Management of ENRON and Virgin Blue Airlines - Case Study Example

Management of ENRON and Virgin Blue Airlines (Name) (Number) (Course) (Tutor) (Date) Leaders of an organization directly play a major role in the success and failure of an organization. Obvious to note that, for a company to succeed, the success of the company is directly proportional to the quality of leadership exhibited in the organization (Carroll & Gillen 1987, 40: Dr. Aman et al 2012, 25). This is because, employees are motivated to follow the lead of the company’s top executives as evidenced in the two company’s managers under study; that is Enron and Virgin Blue Airline. The effectiveness of John Borghetti as a successful Virgin Blue C.E.O. is compared to the ineffectiveness of Ken Lay as the C.E.O. of Enron against a background of Henri Fayol four functions of management. This paper therefore argues that managers directly contribute to the success or failure of an organization (Fairholm 2009, 7). Thesis statement: If a manager is effective in his style of leadership, employees follow suite and success is realized in the organization, if not, the contrary is true. Commanding involves the coordination of staffs on a daily basis to be in line with the objectives that an organization wants to achieve (Pryor and Taneja 2006, 490: Wren 1992, 20). John Borgetti as a successful C.E.O. understands that the airline industry is a people industry and, therefore, engages his staff in improving the airline. On the other hand, Ken Lay, a manager who was unsuccessful in steering Enron, did not command his employees enough as he was a manager who was indecisive on matters involving employees for instance, solving of conflicts between employees (Rantanen 2007, 171: Krebs 2008, 29). According to Henri Fayol, managers are in charge of controlling activities of a company to be in line with the policies and the objectives set to be achieved (Burkus 2011, 55: Poudyal 2013, 12). This is done through provision of a vision by the company’s managers. Innovative leadership type of theory suggests that, managers have to continuously build on their strengths and consequently their staffs or followers will follow suit (Merchant 2006). John Borghetti inspires his staff and creates hope in them that they are in the right direction towards achieving organizational goals. Enron failure is linked to the unprincipled practices which were executed by the company’s top leaders which show that the leaders had no vision for Enron. Enron’s management with the blessing of its CEO Ken Lay, involved in unwarranted activities that pushed the company deep into bankruptcy. This took place with the full knowledge of the manager and support from employees. As by 2000, Enron had created approximately 2000 SPEs from which they entered secret agreements with the banks to lend them loans. If the assets sold by ENRON generated sufficient profits to pay the loan ENRON would have benefitted but if they did not, then according to speculations, ENRON were to offer SPE sufficient shares for the SPE to dispose the stock and repay the bank loan principal. ENROL failed to inform stakeholders of these future obligations subsequently causing a high equity dilution and resulting in lower stock prices. This is a financial impropriety that should not have been allowed by the managers. ENRON was able to use SPE’s to enter into depth with lenders without reporting it on its financial statements. Further, the company could use the sale of its assets and operations to the SPE to generate immediate profit in its current income statements. The managers created a scheme where they engaged in small deals to boost profits and hide small depths in its balance sheets. Consequently, they need this kind of growth every year and were forced to look for more SPE’s in subsequent years. The organization as a whole failed to recognize ENRON’s malpractices and correct it in time to save it from insolvency. Had ENRON’s management acted swiftly to control the number of SPE’s it merged with it could have averted management crisis. Ken Lay as the CEO of ENRON failed to lead employees to properly transact business operations in a legal manner. ENRON employees witnessed the day to day activities of the organization until it’s closure. The accounting department had hundreds of professionally trained accountants working on the reporting of the company’s transactions. Many of its employees prior to its collapse were trained professionals who had worked for auditing firm Arthur Andersen who could have looked at the transactions with an independent auditor’s perspective (Hamilton, 2003). One employee Sherron Watkins tried to blow the whistle on suspected accounting problems in the firm but only in an anonymous communication with the CEO. The CEO being inefficient did not commence an investigation to the alleged impropriety but rather ignored the allegations. It can be said that ENRONS executives and employees drove the company to failure. Out of greed to satisfy profit and stock expectations, they engaged in unscrupulous practices. In the 1990s investors in equity securities became captivated with the expectations of 25-30% annual rates of return, rewarding companies who achieved it with rich stock prices but severely punishing company stocks which failed to meet the target. Enron executives were carried away by greed and the desire to ever report increasing earnings in order to keep stock prices high and secure their jobs and wealth in retirement. The CEO Ken Lay played a crucial role in the failure of ENRON. As the overall oversee of the company, he failed to exert control over the day to day operations in the company (Hamilton, 2003). According to Fayol, (Parker, 2005 175-194) managers play a crucial role in planning and controlling where to take the company. By planning, managers are required to be aware of challenges facing their businesses, to enable them focus future business and economic conditions. Control is a management aspect that involves