area and two are organized by function. With a centralized management structure it makes it hard for them to respond to rapid changes in the competitive environment. It also affects the amount of innovation in the company. Innovation most readily occurs in decentralized operations. Financial Measures and Returns While some of Waste Management’s financial ratios are good, in most cases their competition is still better. For return on equity and assets Waste Management tends to fall in between its’ two competitors. You can see this trend in the following information. In Table 50, return on assets is depicted. Observe that Waste Management’s return is 5.70%, Allied Waste is 1.97%, and republic is 6.52%. In Table 51 the return on equity is detailed for the past four years. For Return on equity Waste

Waste Management Company Analysis 111 Management is 19.36%, Allied Waste is 8.63%, and Republic Services is 21.29%. In Table 52 profitability ratios are present for each firm in ranking order. Waste Management tends to earn more revenue, but has a lower gross profit margin that its’ competitors. In the net profit region they also lie in between Allied Waste and Republic Services. This leads to the point that Waste Management has some room for improvement on these figures. Table 50 Return on Assets Return on 2004 Assets Waste 4.52% Management Allied Waste 0.36% Republic 5.28% Services Data: www.morningstar.com

2005

2006

2007

5.62%

5.51%

5.70%

1.50% 5.63%

1.17% 6.23%

1.97% 6.52%

Table 51 Return on Equity Return on Equity 2004 Waste Management 16.28% Allied Waste 2.21% Republic 12.60% Services Data: www.morningstar.com

2005 19.55% 8.50% 14.59%

2006 18.62% 5.80% 18.47%

2007 19.36% 8.63% 21.29%

Table 52 Company Rank – Profitability Ratios Company Rank Gross Profit Margin

Highest AW - 37.6%

Middle RSG 37.1%

Lowest WMI - 36.8%

Waste Management Company Analysis 112 Operating Profit Margin Net Profit Margin

AW - 17.4% RSG - 9.13%

WMI 16.9% WMI 8.74%

RSG - 16.9% AW – 4.51%

Data: www.morningstar.com

Size Given Waste Management’s large size they will have to be careful not to underestimate their competition. With Republic and Allied Waste talking mergers, Waste Management will have to carefully watch their strategic planning and be able to react quickly to competitor’s moves. In large companies this is sometimes difficult to do. Dealing With Strengths and Weaknesses Waste Management has a major strength in their market share, asset quantity, technological know-how, and environmentally friendly operations. They can utilize these three aspects to gain first mover advantage by continually improving and developing these assets. In the energy generation area, Waste Management already as an advantage over Allied Waste and Republic Service. They already have the technological know-how, and have already started to build the processing facilities to support this type of future technology. Waste Management can use these capabilities to continue to expand in this market. By utilizing

Waste Management Company Analysis 113 the increasing demand for power, they can gain first mover advantage over Allied Waste and Republic. The same is true for their utilization of gas-to-energy resources. While, Allied is also experimenting in this arena, Waste Management has more landfills to utilize in this area. Given their market share, it will be hard for other operating companies to match their ability to service so many parts of the industry. They operate in every state except two (Waste Management, 2007). They also operate in Canada and Puerto Rico. This gives them an advantage over the firms only operating in domestic markets. They do have to consider that Allied Waste is presently competing with them in Puerto Rico, also. By continually expanding their customer base they can maintain and grow in market share. Of course this is subject to controlling costs and meeting customer needs as well. Waste Management can also leverage their increasing image to be environmentally friendly to draw in more environmentally conscious consumers and expand on their environmental product offerings. This strength has many added benefits. It will benefit the company in the long-run as regulations increase on the trash disposal and landfill space becomes more-and-more limited. There is also a large amount of profit potential. They are essentially taking something given to them and processing it into a revenue generating product (Waste Management, 2007).

