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Waste Management Company Analysis 1

Waste Management Incorporated

Company Analysis

Group 10: Amanda Bowling, Aesha Desai,

Curtis Anderson, Jaimin Chokshi,

Michael Stewart, Bhavik Shah

University of North Alabama

Management Policy


Table of Contents

Executive Summary 14

Introduction 15

Company Background 15

Customers & Services 18

Corporate Portfolio 19

Segment Growth Rates 21

Production Sales Data 22

Regional Net Sales 23

Revenue 24

Net Income 25

Expenses 26

Stock Prices 27

Market Share 28

Current Strategies 28

Corporate 28

Business 30

Functional 31

Core Competencies 32

Solid Waste Disposal 32

Transfer Stations 33

Landfills 34

Recycling 34

Waste-to-Energy 35


Gas-to-Energy 35

Competitive Environment 36

Competitive Profile 36

Revenue 37

Net Income 38

Sales Growth 40

Revenue Per Employee 41

Average Operating Income 42

Net Profit Margin 43

Return on Investment 44

Net Income Per Employee 45

Conclusion of Competitive Analysis 46

Significant Competitors 47

Allied Waste Industries 48

Republic Services 48

Competition Core Competencies 51

Allied Waste 51

Collection 51


Recycling 51

Landfills 52

Gas-to-Energy 52



Collection 52


Landfills 53

Recycling 53

Summary of Core Competencies 53

Key Factors of Competition 55

Geographic Location 55

Pricing 55

Quality of Operations 56

Increases in Recycling 56

Cost Effectiveness 56

Governmental Permits 57

Competitive Summary 57

Purpose of this analysis 58

Corporate Profiles 59

Waste Management Inc. 60

Allied Waste Industries, Inc. 62

Republic Services, Inc. 63

Growth Analysis 64

Revenue 65

Net Income 66

Market Value Analysis 69

Earnings per Share (EPS) 69


Price to Earnings (P/E) 69

Price to Sales (P/S) 70

Price to Book (P/B) 70

Price to Cash Flow (P/CF) 70

Stock Price 72

Profitability Ratios 73

Gross Profit Margin 73

Operating Profit Margin 74

Net Profit Margin 75

Return on Assets 76

Return on Equity 77

Return on Assets Trend Analysis 78

Recommendations for Improvement 79

Liquidity Ratios 82

Current Ratio 83

Quick Ratio 84


Leverage Ratios 86

Debt to Assets and Debt to Equity 86

Interest Coverage (Times Interest Earned) 87

Short-Term Debt 88


Turnover Ratios (Asset Management) 90


Receivables Turnover 90

Fixed Assets Turnover 92

Total Assets Turnover 92


Solvency Ratios 94

Solvency Ratio 95

Operating Cash Flow 96


Financial Analysis Summary 98

Revenue and Sales 102

Company Growth 103

Profit Margins 105

Return on Assets & Velocity 107

Cash Assets 108

Cash Flow 108

Competitive Analysis 111

SWOT Analysis 112

Strengths 112

Technology 112

Strategies 112

Global Position 113

Market Share 113

Marketing 113


Products/Services 113

Licenses/Permits 114

Assets 114

Landfills 114


Trucking Fleet 114

Weaknesses 115

Leadership 115

Financial Measures & Returns 115

Size 117

Dealing with Strengths and Weaknesses 117

Opportunities 120

Renewable Energy Sources 120

Recycling Programs & Gas-to-Energy 121

Threats 121

Political & Governmental 121

Legal Forces 122

Economic Conditions & Complementors 122

Competition 123

Management of Opportunities and Threats 124

Business Definition 128

Evolution of the Industry 128

The Future of Waste Management: New 129


Products/Services

Future Customers 130

Major Competitors 130

Allied Waste Industries 131


Possible Mergers & Acquisitions 132

Objectives 133

Revenue/Sales 133

Justification 133

