Of ends and means: Enron & Parmalat

Well, being a week-end, I was undecided: should I post a serious post with some not-so-serious content, or the other way around?

I decided that I would rather split between the non-serious part (on draugiem.lv and on facebook.com, under the title “Assetto di volo”) and the serious one here (both on robertolofaro.com/blog and gettingaroundtheworldnet.wordpress.com)

I was recently reviewing some documents and packing books on auditing and accounting, while preparing the details of my past activities (robertolofaro.wordpress.com).

Usually, I opened them only when preparing a business plan or reviewing a financial prospectus for a startup: I hate re-inventing the wheel, moreover if it is a wheel that I or others had already built once.

I disagree with the concept of reusing “as is”- as each case is unique, but reviewing the structure of ideas, activities, results, is always useful to kick-start new activities.

But I never had the chance to read all at the same time.

So, I was able to review books etc that, in some cases, I had not read again cover-to-cover since… 1990!

Including more recent documents on financial frauds, SOX, the reason why IAS evolved (from the “creative accounting” and “Lloyds” scandals, including the various BCCI, Enron, Ferruzzi, Parmalat
, etc).

I will skip all the others, and focus only on Enron and Parmalat- the first, generated a SOX-inspired consulting activity; the second, was instrumental in the shelving of a business initiative in UK and Italy.

Beside my personal business experience, the commentary that I re-read is quite interesting, as in more than one instance I read discussions about the end results (financial crisis), ignoring the structural difference between the two cases.

Parmalat was (and is) an industrial company- and it was the hijacking of the finance function, diverted from its institutional support role to a new business line leveraging on the industrial activities that created the issue.

Enron was merely a figment of the immagination of its management, an “house of cards”, that eventually was able to affect real energy providers (e.g. energy pricing in California).

The end results were the same- but the consequences were different.

Removing the management in Parmalat was part of the solution- and the company was eventually able to recover.

Removing the managment in Enron dissolved the company.

Why? Because a “virtual company” is based on relationships- that is the real differentiation.

I heard recently that the 1940s “Unique Selling Proposition” (USP) concept is still taught in universities “as is”.

I first studied it in late 1980s, as part of my training on sales and negotiation (yes, and then I decided to complement HBR with McCormack’s books and the Harvard Negotiation Project results’, followed from the early 1990s by Kotler’s books, courtesy of various libraries around Europe).

And it was already obsolete then, as I observed in sales activities that often the differentiator wasn’t the one that we assumed- but the one that we identified for each individual customer.

I arrived on information technology from a mix of human and exact sciences, and I first had to work on the practice of those techniques, then learn the theory (frankly, an approach that I always tried to replicate: otherwise, there is no chance to generate the “out of the box” thinking).

Yes, working in business-to-business is easier than in business-to-consumer: there, you have to “cluster”

Albeit, in the XXI century, micro-production starts to be technically feasible, and you can target the individual consumer- by using database profiling, or, in other fields, by using systems such as 23andme.com (individual genomics); in technical terms: still resource planning and bill of materials- but on a micro-lot scale, as the time to switch from a production to another keeps reducing.

Recently I heard presented as “new” what basically is creating a market by creating a need- you can read it in a 1928 book by Edward Bernays.

If you want, “crowdbuying”, the counterpart of “crowdsourcing”; it could be that eventually marrying the XXI century knowledge on each individual consumer with the same approach could create “dynamic clusters”, i.e. seeing your market as a portfolio of customers and relationships that you invest on, and, based on the information available and your product, services, you actually “match” what you offer with what the customers’ trends show in real time, by creating instant crowds if and when needed.

It is nothing more than expanding the “viral marketing” with a predictive ability based on data collection (what many “entrepreneurs” do on Facebook).

But, in both cases, a company whose differentiating factor is not the product or service, but its perception by customers, works on relationships, and motivating the relationship.

And while this was, in the end, what the financial side of Parmalat generated (I remember the old joke that the powdered milk production volumes that they reported were large enough to blanket all of the US), while Enron started almost immediately to use this approach as a “core value” of its corporate strategy.

A funny book to read is “A Short History of Financial Euphoria”, from John Kenneth Galbraith.

When focusing on individual companies, there is still a difference between a company (Enron) whose ends are what for another (Parmalat) started as means toward a different end (financial efficiency).

But if you shift from the individual company to the general approach, you can see a common thread: a confusion between means and ends.

Pity that also reviewers often focus only on the end results: this obfuscates the path to recovery, as you focus on symptoms instead of the underlying reasons.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s