Waste Management Company Analysis 114 Waste Management has one of the largest asset bases for landfills, transfer stations, and trucks (Waste Management, 2007). With such a large asset base they have the capabilities of servicing more customers than their competitors. These assets can also be leveraged to generate the company more money by finding ways to effectively use them to their fullest potential. Consequently, this is one of the areas Waste Management needs to focus on improving. However, it is clear that if they can improve their return on these assets they have the resources to outperform their competition. In dealing with weaknesses, Waste Management should continually look for ways to create a culture that fosters innovation. This could include the decentralization of management. With decentralization, this will give the local branches the opportunity to react quickly to competitor moves and customer needs of their specific regions. Concerning financial measures there will need to be a continued effort in improving the net, operating, and gross profits by further implementation of cost saving programs. Waste Management has already started to do this by getting rid of unprofitable customers, reducing administrative positions, and with improved safety standards for employees (Waste Management, 2007). It is vital to overcome their financial weaknesses that they focus on utilizing their assets better. This could include

Waste Management Company Analysis 115 the evaluation of assets to determine if they are obsolete or if the costs of retaining the asset outweigh the benefits, or profit generation. These steps would help to improve their return on assets and could free-up valuable cash to be invested elsewhere. While, Waste Management has better ratios than their two competitors, they do lie slightly below the industry average. To overcome their low quick and current ratios they could evaluate their credit policy and evaluate the current assets. This might include issuing discounts to those that pay in a shorter time period. It might also include the evaluation of inventory. How, much inventory is the firm holding and is it cost effective to hold this level. They should evaluate whether the money invested in inventory could be better invested elsewhere. The final weakness is Waste Management’s large size. Even though their size is attributable to their many locations, which is beneficial in growth opportunities, it can be their downfall. Waste Management needs to take steps to continue innovation and customer retention, especially with the merger of Allied Waste and Republic Services. If they underestimate the power of their competitors this could be to their detriment. They will also need to continue to improve relations with governmental agencies that have the power to revoke any operating licenses.

Waste Management Company Analysis 116 Opportunities Renewable Energy Sources Investment in renewable energy production is one of the largest opportunities for Waste Management Incorporated. This particular segment of their industry has very attractive growth potential. Demand for renewable energy is growing very rapidly. Right now renewable energy sources only make up around 7% of the U.S. electricity supply (Waste Management, Inc. SWOT Analysis, 2007). Increases in regulation and the demand for more clean sources of energy are a big opportunity for Waste Management to gain a strategic position at the head of this market. Recycling Programs and Gas Energy There is also the continued attractiveness of increased utilization of recycling programs and the landfill gas to energy projects. During 2007, seven landfill gas-to-energy projects were operational. Given their expertise in that area they have the opportunity to leverage this knowledge to benefit third parties (Waste Management, 2007). Threats Political and Governmental Due to the amount of governmental regulation within the waste management industry, the threat of increasing regulatory acts is prominent. These regulatory actions are likely to get more and more stringent as time progresses. This can add to

Waste Management Company Analysis 117 increased costs of operations, and regulatory permits. Also, recent regulation changes in construction debris disposal in landfills can affect the company. The regulations limit the type of materials, from construction, that can be disposed of in landfills. This can increase the costs of the firm in finding alternative disposal methods (Waste Management, Inc. SWOT Analysis, 2007). Legal Forces Significant threats exist regarding lawsuits from environmental violations given the form of business. As of December 31, 2007 four lawsuits have been filed against Waste Management and its’ subsidiaries for such violations. The allegations are that Waste Management and its’ subsidiaries failed to comply with proper storage requirements for leachate at their landfill locations. They also violated federal air regulations at one of their landfills, failed to meet reporting requirements, and violated National Pollutant Discharge permits conditions at a landfill. They believe that these charges will amount to $100,000 or more (Waste Management Annual Reports, 2007). Economic Conditions and Complementors Due to the recent economic downturn waste volumes are declining. According to the IMF world economy outlook, the real GDP growth of the U.S. is expected to slowdown in 2008. It is

