Enron is a company dealing with energy resources that was founded by Kenneth Lay in 1984 after merging Houston Natural Gas (HNG) with InterNorth. The company grew rapidly as the founder exploited the opportunities of deregulation in the United States and privatization abroad. By the early 1990s, Enron was unmistakably the leading company in the energy industry1.
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However, in the beginning of the millennium, the company was surrounded by big ethical scandals in accounting that led to its bankruptcy in 2001. In that respect, this paper is aimed at investigating the business environment and the strategic position of the company. First, we discuss the company’s business environment through the use of PEST and Porter’s five forces tools of analysis.
Second, we discuss the company’s strategic position by looking at problems in the case as well as the structure and control systems. We also look at Enron’s strategic position by conducting a SWOT analysis. Finally, we make recommendations for turning around Enron’s business.
Political environment that affects Enron like many other firms dealing with energy is characterized by regulations, political instability and labor relations. The company based in Houston has operations and facilities in other countries such as India, Argentina and Brazil where political factors differ significantly. Furthermore, the company has failed due to continuous disputes over terms of deals and prices.
For economic factors, Enron is affected by foreign investments and competition. While the company has exposed US to foreign investments that are uncertain, the ethical scandals have worked to the advantage of competitors.
Regarding to social environment, the changed attitudes of investors and customers as well as the poor corporate social responsibility have significant impacts on the firm. Technology environment is generally characterized by excellent US and foreign technology in extraction and communication, poor facilities for research and development of the company and poor technical collaboration.
Porter’s five forces analysis
In history, the energy industry has never been threatened by new individual entrants due to the cost of establishing extraction and transportation facilities. However, there is a possibility of new entrants through mergers and acquisitions considering how these business practices have increased. Big companies might decide to exploit the market opportunity arising from the failure of Enron.
The threat of substitute products is moderate, because some consumers of gas and oil products can use alternative energy sources while others are completely rooted to gas and oil. Automobiles are the biggest consumers of this source of energy while many industrial machines are using electricity as a source of energy. As big as Enron is, the threat of substitute products is not significant.
The bargaining power of buyers is also important for Enron. In addition to the trust damaged by the ethical scandal, the products offered by the company are not very different as compared to those of competitors, yet the company is not price sensitive. In the presence of competitors who portray excellent performance, the bargaining power of buyers is high.
The bargaining power of suppliers is very high considering the current state of Enron. The bankruptcy has resulted in huge amounts of money that the company owes suppliers of equipment and labor. Therefore, the company is in a situation of begging new and old suppliers.
The rivalry that exists among competitors in the energy industry is high both in the pursuit of suppliers and buyers. Oil deposits are only found in a handful of countries, yet the users of the products are spread worldwide. Therefore, firms compete to win extraction contracts as well as marketing contracts.
Problems at Enron case
The inability of the firm to manage resource is a big problem, especially when it comes to budgeting. Indeed, this has driven the management team to carry out illegitimate actions that disregard the need for the firm to perform excellent corporate governance. The case study reveals that the firm does not carry out good corporate governance because the management has embarked on performing unethical actions2.
This conduct was intended to exhort investors to put their money during the public offering of the shares. Moreover, the decision to hire a consultant to develop a tax structure and review them is clear evidence of Enron’s intentions to present fake figures to investors.
The other problem with Enron is the inability to manage financial resources. Through forged profit reporting, the company could raise enough capital to repay their loans to investment banks and carry on with unethical business when the money was out. Surprisingly, in a span of three years, the fake reporting provided the firm with more than $10 billion of shareholders.
Structure and control systems
Enron used three key supports of control systems. First, Enron’s performance review (PCR), was intended to bring into line Enron employees’ actions with the firm’s strategic goals, reward and keep workers who performed superfluously. Second, the risk assessment and control group (RAC) had the purpose of commending all operative contracts and manage all risks facing the company.
Different levels of authorization were necessary in every deal including the directors. However, the system was not applied to the point and 15% of those evaluated were redeployed in spite of their performance.
Third, the code of ethics was employed as a way of controlling behaviors with the purpose of barring a range of corrupt behaviors. Each employee was supposed to sign this code after joining the company and reaffirm-annually, though it was more of a regulatory accomplishment than commitment especially for the officials in higher levels.
One of the strengths associated with Enron is marketing and value delivery. The company did not succeed to become the energy giant from nothing, but from good marketing and value delivery. Second, the firm is strong due to human capital pool.
While many firms engage in one or two business lines, Enron engaged in five different business lines which required different skills, equipments and methods of reporting. The company was always successful in recruiting and maintaining desired employees which suggests good organization.
The key weakness that also led to the collapse of the company was the failed board of directors. The question that emerge throughout the case study is where the directors were and why did they not see the mess that was building?
The other weakness was conflict of interest as a policy that the Internal Revenue Service requires corporations to adhere to. In fact, the conflict of interest portrayed in the unethical actions was the major cause of the collapse. In addition, corporate culture is a major weakness of the company. The collapse reveals unethical corporate culture that was all through portrayed as a culture of innovation, profits and success.
Supply of high quality energy is an opportunity that Enron can exploit especially when we consider its capabilities. The company is a global leader in goods sale and services. With this supremacy in oil and franchise business, the firm could serve the emerging markets better than many competitors.
Another opportunity is clean energy which the public has claimed for in history in an effort to reduce environmental pollution. Moreover, Enron can re-furnish their image through business mergers and acquisitions. With its experience in this practice, the company can strengthen its assets and expand to new markets.
In regard to the case study, the biggest threat to Enron is competition as the public has realized its weakness and unethical business practices. Hundreds of energy firms are found within the US with the intention of increasing the market share.
Unlike Enron, the competitors have engaged in extensive research and development which increase the trust of investors and consumers. Another threat is regulation or regulatory measures that Enron might face in the near future. It is apparent that governments will keenly reinforce their regulations within the territories that the company has operations.
The first and most important recommendation is for Enron to re-invent its corporate governance. Most of the problems that the firm is facing are associated with the top management. This would include the creation of a completely new board of directors.
The other recommendation is to engage in mergers in order to acquire the funds required to continue with the businesses. This will reclaim the lost confidence and trust of investors as the company clears the lingering debts and improve the stock value which is the core capital source.
Schepers, Donald and Naomi, Gardberg A. “On the Side of the Angles.” The Journal of Behavioral and Applied Management 5, no. 2 (2004): 166-184.
1 Schepers, Donald and Gardberg, Naomi A. “On the Side of the Angles.” The Journal of Behavioral and Applied Management 5, no. 2 (2004): 167.
2 Ibid 177