Case Analysis: Enron

Case Analysis : Enron

2006

Case Analysis : Enron

Introduction

Current economic crises that hit many countries in the world are the results of capitalism , which are marked by stagnation and high unemployment and caused by the tendency for the rate of profit to fall This situation is inline with the notion telling that capitalism tends to move towards ever-worsening crises over the long term

In short , the capitalism works as follow : as competition get fiercer profits fall , investment declines , the economy slows down , and workers sent to unemployment . Interestingly , while

workers experience hard times during crisis , top managements or executives of companies like Enron still receive excessive compensation

This situation represents one of social and business impacts of crises that hit today 's companies . Accounting scandal that existed in Enron several years ago was an example of how the company 's crisis results in unexpected situating in terms moral or social relation and future business

While many literatures explain the case of Enron from moral point of view , this will elaborate the explanation of root cause of Enron accounting scandals from strategic management point of view . While strategic management deals with a broad range of issues , this will focus on two of them : good corporate governance and financing or allocation of resources

II . Strategic Management

In short , strategic management can be considered as an innovative science . Despite the existing guides to formulate strategies that will create competitive advantages , companies depend significantly to the creativity of managements in finding market niche and filling it with appropriate products ' offering

By definition , strategic management is the practice of identifying an organization 's objectives , business policies , and plans to help the company to achieve these objectives by appropriately allocating resources during the implementation stages . Since strategic management involves extensive decision-making situation , therefore , the process of implementing strategic management become the responsibility of a Chief Executive Officer (CEO ) and executive team

In this situation , it is suggested that in to perform good corporate strategy , a company should capable of integrating the company 's goals , policies based on business realities . Many times , it is written in the headlines of many business journals or any other print media that a considerably strong company suddenly fails to sustain in a market due to poor strategy , representing the inability to comprehend the alteration in customers ' needs and the failure to cope with changing in business environment

Basically , strategic management composes of two general issues : strategy formulation and strategy implementation . In strategy formulation , for example , a company deals with situation analysis (internal and external while in strategy implementation the company cope with the allocation of its resources so that the company operation could go smoothly . This resource allocation also drives managements to perform short term and long term strategies

III . Failure of Enron from Strategic Management Point of View

III .1 Problems at Enron Case

As mentioned above , strategic management deals with the operation of a company including the resource allocation . In case of Enron , the inability of the company 's managements to manage its resources especially concerning the budgeting , has driven the company 's managements to perform illegal actions that put aside the needs to conduct good corporate governances . The situation further contributed to the Enron 's collapse

III .1 .1 Inability of Performing Good Corporate Governance

The case of Enron , Global-Crossing , and WorldCom tells us how fragile the monitoring process of the company 's financial system is . The situation leads to accountancy scandals that hurt investors , employees and the industries

The action clearly reveals that the energy company does not perform good corporate governance since the managements of Enron run illegal actions . QNDT .com , in their accounting segment , reveals that what happened at Enron is the company and its auditor cooked up the books to show bogus profits . This is done so to attract the public so that they are interested to invest their money during the company 's initial public offering (IPO ( How did Enron ' 2004

In addition , the decision to appoint a consultant to create tax structure as well as review them becomes proof that Enron intends to provide investors with fake figure (Lorinc , 2002 III .1 .2 Inability of Managing Financial Resources

By doing so , Enron can raise much money to pay their loans to banks and back to the evil business when Enron run out of money again . Amazingly within three years , the fake report gives Enron over 10 billion of investors ' money

The situation reveals that Enron faced difficulty in managing their capital that drives the company to rise as much as capital by giving fake financial figure in the company 's report . Therefore , the company needs to manage their financial resource so that they are still capable of funding their current and future operation

III .2 Organizational Culture and The Implementation of Enron 's Strategy

Concerning the inability to manage its financial resources , it is suggested that the company should change the culture so that they can finance their operation without raising too much debt . Hansen Mowen (2003 ) say there are several functions of an ideal budgetary system they include encouraging managements to plan , providing information that can be used to improve decision making , and improving communication and coordination

III .3 Policy Implications to Corporate Managers

Realizing the impacts of bogus report to investment , government rushes to pass new laws in response to the latest news about corporate misdeeds . In fact , this is really not the best solution to the problem of corporate fraud at Enron

In this situation , Lynne Eisaguirre suggests that corporations to do three points as presented below . This is because there will never be enough laws or enforcement to prevent all possible corporate malfeasance

Educate all managers and executives about business law and ethics

Educate , encourage and protect whistleblowers

IV . Conclusion

Entering the beginning of the 21st century , we encounter several unethical business practices that are disclosed by the whistle blowers such as Enron , and WorldCom cases to name a few . While question about how the giant companies could not detect the possibility of such illegal acts at earlier stages is still an enigma , there are still many cases similar to Enron case waiting to be disclosed

Concerning the case of Enron , this has explained the root cause of Enron accounting scandals from strategic management point of view . The chosen strategic management issues are good corporate governance and financing or allocation of resources

Bibliography

Abell , D . Managing with dual strategies . New York , The Free Press (Macmillan Inc , 1993

Eisaguirre , Lynne . Successful business encourage whistle-blowers BusinessCourier . 6 September 2002 . American City Business Journals Retrieved June 5 , 2006 from HYPERLINK "http /www .bizjournals .com /cincinnati /stories /2002 /09 /09 /smallb4 .html http /www .bizjournals .com /cincinnati /stories /2002 /09 /09 /smallb4 .html

Hansen , Don R . Mowen , Maryanne M . Management Accounting . South-Western 2003

Lorinc , John . After Enron ' Ca Magazine December 2002

Tjosvold , Dean , and Mary M . Tjosvold . Psychology for Leaders : Using Motivation , Conflict , and Power to Manage More Effectively . John Wiley and Sons . Inc . 1995

What Went Wrong at Enron ' AFL-CIO . Retrieved June 5 , 2006 from HYPERLINK "http /www .aflcio .org /corporateamerica /enron /index .cfm http /www .aflcio .org /corporateamerica /enron /index .cfm

Case Analysis : Enron

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