Waste Management Company Analysis 118 estimated that GDP will only grow 1.1% in 2008, down from the 3.3% the industry saw in 2006 (Waste Management, Inc. SWOT Analysis, 2007). This leads to less revenue without cost increases. With cost increases comes the potential loss of customers to competitors who may have lower prices. It is imperative for Waste Management to control cost in order to offset the amount of cost increases passed on to customers. Recent declines in complementing industries, such as the building industry, also have a negative impact on waste volumes. It is estimated that 15% to 30% of waste volumes are generated by the construction industry. Waste minimization strategies are also a threat to the company. With increases in the costs of treating waste and disposing of waste, companies look for other alternatives to reduce waste. Industries start to adopt cleaner technologies and put cheaper, pollution prevention equipment in place. In the hazardous waste segment, which Waste Management also competes, is currently seeing the implementation of waste minimization through reuse and recycling programs. Competition With the likely merger of Republic Services and Allied Waste, Waste Management will encounter a bigger competitor than they have recently dealt with. Their competition will now have the combined resources to issue a substantial threat to Waste

Waste Management Company Analysis 119 Management’s market position. The company must also contend with high competition from municipalities and regional government authorities. These competitors have the advantage of subsidies, giving them a competitive advantage over private firms.

Management of Opportunities and Threats In order to take advantage of opportunities within the market Waste Management will need to continue their focus on energy generation. This will come in the form of increasing the waste-to-energy production facilities and continual improvement in waste-to-energy processes. Money should be allocated to research and development in order to stay ahead of other competitors and look for continuing alternatives for waste disposal. Waste Management will also need to continue to improve and focus on recycling programs to support the more environmentally friendly customers and look at expansionary opportunities. There is also the opportunity to better utilize existing resources to generate increases in revenue. As for threats, minimization of the impact of government regulations will be hard to control. Of course there is always lobbying, but there is not guarantee. The best way to minimize this threat is to stay ahead of the changing regulations by continuous improvement of disposal processes. This should

Waste Management Company Analysis 120 generate more efficiency for the firm, increased revenues, and less problems with more stringent regulations. In dealing with the economic downturn and municipal competition, the firm will need to continue to focus on cost effective programs. These programs will allow the firm to reduce costs and continue revenue generation, with small increases to the customer. It may be beneficial to look at the market segments the firm is currently servicing, and explore opportunities in unexploited market niches. The main focus should be on cost reduction and customer retention. Table 53 Strategy/SWOT Matrix Worksheet Waste Management, Inc. Strengths - S SO Use strengths 1 WTE Operations Strat to take egies advantage of opportunities 2 WO Overcome Gas-to-Energy Strategies weaknesses by Operations taking advantage of 3 opportunities Global ST Use strengths Operations Strategies to avoid In Puerto Rico & threats Canada

Weaknesses – W 1 Centralized Management Structure 2 Mid-range returns for Return on assets 5.70% 3 Large Size

Waste Management Company Analysis 121 WT Minimize Strategies weaknesses and avoid threats

4 29% Market Share 5 Environmental Programs 6 Large asset base, with 277 Active landfills and 314 Transfer Stations

4 Return on equity midrange 19.36% 5 Midrange operating and net profit margins. 16.9% and 8.74% respectively 6 Lowest gross profit margin of 36.8%

7 Largest trucking fleet in waste collection

Opportunities – SO Strategies O 1 Renewable Energy 1 Continue to Resources expand WTE sites (S1,S2,O1) 2 Recycling Programs and expansion 3 Creation of an expanded global presence 4 Utilize closed landfills for revenue resources.

2 Develop recycling program awareness 3 (S5,O2) Evaluate and Pursue expansion opportunities within the national boarders of their global market (S3,S6, O3)

7 Lower Quick ratio .86 and current ratio of when compared with industry average. However they are higher than their top 2 competitors. WO Strategies 1 Increase returns by expanding the growing Wasteto-energy and Gas-to-energy markets (W2,W4,W5,W6,O1) 2 Decentralize decisions in the global operations(W1, W2,O3) 3 Expand the sale of recycled materials (W2,W5,W6,O2)

Waste Management Company Analysis 122

Threats - T 1 Government regulations 2 GDP of only 1% 3 Fuel Price Increases 4 Merger talks between Allied and Republic

ST Strategies 1 Continue to develop WTE and environmentally friendly processes (S1, S1,S5,O1) 2 Consider the possibility of acquiring Republic (S6,T4) 3

