CASE STUDY
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Davao Doctors College**We aren't endorsed by this school
Course
BSA 234
Subject
Management
Date
Dec 21, 2024
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14
Uploaded by CoachLeopardMaster269
CASE STUDY :ENRONPRESENTED BY:DAGALEA, GILAY,RIETA
BackgroundOnce the seventh largest company in America,Enron was formed in 1985 when InterNorthacquired Houston Natural Gas. The companybranched into many non-energy-related fieldsover the next several years, including suchareas as Internet bandwidth, risk management,and weather derivatives (a type of weatherinsurance for seasonal businesses). Althoughtheir core business remained in thetransmission and distribution of power, theirphenomenal growth was occurring throughtheir other interests. Fortune Magazineselected Enron as "America's most innovativecompany" for six straight years from 1996 to2001. Then came the investigations into theircomplex network of off-shore partnerships andaccounting practices.
How the FraudHappenedThe Enron fraud case is extremely complex. Some say Enron's demiseis rooted in the fact that in 1992, Jeff Skilling, then president of Enron'strading operations, convinced federal regulators to permit Enron touse an accounting method known as "mark to market." This was atechnique that was previously only used by brokerage and tradingcompanies. With mark to market accounting, the price or value of asecurity is recorded on a daily basis to calculate profits and losses.Using this method allowed Enron to count projected earnings fromlong-term energy contracts as current income. This was money thatmight not be collected for many years. It is thought that this techniquewas used to inflate revenue numbers by manipulating projections forfuture revenue.Use of this technique (as well as some of Enron's other questionablepractices) made it difficult to see how Enron was really making money.The numbers were on the books so the stock prices remained high,but Enron wasn't paying high taxes. Robert Hermann, the company'sgeneral tax counsel at the time, was told by Skilling that theiraccounting method allowed Enron to make money and grow withoutbringing in a lot of taxable cash.
How the FraudHappenedEnron had been buying any new venture that looked promising as a newprofit center. Their acquisitions were growing exponentially. Enron had alsobeen forming off-balance sheet entities (LJM, LJM2, and others) to move debtoff of the balance sheet and transfer risk for their other business ventures.These SPEs were also established to keep Enron's credit rating high, whichwas very important in their fields of business. Because the executivesbelieved Enron's long-term stock values would remain high, they looked forways to use the company's stock to hedge its investments in these otherentities. They did this through a complex arrangement of special purposeentities they called the Raptors. The Raptors were established to cover theirlosses if the stocks in their start-up businesses fell.When the telecom industry suffered its first downturn, Enron suffered aswell. Business analysts began trying to unravel the source of Enron's money.The Raptors would collapse if Enron stock fell below a certain point, becausethey were ultimately backed only by Enron stock. Accounting rules requiredan independent investor in order for a hedge to work, but Enron used one oftheir SPEs.The deals were so complex that no one could really determine what was legaland what wasn't. Eventually, the house of cards began falling. When Enron'sstock began to decline, the Raptors began to decline as well. On August 14,2001, Enron's CEO, Jeff Skilling, resigned due to "family issues." This shockedboth the industry and Enron employees. Enron chairman Ken Lay stepped inas CEO.
SWOTS(Strengths)W(Weaknesses)O(Opportunities)T(Threats)What unique value doesthe company provide thatcompetitors do not have? What are the company'sstrongest assets?What are the internalforces that can impact thecompany? Which areas of thebusiness needstrengthening?What emergingtechnology can thecompany employ? Are there other markettrends and needs that thecompany could meet?What are the external forcesthat could impact thebusiness? Are there companies thatcould potentially becomecompetitors?
Strength and weaknessAccounting fraud- Enron misrepresented the state of its finances by inflating revenue figures andmanipulating estimates for future income through the use of mark-to-market accounting. Because of this, itwas challenging for regulators and investors to evaluate the company's performance fairly.Complex Financial Structures- Enron's use of special purpose companies (SPEs) like the Raptors and off-balance sheet entities to transfer risk and hide debt covered up the company's actual financial situation. Theconfidence that investors had in Enron's business practices was damaged by these intricate financialarrangements.Lack of Transparency - Stakeholders found it difficult to comprehend the true nature of Enron's activitiesand financial situation due to the company's opaque financial practices and intricate commercialrelationships. This lack of openness damaged investor trust and played a part in Enron's demise.Leadership Issues- Investor confidence in Enron's management team was further damaged by theresignation of CEO Jeff Skilling despite growing scrutiny and the subsequent appointment of Ken Lay as CEO.Problems and their impact on Enron
StrengthInnovation- Enron's ability to innovate and adapt in a variety of economicsectors was demonstrated by its six-year run as America's most inventivefirm.Diversification- Enron's diversification strategy and potential for growthbeyond its core energy sector were proved by its expansion into non-energy-related fields.Strategic Acquisitions- Enron became one of the biggest corporations inAmerica thanks to its acquisition-driven, exponential expansion thatallowed it to dominate a number of industries.
WeaknessesFinancial Mismanagement- Weaknesses in Enron's financial managementand governance procedures were made clear by its dishonest accountingtechniques and intricate financial structures.Lack of Transparency- Enron's opaque financial reporting and lack oftransparency damaged investor confidence in the business's operations.Leadership Instability- Enron's capacity to run its business successfullywas weakened by the resignation of important executives and the ensuingchanges in leadership that caused instability and uncertainty within thecompany.
