Enron Organization

The report revolves around Enron, an organization that was established in 1985 by Kenneth Lay. It was created after the merger of Houston Natural Gas and InterNorth, which immediately provided it with more than thirty-six thousand miles of pipelines (Healy, 2003). They served natural gas transportation and made Enron one of the leading organizations in the business. The firm used resources obtained from its strategic position and initial success to diversify its assets in other industries. Therefore, it extended the model to the coal, steel, water, pulp, fiber optic, and electric power fields. Additionally, the enterprise decided to enter less-regulated international markets and made deals with India and the United Kingdom. The initial success of the organization had a considerable effect on the stock price value attracting numerous investors and partners. At the same time, a shift in the business drew a large number of competitors who desired to mimic the success of Enron. It appeared that the senior management of the organization had prioritized incorrect values and had been focused on financial rewards and benefits rather than the firm’s stability, steady progression, and long-term security (Healy, 2003). Consequently, Enron should have had to decrease the number of industries to which it expanded and prioritize the most organized, efficient, and profitable ones, which would allow it to restructure itself effectively and minimize losses.

Entrust your paper to our best custom writing company and get an original essay!

Central Problems

Many problems led to the failure of Enron, a previously successful organization that had the required infrastructure and human resources to maintain its leading positions (Chen, Ruikar, & Carrillo, 2017). One of the issues was its desire for immediate financial rewards. The underlying cause of the problem was the unwillingness of the organization to plan in the long term and play the infinite game. As stated in the report, “Chewco and several other special purpose entities, however, did more than just skirt accounting rules” (Healy, 2003, p. 9). Symptoms of the problem included the company’s inability to maintain transparent account records and control over the income of the organization. Thus, on numerous occasions, it spent more than could be afforded and used techniques to mask these deductions in paperwork. The above created a chain of red flags, which made it unlikely for Enron to form partnerships with successful organizations that would benefit all participants mutually.

The second problem followed the first and could be defined as a firm’s poor strategic management. A natural desire of an organization is to strengthen its position in both local and global markets (Chen et. al., 2017). However, Enron used an approach without having respective resources. Instead of focusing on a single market and succeeding there before approaching the next, the firm decided to expand in many areas rapidly, including the global arena, which was problematic. According to Healy (2003), “the Dabhol power project in India represented the single largest foreign direct investment project until that time in India, and it attracted considerable political opposition and controversy” (p. 7). One of the symptoms was the enterprise’s inability to adapt to new environments that had subtle technicalities that did not correspond to Enron’s experience in the natural gas industry. Also, the firm had the wrong priorities regarding its assets. As a result, it sold some of its pipelines, which made it easier for competitors to enter the market and challenge its dominance in the natural gas industry. It raised the need for the organization to succeed in other fields escalating the issue further.

Problem Justification

The accounting problem of the organization and its desire for short-term rewards can be explained by a chain of reporting issues. First of all, after a string of expansions, Enron had to adopt a new model of accounting called market-to-market. Although the idea seemed accurate, especially considering forecasts that the company had to present, its execution was flawed. Deals with Eli Lilly and Blockbuster Video could be used as examples where estimated profits and expenses were calculated without considerations regarding the market demand, technical aspects, and service-related costs (Healy, 2003). These issues were noticed but neglected for many years, which made it even more difficult for the organization to restructure and make timely corrections (Schaltegger & Burritt, 2017). Secondly, the top management compensations strategy raises alarms. Managers’ revenues depend on international stock values, which rely on forecasts and data generated by annual calculations of assets, income, expenses, and liabilities (Gomez-Mejia, Berrone, & Franco-Santos, 2014). Therefore, their interest competed against the benefit of the organization, which led to scams related to acquisitions. Some of them such as Chewco was not represented on any balance sheets.

Rapid expansion to many industries elevated the competition of Enron since it did not only target customers of thousands of companies in the United States but the rest of the world too. For example, the Dabhol power project raised concerns about the organization’s expertise since it encountered great political opposition (Healy, 2003). It could hurt the image of the firm and the number of customers that would use its services (Chen & Jermias, 2014). One could suspect that this aspect had a partial effect on the decision of the management to fake some financial reports.

