Enron Case Study


Agency problem is one of the major challenges that shareholders face in their effort to maximize wealth through investment. One source of agency problems is associated with the existence of conflicts of interest. In an effort to increase their earnings, firms’ management teams engage in unethical practices such as financial irregularities. Additionally, they also implement operational strategies that aim at maximizing their firms’ profitability rather than the shareholders’ wealth.

Therefore, to better illustrate how the operational strategies implemented by firms’ management teams can cause a firm to collapse, this paper evaluates the case of Enron Corporation. More focus goes to the firm’s cultural environment and the implemented management control. The paper also conducts an analysis of Enron’s ineffectiveness in implementing a strong organizational culture and its inefficient management control system.

Case background

The case illustrates the rise and collapse of Enron Corporation. Some of the salient features evident in the case include:

  1. Factors that contributed to the rise of the company– These factors are clearly illustrated and explained. The case makes it evident that Enron’s collapse was due to inefficient control by the company’s Chief Executive Officer, Jeff Skilling.
  2. The leadership style adopted by Jeff Skilling – Leadership style stands out as the major factor that contributed towards the emergence of an inefficient organizational culture.
  3. Establishment of a “new economy”- Skilling laid more emphasis on transforming the firm from being an “old economy” to being a “new economy”. However, the leadership style he adopted had a negative impact on the firm’s effort to achieve its goal.
  4. Management control system– The case cites inefficiency in controlling the activities of the employees, which comes out as a major cause that significantly contributed towards the firm’s failure.

Company attributes

Enron Corporation was energy and commodities trading company, which was formed in 1985 by Kenneth Lay. Its headquarters were located in Houston, in the US. The firm owned the most extensive natural gas pipeline in the US. In a quest to maximize its profitability, the firm ventured into the international market. In addition to its energy business, Enron also positioned itself as a giant with regard to water and wastewater management having ventured into the industry in 1998.

Upon its market entry, the firm gained global recognition courtesy of its strategic move with regard to its adoption of the “new economy” strategy. Enron’s management team appreciated the importance of diversification in an effort to maximize profitability. Consequently, the firm established numerous divisions.

Some of these divisions included online marketplace, transportation, wholesale, and broadband services. The firm’s decision to incorporate the concept of product and service diversification emanated from its founders’ focus on steering it towards maximizing the shareholders’ value.

Business strategy

The success of a firm depends on the effectiveness with which it formulates and implements business strategies. In the course of its operation, Enron adopted a business strategy that focused on attaining a high rate of expansion. Consequently, Enron incorporated a number of business strategies, which included internationalization and formation of mergers and acquisitions.

The firm’s success in the international market emanated from its ability to implement strategic practices such as acquisitions. For example, in 1987, Enron acquired Zond Corporation, a leader in wind-power, which provided an opportunity to venture into the renewable energy sector. The firm was very effective in venturing into the international market. In its internationalization strategy, one source of the firm’s success was its ability to formulate and implement effective international marketing campaigns.

Industry analysis using Porter’s five forces

Understanding industry characteristic is paramount in a firm’s efforts to formulate and implement competitive strategies. The porter’s model is one of the frameworks that are suitable in analyzing the intensity of competition, buyer and supplier bargaining power, degree of rivalry, and threat of entry of a particular industry.

The industry was experiencing an increment in threat of entry due to its profitability potential. New firms especially firms dealing in production of renewable energy were considering the possibility of venturing into the industry to exploit the presented profitability. The threat of entry was minimal given that there were minimal legal barriers. The emergence of renewable forms of energy significantly increased the threat of substitute.

Consumers were switching to renewable forms of energy. The intensity of competition led to an increment in the degree of industry rivalry. The various alternatives with regard to forms of energy significantly increased the buyers’ power. This aspect emanated from the fact that they could switch at a minimal cost. On the other hand, the suppliers’ bargaining power was low due to the large number of suppliers.

SWOT Analysis


Pipeline infrastructure-The firm established an elaborate natural gas pipeline network in the United States. The firm’s name attained a relatively high credibility given that it ranked 7th on the Fortune 500.

Positive reputation-In the course of its operation, Enron managed to attain and sustain positive reputation. Its strength also emanated from the fact that it had attained a monopolistic advantage over its competitors emanating from its large size. The firm achieved this goal by positioning itself as the largest energy provider in the US.

Human capital pool- A firm’s ability to attain high competitive advantage relative to its competitors is directly impacted by the quality of its human capital. In its operation, Enron had been very effective in enhancing its employees’ skills, abilities, knowledge, and capabilities by undertaking comprehensive training and development.

