Rock Bottom: How Enron dug a hole deeper than the pitfalls of innovation.

When reading The Smartest Guys in the Room it is clear to see that Enron Executive Jeff Skilling was big on morphogenesis. He was always looking to change the company with huge innovations. Management Blog discusses an article in Business Week about the pitfalls of innovation. These are summarized in the blog as:

1) “Watch for treacherous shifts” – don’t be in denial about emerging trends and don’t wait for a crisis before you      rethink your strategic roadmap

 2) “Get your best people behind the programme” – be prepared to let go of people who aren’t willing to embrace      change

3) “Give initiatives room to breathe” – don’t allow new initiatives to sit within the old business model, consider the  benefits of managing new businesses separately

4) “Make painful breaks with the past” – rethink everything from marketing to manufacturing

5) “Don’t confuse what your company does with how it does it” – understand the difference between the business     you are in with the way you conduct that business

Enron  did a great job with point 2; most of the top executives at Enron were strong behind all of the business changes. They also put the other 4 points into action. The problem with Enron was that they were too headlong with their morphogenesis when they should have had some from of morphostasis in their corporation (something besides the “smart guys” that were working the top of the chain). They escaped these pitfalls, but dug new holes to stumble into.

“Watch for treacherous shifts”: Yes Enron did watch for treacherous shifts, but they did nothing to stop those shifts once they happened. For example, Enron knew that they J-Block deal was bad to begin with, but did anyone stop Rebecca Mark from going through with it? No. They allowed the purchase to happen, and when the deal caused Enron problems it was a massive clean up with the stockholders. If Enron had kept some of its risk management out of the “dirty” side of their business then they may not have made so many of these “bad deal” mistakes that came from trying to move into new industries.

“Give initiatives room to breath”: Enron was big on this one. They believed that innovation was the key to success. Employees were allowed to run wild with their ideas. They were able to make deals as they saw fit. There was no one to stop them (Even though the Risk Assessment and Control department was established it was only there to “keep analysts happy” as one Enron originator put it). There was also no cash limit to the business deals when Jeff Skilling took over. One managing director sums up Skilling philosophy on cost analysis in this way: “If you are focusing on costs, you’re f***ing up.” Skilling did not care about costs, as long as the innovation continued to flow.

“Make painful breaks with the past”: The problem with Enron is that they did not see breaks with the past as a bad thing. They saw themselves as a changing business. Though they started out as a simple natural gas supplier (a business which would have been successful on its own looking at Kinder Morgan, which is still around today). Enron was looking for bigger things. The got into energy trading. The deals that they made with these ventures were the beginning of the pitfall. Moving into other areas such as electricity and broadban were not helpful either. If Enron had held on to some of the past (keeping the working parts is a great function of morphostasis) then they may not had ended up in as poor of a position as they did.

“Don’t confuse what your company does with how it does it”: There was no confusion about this at Enron: their business goal was to make extremely high profits and to do it by any means possible. The problem with this theory is they there is no specialization and no one really knows what is going on. Ken Lay (the CEO of Enron) did not know what was going on in his business a majority of the time. Enron went from being a company of ethical profits to a company that was a free-for-all profit monger. If Enron had better controlled the way it was making its profits (again…maybe a little morphostasis) then they may not have fallen into the “dirty” accounting that they were using to feign huge profits.

While I do believe that being innovative in a business environment is very important, I think that Enron may have taken it a bit too far. They innovated to the point of disaster. They avoided common pitfalls, but created pitfalls of their own.

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4 Responses

  1. I like the idea of pitfalls of innovation. Did all of the ways to tie in Enron come easily?

  2. Unfortunately for Enron, yes they did. While there was a thought process about how to write it all down, I barely had to think about how Enron led itself to its own doom.

  3. […] on Where do I want to work…annabu on Cooking the Books: Recipes fro…zuffola on Rock Bottom: How Enron dug a h…annabu on Where is the World Headed…Jordi on This is the lesson that never…Megan […]

  4. Of your five pitfalls of innovation, I find your connection between Enron and the second pitfall, “Get your best people behind the programme” , interesting. You say that Enron did a “great job”, but I have to disagree. On many occasions, top executives such as Mark, Skilling, and Kinder often strongly disagreed with the goal implementation leading to fights during board meetings. I think one of the reasons Enron collapsed in such a huge fashion because they were involved in so many different and risky projects. Executives did not stick to one program and argued on how money should be spent in support of the different prodjects.

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