Potential Solutions

There is a set of potential solutions that could have been applied to the organization. The first one is related to bonus and salary reorganization. Enron could have stopped measuring its performance based on the stock value and compensating senior management based on reported earnings. The problems of the organization serve as an example of the fact that such a strategy and value system could have been abused and could have led to failure. Instead, Enron should have measured its success based on the value provided to its customers, employees, and other stakeholders. Compensations should have been awarded based on one’s role, responsibilities, and risks related to the position (Chen & Jermias, 2014). Such a model would have attracted a more significant number of customers ensuring that the income of the organization could support forecasts that should have been based on long-term agreements with Enron’s partners.

The second solution is related to accounting issues encountered by the organization. As mentioned earlier, Enron was partially forced to engage in such behavior because of the trading business structure. It was no longer transparent in the natural gas industry. At the same time, new risks related to lenders and investors were introduced. A better idea would have been to reorganize deals to make financial rewards and benefits based on the previous performance of the organization rather than its future parameters that had too many variables and were somewhat unpredictable (Libby, 2017). It suggests a need for a clearer and more organized approach to financial reporting excluding unnecessary chains of fund managers, external auditors, and sell-side analysts.

The third potential solution is related to the number of industries where Enron operated. The case illustrates that the infrastructure of the organization did not allow for careful and efficient management of all departments (Healy, 2003). Instead, many technicalities and issues, such as the rate of consumption and potential expenses, were excluded with liabilities added to the balance sheet (Khomenko & Kuznetsova, 2016). The organization’s expertise in the natural gas arena did not apply to all areas. Thus, it might have been necessary to limit Enron’s investments to two to three selected environments that had the best infrastructure, potential, and revenue. It would have restricted its infrastructure and allowed it to mitigate expenses and free resources for reorganization.

Key Element Analysis

The case illustrates that the organization used an incorrect approach to business, which gradually led it to bankruptcy. At the same time, it had been reasonably successful for many years and operated billions of dollars from revenue and earnings (Healy, 2003). It means that Enron had the resources necessary to transform and utilize any of the proposed solutions. The idea regarding the downscaling of the organization seemed the most efficient since large corporations often require clear, transparent, and effective practices and hierarchy (Kang & Lee, 2017). The latter were not illustrated in the case study. It can be argued that Enron had to transition regardless of market conditions and its bankruptcy since it would not be able to withstand the crisis of 2008. In terms of efficacy, all of the proposed solutions seem equally adequate for the problems. They target the major issue of the organization from different sides. However, the third solution has the highest efficacy since it could immediately generate resources to be used to stabilize the company.

Specific Solution Proposal

It seems that based on the organization’s structure and the problems presented in the case study, the most appropriate solution would have been to limit the number of industries and directions in which the organization worked. The firm showed that it did not have the infrastructure required to manage all of its plans and purchases. Many technicalities and subtle but crucial aspects were missed, which had an adverse effect on its value, image, income, and documentation (Chen & Jermias, 2014). Its financial records were no longer accurate and precise, required unnecessary human resources to be managed, and could not be updated quickly (Kang & Lee, 2017). Consequently, such an enterprise could not survive in modern realities where a quick and accurate response was required for market conditions to change frequently (Khomenko & Kuznetsova, 2016). The reorganization would have enabled the corporation to create and practice new routine and strategies being simple, honest, and efficient. As a result, it would have minimized its expenses, elevated income, and reduced competition making it harder for new companies to challenge Enron’s superiority and expertise in limited markets.

Conclusion

The organization should have decreased the number of industries where it expanded prioritizing the most organized, efficient, and profitable ones, which would have enabled it to restructure itself effectively and minimize losses. Its initial approach failed and led the organization to bankruptcy as it could not direct its resources at multiple fronts and industries. Admittedly, limiting the scope of Enron should have refocused it on solving its financial, marketing, and administrative problems.

Related essays

• European Wax Center
• Poem Comparison: “Living in Sin” and “A Supermarket in California”
• An Evaluation of the Contribution Made By Elton John to the Arts