Net Income 134

Justification 134

Market Share 135

Justification 135

Alternatives 136

Building Materials 138

Solar Panels 139

Windmill Energy Generation 140

Alternative Pros & Cons 141

Building Materials 141

Solar Panels 142

Windmill Energy Generation 142

Recommendations 143

Implementation Considerations 145

Setting Unreasonable Expectations 145


Elastic Business Definition 146

A Cause, Not a Business 146

New Voices 147

Open Market for Capital & Talent 147

Low Risk Experimentation 148

Cellular Division 148

References 150

Tables

Table 1 Gross Segment Revenue 21

Table 2 Net Sales by Product 23

Table 3 Regional Net Sales 24

Table 4 Revenues 25

Table 5 Net Income 25

Table 6 Stock Prices 27

Table 7 Competitive Profile 36

Table 8 Revenue 37

Table 9 Net Income 38

Table 10 Sales Growth Rate 40

Table 11 Revenue Per Employee 41

Table 12 Average Operating Margin 42

Table 13 Net Profit Margin 43

Table 14 Return on Investment 44


Table 15 Net Income Per Employee 45

Table 16 Competitor Comparison 49

Table 17 Operating Revenue; WMI 62

Table 18 Revenue Sources; WMI, AW, RSG 64

Table 19 Revenue – Four-Year; WMI, AW, RSG 66

Table 20 Net Income; WMI, AW, RSG 68

Table 21 Company Ranking – Revenue 68

Table 22 Market Value Analysis 71

Table 23 Company Ranking – Market Value

Analysis

72

Table 24 Stock Prices – Highs and Lows 73

Table 25 Gross Profit Margin; WMI, AW, RSG 74

Table 26 Operating Profit Margin; WMI, AW, RSG 75

Table 27 Net Profit Margin; WMI, AW, RSG 76

Table 28 Return on Assets; WMI, AW, RSG 77

Table 29 Return on Equity; WMI, AW, RSG 78

Table 30 Company Ranking – Profitability 80

Table 31 Current Ratio; WMI, AW, RSG 84

Table 32 Quick Ratio; WMI, AW, RSG 85

Table 33 Company Ranking – Liquidity Ratios 85

Table 34 Debt Ratio; WMI, AW, RSG 87

Table 35 Debt to Equity; WMI, AW, RSG 87

Table 36 Times Interest Earned; WMI, AW, RSG 88


Table 37 Short-Term Debt; WMI, AW, RSG 89

Table 38 Company Ranking – Leverage Ratios 89

Table 39 Receivables Turnover Ratio; WMI, AW, RSG 91

Table 40 Fixed Assets Turnover Ratio; WMI, AW, RSG 92

Table 41 Total Assets Turnover Ratio; WMI, AW, RSG 93

Table 42 Company Ranking – Turnover Ratios 94

Table 43 Solvency Ratio; WMI, AW, RSG 95

Table 44 Operating Cash Flow Ratio; WMI, AW, RSG 96

Table 45 Company Ranking – Solvency Ratios 97

Table 46 Net Profit Margin 105

Table 47 Net Operating Cash Flow 110

Table 48 Net Financing Cash Flow 110

Table 49 Net Investing Cash Flow 111

Table 50 Return on Assets 116

Table 51 Return on Equity 116

Table 52 Company Ranked Profitability Ratios 116

Table 53 Strategy/SWOT Matrix Worksheet 125

Table 54 Projected Revenue/Sales 134

Table 55 Projected Net Income 135

Figures

Figure 1 Company Time Line 18


Figure 2 Segment Revenue by Percentage 21

Figure 3 Income from Operations 22

Figure 4 Revenue Sources 24

Figure 5 Operating Expenses 26

Figure 6 Five Year Total Return 28

Figure 7 Revenue 38

Figure 8 Net Income 39

Figure 9 Sales Growth Rate 40

Figure 10 Revenue Per Employee 41

Figure 11 Average Operating Margin 42

Figure 12 Net Profit Margin 43

Figure 13 Return on Investment 45

Figure 14 Net Income Per Employee 46

Figure 15 Industry Market Share, 60

Figure 16 Revenue Sources; WMI, 61

Figure 17 Revenue Sources; AW, 63

Figure 18 Revenue Sources; RSG, 64

Figure 19 Waste Management Revenue 2004-2007, 66

Figure 20 Waste Management Net Income 2004-2007, 67

Figure 21 Trend Analysis: Waste Management vs.

