The collapse of Enron: managerial aspect
Executive summary The downfall of Enron Corporation is one of
the most infamous and shocking events in financial world in the
whole history of the mankind, and its reverberations were felt
on global scale. Prior to its collapse in 2001, Enron was one of
the US leading companies and frequently considered among top 10
admired corporations and most desired places to work, and its
board was often recognized among the best five US companies in
accordance with the Fortune magazine. Its revenues made up US
$139($184) billion, assets equaled $62($82) billion, and the
number of employees reached more than 30,000 people in 20
countries around the world. While Enron Corporation was so
highly praised by the outside observers, internally it had
highly decentralized financial control and decision-making
structure, which made it practically impossible to get coherent
and clear view on corporations’ activities and operations. Of
course, the problem was not exclusively due to poor managerial
performance, all the departments of the corporation were
involved in the ruining corporate ethical values and principles,
but executives and managers bear primary responsibility for the
absence of corporate culture, clear accountability and
transparence of the company. If operations management worked
properly, in its full force, and if it was given possibility to
work in such a way, there could be a chance of escaping the
tragedy. Enron Corp brief history Enron Corporation was one of
the largest global energy, services and commodities company.
Before it was filed bankruptcy under chapter 11, it sold natural
gas and electricity, delivered energy and other commodities such
as bandwidth internet connection, and provided risk management
and financial services to the clients around the world. Enron
was based in Houston, Texas, and was founded in July 1985
(though company with Enron name emerged still in 1930 (Swatz,
Watkins, 2003)) by the merger of InterNorth of Omaha in
Nebraska, and Houston Natural Gas. Enron Company quickly
developed from merely delivering energy to brokering energy
futures contracts on deregulated energy markets. In 1994, the
company started to sell electricity, and in 1995, it entered
European energy market. By the middle 2001, Enron employed about
30,000 people globally (McLEan, Elkind,2003). Questionable
accounting methods and techniques provided Enron with
possibility to be listed as seventh largest United States
company and was expected to dominate the market which the
company virtually invented in the communications, weather and
power securities (Bryce, 2002). But instead the corporation
became the largest corporate failure in the global history and
an example of well-planned and institutionalized corporate
fraud. Enron became wealthy due to its pioneering marketing and
promotion of power and communications bandwidth services and
risk management derivatives, including such innovative and
exotic items as weather derivatives. In 1999, Enron launched an
initiative of buying and selling access to high-speed Internet
bandwidth, and also Enron Online was launched as a Web-based
trading site, making Enron e-commerce company. In 2000, the
reported revenues of the company made $101 billion. It had
stakes in almost 30,000 miles of gas pipelines, either owned or
accessed 15,000 miles of fiber-optic network and had stakes in
global operations on generating electricity (Thomas, 2002). In
the result, for five years in a row, from 1996 to 2000, Enron
was named “America’s most innovative Company” by Fortune
magazine, and headed the list of Fortune’s “100 best companies
to Work for in America» in 2000. Enron reputation was undermined
by rumors on bribery and political pressure with the objective
of securing contacts in South and Central America, Philippines
and Africa. The Enron was blamed to use its connections with
Clinton and Bush administrations to express pressure in their
contracts. The events were followed by a series of scandals
involving irregular accounting methods bordering on fraud which
involved Enron and Arthur Andersen accounting firm and led Enron
on the verge of undergoing the largest bankruptcy in economic
history in November 2001 (Emshwiller, Smith, 2001). Since Enron
was always considered a blue chip stock, the bankruptcy was a
disastrous and unprecedented event in the global financial
world. Enron’s downfall was definite when it was found out that
a considerable share of its profits resulted from deals with
so-called special-purpose entities, limited partnership under
control of Enron. It resulted in the possibility of not
reporting many of the company’s losses in its financial
statements. The final plan of Enron’s bankruptcy included
creation of three new businesses which would be spun off the
company. The reorganization process started in 2003 with the
creation of three companies – CrossCountry Energy, Prisma Energy
International, and Portland General Electric. CrossCountry
Energy was sold to CCE Holdings L.L.C., with the money to be
used for the repayment of the debts, while Prisma Energy
International and Portland General Electric should emerge as
independent companies descendant of Enron (Swatz, 2003).
