The Fall of Enron and Operational Strategy


This summer I read a few books regarding the operational practices of “great” companies, and how these maintain a competitive advantage.  As I read the case study of Enron these practices kept recurring. One of these books was called “In Search of Excellence,” and was written by employees of McKinsey. This interested me because Skilling came to Enron from McKinsey, and was instrumental in executing the change in Enron that would ultimately bring its demise. Another book, which more closely correlates to the business strategy of Enron when it fell is called “Built to Last.” There are some common themes to these works, however. For example, both extoll the value of hiring the best people and letting the results come organically. “In Search of Excellence” points to the value of not having a hierarchical organization, which exactly what Skilling developed in Enron, with its loosely defined and highly mobile structure.

Another area in which Enron was the poster child of these works is that they saw constant innovation as a necessity if a company is to survive. This is exactly the strategy that Enron followed in its constant search of new businesses to enter, in theory leveraging its core competencies in doing so. It is important to note, however, that in the examples used by “Built to Last” and “In Search of Excellence” were highly product-oriented companies who could easily switch resources to attain different manufacturing capabilities. These companies also faced industries where the demand characteristics in the market were easier to discern, and the company had experience in the related fields. I feel that this is a large area in which Enron leveraged itself too far. It tried to emulate a product-oriented model to a service-oriented company. While this would not have been a bad idea in theory (as the company did not have to replicate costs in many areas) in practice Enron tried to expand too quickly, which was a large part of its demise. The loosely defined organizational structure can be fingered as a contributing factor as to why this happened. While it may have been exciting to work on a project that you own, it would be harder to get follow through in this atmosphere when there is an incentive to switch to other projects. The fact that the company went after growth to such an extent exacerbated this problem, as they could justify any project as long as it was projected to grow the earnings of the company, no matter what the relation to the core competencies of the company were. Getting into water and related commodities are prime examples of this.

In the end, it is hard to say how well Enron can serve as a real world example of these works. This is because while it the company practiced some principals that the books outlay which may have exacerbated their fall, there were other mitigating factors in its bankruptcy. It is hard to say whether or not if the company had operated in a way that was consistent with the principals of the two books and did not expand too quickly, and did not use shady accounting principals that it could have survived. I believe that if the company had stayed in its original business of gas transportation (and even if it had branched out into gas logistics and trading) and used these principals that it would not have reached the heights that it did, but it would also still be operational today.

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