Enron Corporation’s Failure and Its Reasons
Enron was once perceived to be one of the most profitable and visionary companies in the world. Fortune magazine had in fact called Enron the ‘most innovative company in America six years running. Its collapse in 2001 sent shockwaves throughout the financial world. It became a case study on corporate greed, auditing failures and bad planning. This discussion deals with the failure of Enron Corporation and the importance of correct business strategies. It also deals with how failure in formulating correct strategies can bring about the downfall of even giant corporations like Enron.
Even though many reasons like some given above are held responsible for its failure, the real reason is its faulty corporate strategy. One of the earlier policies of Enron was to pool gas and electricity with partnerships and other companies resulting in having a huge hold in the market for these commodities. Its success in this area resulted in a change of strategy. Instead of remaining an asset-rich company dealing in oil and electricity, it shifted it to the once-famous asset-light strategy. This strategy became so successful that future events based on this eventually led to its downfall. Enron believed that it need not hold to a lot of assets to remain profitable.
All it needed to have was, a gas and electricity bank, or in other words, control supply and demand. It began selling many of its assets for it to become asset-light. To make matters more serious, Enron showed the profits from the sale of these assets as business profits, with the approval of their auditors. Its justification was that such profits were recurring ones and hence could be shown as business profit. Enron began buying up companies for the purpose of gaining market leadership. With the help of its core competency stability would be ensured and if found necessary such companies were later sold at a profit, justifying its stand. But, as mentioned above it also sold its existing assets also.
This strategy worked perfectly well until the company began diversifying into other areas outside its core competency. Venture into the water, wood pulp and broadband were attempted. Here, three things went wrong. Some of the new areas it ventured into were not appropriate for the asset-light way of doing business. Secondly, it abandoned the policy of asset-light in markets the company was not familiar with. Thirdly it gave a free hand to its employees in diversifying into new fields and markets. “Enron’s employees scattered all over the world were coming up with ideas to enter new markets and getting approved within weeks, without any kind of senior management oversight.”