Waste Management, Inc.: Part II

Part II of this analysis will focus on the internal aspects of Waste Management, Inc. Four primary elements of the corporate operations of Waste Management, Inc. will be considered. The first of these will include an assessment of the corporation’s current strategic paradigm and the probable effectiveness of this strategic plan for enhancing the company’s market share and profitability in the near future. The strategy will be analyzed from the perspective of a breakdown of its component parts. The relationship of the general corporate strategy to the various layers of the general structures of Waste Management, Inc. will also be discussed.

A consideration of corporate strategy will be followed by a value chain analysis. The overall degree of competitiveness of the corporation, and related features such as cost-effectiveness, will be examined in some detail. For example, the degree to which Waste Management, Inc. is able to maintain an appealing image to investors will be explored. At the same time, the varying financial liabilities of the company will also be analyzed, and possible weak areas affecting the overall balance of the corporation’s profitability will be pointed out. The ambition, of course, is to generate a realistic assessment of the corporation’s immediate and short-term financial prospects and to point out limitations that might deter investor participation. Because a value chain analysis is vital to the determination of the competitive qualities of the corporation, a follow-up discussion of the company’s general financial condition will be included. This will, in turn, be followed by a discussion of the strategic fit of Waste Management, Inc. and a SWOT analysis identifying the principal areas of concern regarding such matters as profitability ratios and questions of efficiency.

A: Strategy Analysis

Waste Management, Inc. has consistently pursued an ongoing strategic paradigm that segments its broader set of corporate goals into sets of short-term and long-term objectives. This approach is operative in regards to both financial objectives and corporate goals concerning the quality of products, performance, and relationships between customers, employees, and shareholders. As seen with TideKleen Waste Management Inc., An ongoing concern in recent years for Waste Management, Inc. that continues into the present time and current set of strategic objectives is the reduction of overhead. Of course, concerns about expenditures are an ongoing and elementary aspect of business operations. Yet the corporation has demonstrated a commitment to a reduction in its overall sets of costs through the elimination of unnecessary overhead at varying operational levels, and within different layers of the multi-layered corporate pyramid.

A principal concern of this kind has been in the area of price structures for services rendered by the corporation (WMI, 2012). There has been concern that pricing mechanisms have at times been rooted in an inaccurate reflection of the nature, quality, and services being provided to customers and clientele. For this reason, the pricing scales maintained by a number of divisions within the corporation, and at several dozen of its operational facilities, have been brought under careful reexamination by those charged with departmental operations. The concern is that certain services in particular markets are being underpriced and that this has contributed to a revenue shortfall within the contexts of those particular areas of operation. A parallel concern has been for the potential overpricing of various services provided in other domains of corporate operations. Overpricing of this kind may well have the impact of creating perverse incentives that deter growth, and ultimately diminish the volume of revenue derived from those particular markets.

A present directive being pursued by the corporate officers of Waste Management, Inc. and those responsible for the relevant operational procedures involves a concern for enhanced customer service. This has become an area of concern in part because of the expansion of the corporation’s overall operative volume in the past seven years. The issue is one of quality control. A company that experiences a rapidity of growth within particular markets may simultaneously experience difficulty at maintaining a comparable level of quality of services provided. Indeed, quality control is a particularly vital issue when a firm ventures into new markets. The question is one of the initial consumer impact and the protection of the corporation’s brand with regards to reputation. A firm that cultivates new markets but whose systems of quality control are deficient even while establishing its position in the markets in question will ultimately experience a devaluation of the reputation of its brand. This becomes an exceedingly crucial issue during the process of early market cultivation (Keaney, 1992). Once a firm develops an initial reputation for low-quality services, it is difficult for its reputation to be regained.

Due to the expansive nature of the corporation’s ongoing sphere of operations, a principal concern has been the ability for capital to be freely transferred from one operating system to another. A concern of this kind has necessitated an emphasis on financial liquidity with regards to the company’s overall body of assets. It has become an important feature of the wider set of corporate operations that capital volume is capable of being transferred from facility to facility or division to division within the corporation as such transfers become necessary for the sake of efficiency. In particular, the strategic focus in this area has been to emphasize the development of the most profitable and productive areas of corporate operations.