5

Impending legal claims for environmental violations

4 Evaluate alternative revenue generation techniques for existing assets (W2,W4,O4) WT Strategies 1 Development more processes to supply electricity (T2,W2) 2 Increase operating efficiency programs and close unprofitable locations (T2, T3,W3) 3 Decentralize Management so locations can react to environmental changes (T4,W1) 4 Implement operating procedures to minimize risk of environmental violations(T5, W1)

Waste Management Company Analysis 123 Business Definition Evolution of the industry In the future, the waste management industry will continue to move toward more renewable products and services. In 1991 the EPA erected very high barriers to entry into the disposal landfill market by enacting the Subtitle D regulations. The permitting process involves the investment of $25 to $100 million just to seek an operating permit, and the process could take up to ten years or more to complete. This effectively limits the number of waste landfills in the United States. As an answer to the future limited landfill space, governments, waste companies, product companies, and consumers will have to devise alternatives to the current model of waste production and waste disposal (MSW Management, 2001). Waste Management will need to continue their focus on environmentally friendly practices and maintain there compliance with governmental permit regulations. They will need to continue their acquirement of new competencies in environmental disposal and recycling programs, to minimize their impact on the environment. They will also continue to make customer service process improvements and change to meet the needs of the growing customer segments.

Waste Management Company Analysis 124 The Future of Waste Management: New Products/Services As the leader in waste collection, Waste Management will have to expand its presence in waste-based energy production. To accomplish this Waste Management will have to expand their partnerships with governments, to develop new waste-to-energy plants and gas-to-energy (landfill gas) projects. In addition, it is anticipated that Waste Management will need to significantly increase its capacity to process recyclable materials. While Waste Management has instituted a single stream process that has increased capacity for local recycling programs, it is obvious that more recycling plants will be needed in the future. Waste Management will also need to implement research and development to explore the possibility recycling other materials. It may be that they can expand the list of items that can be recycled and reused successfully. This would significantly increase the amount of products Waste Management can provide and increase the life of their landfills. Finally, for Waste Management to remain successful it will need to continue its relentless efforts in the area of cost reduction. Waste Management should continue to expand its use of natural gas in their fleet trucks. The company is already expecting to invest up to $500 million per year, over the next ten years to increase the fuel efficiency and emission of their fleet by 15% (Waste Management Annual Report, 2007).

Waste Management Company Analysis 125 Future Customers Waste Management should continue to keep its current base of customers and operating segments. Waste Management’s current revenue segments include collection, landfill, transfer, recycling, and waste-to-energy. They will still focus on municipalities, industrial, commercial, and residential customers. It is anticipated that Waste Management will move further into the areas of recycling, and waste-to-energy as America moves toward a goal of zero waste. This could lead to a slight increase in commercial or industrial customers seeking more environmentally friendly solutions. Further growth and revenue increases, in the collection segment, will come from identifying those markets that will provide higher profit margins, and from acquisitions and/or mergers. There is also the possibility that Waste Management could see an increase in its landfill revenue, as tipping fees will likely increase as other company’s landfills fill to capacity. Major Competitors The waste management industry is made up primarily of three companies; Waste Management Inc., Allied Waste Industries, and Republic Services. Waste Management has the largest market share at 29%, followed by Allied Waste at 13%, and Republic Services has a 7% share of the industry market. This can be seen in Figure 23.

Waste Management Company Analysis 126

Industry Market Share

29% 51% 13%

WMI AW RSG Others

7%

Figure 23 Allied Waste Industries, Inc. (AW) Allied Waste Industries, Inc. operates as a non-hazardous solid waste management company in the United States and Puerto Rico. The company provides collection, transfer, recycling, and disposal services for residential, commercial, and industrial customers. Allied Waste Industries is currently the number two waste management company and is headquartered in Phoenix, Arizona (www.finance.yahoo.com/q?s=AW). Republic Services, Inc. (RSG) Republic Services, Inc. provides non-hazardous solid waste collection and disposal services for commercial, industrial, municipal, and residential customers in the United States. It is currently ranked as the number three waste management company in

