Carroway Environmental

Case Analysis

Dave johnston 3/1/2012

Contents
Executive Summary....................................................................................................................................... 2 Problem Statement ....................................................................................................................................... 3 Situation Analysis .......................................................................................................................................... 3 Objectives and Goals................................................................................................................................. 3 Background ............................................................................................................................................... 3 SWOT Analysis........................................................................................................................................... 3 Strengths ............................................................................................................................................... 3 Weaknesses .......................................................................................................................................... 4 Opportunities ........................................................................................................................................ 4 Threats .................................................................................................................................................. 4 Market Analysis......................................................................................................................................... 4 Financial Analysis ...................................................................................................................................... 4 Key Success Factors................................................................................................................................... 5 Key Uncertainties ...................................................................................................................................... 5 Alternatives ................................................................................................................................................... 5 Alternative 1.............................................................................................................................................. 5 Alternative 2.............................................................................................................................................. 5 Alternative 3.............................................................................................................................................. 5 Analysis of Alternatives ................................................................................................................................. 5 Alternative 1.............................................................................................................................................. 5 Alternative 2.............................................................................................................................................. 5 Alternative 3.............................................................................................................................................. 6 Recommendations ........................................................................................................................................ 6 Action Plan .................................................................................................................................................... 6 Contingency Plan .......................................................................................................................................... 6 Exhibits .......................................................................................................................................................... 7 Exhibit 1 .................................................................................................................................................... 7

Executive Summary
Tom Walsh, CEO of Carroway Environmental, is in need of additional funding in order to open a pilot scale plant. The pilot scale plant will be the home of a unique scrap tire disposal plant. This plant will contain a process called Molecular Dissolution which is a process involving microwaves that separate the materials in tires. Due to a turn in the trend in the economy with respect to the environment, Tom has a very valuable patent in his hands if used correctly. Everyone is aware of the current trend of trying to reduce the amount of damage done to the environment from the disposal of unusable material. The beauty of Carroway Environmental is that it is the only company that contains a process for disposing tires that doesnt harm the environment and doesnt use a large amount of energy. With an initial cost of $5.7 million, Tom Walsh is unable to establish the pilot plant he wished to build in order to get the ball rolling on his business. A current goal of spreading his Carroway across North America into 10 larger scaled plants has come to a halt due to the lack of funding. Tom has determines that Sault St. Marie would be a suitable location for his first pilot scale plant but still wonders how he will obtain the funding.

Problem Statement
The problem that is present in this case is that Tom Walsh, CEO of Carroway Environmental, is unsure as to how he will go about obtaining the $2 million he requires to finalize development and installation of the first pilot plant. A sub problem for Tom would be convincing investors that his process of breaking down tires worked.

Situation Analysis
Objectives and Goals
Tom Walsh was very confident that Carroway Environmental was a very viable business that would succeed if established correctly. His Objectives for this company are to meet the trends present in economies around the world. He would do this by completing his main goal which is to develop his pilot scale plant in Ontario. This pilot scale plant would begin a broader rollout of larger scale plants across North America. In order to complete this goal, he would need to obtain an additional $2 million in funding as well as convince inceptors that his process of Molecular Dissolution would accomplish what the economies around the world are seeking. Walshs end goal is to establish up to 20 plants across North America which he envisions would take up to 10 years.

Background
Currently, the cleaning economy is focused towards cleaner technological solutions to reduce carbon emissions, decrease energy consumption, and eliminate waste. There is a main focus on developing renewable sources or energy which is provided by wind turbines or solar photovoltaic panels which would result in the replacement of coal-generated plants. One very large industry that requires these reductions in carbon emission and energy consumption is the scrap tire industry. Walsh estimated that over 330 million tired were scrapped per year in North America. Many of these tired werent being disposed of properly which harm our environment as well as pollutes our air. Due to the large amount of damage being done to our environment, many local governments began to develop laws against the disposal of tires. As a result of these laws, they were forced to create ways in which disposing tires resulted in resources that could then be re-used. Many methods were then developed but many of them has set backs that still caused harm to the environment; for example, burning tires as a fuel source caused major air pollution and pyrolysis recycling required a large amount of energy. The SPI-900, Carroways Pilot Plant, has the ability of disposing these scrap tires, and creating useable resources from the scrap tires without creating any harm to the environment. Tom planned on opening his Pilot Plant in Sault St. Marie, Ontario due to the fact that the citys economic development committee contacted him and proposed that he build his plant there as a way of branding Sault St. Marie The Alternative Energy Capital of North America. Currently there are many cleaning technology plants in Sault St. Marie which would act as competition to Carroway. Although there was so much competition, Tom was set on building his plant here due to the fact that the city had access to many major Canadian and U.S. markets via road, rail and water transportation.