OpportunitiesExternal environmentTechnological Advancements - By utilizing technological innovations,Enron may be able to optimize its processes, increase productivity, andinvestigate untapped market niches.Market Expansion- Enron has the potential to broaden its market reachby capitalizing on its proficiency and capacities in energy distribution andtransmission, as well as new geographic areas.Renewable Energy- Enron may look at prospects in renewable energyprojects and technologies as sustainability and renewable energy sourcesgain more attention.
ThreatsExternal environmentRegulatory Changes- Modifications to the laws governing financialreporting and the energy markets may make compliance difficult and havean effect on Enron's business.Economic Uncertainty- Enron's financial stability and profitability could beimpacted by geopolitical instability, commodity price volatility, andeconomic downturns.Competition - Strong rivalry in the energy industry and other sectors inwhich Enron works puts its market share and earnings at risk.Legal and Reputational Risks- The fraud scandal's ongoing legal actionsand reputational harm could result in cash penalties, litigation costs, and adecline in investor trust.
VI. Identify Business-Level StrategyCompetitive Strategy- Enron adopted an aggressive competitive strategy, expanding beyond itsenergy roots into diverse industries through strategic acquisitions and innovative ventures. Byleveraging its market position and financial resources, it aimed to establish dominance acrossvarious sectors, positioning itself as a leader in emerging markets and technologies.Marketing Strategy- Enron strategically crafted its marketing messaging to portray itself as atrailblazer in innovation and diversification. It capitalized on its reputation as "America's mostinnovative company" to attract investors and stakeholders, emphasizing its adaptability andforward-thinking approach. Through targeted campaigns and public relations efforts, it sought tomaintain a positive image despite growing concerns about its financial practices.Costs - Enron's cost structure was complex, reflecting its ambitious growth initiatives andintricate financial operations. The company incurred significant expenses related to maintainingits elaborate financial structures, managing diversified business ventures, and engaging inquestionable accounting practices. These costs, coupled with escalating debt and declininginvestor confidence, contributed to Enron's financial downfall.General Focus- Enron's overarching focus was on rapid expansion, diversification, andtechnological innovation. It pursued aggressive growth strategies, venturing into new marketsand investing in emerging technologies to maintain a competitive edge. However, the company'slack of transparency and ethical lapses ultimately eroded stakeholder trust and led to its dramaticcollapse.
VII. Analyze ImplementationsEnron's implementation strategy revolved around a decentralizedorganizational structure, granting divisions significant autonomy in decision-making. This structure facilitated rapid expansion into various industries.However, the control systems in place, primarily focused on financial metricssuch as revenue and profitability, were inadequate. The company heavily reliedon mark-to-market accounting, which obscured its true financial health andmade it challenging to detect fraudulent activities. Furthermore, thedecentralized nature of Enron's operations led to a lack of centralizedoversight. This lack of oversight allowed unethical behavior to go unchecked,contributing to the proliferation of fraudulent practices within the organization.Despite efforts to maintain control through financial metrics, the absence ofeffective monitoring and accountability mechanisms ultimately led tosubstantial financial losses and the collapse of the company.
Organizational Change- Enron underwent significant change withrapid expansion, but the lack of transparency hindered effectivemanagement of this growth, leading to internal resistance.Levels of Hierarchy - Enron had a hierarchical structure, but itsculture prioritized individual performance over traditionalauthority, leading to decentralized decision-making.Employee Rewards- Enron incentivized employees withperformance-based compensation, favoring top performers.However, this focus on financial rewards fostered a short-termmindset and contributed to unethical behavior.Conflicts and Other Issues- Enron faced conflicts of interest andethical dilemmas due to its aggressive pursuit of profits. Lack oftransparency exacerbated internal tensions and eroded trust,ultimately contributing to its downfall.VII. Analyze Implementations
VIII. Make RecommendationsImprove Transparency and Accountability - Enron should establish more robust control systems to enhancetransparency and accountability in financial reporting and decision-making processes. This includesimplementing rigorous oversight mechanisms to monitor the company's financial health and prevent fraudulentpractices.Strengthen Leadership Stability- Enron should prioritize leadership stability by fostering a culture of continuityand succession planning. This involves developing and retaining talented executives, promoting ethicalleadership practices, and ensuring seamless transitions in key leadership roles to mitigate instability anduncertainty.Enhance Organizational Communication- Enron should improve communication channels within theorganization to facilitate better collaboration and coordination across divisions and levels of hierarchy. Thisincludes promoting open dialogue, sharing information transparently, and fostering a culture of inclusivity andmutual respect to address conflicts and resolve issues effectively.Align Incentives with Long-Term Sustainability - Enron should revise its employee rewards system to alignincentives with long-term sustainability rather than short-term financial gains. This involves incorporating non-financial performance metrics, such as ethical behavior, corporate governance, and stakeholder satisfaction, intocompensation structures to promote responsible decision-making and mitigate unethical behavior.Implement Ethical Leadership Practices- Enron should prioritize ethical leadership practices throughout theorganization, emphasizing integrity, honesty, and accountability at all levels. This includes providing ethicaltraining and education for employees, promoting a culture of ethics and compliance, and establishing clearethical guidelines and standards of conduct to guide behavior and decision-making.