Waste Management Company Analysis 127 the United States. Republic Services, Inc. was founded in 1996 and is headquartered in Fort Lauderdale, Florida. (www.finance.yahoo.com/q?s/RSG) Possible Merger and Acquisitions In June 2008 Republic Services made a bid to purchase Allied Waste for approximately $6.07 billion to which Allied Waste accepted the offer, pending shareholder and regulatory approval. In response, on July 14, 2008, Waste Management made a $6.2 billion offer for Republic Services. This offer was a 22% premium over Republic Services’ closing price on Friday, July 11, 2008. On July 18, 2008, Republic Services decided not to enter merger negotiations with Waste Management, because management decided that the proposal would not result in a more favorable transaction for its shareholders than the merger with Allied Waste (SmartMoney, 2008). Republic Services and Allied Waste are moving their merger plans forward by hiring Deloitte Consulting, LLP to advise them in their merger integration planning (Houston, 2008).On July 24, 2008, Waste Management announced that it will seek to buy shares of Republic Services (Yahoo!, 2008). This merger has a tremendous effect on the competitors in the future. If these two firms merge their assets will be combined to provide an equivalent size opponent to Waste Management. We feel that these opponents, along with firms that

Waste Management Company Analysis 128 pursue environmentally friendly strategies, will be our major competitors. Objectives Revenue/Sales Waste Management will generate average annual sales growth of 2.5% for the next 4 years. Justification Waste Management will see a revenue increase 2.5% per year primarily from its pricing initiatives as well as higher recycling commodity pricing. It will see a decrease in collections for 2008 due to volume declines primarily resulting from economic slowdowns in the residential and commercial building industries. Revenue from the collection line of business is anticipated to increase in years 2009 through 2011 due to price increases (Annual Report, WMI, 2007). Recycling commodity pricing will continue to rise approximately 10% per year, contributing $578 million over the four year period.

Waste Management Company Analysis 129 Table 54 Projected Revenue/Sales Projected Revenue/Sales Collection Landfill Transfer Wheelabrator Recycling and other Intercompany Total

2007 8,714 3,047 1,654 868 1,298 -2,271 13,310

2008 8,656 2,986 1,620 878 1,428 -1,926 13,642

2009 9,002 2,976 1,596 887 1,542 -1,989 14,014

2010 9,097 2,988 1,616 896 1,711 -1,975 14,333

2011 9,187 3,010 1,635 900 1,876 -1917 14,691

Net Income Waste Management will generate average annual net income growth of 2.5% for the next four years. Justification Waste Management will continue to increase its net income due to increases in revenue from its recycling operation and from steady collection and landfill fees. Although collection revenue will be modest, Waste Management has the capability to increase its landfill tipping fees from local haulers. Driving the increase in net income will be management insistence on decreases in its operating expenses, primarily fuel expenses through the continued efforts to change its fleet from diesel to natural gas, as well as lowering its work-related injuries through its zero accident campaign (Annual Report, WMI, 2007).

Waste Management Company Analysis 130 Table 55 Projected Net Income Projected Net Income

2007 1,163

2008 1,192

2009 1,221

2010 1,252

2011 1,283

Market Share Waste Management will expand its market share by 3% over the next four years. Justification Gains in market share in this industry have traditionally been the result of consolidation, mergers, and acquisitions. However, as the leader in renewable waste-based energy production and recyclable materials, Waste Management stands to increase its current market share of 29%. Waste Management must increase its volume of recyclable materials through the development of new recycling plants, acquiring existing companies that own recycling facilities, or expanding the capabilities at its existing facilities. Waste Management has recently made a bid to buy Republic Services, but the bid was refused by RSG. Waste Management has made it clear that it intends to buy shares of Republic Services in the future. This will no doubt bring an anti-trust issue in to play that will have to be addressed.

Waste Management Company Analysis 131 Waste Management will increase its total market share by investing in alternative energy sources, including both landfill gas-to-energy and waste-to-energy combustors. Alternatives As the industry leader, Waste Management Inc. has the financial resources and human capital, to explore alternative means of growth that stretch their current operations. Trends in the industry are moving toward an increased focus on environmentally friendly operations. As government regulations continue to increase, the industry is continually moving toward more environmentally friendly operations and processes. Consumers are more aware of the environment and are demanding energy resources that do the least amount of harm to the environment. Waste Management can use this to their advantage in a number of different ways, which will not only allow them to increase market share, net income, and revenues, but it will also improve their image among society. In the idea generation process for alternatives, the core competencies, existing assets, and future of the industry were all considered. Waste Management already has an enormous asset base, from which to draw upon for alternatives. We feel the merger of Allied Waste and Republic will force Waste Management to look at acquisitions, in order to gain market share in the waste disposal segment. However, should they choose, we feel

