jeff skilling president and ceo enron cost of interaction value of specialization $ economic...
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Jeff Skilling
President and CEOENRON
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Cost ofInteraction
Value ofSpecialization
$
Economic Trade-Off
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
Types of Interaction Costs
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Cost of Interaction
Mining
30-40%
FinancialInstitutions
60-70%
U.S.
55%
India
40-50%
Source: McKinsey
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Business Structure
.95 1.10 1.20 1.10.20 .20 .20
.90
1.0 1.0 1.0
.85
.80
.90
3.45 3.00 6.45
FinishedProduct
Transformation
Interaction
TransformationCosts
InteractionCosts
TotalCosts
Business Structure
FinishedProduct
TransformationCosts
InteractionCosts
TotalCosts
4.35 0.60 4.95
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Interaction Costs are Radically Falling for Teller Transactions. . .
$1.50
$0.30
$0.01
1985(Bank)
1995(ATM)
2000(Internet)
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. . .and Natural Gas and Bandwidth Transactions
1995
6-8 months
2-3 months
< 1 second
Today NextYear
Time to Provision Bandwidth
9 months
2 weeks
< 1 second
2-3 years
1981 1989 1997 2000
Time to Execute a Long-Term Gas Contract
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.95 1.10 1.20 1.10.20 .20 .20
.90
1.0
.10
.85
.80
.90 Transformation
Interaction
Change in Economics of Business Structure
1.0
.10
1.0
.10
3.45 3.00 6.45
FinishedProduct
TransformationCosts
InteractionCosts
TotalCosts
3.45 0.30 3.75
FinishedProduct
TransformationCosts
InteractionCosts
TotalCosts
4.35 0.60 4.95
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Where’s the Opportunity?
.95 1.10 1.20 1.10.20 .20 .20
.90
.90
.85
.80
.10 .10 .10
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Where’s the Opportunity?
.95 1.10 1.20 1.10.20 .20 .20
.90
.90
.85
.80
.10 .10 .10
NotCostCompetitive
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Where’s the Opportunity?
.95 1.10 1.20 1.10.20 .20 .20
.90
.90
.85
.80
.10 .10 .10 • Commoditized• Overcapitalized• GlobalizedCan’t make compensatoryreturn in traditional assetbusiness
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Where’s the Opportunity?
.95 1.10 1.20 1.10.20 .20 .20
.90
.80
.10 .10 Creating low cost, dependablemarket interfaces
• Market making• Logistics• Back office• Trade finance
.90
.85
.10
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Where’s the Opportunity?
.95 1.10 1.20 1.10.20 .20 .20
.90
.80
.10 .10
.90
.85
.10
“Virtual” Integration
Providing packaged turnkeysolutions for customers
• Complex structures• Differentiation• Customization
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. . . and Resource Model
Traditional
New
• Asset intensive• Vertically integrated• Slow moving and rigid• Hierarchical
• Networked• “Real options” oriented• Brain power intensive• Fast moving &
entrepreneurial
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UB-eCommerce2-0501
Enron’s e-Commerce Strategy
• Define and make new markets (core competency)
• Utilize strong skills in risk intermediation & credit and risk control
• systems
• Expand and extend existing businesses and increase access to prices and products via e-Commerce
Enron’s strategy grows directly out of the Enron culture
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In-House Technology Resources Wholesale Services
Expenditures(Millions)
People
1,380
1999 2000
1,154
$358
1999 2000
$291
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UB-eCommerce2-0501
e-Commerce Initiatives
Commodities EnronOnline.com
Pulp, Paper & Lumber Clickpaper.com
Mid/Back Office CommodityLogic.com
Credit Enron Credit
Auction/Data Rooms DealBench.com
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UB-eCommerce2-0501
A Free Internet-based, Global Transaction System WhichAllow Counterparties to View Real Time Prices From Enron’s
Traders and Transact Instantly Online
EnronOnlineChanging the Way Commodities are Bought and Sold
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EnronOnline Transactions Per Day
-
1,000
2,000
3,000
4,000
5,000
6,000
29-N
ov-9
9
10-D
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24-M
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06-A
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19-A
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16-M
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30-M
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12-S
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25-S
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06-O
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19-O