SWOT Analysis
Strengths After over 15 years of trying to master the art of breaking down scrap tires into carbon black, oil, gas, and steel, Tom Walsh has developed a way in which this process, called Molecular Dissolution, would be successful. Due to the recent turn in economic cleanliness, Carroway had the answer to solving 3

the tire disposal problem that was being faced. With a patent for the technology and a license for Canada and the U.S., growth for Carroway Environment was more than possible. Weaknesses One very harmful weakness in Toms process of breaking down scrap tires in the possibility of explosion or fire if all of the oxygen wasnt completely removed from the chamber prior to the tire entering the microwave stage. And explosion or fire in the plant would put employees as well as anyone in the surrounding area at risk of being hurt. Another weakness that Carroway has is the reliance on the disposal fee and the price paid for energy (see Exhibit 1) when these two sources of income are at risk of being cancelled at any time. Finally the viability of the technology is another weakness. There must much more fine tuning to be done to the equipment which may cost another $1 million. Opportunities The main opportunity that presents itself to Carroway Environmental is the trend toward cleaner technologies in the economies around the world. All around the world many people are beginning to realize that they are causing a great deal of harm to our environment by failing to take precautions when disposing of certain materials. This fact alone is a great opportunity to capitalize on since this is exactly what Tom Walshs company would do. Another opportunity being presented to Carroway is the great deal of access to Major Canadian and U.S. markets in Sault St. Marie which is where Tom is planning on establishing his scale pilot scale plant. Threats The main threat that would be presented to Tom would be the risk of explosion or fire in one of his plants. If enough caution isnt taken while undertaking the microwave stage of the process, an explosion way occur which would result in either injury or death which may result in Carroway going out of business due to the fear that more people would get hurt. Another threat that Carroway Faces is the uncertainty of the tire disposal fee as well as the price paid for energy. This fee and this price paid may be cancelled or reduced which would affect Carroway very negatively.

Market Analysis
The current market that Carroway is targeting would be the environmentally clean market. These are the people that want to make a change and start reducing the amount of damage done to the environment. There is a large amount of potential for growth in this market as more and more people are making this change. The current competition for Carroway would be any other Tire Disposal plant using any other method of tire disposal. Also, the other environment cleaning plants would act as indirect competition due to the fact that they are also producing grad deals of energy and some of them are producing usable resources.

Financial Analysis
Currently, Carroway is in need of an additional $2 million dollars in order to begin opening their pilot scale plant in Sault St. Marie. Their capital expenditures include the SPI-900 process as well as their Loading and Handling equipment and building costs. These capital costs amount to %5.7 million dollars and they currently have $3.7 million to expend. Their annual operating costs amount to $1.75 million which means they must general at least this amount in revenue in order to break even. After taking into consideration the revenue generated per tire, it would take about 16500 tires to break even. If Carroway is able to obtain the maximum expected amount of revenue per tire, as shown in the sensitivity analysis, it would reduce their break even amount by about 23,000 tires (see Exhibit 1 for Calculation and further detail). 4

Key Success Factors

The key success factors that are vital to the success of Carroway Environmental are the turn in the trend towards cleaner technologies and the ability to dispose of scrap tires in a way that doesnt harm the environment and doesnt use a large amount of energy. The turn in the trend towards cleaner technologies is vital to the life of Carroway because they need to capitalize on the fact than many people are looking for cleaner solutions to disposing scrap tires. They need to focus on targeting these people and meeting their beliefs. Finally, the ability to dispose of these tires in an environmentally friendly way is also vital to Carroways life ties in with the turning trend as well. They must get their name out there and show people that they have a solution to their tire disposal problem.