Five year Industry Average

79

Figure 22 Net Profit Comparison 107

Figure 23 Industry Market Share 131


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

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).

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

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

customers (Waste Management History, 2008). In Figure 1 you will

see the timeline for the company.


Time Line of Waste Management Incorporated

Figure 1

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

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

1971 WMI Est..

During the 1970’s made acquisitions

1975 Chemical Waste

1980 ENRAC

1982 Chem Nuclear

1993 Change name to WMX

1997 Change Name Back to Waste Management

1998 Merger with USA Waste

1999 Acquired Eastern Recycling

2000 Sold Asian, South American, & European Operations

2002 Began Re-organization

2002 Insider trading allegations

1990 Acquired Wheelabrator

Acquired Pelts Group


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-to-

energy, 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

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).


Table1

Gross Segment Revenue (millions)

2007 2006 2005

Eastern 3281 3614 3632

Midwest 2983 3003 2922

Southern 3681 3759 3590

Western 3508 3511 3416

Wheelabrator 868 902 879

WMRA & Other 1260 1023 1101

Segment Revenue Percentages

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)

Figure 3

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 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)

2007 2006 2005

Eastern 2650 2875 2848

Midwest 2491 2487 2414

Southern 3141 3191 3034

Western 3064 3046 2969

Wheelabrator 797 831 817

WMRA & Other 1167 933 992

Revenue

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

Table 4


Revenue

2003 2004 2005 2006 2007WMI 11,648.0 12,516.0 13,074.0 13,363.0 13,310.0www.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 2005 2006 2007WMI 630.0 939.0 1,182.0 1,149.0 1,163.0www.wastemanagement.com

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 Percent of Revenue

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

reduction in administrative staff (Waste Management Annual

Reports, 2007).


Stock Prices

Table 6

Stock Prices

2003 2004 2005 2006 2007

WMI 29.600 29.940 30.350 36.770 32.670

www.wastemanagement.com

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).


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


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.


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


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 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


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


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 single-stream recycling,

eCycling, or shredding, to regional and national bale routes

(Waste Management, 2007).


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).


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 SERVICES

WASTE CONNECTION

STERICYCLE

Revenues(Millions)

$13,310 $6,068.7 $3,176.2 $958.5 $932.8

Net Income(Millions)

$1,630 $ 273.6 $290.2 $99.1 $118.4

Sales Growth Rate(2003-2007)

3.49% 3.17% 6.07% 14.69% 18.36%

Revenue Per Employee

$282,477 $267,908 $245,369 $198,773 $160,345

Average Operating Margin (2003-

14.45% 16.40% 16.72% 22.98% 25.75%


2007)Average Net Profit Margin (2003-2007)

8.05% 2.89% 8.91% 10.90% 13.17%

Return On Investment (2003-2007)

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.Nhttp://www.reuters.com/finance/stocks/ratios?symbol=AW.Nhttp://www.reuters.com/finance/stocks/ratios?symbol=WMI.N

Revenue

Table 8

Revenue


WASTE CONNECTIO

N

STERICYCLE

Revenues(Millions)

$13,310

$6,068.7

$3,176.2

$958.5 $932.8


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


WASTE CONNECTIO

N

STERICYCLE

Net Income(Millions)

$1,630 $ 273.6 $290.2 $99.1 $118.4


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.


Sales Growth

Table 10

Sales Growth Rate


WASTE CONNECTIO

N

STERICYCLE

Sales Growth Rate(2003-2007)

3.49% 3.17% 6.07% 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 concentrated on growth through

acquisitions, new technologies, and maintaining their market

share.


Table 11



WASTE CONNECTIO

N

STERICYCLE


$282,477 $267,908

$245,369

$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 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


WASTE CONNECTION

STERICYCLE

Average Operating Margin (2003-2007)

14.45% 16.40% 16.72% 22.98% 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

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


WASTE CONNECTION

STERICYCLE

Average Net Profit Margin (2003-2007)

8.05% 2.89% 8.91% 10.90% 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 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


WASTE CONNECTIO

N

STERICYCLE

Return On Investment (2003-2007)

6.00% 1.36% 6.57% 5.59% 9.53%


Figure 13 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.