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14-N
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29-N
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0
12-D
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0
26-D
ec-0
0
09-J
an-0
1
23-J
an-0
1
05-F
eb-0
1
16-F
eb-0
1
02-M
ar-0
1
15-M
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1
28-M
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1
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24-A
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07-M
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18-M
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1
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UB-eCommerce2-0501
Enron Online Completed
1,000,000 transactions on
May 23, 2001
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UB-eCommerce2-0501
EnronOnline Statistics
• Total Life to Date Transactions > 1,020,000
• Average Daily Transactions > 4,700
• Life to Date Notional Value of Transactions > $610 billion
• Daily Notional Value Approximately $2.8 billion
• Number of Products Offered: Approximately 1,600
• Number of Currencies Traded in = 13
• EnronOnline Version 1.0 Launch Date: November 29, 1999
• EnronOnline Version 2.0 Launch Date: September 18, 2000
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UB-eCommerce2-0501
EnronOnline Product Slate
1999 - 4Q May 2001
• Natural Gas– U.S.– Canada
• Power– U.S.– Nordic
• Coal
• Pulp & Paper
• Plastics
• Bandwidth
• Weather– U.S.– Europe– Japan– Australia
• Emissions
• Crude & Refined Products
– Asia
• Petrochemicals
• Plastics• • LPG• • U.S. Steel
• Pulp & Paper
• Auction– Emissions (U.S.)– Enbank virtual storage
(U.K.)– Pipeline Capacity
• Metals– U.S.– U.K. (LME Contacts)– Japan– Asia
• Metal Spreads– U.K.
• Sea Freight
• U.S. Lumber
• Auctions– Emissions – EnBank Virtual – Storage
• Credit Derivatives
• Aluminum– Japan– Holland
• Options– Continental Power– Nuclear outage
Knock-in call option– Nordic power– U.S. and U.K. gas
• Natural Gas– U.S.– U.K.– Belgium– Argentina– Canada
• Power– U.S.– Germany– Holland– Switzerland– Australia
• Coal– Europe– U.S.– International
• Options– Continental power options– Nuclear outage knock-in call
options– US & UK gas options
• U.S. Gas Spreads
• U.S. Gas Pipeline Capacity
– U.K.– Spain– Austria– Nordic
Countries– Canada
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EnronOnline Utilization
Online Transactions as a % of Total Transactions
25%
39%
52%
43%49%
20001999
55%
4Q 1Q 2Q 3Q* 4Q 1Q
* The percentage of transactions on EOL declined in 3Q00 due to the purchases of MG Metals
2001
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Transactions Per Market Maker
1999 2000
672
3,084
Marginal Cost Per Transaction
(Indexed)
25
100
1999 2000
EnronOnline Efficiency Gains
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EnronOnline vs. Major CompetitorsNorth American Natural Gas and Power (TBtue)
22,594 23,14931,151
10,625
1,021 1,689 1,452
3,680
2Q00 3Q001Q00
All Major Platforms Reporting Combined (Includes Altrade U.S. Gas, Intercontinental Exchange and NGX)
EnronOnline
3,119
1Q014Q00
24,228
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UB-eCommerce2-0501
Clickpaper.comImproving the Pulp & Paper Industry
A free, internet-based system to buy and sell Forest products with Enron in real time
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UB-eCommerce2-0501
CommodityLogic.comMaking Back-office Systems More Efficient
An internet-based system that allows users to automate fulfillment process from confirmation
through physical delivery, invoicing and payment
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UB-eCommerce2-0501
Enron CreditAssessing and Managing Credit Risk
Provides live credit prices and enables customers to hedge credit exposure
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UB-eCommerce2-0501
DealBench.com Facilitating Price Discovery...The Art of the Paperless Deal
An internet-based system for auctions, online collaborationsusing e-RFPs, internet roadshows and virtual data-rooms
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UB-eCommerce2-0501
Conclusion
“Sticking a big shiny ‘dot’ on your tired brick-and-mortar business model won’t do the trick. To truly excel, you’re going to have to reinvent your
company fast enough to stay relevant in a dramatically discontinuous world.”
- Gary Hamel
Conclusion
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0
10
20
30
40
50
60
70
80
90
100
1922 1932 1942 1952 1962 1972 1982 1992 2002
Radio Television Cable InternetU.S
. Use
rs (
Mill
ion
s)
Source: Jupiter Communications
The Internet: Fastest Social Change in History