Waste Management Company Analysis 132 they can venture into the following alternatives to grow their presence in other markets and support their current market presence. The three alternatives that we generated include: 1. Enter the building industry using their own recycled products. 2. Invest in solar panels to run their garbage disposal plants and facilities. 3. Place windmills on closed landfills to produce energy to sell to consumers. These alternatives are unique in that they could all be used simultaneously with existing assets, if Waste Management found the alternative to be profitable. Given the current trend of consumers placing a great amount of weight on being environmentally responsible, these alternatives could help them achieve their objectives to increase market share by 3%, net income by 2.5%, and revenues by 2.5%, over the next four years. Although Waste Management is feeling increased pressure from the competition, including a merger between the number two and three companies, we feel that Waste Management can still achieve these objectives. Devoting research and development efforts to these alternatives, right away, will allow Waste Management to be successful in its endeavors to "think outside the box", and provide a unique way to outpace the competition.

Waste Management Company Analysis 133 Building Materials The first alternative Waste Management can explore to achieve these objectives, is to venture into the building industry using recycled products such as plastic, glass, and aluminum as components of building materials. They would be the first-mover, among Waste Management companies, to venture into this operation. This would give them an edge over competitors who enter later. Waste Management already promotes environmentally friendly practices and procedures; and this would only further improve their image with customers, as well as give them a source of diversification to increase net income and revenues. There are two paths that Waste Management could explore under this option. The first is generating the recycled materials to sell or utilizing the materials to enter the building market. In the home building industry, Waste Management will be able to compete, not by being the best home builder necessarily, but by being the most environmentally conscious home builder. Waste Management can maintain a low cost basis because all of its building materials will be "donated" in the form of waste. This gives them a major competitive advantage over other home builders, as they compete for market share in this emerging industry.

Selling houses gives Waste Management a

tangent to explore that is away from their normal operations,

Waste Management Company Analysis 134 but is still aided by their normal activities of recycling. Ensuring that these houses are built quickly and efficiently, as well as making them energy star certified should make this alternative a successful way to boost sales (Balogh, nd.). The other path is to simply sell the products on the open market to home builders. While this is more in line with Waste Management’s current operations, this is a viable backup, should the building industry be unattractive. This strategy is unlike any strategy the competitors have. This alternative will enable Waste Management to grow market share in other industries, increase the revenues brought in, and increase net income through the use of existing assets. Solar Panels Another alternative for Waste Management to consider is to invest in solar panels to run their garbage disposal plants. If Waste Management could find a way to run their plants full-time using only the power of the sun, they would not only become an icon in their industry, but they would be globally recognized. Again, this option would increase revenues by adding sales of those consumers that are the most worried about the health of the environment. This will also increase the firms’ net profit, by creating reduced costs for utilities. This alternative could also generate growth, by drawing in customers who are concerned with the environmental impacts of firms.

Waste Management Company Analysis 135 Other alternatives using solar panels include the conversion of Waste Managements fleet to run off of solar power. When taking into account all the costs that are incurred by Waste Management companies, the use of gasoline and diesel hurts their bottom line more than anything else. A company that is spending most of its earnings to fuel its operations cannot be successful in adding explosive growth to its net income. Using the energy of the sun is free to any company that can successfully harness it, and would be worth the short-term expenditure to invest in these solar panels. As fuel prices constantly rise, Waste Management companies will all be looking for a solution that will enable them to operate at a cost low enough to turn a profit. Waste Management can generate higher returns if the process can be perfected for their fleet. Their competitors will literally burn their profit up as gas prices rise. These alternatives are also unique for the company because no other waste management company has explored the use of alternative energy sources to operate their fleet. Windmill Energy Generation Keeping the same theme of alternative energy and environmentally friendliness, the third option Waste Management should look into is placing windmills on their closed landfills, in order to create electricity. Not only could Waste Management use the electricity to help operate its own plants, but Waste