Table 15



WASTE CONNECTION

STERICYCLE


$24,599 $15,311 $24,031 $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

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.

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. 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

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 Relative Market Share

Growth Rate

WMI 28.5% 2.2%AW 13% 5.1%RSG 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 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

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

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,

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.

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

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


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


Increases in Recycling

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

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

participate in due to their geographic locations, resources, and

abilities. However, Allied is quickly moving into the gas-to-

energy 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


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.

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.


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,

Industry Market Share

29%

13%

7%

51%

WMIAWRSGOthers

http://www.finance.yahoo.com/q?s=WMI


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.

55%

20%

11%

8% 6% Collection

Landfill

Transfer

Recycling

Waste-to-Energy

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


Operating Revenues - WMI

2007 2006 2005Collection 8,714 8,837 8,633Landfill 3,047 3,197 3,089Transfer 1,654 1,802 1,756Wheelabrator 868 902 879Recycling and other 1,298 1,074 1,183Intercompany -2,271 -2,449 -2,466 Total 13,310 13,363 13,074

Data: www.wastemanagement.com

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.

http://www.finance.yahoo.com/q?s=AW

http://www.wastemanagement.com/


Figure 17 Revenue Sources, AW 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.

Revenue Sources - Allied Waste

70%

14%

7% 4% 5% Collection Landfill Transfer Recycling Other

http://www.finance.yahoo.com/q?s/RSG


Figure 18 Revenue Sources, RSG 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

Revenue Sources - Republic

Services

76%

9%9% 6%

Collection Landfill Transfer Recycling

http://www.republicservices.com/

http://www.awin.com/



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 non-strategic

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:


Figure 19 Waste Management Revenue Data: www.morningstar.com

The Table 19 summarizes the four-year revenues for each

company:

Table 19

Revenue

Revenue 4-year

2004 2005 2006 2007Waste Management

12,516.0 13,074.0 13,363.0 13,310.0

Allied Waste 5,362.0 5,612.2 5,908.5 6,068.7

Republic Services

2,708.1 2,863.9 3,070.6 3,176.2

Data: www.morningstar.com

Net Income

Net income is determined by subtracting cost of goods sold,

depreciation, taxes, interest, and other expenses from revenue.

Waste Management Revenue

12,000.012,200.012,400.012,600.012,800.013,000.013,200.013,400.013,600.0

2004 2005 2006 2007

Revenue

http://www.morningstar.com/



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:

Figure 20 Waste Management Net Income


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 Net Income

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

2004 2005 2006 2007

Net Income



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 2007Waste Management

939.0 1,182.0 1,149.0 1,163.0

Allied Waste 49.3 203.8 160.9 273.6Republic Services

237.9 253.7 279.6 290.2


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

Highest Middle Lowest

Revenue WMI - $13,310

AW – 6,068.7

RSG – 3,176.2

Net Income WMI - $1,163

RSG – 290.2

AW – 273.6





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.


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.

Table 22

Market Value Analysis


2004 2005 2006 2007Earnings per shareWaste Management $1.61 $2.09 $2.10 $2.23 Allied Waste $0.11 $0.42 $0.32 $0.71 Republic Services $1.08 $1.20 $1.39 $1.51

Price/EarningsWaste Management 18.7 14.5 17.5 15.8Allied Waste 84.0 20.3 37.2 24.5Republic Services 21.9 21.5 19.7 22.2 S&P 500

19.0 17.3 16.8 16.5

Price/SalesWaste Management 1.4 1.4 1.5 1.3Allied Waste 0.6 0.5 0.7 0.7Republic Services 1.9 2.0 1.9 2.0 S&P 500 1.6 1.5 1.6 1.5

Price/BookWaste Management 2.9 2.7 3.2 2.8Allied Waste 1.3 1.1 1.5 1.3Republic Services 3.0 2.8 2.9 2.7 S&P 500 3.0 2.8 2.9 2.7

