Enron is a company that operates in the energy sector. Later it expanded its operations to Gas Bank, electricity sector, water, metal, broadband and newsprint. In 2002, the company used to be the number 5 of the top 500 fortunes companies but later on after facing an accounting scandal, the company started to collapse.
Enron has transformed its company from being an old economy company focusing on hard assets to a new economy firm focusing on a strategy of creating new markets HFV (Hypothetical Future value). Enron’s strategy to differentiate in the market was through reducing physical assets, keeping key assets (peak demand generators) and developing a core competence of risk arbitraging. With its core competency on risk management, managing the risk of commodities through purchasing electricity at a fixed price with suppliers and then sell electricity to customers with the new price, Enron was able to increase its profits, some thing Enron called M2M (Marked to Market Accounting).
Now the question is how Enron has collapsed? The collapse of Enron was the largest bankruptcy in the US history. The stock’s price dramatically collapsed from $80 per share to 30 cent per share. The collapse was mainly due to the management’s fraudulent practices. Enron lied about its profits and when the deception was unfolded, investors and creditors pull back their financial resources, which finally cause the company to face bankruptcy. Over expansion and excessive borrowings have also contributed to the company’s eventual demise. The finances were a disaster, this happens because of poor management and due to intentional deception and fraud. Poor management, we referred this as a systemic corporate governance failure.