enron case analysis_final

ENRON CASE ANALYSIS_final.docx 1

ENRON CORPORATION ANALYSIS (VIDEO ANALYSIS)

Anglo-American UniversityBy: Tomas CinkPrague, 2011.07.01Pages: 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. The whole system was just a very well planned 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 formula1.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. The 4+2 formula says that a clear and 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.

1 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


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, for 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 the 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


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


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


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.

enron case analysis_final

Documents