measuring achievements against established objectives and goals (Blyton, 2001 445-463). Managers are tasked with identifying sources of deviation from successful accomplishments and initiating corrective courses of action. The failure of Ken Lay to correct financial malpractices apparent in ENRON even after becoming aware of it imply the inefficiency with which he managed with. ENRON failed to achieve its objectives by continually engaging in off-balance sheet partnerships and financing activities. Year after year, ENRON required more SPE’s in order to report positive annual returns and the CEO failed to realize that the trend did no good to the company (Gillan 2002: Hamilton 2003). Coordinating involves harmonizing the activities in such a way that organizations activities complement each other towards attainment of its objectives (Fells 1987, 350: Reid 1995, 65). One of the causes of failure of Enron is group thinking in such a way that that information could be held by only some few members of the organization. This helped in perpetrating the unethical behavior by the company’s top management and hence its collapse. Virgin Blue C.E.O. ensures that employees are briefed on information appertaining to the company’s objectives and goals. Organizing as an important function in an organization involves having the right people at the right place, an efficient workforce and structure and also workers who are educated for the tasks that they are to undertake in the organization (Hales 1986, 90: McNamara 2009, 64). John Borghetti ensures that employees are recruited through the best recruitment methods while for Ken Lay, such decision were hard to make and this made Enron be run by unethical leaders who were only interested on how they were going to benefit as individuals and not benefit the organization. Contrary to ENRON is the management of Virgin Blue airline. Borghetti emphasized the need for good recruitment methods and how recruiting outside the industry has helped the company survives in the service industry. Borghetti’s management style is reinforced by constant contact with his staff and crew. According to (O'Sullivan, 2010), the CEO flies at least 8 times a week where he is continually face to face with pilots and crew giving him a better view of behavior and service levels. The CEO notes that being constantly in touch with staff and respecting them is an attribute that instills confidence among them and increases their productivity. This is summed as leadership according to Fayol and it involves motivating employees to achieve business goals and objectives. Increases contact with employees enhances supervision in a positive way as effective communication and authority. They influence their personnel view of situations from the leader’s perspectives. Planning is a management objective that involves deciding on an objective and laying bare the steps to getting there. With efficient planning, managers formulate objectives to reach by certain deadlines and re-evaluate the effectiveness of their implementation strategies. As conditions change, the need to be dynamic in executing operations geared towards the laid down objectives is feasible. This is a strategy that was put in place by Borghetti when he took over as the CEO of Virgin Blue. Virgin Blue has a 6500 able workforce and over 80 aircrafts. The first action the CEO undertook upon taking over was to axe unprofitable routes. Reschedule flights and install a new management system. Four months into the job, he forged alliances with Delta, Air New Zealand and Etihad. These alliances are central to Borghetti’s plans to turn around Virgin Blue’s fortunes by doubling the number of business passengers in the next two years. Borghetti is keen to forge alliances with Asian operators to close a gap in the Asian market. The strategic plan has seen negotiations with Singapore Airlines, Malaysian Airlines and Japans Nippon Airways. These strategic alliances are geared towards increasing passenger turnover for the airline as well as profitability. Virgin Blue has engaged in numerous partnerships and alliances including United Airlines, Emirates Airlines, Hawaiian Airlines and Malaysian Airlines. It also has an Interline Agreement with Regional Express Airlines for commuters with smaller regional centre’s in smaller states of Australia. This offers easy transfers to both regional and international airlines. These strategic alliances demonstrate an aspect of planning that forms an essential part in the success of the company. The manner in which Borghetti addresses challenges in the aviation industry contrast that employed by ENRON’s chief. During a computer meltdown in September which knocked down the airlines booking system for 11 days, Borghetti maintained a hopeful mood terming it a revolutionary process that will see the introduction of products aimed at discern business travelers in future. During the period, he remained in touch with his management trying to solve the problem (Francis, 2006, 86-94). The success or failure of an organization is fully bestowed on a manager. It is a task that requires leaders to choose the right path that will steer the organization towards the attainment of its goals and objectives. As discussed in the essay, one of the reasons that contributed towards the failure of Enron is the indecisiveness of its manager, Ken Lay. Consequently, the decisiveness of John Borghetti as the C.E.O of Virgin Blue has led to the success of the organization. This shows that, in every case of success or failure of the organization, the people to first point fingers at are the manager, who must provide a vision for the organization employees to follow, command, control, organize and coordinate the activities of the organization and hence success whilst the organization fails. The manager plays a pivotal role in laying out strategies, guiding the implementation team through it and sometimes using authority to correct deviation. 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