Drive to Succeed: Enron Prefers Toyota to GM

To prosper in the new energy economy, Enron COO Jeffrey K. Skilling says oil 
and gas companies need to trash their traditional business models and instead 
reshape themselves to resemble Toyota when it captured the imagination and 
pocketbook of U.S. consumers 30 years ago. 

In a somewhat back-to-the-future treatise on how Enron expects to continue 
its monumental success, Skilling told Arthur Andersen Energy Conference 
attendees to define themselves not by their industry, but rather by their 
skills base. Toyota changed the U.S. auto industry by outsourcing its 
production, offering customers exactly what they wanted cheaper and faster. 
The energy industry has to do the same thing into the future, he told the 
Houston audience. 

"In 1982, the energy industry was a very rigid industry," he said, pointing 
to a similar business model that had been used by General Motors and Ford 
Motor Co. Those companies did every bit of the manufacturing process, keeping 
all of its pieces within the corporate structure. Then Toyota turned things 
upside down. 

When a customer wanted a different radio, Toyota relied on outside producers. 
It didn't stop the production line to please the customer. And it was able to 
do it faster. Enron has used the same model to shape its achievements, 
packaging components for customers to save time and money. Other energy 
companies are now adopting that method. 

In many ways, Skilling said Enron views itself as the Toyota of the energy 
industry. "We don't feel we have to provide all components, but package them 
the way the customer wants them. This is a pervasive trend we are seeing all 
over the industry." 

Enron, which has had a shareholder return of 1,333% in 10 years (January 1990 
to November 2000), saw the changes required by new technology and 
deregulation and redefined its core competencies, which grew from its 
pipeline business. Skilling said to remain successful, the Houston-based 
corporation plans to continue to morph. 

"It all hinges on one good idea Enron had in the 1980s, that vertically 
integrated structures had dominated our industry and the structures were 
starting to break up. In the energy industry, the reason was deregulation. 
Fundamentally, this is a better business structure for two reasons: you can 
be supplied with cheaper cost components and it allows you to change much 
more quickly." 

Instead of bigger energy companies, Skilling said he expects to see many 
smaller companies, "maybe thousands tied together electronically and 
vertically." The transformation and interaction costs are "collapsing across 
the economy." As an example of interaction costs, Skilling used bank tellers. 
In 1985, it cost a bank $1.50 a transaction. To bank on the Internet today, 
it costs a bank less than a penny. 

This drop in interaction costs is a major reason Enron finds the bandwidth 
market so attractive. In 1995, the length of time to provision bandwidth was 
six to eight months. Today, it's two to three months. And next year, Skilling 
predicts it will take one second. 

"We will have bandwidth on demand by next year," he said, and added that 
Enron plans to be the leader in the field. 

Similarly, long-term gas contracts in 1982 took two to three years to 
execute. In 1989, they took nine months. Three years ago, they took two weeks 
to execute. Today, using EnronOnline and other similar Internet trading 
systems, it takes less than one second. 

"All of the sudden the world has changed. We have the same manufacture cost, 
but interactive costs collapse. I think that because of this, we'll see the 
collapse and demise of integrated energy companies around the world," 
Skilling said. 

To survive, Skilling advised companies to "virtually reintegrate" what they 
need. "If you have an old vertically integrated mind set, it's tough. Give it 
up. I know there are still power producers who are buying gas reserves. I 
don't get it. It makes no sense whatsoever. You can get it online at the 
lowest cost. If your business strategy is dependent on this, it will be a 
very hard row to hoe." 

Each stage of production will become increasingly competitive in the next 10 
years, predicted the Enron president. "You're not just competing against 
three people in West Texas, but thousands around the world." 

Opportunities exist, he said, for those companies that "go with the flow and 
find ways to compete. Create low cost, dependable market interfaces...provide 
packaged turnkey solutions for customers through complex structures, 
differentiation and customization." 

The only threat is from the old way of doing business, he said. "But there is 
tremendous opportunity to do things for customer you've never been able to 
do." He suggested a "new" energy model based on brainpower, networking, 
offering real options to customers, moving quickly and being entrepreneurial. 

"At Enron, this has been the whole premise: to be able to change by 
responding and reacting to the environment. By getting components together 
and packaging them for the customer."