ENRON CORPORATION ANALYSIS (VIDEO ANALYSIS) Anglo-American University By: Tomas Cink Prague, 2011.07.01 Pages: 4 Enron Corporation was an American energy, commodities and services company based in Houston, Texas. The company was founded by Kenneth Lay in 1986 through a merger of highly diversified energy companies and became one of the world’s leading natural gas and electricity companies. At the end of 2001, it was revealedthat Enron´s official financial books were adjusted according to sophisticated financial operations hiding debt and losses of the company in its daughter offshore companies. companies. The whole system system was just a very well planned planned accounting accounting fraud with one goal, to earn money bykeeping share prices high. The TOP management was sentenced to jail, Enron wentbankrupt and 22,000 employees lost their jobs and everything they had in the company’s pension system. This report has a goal to analyze Enron´s operation according to the 4+2 formula 1.This report also aims to critically evaluate the formula retrospectively if Enron really did not do well in the areas as the formula defines. The analysis also seeks to find successful procedures as well. The analysis will be based upon the documentary movie „Enron: The Smartest Guys in the Room“2 and this means that not all facts, this analysis is based on, have to be according to the reality. This analysis does not draw from other sources.
Starting the analysis with a look atEnron´s strategy allows us to get a rough idea about the whole company. company. The 4+2 formula says that a clear and focused focused strategy is one of the pillars of long-term success and should consist of five points: clear value proposition, building strategy outside in, attuning strategy to marketplace changes, communicating strategy clearly and growing core business.
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William F. Joyce, Nitin Nohria, Bruce Roberson: What really works: the 4+2 formula for sustained business success (2003). This books reveals a formula of enduringly successful companies that consists of four areas successful companies have to focus on – strategy, execution, culture, structure and other four areas those companies have to focus on two of them – talent, leadership, innovation and growth. 2 Enron: The Smartest Guys in the Room, 2005, Alex Gibney ENRON CASE ANALYSIS_final.docx
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In my opinion, Enron started its business with a clear and focused strategy as the leader in the energy industry, specifically natural gas production and transmission. Kenneth Lay founded the company and it had a dominant role in the US market and followingly gained a global position by building power plants all around the world. Customers understood clearly what value Enron was offering.
The energy industry has an easy position in this area,
because natural gas, or later electricity, represents clear value to all customers all around the world and Enron could not make any mistake here. It is hard to evaluate, whether the strategy was built “outside in” according to the demand of the market or simply orienting on the electricity market logically complemented the energy market strategy in the following years. However, this development of strategy strengthened the position of Enron as a global energy company. Similarly, Enron increased company value when it attuned strategy to marketplace changes and started trading on energy the stock exchange. Until this point Enron´s strategy was clear and focused and despite an underperformed execution of the strategy, the company was successful. This changed with new ideas consisting of broadband and later weather trading. Enron´s strategy stopped being comprehensible and bringing clear value to its customers. Enron changed from energy supplier to innovative trader, unluckily quite unsuccessful in the areas that were not connected with original energy strategy. However, Enron did quite well in marketing and it communicated its strategy quite clearly to the public, customers, and also to the employees. CEO Jeff Skilling was a smart speaker and without setting broadband trading in the whole company strategy, was able to “sell” the idea of broadband trading to the public. Jeff Skilling tried to find new opportunities in the market to substitute losses that were generated, f or example, from an enormous power plant construction project in India where the undertaken investment risks were extremely high and became a reality. Jeff Skilling made a strategic managerial mistake when he did not focus on growth and care of the core business. He tried to substitute problems in the core business with a focus on new areas not fitting into the strategy. Jeff Skilling and Kenneth Lay seemed to have a different strategy than was the original strategy of Enron. They focused on high share price and not the core business of the company. This failure undercuts one of the key pillars of enduringly successful companies and led, with other mistakes, to the end of t he company. As above said strategy was defined well at the beginning, a flawless execution helped Enron Corporation to become one of the leading global energy companies. Enron met customers´ expectation with the product, but, with the increase of greed that will be later discussed in context of company’s culture, definitely did not meet the customers´ price ENRON CASE ANALYSIS_final.docx