Waste Management Company Analysis 136 Management could actually venture into selling this energy as any power company would. The windmills could be made of recycled material and the wind certainly would be a free resource that Waste Management would never run out of. Windmills are just starting up as a viable means of creating electricity and the time to create windmill farms is now. In order to maintain as well as create brand awareness, Waste Management would still operate this section of its business under the Waste Management brand name. This would give Waste Management a chance to increase revenues and net income by not only making money off of materials exiting the home, but now they would be able to sale a service that goes into the home as well. This essentially gives Waste Management the opportunity to create "two-in-one" customers as both waste and power services would be available to all households (The Sustainable Resource Guide, 2007). Alternative Pros & Cons Building Materials Of course the positive aspects of this alternative are the potential to increase revenues, net income, and market share, while prolonging the life of landfill assets. This alternative opens-up a largely untapped revenue base for the company. The negatives include economic downturns in the building industry and the potential of the process to require more asset

Waste Management Company Analysis 137 acquirement to produce the products. Solar Panels The positive aspects of this alternative are the increased cost savings to the company and potential acquirement of environmentally focused customers. The negatives come down to the costs involved in acquiring and setting up the plant to use the panels. There could also be significant research and development costs to create the technology to convert the fleet over to solar power. Windmill Energy Generation The positive aspects of this alternative are the increased costs savings, new revenue potential, and increase in net income. The negative aspects include the costs involved with acquiring the assets to harness and transport the energy. In summary, these alternatives would be relatively unique to Waste Management. They would provide them with increased opportunities to cut costs, increase revenues, increase market share, and increase net income. The alternatives would provide Waste Management with entry into a relatively untapped market. These alternatives have the potential to bring about a dynamic change for Waste Management. However, they also have some drawbacks that need to be taken into consideration. The exploration into these alternatives will largely be in uncharted territories, in which Waste Management has never ventured

Waste Management Company Analysis 138 before. It will bring about the addition of differing kinds of employees, added costs, and the risk of failure. If one of the alternatives were to fail, Waste Management could more than likely continue operations with no visible problems, but if two or all three were to fail, the consequences could be disastrous. However, the opportunity to outpace the competition is worth taking the chance of having to deal with the cons that go along with these alternatives. Recommendations In order to achieve Waste Management’s objectives, we recommend that Waste Management tries a mixture of all three alternatives, as opposed to using only one. One positive factor about the alternatives is that they can stand on their own or they can be used together to make even more of an impact. Each alternative would affect the objectives in their own way, but when the right mixture of each is used, the objectives become much more realistic to achieve. In deciding to utilize all of these alternatives, we evaluated the current and future industry environment. Pricing and cost efficiency are two major factors in the industry currently. All of these alternatives utilize, to a large extent, assets Waste Management already owns. These alternatives also have the possibility of creating costs efficiencies for the company. They are also very cognizant of industry trends toward

Waste Management Company Analysis 139 environmental consciousness. If Waste Management explored each alternative, they would first and foremost create an image of one that is socially responsible. This would set the stage for an increase in net income, revenues, and market share. Building houses and selling power would increase revenues, as well as net income, and investing in solar panels would lower costs, further creating a surge in net income. Together, all of these would steal market share and further solidify Waste Management’s position as the industry leader. It is possible that they could also ward off threats, like the merger of major competitors, if they were to capture even more market share through these alternatives. In addition, over the next five years there will only be further pressure to pursue environmentally friendly operations. Those companies that are perceived to efficiently achieve these goals will be the ones who earn customer loyalty and have the potential to open up new markets. Each of these alternatives serves as a way to improve the image of Waste Management over other companies in the industry. This aspect by itself will contribute a great deal to achieving the objectives set forth over the next five years.

Waste Management Company Analysis 140 Implementation Considerations There are also several factors that Waste Management must take into consideration when trying to implement a mix of these three alternatives. Most of the issues that would arise from implementing these alternatives would be similar, because they are all pointed relatively in the same direction.

