Describe the Strategic Management Failure in Enron That Led It Into Its Demise?
Do some research on the Internet about what has happened with Enron. Now apply the three questions used to test the merits of a winning strategy (text p13) to Enron. Describe the strategic management failure in Enron that led it into its demise?
Enron was formed in 1986 from the merger of natural gas pipeline companies Houston Natural Gas and Internorth. At the time of filing for Chapter 11 Bankruptcy protection in December 2001, Enron had a portfolio of diversified activities ranging from the transportation of natural gas, the generation transmission and distribution of electricity; marketing of natural gas, electricity and other commodities and related risk management and financial services; development and operation of power plants and energy related assets; the delivery and management of energy commodities and capabilities to industrial and commercial sectors and the development of a network platform to provide bandwidth management services and the delivery of high bandwidth communication applications. At a daylong conference meeting in Houston, filled with Wall Street analysts and investors, prior to Enron’s demise in 2001, analysts and other stake holders were mesmerized by the scope of Enron’s “vision”. At the time the money losing Broadband Division was said to be worth $29 Billion or $37 a share. Excitement among investors and share holders and false accounting drove the share prices up.
To support their false rate of growth Enron had to borrow more to fund capital projects. More borrowing meant higher debt levels which in turn weakened their earnings. Enron’s creative accounting strategies and partnerships then allowed for debt not be reflected on the balance sheets, artificially improving their forecasts. An example of this is a partnership created by Enron and Chewco Investments, which allowed Enron to keep $600 million of debt off the books that it showed to the Government and shareholders. By December 2000, Enron claimed to have tripled its
Enron was formed in 1986 from the merger of natural gas pipeline companies Houston Natural Gas and Internorth. At the time of filing for Chapter 11 Bankruptcy protection in December 2001, Enron had a portfolio of diversified activities ranging from the transportation of natural gas, the generation transmission and distribution of electricity; marketing of natural gas, electricity and other commodities and related risk management and financial services; development and operation of power plants and energy related assets; the delivery and management of energy commodities and capabilities to industrial and commercial sectors and the development of a network platform to provide bandwidth management services and the delivery of high bandwidth communication applications. At a daylong conference meeting in Houston, filled with Wall Street analysts and investors, prior to Enron’s demise in 2001, analysts and other stake holders were mesmerized by the scope of Enron’s “vision”. At the time the money losing Broadband Division was said to be worth $29 Billion or $37 a share. Excitement among investors and share holders and false accounting drove the share prices up.
To support their false rate of growth Enron had to borrow more to fund capital projects. More borrowing meant higher debt levels which in turn weakened their earnings. Enron’s creative accounting strategies and partnerships then allowed for debt not be reflected on the balance sheets, artificially improving their forecasts. An example of this is a partnership created by Enron and Chewco Investments, which allowed Enron to keep $600 million of debt off the books that it showed to the Government and shareholders. By December 2000, Enron claimed to have tripled its
References: 1. Arthur A. Thompson Jr , A.J Strickland III, John E. Gamble (2010) Crafting and Executing Strategy. 17th ed. McGraw-Hill/Irwin pp 4-53. 2. Prentice R. (2003) Enron: A brief behavioural autopsy. American Business Law Journal 422(40), pp 417 – 444.