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!