Operations management scope of functions To understand the
reasons of this bankruptcy and the level of managerial
implication in the quality performance of the company,
particularly that of operations management, it is necessary to
outline the main functions of operations management and impact
it should have of functioning of the organization. The principal
task of operations management is effective transformation of
inputs into “desired outputs” of the company (Shafer, 1997). The
outputs are traditionally understood in manufacturing and
profit-making context within the organizations. But recently it
has been recognized that operations management is a discipline
which is not limited with such narrow functions; it can be
deployed in practically any area where the organization aims at
achieving its objectives (Barnett, 1996). For instance,
non-profit or public sectors have to learn to optimize their
internal operations and processes in the situation of limited
resources; service companies come to conclusion that by
reappraising their delivery process they can revolutionize and
significantly improve their approach to manufacturing companies
and their marketplace. Robin Wood (2001) gives the example of
such operations management implication in Daewoo company, which
understood that it can specialize and differentiate its product
by adding definite bundle of benefits to its product which
includes additional supporting services. Operations sector is
the heart of these changes that are made by leading companies to
improve their performance and increase customer base. The
survival of commercial company depends on ability of the
organization to focus and shape its operational resources to
meet the expectations of its stakeholders: customers, employees
and shareholders, expressed in organizational strategy (Russel,
1995) . Irrespective of economic sectors the company operates
in, the ability of operations management of this company to
fulfill those above-mentioned tasks depends on their
understanding that it is necessary to make trade-offs. They
cannot avoid the situation of working under constraints and have
to understand their capabilities and constraints to provide
significant inputs into strategic decision-making process
involving further resources of the organization. Operations
managers in the organizations are not empowered to make
strategic decisions, but they play important role in shaping the
organization’s strategy and contribute to the strategic thinking
( Pasternack, Viscio, 1998). Operations managers should be able
to translate strategic aims and objectives into clear
operational objectives and actions and to implement, design and
improve the products of the company themselves and the processes
of their delivery. They have to know how changes incorporated to
external factors influence the operation and how changes in one
aspect of the operating system influence other aspects. Also,
operations managers need to know how technological changes
impact organization’s capability of delivery, and to incorporate
their conclusions into strategic process (Peters, Waterman,
1982). Therefore, the heart of operations thinking includes the
ability to think dynamically and systematically across time and
space (Miller, 1998). Besides traditional tasks of operation
management, new perspectives and objectives emerge connected
with the emergence of new trends and developments of operations
management, such as total quality management, shop floor
control, global supply chain management, manufacturing planning
software, and others. Total quality management has become one of
the most important developments of the operations management.
The quest for higher level of products and services quality is
caused by the globalization of markets, on the one hand, and
increasing litigation over service or product failure. The
relationship between quality and market share performance is
doubtless. Those firms that fail to understand the issue of
quality find themselves on the bottom of their industry
hierarchy. A significant share of the responsibility for quality
standards rests on the operations manager. Global supply chain
management is another very important component of operations
management. The world economy is becoming more global than ever.
Looking for lower production costs, more flexibility and local
risk reduction, companies are seeking to outsource and produce
services and products on global scale (Heizer, 2004). Operation
managers are responsible for fulfilling the task. Project
management is yet another task of the operations management
department. Operation managers bear responsibility for numerous
projects which range from considerable capital projects to
specific ones such as installation of new information system.
Effectively managing projects involves fulfillment and delivery
them in timely manner and within the budget (Stevens, 2001). In
a word, operations management is indispensable component of the
organization, since it fulfills numerous important functions of
the company. Operations manager handles daily running and
functioning of the organization. The implication of poor
managerial performance for the collapse of Enron Corporation Now
it is necessary to find out and analyze whether operations
management of Enron Corp performed all the functions mentioned
above and what was the quality of their activity. The Enron did
have operations management department, which, according to their
official source, fulfilled the following functions: setup
accounts and notify utilities, agency agreement from customer,
verify the format of invoice, setup invoice data transfer, test
algorithms of invoice and file transfer to the customer,
determine the reporting requirements of the customer (Enron
Energy Services, 2000). As it is seen from the source, the
functions of very operations management department are very
limited. There are other management departments which perform
the functions of operations management stated above: operations
facility management, commodity management, energy asset
management, financial operations, and capital management.
Though, most of functions performed by these departments,
according to the source, are purely executive and lack
integration, systematic vision, responsibility, control and
creative aspect. Besides limited scope of functions assigned to
operations management in Enron Corporation, another important
point concerns the quality of their performance and overall
corporate culture and atmosphere created within corporation. As
it was mentioned above, ideally, the functions of operations
management include creating ethic values, integrity, competence
and clear accountability within the organization. Enron’s
management failed to comply with these tasks.
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