Observing a

few different aspects and challenges that may arise during implementation of these alternatives will allow Waste Management to better understand the most effective ways to venture into these new projects. Setting Unreasonable Expectations The first pitfall that must be avoided when implementing new alternatives is to avoid setting your goals and expectations too high. We believe the objectives of 3% growth in market share, and 2.5% in net income, as well as revenues over four years is not only feasible, but it is well in line with our alternatives. By not making its expectations unreasonable, Waste Management can focus on steady growth and taking the time to make the correct decisions, in order to implement these alternatives effectively. Setting the bar too high when experimenting with new alternatives will only serve to lower employee morale by being too demanding, losing revenues by not working efficiently, and essentially losing market share because so much time, effort, and money is tied up in the alternative.

Waste Management Company Analysis 141 Elastic Business Definition One aspect of demand for these new alternative's outputs is that it will be relatively elastic. That is, as the price goes up for these new services, the demand will tend to go down. Waste Management must realize that although people are concerned about the environment, they will be unwilling to pay unreasonable amounts regardless of the environmental impact. It will be a necessity that Waste Management is able to be profitable from these alternatives without raising prices so much that customers will be unwilling to do business with them. Creation of a Cause, Not a Business Becoming a company that is constantly aware of its environmental impact does not need to take priority over making a profit. The bottom line is that companies are in business to turn a profit in order to sustain growth and satisfy shareholders. Waste Management must be careful with using these alternatives only as a cause to better the environment, and they must insure that these alternatives are viable business options as well. Waste Management must not get caught up in simply operating for the environment's sake, but they must also focus these alternatives as ways to make ever-increasing profits.

Waste Management Company Analysis 142 New Voices When attempting to implement these alternatives, Waste Management’s management must encourage input from its employees on ways to successfully adopt these new experiments. According to Gary Hamel, there are three places that Waste Management should look, in order to hear the most innovative ideas that could help Waste Management make a smooth and profitable transition into these alternatives. Waste Management should look to its younger employees or anyone with a youthful outlook; employees near the geographic areas, because they usually have fewer resources and are move creative; and newcomers who offer a fresh new perspective on the situation. Encouraging input from all these sources will profit Waste Management by allowing it to gain insight from a diverse group with fresh, new ideas (United Bit, 2000). Open Market for Capital and Talent When initially trying to implement these new projects, Waste Management must not limit their own opportunities by deciding to spend only a certain amount on these alternatives. If Waste Management is serious about being an innovative leader, they must make the necessary sacrifices in order to push through any difficulties and give these alternatives every chance to succeed.

Also, these new projects are going to require some of

the most knowledgeable, intelligent human capital that Waste

Waste Management Company Analysis 143 Management can find. The company must create an atmosphere that will not only attract top talent, but also one that will maintain this talent. In order to do this, Waste Management must create a work environment that promotes experimentation and innovation, while also compensating their employees at a level as good as or better than the employee could find elsewhere. Low Risk Experimentation By trying to implement a mixture of all three of these alternatives, Waste Management gives itself a cushion when it comes to the risk involved in each. If one alternative is clearly not going to work, Waste Management can abandon this operation and focus even more of its efforts onto the other two. These alternatives certainly won't be accomplished without taking on some risk, but Waste Management has established enough financing that a loss wouldn't be totally crippling to its operations. The main aspect of risk that Waste Management’s management must keep in mind is that the realization of when one of the alternatives isn’t going to work out, and be willing to put a stop to it before too much money is lost. Cellular Division The last aspect of implementation that Waste Management must take into consideration when looking at these alternatives is cellular division. Right now, Waste Management has mainly focused on its core competency, and has yet to stretch itself

Waste Management Company Analysis 144 out in order to experiment with alternatives that are "outside the box." These alternatives give Waste Management a chance to differentiate and diversify its business operations. Instead of becoming a stagnant company, these alternatives will yield results not only with net income, revenues, and market share, but they will also promote a company-wide attitude of growth and innovation. (United Bit, 2000) In summary Waste Management should carefully evaluate each alternative for viability and strategic possibilities. They should keep a close watch on market trends and respond accordingly, in order to maintain and increase market share. They should decide on the course of action that will help them meet their growth, revenue, and net income objectives, as well as provide the firm with long-term profitability.

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