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Innovation Corrupted: the Rise and fall of Enron (A) Case Solution

Solution Id Length Case Author Case Publisher
793 659 Words (2 Pages) Malcolm S. Salter Harvard Business School : 905048
This solution includes: A Word File A Word File

The strategy of Asset light in the diversification process of Enron made clear that they were planning to divest the assets as soon as they get the hold on the main supply of electricity and gas. Their diversification in electricity and gas markets rested in the notion that the management wanted to become the market leader and provide the commodities at a much cheaper tariff within a short notice.

Enron entered into the industrial sector with a position of risk Management Company for the dealers in the metal industry, pulp industry and the paper industry. It had to maintain the price risks for these companies in order to make them sustain for a longer period of time. Asset light strategy was not suitable for this type of markets as the products were not homogenous like electricity/gas. Diversification strategy did make sense as it was based upon risk management of commodity prices, but the management failed to take most of the important factors into consideration.

Following questions are answered in this case study solution:

  1. Did the diversification make sense? Why? Why not?

  2. Please appraise Enron’s key management systems and processes: what were their strengths, weaknesses?

  3. Can you identify internal factors that led to the collapse?

  4. Can you identify external factors that led to the collapse (What pressures did Enron’s management face in 1999/2000)?

Innovation Corrupted the Rise and fall of Enron A Case Analysis

Please appraise Enron’s key management systems and processes: what were their strengths, weaknesses?

Management systems refer to the instruments used to apply strategic roadmaps in order to achieve desired goals and objectives. There were three main departments dealing with the management systems of Enron at the time of its downfall. This department dealt with the risk involved in every trade and dealings of the company with its partners and other companies. Risk management and forecasting was also the responsibility of this control group.

This department was responsible for the maintenance of optimum performance by the employees and aligning the employees’ efforts with that of the strategic requirements of the company. Incentives and bonuses were also under this department as every employee was compensated according to his/her efforts. Third major management system was the code of ethics which was designed to discourage and eliminate unethical behavior in the company.

These three systems are more family oriented, interactive and strong in Kinder’s Era. In the era of Jeff Skilling, they were more advanced, according to international standards, but were subverted and overused.

Can you identify internal factors that led to the collapse?

There were a number of factors which were internally responsible for the downfall of the company. The main motive of all the risky strategies was to hide the enormously high debt and project high sales and good position of the company. The result was expected to be the increase in share price of the company. Some of the internal factors of the collapse are as follows:

Enron followed the merchant model of revenue recognition instead of the traditional agent model. In the merchant model, revenue is increased making the model an aggressive one. The accounting procedure used under Jeff Skilling’s supervision was based on the future estimated profits/loses. As the company made any deal with other companies, it included the estimated revenue in the financial reports in order to impress the investors. However, many of the predicted profits were resulted in a loss.  Enron used a number of Shell firms in order to transfer the debts and make Enron’s name clean in front of the investors. The company operated more than hundred special purpose entities which were violating a number of accounting laws and ethical practices.

Can you identify external factors that led to the collapse (What pressures did Enron’s management face in 1999/2000)?

Enron was not the only market player in the electricity/gas industry. It had a number of competitors such as Dynergy and Duke Energy which increased the pressure on the management of Enron. The management continued to indulge in a similar kind of futuristic trading and did not cater to the increased competition.

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