Vision Vanquisher

Dec. 21, 2004
Enron Corp. CEO Ken Lay has overrun three corporate visions in transforming a struggling gas-pipeline firm into a leader in electricity deregulation and a world energy Goliath.

A corporate vision statement usually is considered long-term in nature -- a formal declaration of an ultimate business goal that a company strives to achieve in, say, a decade or a generation. Or maybe never: Many firms deliberately adopt a vision that they know is unattainable, believing that the mere pursuit of it will keep them sharp and competitive. None of this long-term stuff applies, however, to Kenneth L. Lay, the hard-driving chairman and CEO of Enron Corp. He keeps setting visions for the Houston-based energy conglomerate that are appropriately both long-term and tough. But then to everyone's surprise, including Wall Street's, he overruns them in astonishingly short periods of time. At Enron, the long-term has merged seamlessly into the short-term. Right now, Lay is leading Enron through its third vision in only 10 years, having quickly surpassed two previous ones. The current version, adopted in 1995, calls for Enron to become no less than "the leading energy company in the world." Overly ambitious for a firm only 13 years old? Few observers would dare say so. Not after the way Enron quickly moved from a modest natural-gas pipeline firm to become the biggest U.S. natural-gas marketer . . . the way it stormed into the electricity business to become the nation's largest wholesale-power marketer . . . the way it is spearheading the fast-moving drive to deregulate the retail electricity market . . . the way it's sweeping into overseas markets in a variety of energy ventures . . . and the way it so efficiently vanquished its two earlier visions. One who doesn't think Enron has set the bar too high for itself is Ronald Barone, New York-based analyst for PaineWebber Inc. "Enron has been on the leading edge of change and innovation," he observes. "And Ken Lay is the No. 1 energy visionary in the country. I am vastly impressed with the management and capabilities of this company." Enron's initial vision seemed ambitious enough: "To become the premier integrated natural-gas company in North America." Lay articulated that mission at the company's founding in 1985 through the merger of two small, troubled gas-pipeline companies -- Omaha-based InterNorth Inc. and Houston Natural Gas Co., of which he was CEO. "It was a pretty aggressive vision, no doubt about it," Lay acknowledges. Not only was the fledgling company saddled with heavy debt, he points out, but also with long-term contracts that committed it to buy natural gas at previously negotiated high prices, even though prices subsequently fell precipitously. "A lot of people thought we couldn't survive, let alone become premier anything," he comments. But Lay worked aggressively to settle Enron's long-term contracts. At the same time he adopted a corporate strategy that directly countered the traditional gas-industry practice in which pipeline firms bought gas from producers and then sold it to local distribution companies, shipping it through their pipelines. Instead, Lay set up separate businesses at Enron to buy gas, transport it, sell it, and even explore for and produce it -- all to take advantage of the Federal Energy Regulation Commission's then-new Order 436 that set in motion natural-gas deregulation. "We moved to get the buying and selling of gas out of regulated markets into unregulated markets," explains Lay, 55, a soft-spoken, personable executive who grew up on a Missouri farm and has a Ph.D. in economics. "Our move was fairly dramatic at the time. Most pipelines were clinging to the traditional buying and selling function. But we thought you can only break even doing that, and breaking even isn't good enough for us." By the late '80s, Enron also had set up an unregulated gas-marketing affiliate -- the beginning of its thriving "one-stop-shopping" Enron Capital & Trade Resources unit that also markets electricity and provides risk-management and financial services for worldwide customers. Having achieved its first vision, in early 1990 Lay steered Enron into its second vision: "To become the world's first natural-gas major." His reasoning: As natural gas was being deregulated and the world was becoming more attuned to the benefits of the fuel -- it is clean-burning, cheap, and plentiful -- there would be a need for huge, integrated companies in natural gas just as the "Seven Sisters" oil companies had emerged in the oil industry in the late 19th and early 20th centuries. "We wanted to be the first," Lay says. To implement the "world" aspect of its vision, Enron spread its wings abroad. When the vision was adopted, only about 2% of the company's operating income came from overseas; this year, Lay expects that figure to rise to more than 35%. Enron now operates in more than 30 countries. The first foreign venture was an independent power project, a gas-fired cogeneration facility in the United Kingdom begun in 1990 shortly after the UK had deregulated its energy industry. In rapid succession Enron built or started construction on other powerplants in such far-flung locations as the Philippines, Guatemala, China, India, Turkey, Brazil, Puerto Rico, Italy, Poland, Guam, and the Dominican Republic. It owns or has a stake in gas pipelines in South America; has won several gas franchises in Brazil; and operates production facilities in Trinidad (natural gas), China (a combination of oil and gas), and offshore India (oil and gas). After this international splurge, "we declared victory on our 1990 vision," Lay chuckles, and in 1995 Enron adopted