The case of Enron stands out since it revealed how corporate leaders could engage in unethical practices, deceive stakeholders, and eventually disorient organizational performance. The company relied on the power of mark to market (MM) accounting to achieve the intended aims. The leadership of Jeffrey Skilling proved catastrophic since the organization’s stock price plummeted to less than a dollar in 2001. The company would file for bankruptcy during the same year, a decision that triggered new investigations in an attempt to understand the critical aspects that led to its demise. The discussion presented below uses different business models and frameworks to describe the situations recorded in this organization.
Porter and Miles & Snow’s Strategy of Typology
Different strategies of typology propose diverse managerial practices that corporations can employ to remain or achieve the intended business aims. Before filing for bankruptcy, Enron appeared to be one of the most successful and profitable companies in the regional energy sector. Many people believed that the established business model was outstanding and capable of taking this company to the next level. However, investors would later be shocked to realize that Enron was operating at a loss while at the same time creating huge debts. Porter’s strategy of typology can describe how the leaders at this company promoted the concepts of market focus and non-differentiation (Kabeyi, 2019). The available products were designed in such a way that they met the changing demands of the mass market. The managers went further to present new ways of minimizing costs of operation. They achieved this aim by borrowing money and using nonconventional accounting practices to show that the organization was making increased profits. Additionally, the company went firm to develop additional strategies between the available processes or options in accordance with the intended typology. These initiatives would eventually set the stage for failure and potential bankruptcy.
Similarly, Enron’s managers went further to employ Miles and Snow’s strategy typology to create its own environment that could support the intended intentions. Since the model revolves around four business types, it is evident that the leaders at Enron embraced the reactor’s version. With the recorded inconsistencies in performance, the new manager conceived an ingenious plan that would ensure that it remained profitable in the eyes of all investors. The company lacked consistency within its business and functional level strategies (Kabeyi, 2019). The departments did not collaborate or read from the same page in an attempt to improve performance and transparency. Consequently, these measures have the potential to increase profits but only in the short term. In order to cushion itself against any predictable debt, Enron chose to embrace the power special purpose vehicles (SPVs) to achieve the intended aims while at the same time maintaining a clean bill of health in the eyes of the public, the US Securities and Exchange Commission (SEC), and investors (Daft, Murphy and Willmott, 2017). Consequently, this company became unsustainable and incapable of meeting the needs or expectations of different stakeholders and clients. By mid-2001, Enron had started to experience serious challenges that compelled Skilling to quit as the company’s CEO. These events would eventually force Enron to file for bankruptcy towards the end of the same year.
Business organizations diversify or expand their operations as a way of maximizing profits and attracting more clients. For Enron, a new form of growth was considered whereby the leaders ventured into new or untapped areas. The first phase of this organization’s growth was that of merger and acquisition. For instance, its origin was as a result of a merger between InterNorth and Natural Gas in an attempt to expand operations and achieve its goals in the energy industry. Within a short period, the leaders decided to focus on the concept of rapid diversification. This meant that it considered new areas of energy that were not fully regulated in the American market. For example, it chose to start supplying both water and electricity to additional customers in California (Hosseini and Mahesh, 2016). The existing legal and economic factors at the time allowed such a trend to take place. The government did not impose strict measures to prevent companies from venturing in or identifying new sectors. Within the next decade, Enron began to focus on untapped regions across the globe to market its products and services across the world. This kind of expansion strategy was capable of attracting more clients, investors, and partners. The company would also be in a position to make increased profits without the need to invest in assets or create infrastructure to support its original business model.
While pursuing this form of strategy, Enron made a terrible mistake of shifting its core activities as part of its expansion strategy. The leaders chose to venture into a new field of energy trading in order to diversify much further. Although such a model was appropriate, the combination of other weaknesses and poor accounting malpractices created a scenario whereby the company lacked adequate assets and infrastructure that would cushion it against an unprecedented event or economic meltdown (Crowther and Green, 2004). The rate at which Enron was introducing such expansions remained questionable since a specified plan to achieve such aims did not exist. Additionally, the company lacked an effective strategy to finance the ongoing business diversification process. These malpractices and the absence of a superior model made it impossible for Enron to keep pace and achieve its business aims. By 2001, the malpractices led to increased debts since they established SPVs were no longer able to continue supporting the company (Wang et al., 2016). The stage had already been set for this company to lose its business and file for bankruptcy.