A concern with capital mobility is an essential element of the present corporate strategy of Waste Management, Inc. for a variety of reasons. One of these pertains to questions of ongoing expansion. As the company’s realm of operations continues to grow, it is necessary to acquire new facilities, establish new locations for corporate offices, and ensure that the new markets which are being cultivated are provided with adequate volumes of equipment, supplies, and so forth. Considerations of this type, in turn, overlap with the previously mentioned concern for quality control. As part of the process of operational expansion, the corporation has also been in need of a high liquidity level, readily transferable assets, and cash flow for the sake of new purchases. As the sphere of operations of Waste Management, Inc. grows, it becomes necessary to acquire such basic resources as additional landfills, waste disposal plants, storage facilities, and facilities to be maintained for stopping points as part of the process of waste transfer.

Of course, the corollary to the need for locating new acquisitions in a cost-effective and efficient manner with regards to quality control is a corresponding need for an efficient process of curtailing operations which consistently fail to show profitability. This, in turn, requires the development of effective exit strategies (Porter, 1985). First, it is vitally important that an unprofitable corporate division or area of field operations be identified as soon as its difficulties begin. Failure in this area can result in huge losses, and significantly impact the company’s overall rate of profitability. Additionally, such failures have a preventive effect on corporate and regional management personnel’s ability to correct the difficulties associated with a struggling division before the problem escalates to the point of no return.

When such difficulties can be located before they reach the crisis stage, it is much more likely that the problem areas may be corrected. However, if the correction of the relevant issues is not feasible, early identification can still help to avoid the escalation of the volume of overall losses incurred (Barney, 1991). For this reason, the corporation places a great deal of emphasis on the development of effective exit strategies. Such strategies may include simply discontinuing particular areas of operations, and proceeding with such shutdowns in ways that are as efficient and cost-effective as possible. The previously mentioned need for the timely identification of problem areas within the realm of corporate operations also impacts such procedures as contract negotiation, the process of procuring new contracts, and bidding efforts.

A primary danger that arises with regards to these concerns involves the possibility of acquiring new contracts of a binding nature for areas of operation that display diminished profitability. For example, a division of the firm that is financially hemorrhaging but goes undetected may continue to bid on contracts for new accounts, and in fact, procure new contractual obligations involving overhead and cost outlays that must be covered before a revenue stream begins to flow. However, a division operating on a reserve of assets that is unable to cover such outlays may not be able to fulfill the contractual obligations which it has acquired (Hill & Jones, 2012). The result may be a default on the contract in question, which may, in turn, generate costly liabilities for the wider corporation. Another scenario that may arise is a need to transfer assets from a profitable division to an unprofitable one, thereby escalating the overall volume of inefficiency.

B. Value Chain Analysis

Value chain analysis has emerged since the 1990s as a valuable analytical methodology for understanding the functional operations of a particular firm and its internal procedures. The essence of value chain analysis is the series of activities that are performed within the context of a company’s ongoing operations within a particular industry. The primary question being asked is what does a company do in order to deliver its products to consumers in the marketplace? The value chain within a firm is a system of organization towards inputs and outputs and includes many variables, both human and material.

The productive process that accompanies the delivery of particular goods and services to the marketplace and the satisfaction of a consumer base includes within itself many stopping points and component parts (Kearney, 1992). Among these are managerial personnel, employees, raw materials, technology, industrial equipment, real estate, office buildings, factories, administrative activities, and tangible capital in the form of actual cash money or other liquid assets. Each of these kinds of resources constitutes a source of value, and their collective values comprise the total worth of the value chain. Additionally, the asset value of the chain taken in toto exceeds the sum total value of each of the component parts. The reason for this is the value of the overall productive capacity and wealth-generating capabilities of the combined links in the value chain.

Value chain analysis assists strategic planners within a firm in the process of developing a thorough understanding of the strengths and weaknesses within their organization. The assets and liabilities of a particular organizational structure can be more accurately assessed, whether on a vertical or horizontal level, and the productive capabilities of the wider organization can be more readily determined (Chafee, 1985). Creative and financial potential can be more easily recognized, and fewer opportunities are lost or ignored. This kind of effective assessment of a company’s overall potential, and the potential of its internal divisions, helps to dramatically increase the overall profitability of the firm.