Innovation- Enron’s management team appreciated the fact that it operated in a very dynamic industry. Consequently, it laid great emphasis on innovation in an effort to thrive. Its innovation ability enabled Enron to shift from natural gas and energy transportation to being a trading company. The firm specifically focused on other areas such as pulp and paper production, coal, steel, and communication business lines.

Marketing and value delivery- Since its establishment, Enron had been committed towards meeting the customers’ needs. Its ability to identify and deliver customer values played a significant role in enabling Enron to attain an optimal market position.


Failed board of directors- The firm’s board of directors did not execute its oversight role effectively, which stands out clearly in the face of its inability to monitor the firm’s operations through its committees. Additionally, the firm’s board of directors failed in enhancing moral and ethical practices within the firm. As a result, its auditors and employees engaged in unethical practices such as deceit.

Conflict of interest- The firm’s weakness also stands out given the inability of the management team to control conflicts of interest that occurred in various transactions that the firm engaged in during its existence. This aspect pushed the firm into great losses due to the persistent fraud, which further necessitated the firm’s collapse.


Public reputation -In the course of its operation, Enron developed a strong public reputation, which presents an opportunity that the firm could have exploited in the course of its operation. Consumers associated Enron with its ability to provide quality energy. Consequently, Enron could have exploited such public perception to expand its pipeline and other businesses. Additionally, Enron could have exploited the move by the government to deregulate the energy industry by venturing in other energy sectors. For example, the firm should have considered the possibility of venturing into production of clean energy. This move would have played a significant role in dealing with climate change challenges of the 21st century and thus the firm’s reputation would have improved significantly.

Formation of mergers and acquisitions– Considering the prevailing economic environment, Enron should have improved its competitive advantage by seeking reputable firms in the industry to form mergers and acquisitions. Some of the potential partners that the firm should have focused on included firms dealing in production of clean energy. In the course of its operation, Enron gained sufficient experience informing mergers and acquisitions.


Terrorist threat – The threat of terrorism had become real to firms in different economic sectors. Terrorists were increasingly targeting major infrastructure in the US such as energy plants in an effort to sabotage the country’s economy. Therefore, the extensive natural gas pipeline that Enron had developed in the US could have attracted terrorists, and such an occurrence could have a significant impact on Enron’s operation.

Economic crisis- Due to the high rate of globalization, the US could not shield itself from the occurrence of another economic recession. The occurrence of a recession could have directly affected Enron because it derived a significant proportion of its revenue from household consumption.

Competition– In the course of its operation, Enron faced competition challenges emanating from the numerous firms in the US energy industry. The intense competition significantly increased the degree of rivalry within the industry. Consequently, most firms in the industry focused at formulating and implementing strategies that enhanced their ability to increase their market share. One of the strategies that the industry players were focusing on entails research and development.

Organizational culture

An organization’s culture has a significant impact on how its employees act. This aspect arises from the fact that the culture nurtured by a particular organization affects its traditions and customers coupled with how employees execute their duties and responsibilities. Firms develop their culture over time. Upon his entry into the company, Jeff Skilling intended to transform the company’s culture into a “New Economy”, and to achieve this goal, he focused on transforming the company into becoming an exemplary intellectual capital firm that would greatly delight the shareholders and stakeholders.

Consequently, Enron developed a culture that was characterized by intense regulation. This move significantly contributed towards the firm’s collapse. The firm’s management team believed that the culture it developed would foster its innovativeness and capacity to adapt.

Consequently, the firm recruited the most talented employees mostly composed of new university graduates such as MBA holders. The decision to recruit employees of such caliber hinged on the management teams’ emphasis on entrepreneurial thinking and risk taking, which made the firm’s managers to become overconfident.

Enron nurtured an aggressive culture that led to a high rate of employee turnover. This scenario arose from the fact that the firm laid more emphasis on attaining short-term results. The firm’s management team formulated an employee evaluation program that was conducted after every six months. The objective of the evaluation was to enhance the integrity and creativity amongst the employees.

However, this move stressed most of the employees thus reducing their operational efficiency. Employees who succeeded in attaining the set targets received extensive monetary rewards such as salary increments, stock options, and bonuses. Skilling’s focus on development of such culture did not succeed. Instead, a culture of arrogance, fierce internal competition, and extreme decentralization became the norm.

The firm’s manager was mainly concerned with transforming the institution into a postmodern, hyper-flexible, and a firm that continuously re-invents in order to align with changes in the external business environment. According to Skilling’s opinion, this would enable the firm to increase its profitability. Conversely, the ever-changing characteristic of the firm made employees to perceive a significant decline in their job security.

Due to its extensive expansion, Enron ventured into unfamiliar territories. The inexperience of the firm’s executives significantly contributed towards the occurrence of mistakes.