Techniques of Controlling the Environmental Domain
Enron as a Closed System
The fall of Enron was a result of various misbehaviors and malpractices that its leaders promoted. The managers devised superior techniques to control the environmental domain in order to continue operating without suspicion. The first one was to design a new corporate culture that lacked transparency and whereby followers were required to avoid reporting any form of malpractice at the company (Wang et al., 2016). The managers controlled the kind of information available to the employees and what could share with members of the public. It was essential to maintain a positive image and continue to encourage more investors and clients to do business with Enron.
The second technique that supported this organization’s control of the environment was to maximize its opportunities by investing in new areas. This strategy encouraged many people to acknowledge that the company was performing positively and capable of meeting the demands of both the workers and the external partners. The third one was the leaders’ strategy of colluding with auditors and accountants throughout the period in question (Jones, 2012). This technique proved essential since it took long before the authorities could learn more about the malpractices that were taking place at Enron (Daft, Murphy, and Willmott, 2017). Skilling went further to acquire additional shares from the company as a way of increasing the trust of more investors and encouraging them to follow the same trend. However, the CEO would sell his stock immediately after quitting as the CEO.
These aspects reveal that Enron managed to operate as a closed system for several years. Kabeyi (2019) indicates that most of the practices and business strategies pursued at this organization did not leak to the customers or authorities. Instead, the company managed to paint a positive picture of excellence and improved performance. The majority of the customers continued to do business with Enron since it was diversifying its operations quickly and delivering high-quality services. During the same period, the company managed to maximize the use of SPVs in an attempt to achieve the intended aims. The leaders were also able to convince more stakeholders that it was focusing on superior or state-of-the-art strategies to manage operations and pursue the intended aims (Daft, Murphy, and Willmott, 2017). These developments were appropriate for the leaders since they were able to record meaningful results. Consequently, such a closed system would eventually have negative implications on the future performance of Enron and the financial positions of its stakeholders and employees.
Model of Decline Stages
Companies that fail to implement superior control systems or safeguards will eventually collapse and affect the experiences of all key shareholders. The organizational decline is a possible occurrence when leaders fail to neutralize or anticipate possible pressures that might eventually disorient performance. With many aspects capable of affecting profitability, it becomes necessary for managers to consider emerging models that can address such issues and put companies on the right path. The case of decline can be studied succinctly using the five stages of the decline model (Ghazzawi, 2018). First, the blinded stage reveals that the managers at Enron failed to monitor and identify possible changes in both the internal and external environments that could affect performance and future survival. Some of the potential causes that existed at the time included poor accounting practices and ineffective financial systems. The ignorance of different stakeholders set the stage for the inaction stage of decline (Ghazzawi, 2018). During this phase, the managers at Enron could suspect that several actions were not being done right. The rapid success and performance recorded at the organization remained questionable. The individuals at the top failed to consider how such issues could be monitored and addressed.
The third phase of decline is called the faulty action whereby the need was real and evident for the company to institute evidence-based measures. The workers and other stakeholders remained aware of the accounting procedures and deception measures put in place. They failed to act immediately to ensure that the company did not plunge into the crisis stage. This fourth phase became a reality when all the stakeholders realized with a shock that they had failed to control the existing malpractices and share the information with the right agencies or authorities (Ghazzawi, 2018). Many stakeholders and managers even chose to quit their positions as a way of distancing themselves within the unfolding events. The best example was the fact that Skilling chose to leave his position after realizing that the company was broke and incapable of pursuing its goals. The inability to introduce structural change or strategy to transform the company worsened the situation. The final stage of dissolution took shape after the company depleted its available resources. It was unable to achieve its aims or pay salaries. This was the final development that encouraged Lay to file for bankruptcy (Ghazzawi, 2018). The damages recorded at Enron could not be amended since there were enormous debts and thousands of workers who had to be compensated.