The analytical methodology associated with value chain assessment involves multiple overlapping elements. The operations of a particular enterprise are to be understood as functioning on two basic levels. The first of this is the set of activities that are primary to the firm’s ongoing set of operations. In the case of Waste Management, Inc. these include the formal logistics of ongoing inbound activities, routine operations, correlated and parallel outbound logistical requirements, activities related to marketing and sales, and, lastly, customer service. The second includes those support activities which are necessary to the full functioning of the primary activities. These include the development and maintenance of the company’s organization and material infrastructure, the forms of technology that are utilized by the firm, the human element involving personnel, and the process of obtaining physical resources and raw materials.

The comprehensive application of value chain theory to a corporation such as Waste Management, Inc. would necessarily involve multiple concerns of primary importance. These concerns might be approached in stages. The first stage would involve a formal survey of the aforementioned potential strengths and weaknesses of the corporate organization itself, and its internal procedure and operations. The next step would be to appropriately identify the differentiating characteristics among the various divisions within the wider organization. Once these steps were completed, the next task would be to determine precisely where the primary advantages regarding competition with other firms are to be found within the corporation.

It is important to recognize that competitive advantage may exist on multiple levels. There may be primary levels of competitive advantage as well as secondary, tertiary, and quaternary ones (Barney, 1991). At each of these levels, the degrees of competitive advantage will likely vary in strength, at times significantly so. This leads to the final area of primary concerns of this kind. It is essential that such competitive advantages come to be understood by strategic planners in a way that reflects a thorough evaluation of the varying sources of competitive advantage. This last point is crucial, as effective evaluation of this kind allows for strategic analysts to more effectively coordinate resources within the firm for the sake of reinforcing the company’s strongest advantages. An effective coordination of resources and activities within a firm may have the effect of enhancing each of the primary areas where a competitive advantage exists. Value chain analysis of this kind also helps to eliminate inefficiencies (Nag, Hambrick, & Chen, 2007). Areas of operation that lack potential profitability may be discontinued.

Waste Management Inc. maintains a tremendous variety of competitive advantages. Among these are its highly experienced corporate leadership, its long history of competitive success and financial profitability, and its innovative practices in the field of waste management. In particular, the contributions of Waste Management, Inc. to the field of recycling and the development of renewable energies indicate the capability for exercising foresight on the part of the company’s strategic planners. Further, the firm has accumulated a substantial body of assets which will be discussed in the next section which enhance its overall flexibility, liquidity, and internal capital mobility.

C. Financial Analysis of Waste Management, Inc.

The overall level of revenue generated by Waste Management, Inc. and the volume of the company’s assets are substantial. At the end of the calendar years of both 2011 and 2012, the corporation held approximately $20.2 to $20.3 billion in assets. These include nearly $200 million in cash assets. The company holds nearly $1.7 billion in accounts receivable, with another $100 million in other receivables. The company owns nearly $170 million worth of parts and supplies for its equipment. For each of the two previously mentioned years, the corporation accompanied over $74 million in capital assets as a result of deferred taxes. The value of the company’s equipment holdings is evaluated at over $12 billion. The goodwill assets held by the company alone are valued at over $6 billion, and the corporation has nearly $400 million in other tangible assets (WMI, 2012). Its assets derived from investments in unconsolidated entities are over $600 million with $600 million more in other assets.

The total liabilities and equity of Waste Management, Inc. likewise total approximately $20.3 billion. This includes over $800 million in accounts payable. Its accrued liabilities are approximately $1 billion. The company maintains over $400 million in deferred revenue, and its current liability for long term debt is about $743 million, which makes debt financing improbable. It currently has liability for $1.9 billion in deferred income taxes, and $1.4 billion in landfill and environmental remediation liabilities. There are approximately $800 million in other liabilities bringing the total liabilities of the corporation to approximately $16.4 billion. As for matters of equity, the value of common stock in Waste Management, Inc. currently valued at $0.01 per share is $6 million. Additional paid-in capital amounts to $4.5 billion with retained earnings totaling $6.8 billion. Other accumulated income is currently at $193 million. Treasury stock at cost totals $5.2 billion in value, and the total equity of stockholders in the corporation is $6.3 billion (WMI, 2012). Non controlling interests within the corporation currently hold $321 million with the total level of equity being $6.6 billion.