Price/Cash FlowWaste Management 7.9 7.4 8.0 7.0Allied Waste 4.6 3.9 4.5 3.9Republic Services 7.7 7.5 11.0 9.3 S&P 500 11.5 10.8 11.1 11.6Data: www.morningstar.com

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

AW - $0.71

Price/Earnings WMI – 15.80 RSG - 22.20

AW – 24.50

Price/Sales AW – 0.70 WMI - 1.30 RSG – 2.0 Price/Book WMI - 2.80 RSG - 2.70 AW - 1.30 Price/Cash Flow RSG - 9.3 WMI - 7.0 AW - 3.9Data: www.morningstar.com

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-and-low prices for each

company.

Table 24

Stock Prices – Highs and Lows



2004 2005 2006 2007Waste Management - High

31.1 30.71 38.35 40.38

Waste Management - Low

26.56 27.21 33.28 32.67

Allied Waste - High 14.28 13.5 9.13 13.99Allied Waste - Low 8.2 9.78 6.98 9.3

Republic Services - High

22.36 25.39 28.66 34.85

Republic Services - Low

16.63 20.23 25.3 26.61

Data: www.financeYahoo!

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 increased its gross profit margin 1.1%

primarily through a decrease in its operating expenses of $185

http://www.financeYahoo/


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 Margin

2004 2005 2006 2007

Waste Management

34.20% 33.90% 35.70% 36.80%

Allied Waste 37.10% 34.70% 35.70% 37.60%Republic Services

36.70% 37.00% 37.30% 37.10%

Data: www.wastemanagement.com , www.awin.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

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



2004 2005 2006 2007

Waste Management 13.60% 13.10% 15.20% 16.90%Allied Waste 16.50% 16.00% 16.00% 17.40%Republic Services

16.70% 16.70% 16.90% 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

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 Margin

2004 2005 2006 2007

Waste Management 7.50% 9.04% 8.59% 8.74%Allied Waste 0.92% 3.55% 2.67% 4.51%Republic Services

8.78% 8.86% 9.10% 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).



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 Assets

2004 2005 2006 2007

Waste Management

4.52% 5.62% 5.51% 5.70%


5.28% 5.63% 6.23% 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).



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 2005 2006 2007Waste Management 16.28% 19.55% 18.62% 19.36%Allied Waste 2.21% 8.50% 5.80% 8.63%Republic Services

12.60% 14.59% 18.47% 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.



Figure 21 Trend Analysis: Waste Management ROA vs. Industry

Data: www.reuters.com

Recommendations for Improvement

Table 30 summarizes the profitability ratios for the three

companies.

Table 30

Company Rank – Profitability Ratios

Waste Management Return on Assets

0

1

2

3

4

5

6

2004 2005 2006 2007

Ret

urn

Per

cen

tag

eWMI Returnon AssetsIndustry 5 yraverage

http://www.reuters.com/


Company Rank Highest Middle LowestGross Profit Margin AW - 37.6% RSG -

37.1%WMI - 36.8%


AW - 17.4% WMI - 16.9%

RSG - 16.9%

Net Profit Margin RSG - 9.13% WMI - 8.74%

AW – 4.51%

Return on Assets RSG - 6.52% WMI - 5.70%

AW - 1.97%

Return on Equity RSG - 21.29%

WMI - 19.4%

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

(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-to-date

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

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

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 short-

term 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 short-term

debt, a decrease in current assets, or a combination of both


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

$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 2005 2006 2007


Waste Management 0.88 1.06 0.97 0.95Allied Waste 0.53 0.58 0.68 0.52Republic Services

1.11 0.72 0.65 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

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 2005 2006 2007Waste Management 0.75 0.82 0.76 0.86Allied Waste 0.42 0.47 0.52 0.41



Republic Services

0.92 0.62 0.54 0.51



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 Middle Lowest Current Ratio WMI - 0.95 RSG - 0.66 AW - 0.52 Quick Ratio WMI - 0.86 RSG - 0.51 AW - 0.41Data: www.morningstar.com

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

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 2005 2006 2007Waste Management

