Term Paper on "Waste & Environment Management Spelt"

Term Paper 20 pages (5402 words) Sources: 5 Style: APA

[EXCERPT] . . . .

These types of customers are also subject to unique legislation under RCRA. So the way that this industry is segmented is in part by customer type, in part by legislation and in part by waste type. Some firms will specialize in certain types of waste or certain types of customers, while larger firms might operate in a number of industries.

Customers generally have simple needs. They need the company to remove the waste and to do so at a reasonable cost. The basic removal of waste is one of the simpler tasks for a waste management company in most instances. This provides these companies with something of a luxury -- customers do not care that much about what happens to the waste once is in possession of the waste management company. So while the company is in the most complex part of the process, it answers only to regulators and its own shareholders. Waste management companies seeking to process and divert waste as a means of earning additional income are free to manage their waste as they see fit, provided that they are able to convert it into some sort of product that they can subsequently market. So when looking at the way the industry breaks down, only the removal part of the business is directly tied to the paying customer; the customer is typically far less concerned about how the waste management company handles, transfers and disposes of the waste, as long as this occurs within the bounds of the law.

Within even basic waste business, there are residential, commercial and municipal customers. Residential would be apartment buildings or communities that must contract their own removal services, and commercial are typically businesses in the same position, where they are outside of a municipal system. In the industry, the actual removal of waste at these businesses might be the same but the process of managing these customers is very different, and therefore the industry treats them differently. The most important distinction is the public entities -- usually municipalities -- which can be very different from other customer types. Municipal systems "are increasingly selling their assets to private companies in order to fight budget shortfalls" (Industry Surveys, no date). This highlights the need for companies to work closely with municipal entities to bring about the sort of business changes that will help them to grow -- the relationship with government is inherently different than the relationship with other customer bases.

Each company will have a different breakdown of their customers and waste types. Some companies have a broad customer base and focus on waste types, while others are niche players. This allows for a fairly high degree of differentiation within the industry. The industry is generally in a state of maturity (IBIS, 2014), which highlights the need for those within the industry to focus on finding ways to make money in a mature state rather than seeking out market growth. Thus, while building strong customer relations is a key success factor, so too is building opportunity for growth, which is not going to be found everywhere.

Major Competitors and Market Share

How the market is divided depends on how the market is defined. There is a degree of specialization that exists with some players in this industry that highlights the challenges with defining waste management as a broad industry. That said, some of the major industry players are fairly large. If IBIS is correct that the different elements of the waste management industry combine for a value of roughly $60 billion, then it is easier to figure out overall market share. Despite a high level of diffusion in the waste management business, there are some leading companies. Waste Management Inc. has around $14 billion in income, implying 23.3% market share. Republic and Allied are the next-largest competitors, and combined have around 17-18% share, Republic worth 6% and Allied around 11% (Steverman, 2008). It is worth noting that municipalities still handle around 23% of the market as a group, essentially taking a quarter percent of waste management business out of the market (EBI, 2012). The market share pie chart therefore looks as follows:

Waste Management Inc. was created in 1971, is based in Houston and is an S&P 500 company. The company was built from a single garbage truck and today is the largest residential, commercial and municipal waste management company, specializing in collection, landfill and disposal. The company has recently expanded its business, basically via vertical integration, into recycling and renewable energy.

Allied and Republic, which were the 2nd- and 3rd-largest players in the industry, merged in 2008 to create the 2nd-largest player in the industry. After the municipalities, the other 37% is diffused among regional and smaller players in the industry. The two major companies at this point are not large enough to have duopoly or oligopoly power, however, because in almost every market there is a viable third player, or the municipality has retained control of its waste management services.

Porter's Five Forces

Porter's five forces analysis helps to outline the profitability of an industry by analyzing the different factors that contribute to profitability. The first of these is the bargaining power of buyers. Buyer power is generally quite high. Buyers are often municipalities or other entities with major waste disposal needs. Most buyers have a high volume of waste to offer, which creates a competitive situation in most markets. The result is that most markets the buyer has pricing power. If you are a decently-sized city, and there are at least two firms bidding for the waste management contract, that creates a situation where buyer power is relatively high, because firms in the industry will often compete on price, especially the small companies trying to establish their business.

The bargaining power of suppliers is relatively low. Suppliers are labor, and firms that provide the technology that companies in the industry utilize. While much of the technology is relatively specialized, there are not a lot of major buyers. While smaller waste management companies are price takers, the large ones like Waste Management and Republic are not price takers because their business, along with that of major cities, is essential to the survival of the companies that develop waste management technology.

There is low threat of substitutes. While some waste can be diverted, let's be realistic here. We create a lot of waste, and somebody has to deal with that. There is no serious substitute for waste management services. The threat of new entrants is moderate. There are fixed costs associated with entering the business. All companies in the industry need access to a disposal site -- a landfill -- and there are strict regulations from the federal level on down that outline what it takes to be granted permission to operate a waste disposal site. Companies that have gone through this learning curve are at substantial advantage. Social pressure in many jurisdictions all but prevents the use of the lowest cost provider, because those tend to be a greater risk of environmental or ethical issues.

The intensity of rivalry is high. The companies involved in this industry have relatively high fixed costs associated with landfills and treatment facilities, and high variable costs in the trucks and other infrastructure. The result is that there is intense competition among the firms in the industry for the long-term contracts on which the industry thrives. That there are two major companies, and then a large number of smaller firms that are trying to compete, only drives prices down in the industry, since is difficult to differentiate on other factors.

Overall, Porter's five forces tell us that the prevailing industry conditions are generally challenging. The firms in the industry are highly competitive, and the buyers often have the ability to dictate prices. There are some buyers that do not, however. That said, firms in the industry also have a low threat of substitution, which is a particularly important factor because as much power as buyers have, there is an understanding that they need to buy from someone; they cannot simply choose to not buy. The industry's profits derive from this dynamic -- firms know that as long as there is waste created by our society there will be a business for them. The form, shape and profitability of the business might change -- maybe this year recycling will be big and next year it might be incineration -- but there will always be demand. That is what allows the companies in the waste management industry to be profitable, and it will continue to be that way into the future. An industry was stable and predictable demand is not a bad thing -- it may not be massively profitable but it is definitely attractive because firms within the industry can find ways to turn profits given a stable and predictable demand level.

Financials

The waste management industry is generally profitable, and is consistently so. Intuitively, if companies operate… READ MORE

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