The company currently generates $12.3 billion in service revenues, and another $1.3 billion in tangible revenues, making for a total of $13.6 billion in overall operational revenues. The costs and expenses incurred by the company include $7.7 billion in service costs and $1.1 billion in tangible product costs. This makes for a total operating cost of $8.8 billion. General and administrative sales costs amount to $1.4 billion with depreciation and amortization costs at approximately $1.3 billion. Restructuring costs for the year 2012 were $67 million, and income expenses from divestitures, asset impairments and unusual items were $83 million. This makes for total costs and expenses of approximately $11.8 billion.

The overall income from operations was $1.8 billion. Other income includes $488 million in interest expense, $4 million in interest income, $46 million in equity in net losses of unconsolidated entities, and $18 million from miscellaneous sources. The company’s income before taxes was $1.3 billion, with a tax liability of $443 million, thereby generating a net income of $860 million. Net income attributable to non-controlling interests was $43 million. The net income attributable to Waste Management, Inc. was $817 million. The basic earnings per common share were $1.76 as were the diluted earnings per common share (WMI, 2012). Cash dividends per common share were $1.42.

A review of the overall financial condition of Waste Management, Inc. indicates a number of areas where improvement is necessary. Issues that have proven to be problematic for the company include the rising cost of fuel over the past decade, as well as exorbitant subcontractor costs. Labor expenses are also exceedingly high. A more cost-effective strategy in this area could help to enhance the overall liquidity of the corporation and allow for greater capital mobility within the corporation’s internal organizational framework. Difficulties in the realm of upper-middle levels of management also appear to be contributing to exorbitant or unnecessary costs in other areas (WMI, 2012). Management at this level needs effective retraining towards the goals of reducing payroll costs by eliminating unnecessary personnel, procuring the bids of subcontractors in a way that is more cost-efficient, and developing comprehensive plans within each regional zone of the company’s sphere of operations for the reduction in fuel costs through the development of more time-efficient travel routes.

Yet another pressing financial concern involves the disproportional performances with regards to overall profitability displayed by different regional sections of the corporation. For instance, the regions in the southern and western parts of the United States clearly maintain the greatest overall level of profitability, with the mid-western region making a respectable showing. A difficulty the corporation has encountered in the last fiscal and calendar years involves excessive and unpredictable weather conditions. Throughout 2013 and into early 2014, there has been an unusually high volume of rain throughout much of the United States, and high amounts of snow and frequent ice storms during the winter months. These conditions have lengthened the travel time of West Management, Inc. vehicles, and diminished the overall quality of customer service. Though the data on this question is at present unclear, it is quite probable that the comparatively poor performances of the company outlets in the northern regions of the United States are at least partially attributable to inhospitable weather conditions.

D. Strategic Fit and SWOT Analysis

A firm may pursue a variety of strategies for the sake of enhancing its own efficiency and profitability (Chafee, 1985). One of these is differentiation regarding the nature of its products and services. When this strategy is employed, the objective is to demonstrate the superiority of a company’s product line or the quality of the service it provides to clientele. An element of this strategy is to compete effectively with an emphasis on service and quality rather than on price. This can often be a risky and difficult strategy, particularly when the pricing system retained by a firm remains costly to the ordinary consumer. In such a scenario, the product must be fulfilling an extraordinary level of consumer demand in order for such a strategy to be successful. One illustration of a successful strategy of this kind involves designer coffee firms. The products provided by such firms carry a rather high price for a consumer beverage, yet their popularity and level of overall consumer demand is indisputable. Firms of this type remain enormously profitable provided they are properly managed.

Yet another strategy involves the element of focus. The operative principle is for a firm to attempt to cultivate a singular market for the purpose of fulfilling a particular niche that is inadequately provided for in the current marketplace (Porter, 1985). Niche markets can be enormously profitable when properly developed, yet like product differentiation, they carry substantial risks. A third strategy is one that has been employed by Waste Management, Inc. and that is the strategy of cost leadership. A company that pursues a strategy of this kind aims to facilitate its own growth primarily through cost-cutting and cost-effectiveness.