its current one. But by striving to be the world's leading energy company, he stresses, "we don't necessarily mean to be the largest or the most profitable -- at least not now. We just aim to be the leader in all the businesses we're in worldwide." And that, he stresses after a pause, "includes electricity." Inevitably, when you think of electricity deregulation, you think of Enron and Ken Lay. No company or individual executive has been more in the forefront of the trend, which saw California become the first state to launch full competition in electricity markets -- at the retail level as well as wholesale -- on Mar. 31. At least some activity toward competition is underway in every state. Enron stuck its toe in the electricity business in 1985 and '86 when it built two cogeneration plants in Texas. But its motive "was as much to sell gas as to sell electricity," Lay admits. As the months went by, though, he says, "the more we looked at the two industries -- gas and electricity -- we increasingly could see their convergence over time, primarily because natural gas would be the swing fuel in power generation. We also saw how fragmented the industry was. And we realized that our services -- such as risk management and financial services -- could be transferred easily from gas to electricity. "We determined that electricity was a business in which we wanted to be a major participant." As a result, the company poured resources into the electricity business. And, importantly, it became a prime lobbyist for 1992 legislation that opened up the nationwide electricity transmission grid to nonutility third parties -- like Enron -- for wholesale sales. Enron became one of the first parties to move wholesale power in 1994. A mere four years later, Enron last year passed the Tennessee Valley Authority as the largest wholesale power marketer. And Lay thinks that this year his firm "probably" will pass Southern Co. as the largest total marketer of electricity, including retail. Enron got into the retail field last year by acquiring Portland General Electric Co., the Oregon-based utility that serves some 700,000 residential customers. How important is the electricity business to Enron? Lay points out that the total electricity market is approaching $250 billion -- nearly three times that of the natural-gas market. The company, which already has 15% of the wholesale natural-gas market, also has captured 15% of the wholesale electricity market and expects to gain 10% of the retail market when that's fully deregulated. Within five years, he predicts, Enron's retail electricity business alone "will be as large or larger" than the firm's total 1997 revenues of some $20 billion. "Retail markets are just going to explode," he says. He predicts that both Enron's revenues and net income from electricity will pass that of gas within five years. And 50% of the company's business will come from international customers as energy markets increasingly open up to competition in Europe, Latin America, and -- somewhat later -- Asia. If Lay is bullish on Enron's future, so is Wall Street. Enron's current vigorous investment in electricity infrastructure, although somewhat tarnishing last year's stock price, is putting the company in good position to capitalize fully on electricity deregulation, remarks Barone, the PaineWebber analyst. "As states open up their electricity markets to competition and customer choice, it will enable Enron to become more profitable, faster," he says. Moreover, comments Stephen Moore, vice-president and senior analyst of New York-based Moody's Investors Service, Enron's heavy international investment will start paying off "in three or more years." Enron, he says, "is a forerunner." To be sure, though, the company is not without problems. Last month, for example, it decided not to pursue residential customers in the newly deregulated California market because of disappointing early response. Moreover, Enron has faced difficulties with the $2.8 billion powerplant it's building in Dabhol, India. The project became snarled in politics, successive changes in local governments, a backlash against foreign investment, and 27 lawsuits against Enron. At one time the deal even was canceled. So traumatic was Enron's experience that other investors were discouraged from entering India. But now the project is on track -- bigger than before -- and will begin operating later this year. The fact that Enron persevered in India -- as it has in a variety of other challenges -- is a tribute to Lay, praises Stanley Horton, chairman and CEO of Enron's Gas & Pipeline Group. "Ken's confidence has always been a source of strength," comments Horton, who has worked with Lay since 1974 when both were executives at Florida Gas Co. (now Continental Resources Inc.). "In the early times at Enron, when we were just a pipeline company, we had very tough financial problems. It was Ken's confidence that carried us through. Anyone can lead in good times, but it takes a certain individual to lead in bad times." As for Lay, he professes surprise at how fast his company has progressed. "We never intended for our visions to last only five years," he smiles. "But the trend to free [energy] markets around the world -- privatization, deregulation, and competition -- has happened much faster than we expected. It's been dramatic." What's next for Enron? Given the enormity of its current vision, the company may take longer than its customary five years to fulfill it. But it has a solid start. And who's to say that before he retires, Ken Lay won't be propelling his big-thinking, can-do firm on a fourth vision.

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