Vertical Sources of Power
Business organizations can adopt and implement different types of management depending on several factors, such as environment, intended goals, and cultural values. Competent leaders embrace the established model to influence their followers, make appropriate decisions, solve emerging problems, and present a sense of direction (Kabeyi, 2019). At Enron, a vertical source of power existed whereby the CEO and other leader made the right investment and business performance decisions. The employees and other stakeholders had to consider such ideas and follow them to deliver the intended outcomes. The managers at Enron received authority legitimately after proving that they could transform the organization and make it profitable. For instance, the appointment of Skilling to become Enron’s top leader was informed by his commitment and the ability to promote better practices (Daft, Murphy, and Willmott, 2017). He had managed to make Enron a reputable and successful organization in the American market. He liaised with his bosses from the beginning and introduced new business strategies that had the potential to take this corporation to the next level. He applied most of his skills to ensure that additional gains and expansion targets were recorded in a timely manner.
However, the true situation was quite different since the gains and achievements recorded at Enron were not factual. Instead, Skilling and his colleagues considered the weaknesses in the United States’ regulatory systems and accounting practices to pursue their personal gains. The managers went further to invent new ways of maximizing incomes without considering the stability and future performance of this company. The individuals failed to communicate with their followers and guide them to make practical decisions and practices. The top managers went further to use SPVs as a way of cushioning the company and targeting untapped sectors (Hosseini and Mahesh, 2016). The absence of proper guidelines and the inability to establish and follow a code of conduct worsened the situation. The leaders at Enron collaborated with external auditors and accountants to provide inaccurate data regarding the company’s financial performance (Kabeyi, 2019). These developments affected the future profitability of the company since the main focus was short-term (Kabeyi, 2019). Within less than a decade, Enron was unable to pursue its business goals due to the increasing level of debts. It is, therefore, agreeable that the managers at Enron misused the concept of vertical power to benefit themselves while at the same time ignoring the fate of the company, key stakeholders, and employees. These malpractices would eventually have far-reaching negative consequences on both the company and the leaders.
Corporate Social Responsibility
Top managers in any organization need to consider the needs and expectations of all stakeholders, such as employees, customers, and community members. At Enron, different practices emerged that affected or disoriented the true image of the company and made it impossible for the company to retain its corporate social responsibility (CSR) image. The professionals began by creating a new compensation framework that was based on performance-based commissions (Wang et al., 2016). This meant that the leaders were ready to stretch the limits and engage in dishonest practices that could result in personal wealth creation. This kind of model became the beginning of Enron’s future demise and bankruptcy.
CSR is informed by codes of ethics that all stakeholders and managers need to take seriously and guide their followers to do so. The company’s failure to follow this principle encouraged different workers and leaders to behave in a negative way. They failed to consider some of the best strategies that would treat employees, business partners, and shareholders in a dignified manner (Wang et al., 2016). Following the merger that led to the establishment of Enron, a new model of management emerged whereby executives worked separately from the employees (Wang et al., 2016). The concept of hierarchy appeared to get a new meaning. This development was essential since it would prepare or prevent the relevant opportunities for making more money and maximizing personal wealth.
Skilling’s leadership presented new challenges to the effectiveness of the CSR framework since he was interested in making Enron more of a trading organization. The creation of special purpose entities (SPEs) became a new opportunity to acquire liquidity while at the same time maximizing income. The primary intention behind such models was for Enron to hide losses and debts. The company continued to borrow more funds as a way of offsetting existing ones while at the same time maintaining the image of a profitable company (Wang et al., 2016). Throughout the period, Skilling made no effort to consider the concept of CSR or guide the organization to meet the demands of all key stakeholders. These gaps made it impossible for the company to support the surrounding communities or make it possible for more people to lead better lives. At some point, the leaders expressed the need to increase energy costs in California in an effort to maximize profits (Wang et al., 2016). These malpractices were ineffective and incapable of making Enron an ethical company. Consequently, the established models and malpractices resulted in this corporation’s bankruptcy.
The above sections have outlined the unique failures and malpractices that affected the image of Enron as one of the most profitable companies in the United States throughout the 1990s. The entry of new leaders changed managerial strategies and business models. The introduction of a revolutionary compensation system aimed at boosting performance became a new opportunity for such managers to pursue their selfish goals. Consequently, its profits started to reduce, and eventually it had to file for bankruptcy. The attributes have revealed that the company failed to take the concepts associated with organizational theory seriously from the beginning, such as CSR, effective leadership, positive organizational culture, transparency, stakeholder involvement, and strategic planning. In conclusion, future entrepreneurs, managers, and business leaders should analyze the challenges and malpractices in order to avoid them and introduce superior measures to maximize shareholder value.
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