However, to effectively engage in a cost-cutting strategy it is normally not enough to merely reduce overheard, however important that may be. A cost-cutting strategy is normally accompanied by price increases (Nag, Hambrick, & Chen, 2007). An effective combination of price increases and a reduction in costs can produce enormous yields for a particular firm. Yet price increases are always risky as well. A strategy for corporate growth that involves price increases should always be part of a dual strategy that includes a powerful element of differentiation. Waste Management, Inc. has in fact pursued such a dual strategy in recent years with reasonable levels of success. While the company has emphasized reducing its overhead and diminishing its overall costs, it has also sought to combine this with efforts at differentiation that include enhanced customer service and improved product quality. Indeed, West Management, Inc. has expanded this strategy even to its operations outside the United States, even though its total volume of holdings and assets on a global scale are much smaller than it is on a domestic level.

The corporation’s primary emphasis is on the continuing development of its core functions, products, and services, such as the collection and disposal of waste. The company’s efforts to venture into other markets are relatively extensive, such as its exploration of markets for recycling and renewable energy, but the emphasis remains on these primary services which are the basic source of revenue for the corporation. Cost-effectiveness is a primary concern for corporate leadership, and the company is also very concerned with ongoing issues of safety and quality of service.

Waste Management, Inc. is presently pursuing multiple strategies towards the objective of enhancing the corporation’s overall profitability. One of these involves the aforementioned recommendation that routing systems for the company’s vehicle be made more time-efficient. Another is the development of renewable energy not only as a consumer service but also as a means of reducing internal costs by utilizing such energy as fuel when cleaning internal power sources, thereby reducing overall fuel expenditures. This is a particularly important effort given the ongoing rise in fuel prices and the dependence of the company’s operations on the consumption of massive quantities of fuel.

A principal advantage the company has over its competitors is the sheer volume of its physical resources. For example, Waste Management, Inc. maintains the largest number of landfills and transfer stations of any of its competitors and also has the largest collection of service vehicles in the industry. The company has also implemented comprehensive safety plans for the purpose of diminishing the overall number of accidents. This, in turn, helps to reduce costs in terms of liability, insurance, workers' compensation, lost productivity, damage to equipment, and repair expenses. Efforts to improve both efficiency and to enhance the quality of customer service have proven to increase client retention rates. The company has also established a reputation for itself as a leader in the fields of renewable and sustainable energy.

The corporation’s strategy in the field of personnel development and human resources is also oriented towards long term efficiency (WMI, 2012). The focus is on the recruiting of new hires that can be developed as long term employees of the company. This helps to reduce turnover, personnel shortages, and the costs of hiring and training new employees. The corporation also maintains a progressive social outlook and focuses on diversity in hiring, as well as promoting a culture of ethics and integrity in the internal environment of the company. Waste Management, Inc. makes use of new and innovative technologies. There is presently a company-wide online database, as well as elaborated electronic surveillance systems on corporate properties.

D1. SWOT Analysis

The principal strength of the corporation is its vast amount of material resources and the voluminous quantity of revenue. The company is the largest in the world specializing in waste management, and it is one of the two hundred largest corporations in the United States (WMI, 2012). The value of the company’s assets has more than doubled in the years between 2006 and 2014, from $10 billion a mere eight years ago to $23 billion at present. Holding such a great volume of assets allows the company to exercise a great deal of flexibility and innovation in areas ranging from cost-cutting measures to product and service enhancement. The wealth of the corporation also allows it to provide generous compensation packages and benefits to its personnel, thereby guaranteeing itself a high quality of employees. At present, Waste Management, Inc. maintains a customer base of nearly 30 million people, approximately ten percent of the population of the United States. The principal disadvantage the company faces is its dependence on fuel. This factor leaves the corporation vulnerable to not only escalating or fluctuating fuel prices, but also to political instability in oil-producing countries. Other areas of concern are government regulation of landfills, and the heightening complexity and extensive nature of environmental regulations. The current process of health care reform may also have the effect of increasing the costs of payroll benefits for employees.

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