Post on 26-Mar-2015
Enron and the New Integration Model
Jeff Skilling
Southern Methodist University
March 27, 2001
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Enron Annual Revenues
1997 1998 1999 2000
20.3B31.3B
100.8B
40.1B
+ 54% + 28% + 151%
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1997 1998 1999 2000
$0.87$1.00
$1.47
$1.18
+ 15% + 18% + 25%
Earnings Performance(Recurring Per Diluted Share)
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Management Efficiency
Source: msn-MoneyCentral © 2001
55,000
32,000
43,836
5.6 Mil
894,0941.1 Mil
Income per Employee Revenue per Employee
Enron Industry S&P Utilities Enron Industry S&P Utilities
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Enron Market Value*
1997 1998 1999 2000
12.8B
18.9B
62.5B
31.8B
*Uses baisc shares outstanding at 12/31
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Enron Price/Earnings Ratio
1997 1998 1999 2000
23.928.5
37.6
56.6
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Total Return to ShareholdersJan 1, 1990 to February 28, 2001
200
1600
1400
1200
1000
800
600
400
-200
0
Dec 97Dec 96Dec 95Dec 94Dec 93Dec 92Dec 91Dec 90
Enron Corp.
S&P 500
Pipeline Avg.
Utility Avg.
E&P Avg.
1,151%
354%
571%
246%
183%
Dec 00Dec 99Dec 98
Note: Calculated to February 28, 2001
Jan 01 Feb 01
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Enron Corp
Enron Transportation Services
Enron Wholesale Services
Enron Energy Services
Enron Broadband Services
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Cost ofInteraction
Value ofSpecialization
$
Economic Trade-Off
Volume
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BarterEconomy
Creationof Money
Evolution of Economic Trade-Off
1300’s
$
Volume
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BarterEconomy
Creationof Money
Transportation & Communication
Evolution of Economic Trade-Off
1300’s
1800’s
$
Volume
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BarterEconomy
Creation of Money
Transportation &Communication
Internet &InfoTech
Evolution of Economic Trade-Off
1300’s
1800’s
2000’s$
Volume
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Types of Interaction Costs
Price ofSuccessfulEconomicTransactions
Legal &Regulatory
InformationSeeking &Gathering Inventory
Payments
Logistics
Credit
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Cost of Interaction
Mining FinancialInstitutions
U.S.
India
30-40% 60-70% 55%
40-50%
Source: McKinsey
Business Structure
.95 1.10 1.20 1.10.20 .20 .20
TransformationCosts
InteractionCosts
TotalCosts
4.35 .60 4.95
FinishedProduct
15
.90
1.0 1.0 1.0
.85
.80
.90
3.45 3.00 6.45
FinishedProduct
Transformation
Interaction
TransformationCosts
InteractionCosts
TotalCosts
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Cost of Teller Transaction
$1.50
$0.30
$0.01
1985(Bank)
1995(ATM)
2000(Internet)
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Length of Time to Provision Bandwidth
6-8 months
2-3 months
< 1 second
1995 Today NextYear
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Length of Time to Execute a Long-Term Gas Contract
9 months
2 weeks
< 1 second
2-3 years
1981 1989 1997 2000
.95 1.10 1.20 1.10.20 .20 .20
TransformationCosts
InteractionCosts
TotalCosts
4.35 .60 4.95
FinishedProduct
19
.90
.85
.80
.90
3.45 3.00 6.45
FinishedProduct
Transformation
Interaction
Change in Economics of Business Structure
1.0 1.0 1.0
19
.10 .10 .10
3.45 .30 3.75
TransformationCosts
InteractionCosts
TotalCosts
Where’s the Opportunity?
20
.95 1.10 1.20 1.10.20 .20 .20
.90
.85
.80
.90
.10 .10 .10
Where’s the Opportunity?
21
.95 1.10 1.20 1.10.20 .20 .20
.90
.85
.80
.90
.10 .10 .10
NotCostCompetitive
Where’s the Opportunity?
22
.95 1.10 1.20 1.10.20 .20 .20
.90
.85
.80
.90
.10 .10 .10
• Commoditized• Overcapitalized• GlobalizedCan’t make compensatoryreturn in traditional assetbusiness
Where’s the Opportunity?
23
.95 1.10 1.20 1.10.20 .20 .20
.90
.85
.80
.90
.10 .10 .10
Creating low cost, dependablemarket interfaces
• Market making• Logistics• Back office• Trade finance
Where’s the Opportunity?
24
.95 1.10 1.20 1.10.20 .20 .20
.90
.85
.80
.90
.10 .10 .10
“Virtual” Integration
Providing packaged turnkeysolutions for customers
• Complex structures• Differentiation• Customization
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Enron Opportunity
Traditional Model
New Model
• Asset intensive• Vertically integrated• Slow moving and rigid• Hierarchical
• Brain power intensive• Networked• “Real options” oriented• Fast moving & entrepreneurial
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Enron’s Corporate Culture
StructureFlat/Horizontal
StaffBest & Brightest
StrategyDe-integration/
Virtual IntegrationSuper-ordinate
GoalCrusade for free markets
StyleLoose/Tight
SharedValues
Respect, Integrity,Communication &
ExcellenceSystems
PRC
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“Somewhere out there is a bullet with your company’s name on it. Somewhere out there is a competitor, unborn and unknown, that will render your strategy obsolete. You can’t dodge the bullet—you’re going to have to shoot first. You’re going to have to out-innovate the innovators.”
Gary Hamel, Leading the Revolution
The Challenge of Tomorrow—Reinvent!