71.4% 71.0% 69.8% 71.3%


58.3% 65.4% 67.8% 70.8%


Table 35

Debt Ratio and Debt to Equity Ratio

Debt to Equity 2004 2005 2006 2007Waste Management

1.37 1.33 1.20 1.38

Allied Waste 3.56 2.97 2.21 1.83Republic Services

0.72 0.92 1.09 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

Times Interest Earned

2004 2005 2006 2007

Waste Management 3.73x 3.45x 3.72x 4.32xAllied Waste 1.16X 1.56X 1.7X 1.96XRepublic Services 6.59X 7.02X 6.85X 7.89XData: www.wastemanagement.com , www.awin.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


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 2005 2006 2007Waste Management 1.80% 2.50% 4.00% 1.60%Allied Waste 2.40% 1.80% 1.70% 4.00%Republic Services

0.10% 0.10% 0.10% 0.10%



Table 38 summarizes the company positions for all of the

leverage ratios.

Table 38

Company Rank Leverage Ratios

Highest Middle Lowest Debt Ratio AW - 72.2% WMI -

71.3%RSG - 70.8%

Debt to Equity AW – 1.83 WMI – 1.38 RSG - 1.20

Interest Coverage RSG - 7.89x WMI - 4.32x

AW - 1.96x

Short-Term Debt AW - 4.00% WMI - 1.60%

RSG - .10%


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,

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 change in

their receivables turnover ratio. Table 39 reflects the

receivable turnover for each company.

Table 39

Receivables Turnover

Receivables Turnover

2004 2005 2006 2007

Waste Management 6.7 6.6 7.2 7.1

Allied Waste 8.1 8.4 8.7 8.7

Republic Services

10.5 10.4 10.7 10.7


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 and Allied Waste were unchanged from 2006 to

2007, but Republic Services had a slight increase.

Table 40

Fixed Assets Turnover

Fixed Assets Turnover

2004 2005 2006 2007


Allied Waste 1.3 1.4 1.4 1.4Republic Service 1.4 1.4 1.4 1.5Data: www.morningstar.com

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 and assets

during 2007. Table 41 summarizes the total assets turnover for

each company.

Table 41

Total Assets Turnover

Total Assets Turnover

2004 2005 2006 2007


Allied Waste 0.4 0.4 0.4 0.4

Republic Services

0.6 0.6 0.7 0.7



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


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

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


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 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


Allied Waste 1.24 1.34 1.35 1.39

Republic Services

1.72 1.54 1.47 1.41

Data: www.wastemanagement.com , www.awin.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

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



2004 2005 2006 2007


Allied Waste 0.37 0.45 0.60 0.47

Republic Services 1.49 1.15 0.86 1.05Data: www.morningstar.com




Table 45 ranks the company positions for all of the solvency

ratios.

Table 45

Company Rank – Solvency Ratios

Highest Middle Lowest Solvency Ratio RSG -

1.41WMI - 1.40 AW - 1.39

Operating Cash Flow RSG - 1.05

WMI - 0.94 AW - 0.47


To improve its solvency ratios, Waste Management should

increase the value of its assets, decrease liabilities, and

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


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’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

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

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

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.

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.

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 waste-based

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).

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-to-

energy, 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

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 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.


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).

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).

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 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 2007WMI 2,218.0 2,391.0 2,540.0 2,439.0Allied 650.4 716.6 921.6 1,057.0Republic 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)

2004 2005 2006 2007WMI (1,130.0) (1,090.0) (1,803.0) (1,946.0)Allied (489.2) (45.5) (274.8) (334.8)Republic (437.3) (480.0) (409.4) (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)

2004 2005 2006 2007WMI (863.0) (1,062.0) (788.0) (761.0)Allied (537.9) (683.0) (608.8) (585.4)Republic (206.7) (297.2) (215.4) (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

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 waste-

to-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

Management focus on expanding the waste-to-energy and gas-to-

energy 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

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-to-energy facility.

Allied Waste only has 164 transfer stations (Allied Waste, 2007).

Republic Services only has 93 transfer stations (Republic

Services, 2007).