Additionally, the management team’s emphasis on generation of ideas from the employees led to accumulation of information, which the firm could not process adequately. Its over-emphasis on risk taking made the firm to ignore the costs associated with such risks. Additionally, putting pressure on the employees to be creative stimulated most employees to take shortcuts, which were in most cases unethical.

The firm’s employees laid more emphasis on creativity because it attracted great rewards compared to integrity. This aspect led to the occurrence of agency problem between shareholders and managers. Employees were mainly concerned with their personal welfare rather than attaining the shareholders’ wealth maximization goal.

Problems and Key Issues raised in the case

The case illustrates a number of problems and key issues that Enron experienced in the course of its operation. One of the major problems evidenced in the case touches on the accounting system used by the firm.

Enron adopted an aggressive accounting style whereby the accounting officers inflated figures in the firm’s financial statements. Additionally, special partnerships were formed with the objective of defrauding the firm. The partnerships rendered the process of accounting very complicated. The accounting officer did not record the actual values in the firm’s accounting books.

The records were made to look attractive, which was not the case. The management team engaged in fraudulent reporting by manipulating the firm’s revenue and earnings in order to sustain the firm’s credit rating. Consequently, most investors perceived the firm as a solid and reliable investment partner. The auditors colluded with the management team in return of huge financial gains.

Approximately, the auditors and consultants earned between $25 million and $27 million in audit and consulting fees. In the course of executing its oversight duties, Enron ignored the firm’s financial capacity, which made its shares to rise significantly during the 1990s.

Enron relied on the “mark to Market” accounting system, which enabled it to succeed in adjusting the value of its stocks and shares by reflecting the prevailing market value. By using this method, Enron comfortably reported its expected future earnings as current earnings.

Therefore, Enron disregarded its codes of ethics, which is based on integrity, respect, excellence, and communication. The existence of conflict of interest between managers and shareholders comes out clearly given the fact that the executive mainly focused on maximizing their earnings. In August 2001, the company Chief Executive Officer Jeff Skilling resigned from the company and immediately disposed off his stocks, which were valued at more than $33 million.

In addition to the accounting fraud, another key issue that is evident in the case study relates to the firm’s overdependence on making deals. Despite the fact that Enron had developed a professional risk assessment and control committee, the committee did not execute its duties effectively.

For example, the committee was reluctant to reject projects that were evidently risky. Its inability to execute this role was necessitated by the fact that the management team mainly focused on making deals that would contribute to increment in the firm’s cash flows, hence necessitating the firm’s ability to attain high growth.

Additionally, the committee was reluctant to express its opinion regarding illegal businesses and practices that the firm was undertaking. This scenario arose from the fact that making such opinions would herald their career’s death. The firm’s management team rewarded blind loyalty to employees and quashed those who portrayed dissent.

Enron situation fits perfectly in the theory of planned behavior. The theory explains that there exist reasons behind the occurrence of a particular situation.

It asserts that unethical practices such as corruption mainly hinge on specific values and intent. Enron’s employees mainly focused on engaging themselves in extreme competitive actions and favored unethical practices in order to achieve their desired operational efficiency. The behavior thrived because the employees observed the optimal treatment to individuals who engaged in shortcuts to attain the desired level of creativity.

Conclusion and recommendations

In summary, the fraud in Enron Corporation was a result of failure in the firm’s leadership system, management control, and ineffective organizational culture. Its focus on positioning itself as a “new economy” stimulated employees to engage in unfair activities in order to achieve the desired objective.

Additionally, the management team developed a culture that focused on attainment of results rather than nurturing integrity. Consequently, employees engaged in unethical practices and disregarded the codes of ethics implemented by the firm. Therefore, to deal with these challenges, Enron should have considered the following recommendations.

  1. Enron should have adopted a progressive-adoptive culture. This culture focuses on generation of new ideas and openness to new ideas. However, it does not force employees to implement the ideas hence it does not enhance unhealthy competition. It would also have been important for the firm to consider nurturing a community-oriented culture, which mainly seeks to ensure a high level of collaboration and cooperation amongst employees. Adoption of such cultures would have played an important role in providing employees with direction.
  2. To ensure effective reporting, Enron should have incorporated accrual method of reporting to ensure accurate description of the company’s value.
  3. With regard to control issues, the firm should have adopted a more current control system by reviewing its policies, procedures, and rules. The policies and procedures should have focused on nurturing integrity and ethics. The firm should have remained strict in implementing ethical policies and procedures to refrain employees from unethical behavior.


Action plan on how to implement the recommendations and the expected time duration

Action Time December 2012
1st – 4th 7th 10th 11th– 14th 15th –20th
Reviewing the organization culture
Reviewing the firm’s reporting system
Evaluating the firm’s management control system
Reviewing the leadership system

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