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expectation especially with electricity supplies. When Enron achieved electricity deregulation in California, as seen in the video, energy traders started to manipulate the market by switching off power plants and pushing the electricity price to extreme levels to reach maximum profits. This caused a very difficult situation for the population in California that could not afford to pay for the electricity and who suffered from blackouts. Flawless execution is achieved also by empowering employees. Enron outshined in this area. Commodity traders were empowered to generate profit no matter what. CFO Andrew Fastow was empowered to keep Enron’s share price high by hiding debts and losses in special purpose entities, as Raptor or Jedi, accounting for future returns (that were never realized) and selling Enron’s assets and derivatives through a special purpose fund to investment banks no matter what. An analyst may say that employees were empowered too much but this was not the case. The CEO was aware of all of these operations and it was a problem of company’s culture, ethics and greed that led to violation of law. What Enron did well from the point view of effective execution, was extremely high productivity and elimination of waste. It is very difficult to express it in relevant numbers but by accepting for a while that Enron’s revenue was only half of its proclaimed 100 billion USD, than with 22,000 employees, its workforce productivity was appx. 2.3 million USD which is higher than ExxonMobil and British Petroleum, global leaders in energy industry. Workforce productivity is tightly connected with structure. Another feature of enduringly successful companies is said to be fast and flat organization. There was not enough information about Enron´s structure in the video, but it seems that Enron succeeded in eliminating bureaucratic structures and behaviors. The company kept the productivity high and number of employees low considering the wide range on countries it was operating in. Efficiently empowered traders were communicating with managers of power plants and were able to stop production instantly with a phone call with no official bureaucratic documentation. Information sharing between the production part and trading part of the corporation ran smoothly. All information important for profit making seems to be shared effectively and the cooperation was very good. Fast information exchange was strongly supported by new technology, computers with multiple monitors, big screens and electronic maps with information about electric transmission network and power plants. However, information about the real financial situation of the company and accounting books being cooked was kept secret. Information about debt, losses and unsuccessful projects was kept hidden as well. The last pillar involved in the first part of the formula is culture. Information that was being kept hidden tightly relates to the culture within the corporation. Enron created an aggressive ENRON CASE ANALYSIS_final.docx
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culture based on performance which was influenced by Darwinism. All employees were inspired to do their best. CEO Skilling even supported a macho culture (culminating in legendary adventure trips), where only the toughest and most profitable employees gain respect. The traders were especially motivated to make profits no matter what. And thus they were paid for performance, which is a normal company optimization practice, but, without an internal ethical codex within Enron, they cared only about profits and even manipulated the market to reach the highest prices. According to some voice recordings played in the video, one of the traders happily said: “Burn, baby burn” when there were fires at several places in California. Risky and unsuccessful trades were not punished by losing their job. Kenneth Lay only said: “Keep them in the company until they earn millions”. The work environment was very challenging, satisfying and fun, especially for traders as was seen in the video. However, the problem was in values. Enron followed even the last culture recommendation for successful companies, which is living the company’s values. The problem is that the values were wrong. Enron´s values were keeping the price of share high, making profit for Enron and making high profits for traders no matter what. Enron quite succeed in the other four formulas as well. Definitely Enron tried to get the best talented and most clever people to work for them and was ready to pay them. As shown in the video, Enron succeed in keeping excellent people in organization and had reputation as a very good employer. Another successful area is innovation. Fortune named Enron “America´s Most Innovative Company” for several years. As already mentioned, traders used innovative technology for optimal information sharing which significantly increased productivity. Another successful area was leadership. CEO Jeff Skilling was a very smart leader who knew how to public speak effectively, how to influence, motivate and lead people. Founder Kenneth Lay was a very good leader as well. Less successful was Enron in growth through M&A despite the fact that Enron became one of the leading global energy companies. Enron´s growth was not well managed and, for example, that no market share was achieved in India. Although Enron was obsessed with M&A, it was not very successful. One example can be Blockbuster and Enron´s intention to sell broadband. In conclusion, Enron might have followed a pattern similar to 4 + 2 formula and did a lot of things properly that helped it to become a global corporation. However, Enron did not
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involved value for customers in its strategy and focused only on share price and making profit. With no ethics, wrong values and no integrity the company could not become enduringly successful. Enron falsified its accounting, bullied California by abusing its monopoly position in energy supply, thustly there was no possibility to keep the customers and survive for more than 100 years.
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