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

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 Assets

2004 2005 2006 2007

Waste Management

4.52% 5.62% 5.51% 5.70%


5.28% 5.63% 6.23% 6.52%


Table 51

Return on Equity

Return on Equity 2004 2005 2006 2007Waste Management 16.28% 19.55% 18.62% 19.36%Allied Waste 2.21% 8.50% 5.80% 8.63%Republic Services

12.60% 14.59% 18.47% 21.29%


Table 52

Company Rank – Profitability Ratios

Company Rank Highest Middle LowestGross Profit Margin AW - 37.6% RSG -

37.1%WMI - 36.8%


AW - 17.4% WMI - 16.9%

RSG - 16.9%

Net Profit Margin RSG - 9.13% WMI - 8.74%

AW – 4.51%


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 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 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

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.

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


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

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

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

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

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 Weaknesses – WSO Strategies

Use strengths to take advantage of opportunities

1

2

3

4

WTE Operations

Gas-to-Energy Operations

GlobalOperationsIn Puerto Rico & Canada

29% Market Share

1

2

3

4

Centralized Management Structure Mid-range returns for Return on assets 5.70%

Large Size

Return on equity midrange 19.36%

WO Strategies

Overcome weaknesses by taking advantage of opportunities

ST Strategies

Use strengths to avoid threats


5

6

7

Environmental Programs

Large asset base, with 277 Active landfills and 314 Transfer Stations

Largest trucking fleet in waste collection

5

6

7

Midrange operating and net profit margins. 16.9% and 8.74% respectively

Lowest gross profit margin of 36.8%

Lower Quick ratio .86 and current ratio of when compared with industry average. However they are higher than their top 2 competitors.

WT Strategies

Minimize weaknesses and avoid threats

Opportunities – O

SO Strategies WO Strategies

1

2

3

4

Renewable Energy Resources

Recycling Programs and expansion

Creation of an expanded global presence

Utilize closed landfills for revenue resources.

1

2

3

Continue to expand WTE sites (S1,S2,O1)

Develop recycling program awareness (S5,O2)

Evaluate and Pursue expansion opportunities within the national boarders of their global market (S3,S6, O3)

1

2

3

Increase returns by expanding the growing Waste-to-energy and Gas-to-energy markets (W2,W4,W5,W6,O1)

Decentralize decisions in the global operations(W1, W2,O3)

Expand the sale of recycled materials


4(W2,W5,W6,O2)

Evaluate alternative revenue generation techniques for existing assets (W2,W4,O4)

Threats - T ST Strategies WT Strategies1

2

3

4

5

Government regulations

GDP of only 1%

Fuel Price Increases

Merger talks between Allied and Republic

Impending legal claims for environmental violations

1

2

3

Continue to develop WTE and environmentally friendly processes (S1, S1,S5,O1)

Consider the possibility of acquiring Republic (S6,T4)

1

2

3

4

Development more processes to supply electricity (T2,W2)

Increase operating efficiency programs and close unprofitable locations (T2, T3,W3)

Decentralize Management so locations can react to environmental changes (T4,W1)

Implement operating procedures to minimize risk of environmental violations(T5,W1)


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.


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).

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.

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,

Industry Market Share

29%

13%

7%

51%

WMIAWRSGOthers

http://www.finance.yahoo.com/q?s=AW


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)

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

http://www.finance.yahoo.com/q?s/RSG


these opponents, along with firms that 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.


Table 54

Projected Revenue/Sales

Projected Revenue/Sales 2007 2008 2009 2010 2011 Collection 8,714 8,656 9,002 9,097 9,187 Landfill 3,047 2,986 2,976 2,988 3,010 Transfer 1,654 1,620 1,596 1,616 1,635 Wheelabrator 868 878 887 896 900 Recycling and other 1,298 1,428 1,542 1,711 1,876 Intercompany -2,271 -1,926 -1,989 -1,975 -1917 Total 13,310 13,642 14,014 14,333 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).


Table 55

Projected Net Income

Projected Net Income 2007 2008 2009 2010 20111,163 1,192 1,221 1,252 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 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 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.


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, 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.

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

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 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 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

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.

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.

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.

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 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 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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