Key Uncertainties
One factor that could seriously affect Carroway Environmental is the bugs that are present in the Molecular Dissolution process. The reason why this is a major uncertainty is because the risk of having an explosion is a risk that should not be taken lightly. If an explosion does in fact occur, Carroway is likely to go out of business or will be limited until they can remove these bugs.

Alternatives
In order to complete the objectives set out by Tom Walsh which is to complete his Pilot Scale Plant in Sault St. Marie and begin rolling out his larger scale plants until he meets his 10 year goal of establishing 10 plants. His alternatives include

Alternative 1
Create a joint venture agreement with an established company in a related industry.

Alternative 2
Issue publicly-traded equity

Alternative 3
Seek financial assistance from government programs.

Analysis of Alternatives
Alternative 1
In order to create a joint venture agreement with an established company in a related industry Tom would have to share the patent he has on the Molecular Dissolution that he has which would be a con of this alternative. If he feels comfortable with sharing this patent, he does have a large amount of potential joint venture partners in Sault St. Marie which is a very large pro. Alternative 1 has great potential due to the availability of venture partners in the location that Tom is thinking of opening his pilot scale plant. Sault St. Marie is currently trying to establish a brand name for them self which supports the probability of finding a venture partner.

Alternative 2
The option of issuing publicly traded equity doesnt seem to be the best alternative for Tom. The reason for this is because beginning to trade publicly holds a large amount of costs as well as tax which 5

is a very con of this alternative. Due to the fact that Carroway already has a large amount of expenditures associated with initial start up as well as the annual operation that they are having difficulty paying, Alternative 2 would not be recommended for Carroway. The only pro associated with this alternative would be the ability to control how much of the business they sell.

Alternative 3
Alternative 3 has the least amount of risk associated with it. The reason for this is because it doesnt involve giving up and of the business and doesnt result in more expenses. If Tom seeks external financing from government programs, they will very likely receive the financing they need. The reason for this is because the location they are building is seeking to be branded The Alternative Energy Capital of North America. This alternative holds many pros and very few cons.

Recommendations
Alternative 3 would be the best alternative for Tom to take. This Alternative is recommended because it holds the least amount of risk and highest probable success rate. This objective would grant them the $2 million they need and help them establish a name for themselves and a member of The Alternative Energy Capital of North America group. Carroways competition would be the other members of the group due to the fact that they also produce energy and usable resources. The longterm recommendation would be to begin establishing larger Carroway Plants across North America in order to stabilize Carroways presence in the economy.

Action Plan
The implementation of Alternative 3 would be to accept the proposal to open the pilot scale plant in Sault St. Marie and request the required funding from government programs such as the Northern Ontario Heritage Fund. After the launch of the pilot plant, Tom Walsh should establish a name for himself in the community as the Tire Disposal Guy. After creating this brand for himself, those who are active in the turning trends of the economy will be motivated to bring their scrap tires to him which would build a client base for future growth.

Contingency Plan
In the situation in which Alternative 3 fails to complete the goals set out by Tom Walsh, he should propose a smaller amount of funding from government programs and seek additional funding from either publicly traded equities or a joint venture partner. The prefers alternative would be a joint venture due to the fact that there is already a large amount of potential venture partners in Sault St. Marie.

Exhibits
Exhibit 1
Carroway Environmental Systems By Product Revenue Range of Revenue By Product Carbon Black Tire Disposal Fee Diesel Fuel Scrap Metal Hydrocarbon Gas Total Operating Costs Property Labour Maintenance/Repair Supplies Total Capital Expenditures SPI-Process Loading and Handling Total Break Even = Expected Revenue $ 4.62 1.58 2.10 0.36 2.04 10.70 200,000 400,000 250,000 900,000 1,750,000 $ 5,350,000 350,000 5,700,000 1750000/10.70 163551 $ Min $ 4.16 1.00 1.89 0.32 1.53 8.90 200,000 400,000 250,000 900,000 1,750,000 5,350,000 350,000 5,700,000 1750000/8.90 196629 $ $ Max 5.10 1.00 2.35 0.44 2.51 12.40 200,000 400,000 250,000 900,000 1,750,000 5,350,000 350,000 5,700,000 1750000/12.40 141129