The current issue and full text archive of this journal is available at

[Link]

Socio-political structures as Socio-political

structures as
determinants of global success determinants

The case of Enron Corporation

Carolan McLarney 349
Dalhousie University, Halifax, Nova Scotia, Canada, and
Ramakrishna Dastrala
Edith Cowan University, Perth, Western Australia, Australia
Keywords Energy, International business, Organizational effectiveness, Politics,
Cross-cultural management
Abstract Especially over the past decade, there have been numerous changes in the global
marketplace which indicate that change is the only constant fact of life. These changes have
increased not only opportunities but also uncertainty for organizations. The dynamic environment
provides organizations with continuous feedback, to which they need to adapt. Past success masks
the multinational corporation's ability to perceive and respond to these changes. The key to survival
in such a setting is culturally sensitive organizational learning. Strategic planning is necessary to
cope with different levels of uncertainty encountered in foreign markets and to fully tap the new
resources. Organizational effectiveness is directly influenced by the firm's ability to achieve a ``close-
fit'' between the internal dynamics and the socio-political structures. This, in turn, is possible
through management practices sensitive to the local core cultural values. The Enron Power Project
at Dabhol (Maharashtra, India) brings to light various socio-political factors that have a direct
impact on the organizational effectiveness, its survival and its long-term success.

Introduction
Success in an industry depends on the firm's ability to match the
aggressiveness of its operations and its strategy with the rapidly changing
demands and opportunities in the marketplace. Survival in such a turbulent
environment depends on the way managers react to ``change'', their personal
flexibility and resistance, their preparedness to defend (or adapt) themselves
and their predisposition to learn and change. This is the ability to translate the
environmental threats into opportunities.
Over the past decade, the global environment of business has undergone
major changes that have no precedent in the historical business climate.
Changes have become more frequent and faster developing, increasing the
complexity of the business arena. Most commonly, organizations seem to focus
on the quantitative aspects of an investment (like size of the market, labor cost,
production costs, etc.) and adopt a cost-benefit approach in evaluating the risks
involved. This approach is valid to determine the technical feasibility of an
investment; however, there are some intangible parameters that gradually
increase the risks of an investment, as the project progresses through different International Journal of Social
stages. These parameters are mostly cultural in nature and difficult to quantify. Economics, Vol. 28 No. 4, 2001,
pp. 349-367. # MCB University
Therefore, while numbers convey the returns from an investment, culture Press, 0306-8293
International determines the long-term success of an investment and thus assures sustained
Journal of Social returns from the investment.
Economics This paper attempts to bring to light some of the strategic issues in cross-
cultural management, from a theoretical perspective, to understand their
28,4 implications on business organizations. It will first consider the rapidly changing
global dynamics and their impact on the competitive environment in which the
350 multinational companies must operate. The paper then reveals some of the
reasons for the failure of some international companies to extrapolate their
successes to the global arena. In this process, it attempts to outline the
organizational dynamics and effectiveness by employing some of the models
proposed by organizational theorists. The major focus is on understanding the
applicability of these models in the wake of the current environment. The final
section of the paper conceives a model, which has relevance in the current global
environment and enables globalizing companies to scan the environment better
(to identify the threats and opportunities). In turn, firms formulate a fitting
strategy which will enhance organizational effectiveness. Finally, a real-world
example is considered to verify the applicability of the model.

The need for a new paradigm

The onset of financial globalization, the liberalization of economies through
market deregulation, and the diffusion of the new information technologies
constitute the three important factors that have played a central role in
spurring a deep change in the dynamics of global competition. They have
combined to accelerate integration of the world markets. Competition comes
from every corner of the globe in today's marketplace and is forcing each
business to look at new ways of improving its competitiveness ± cutting down
costs while maintaining market share and quality norms:
Economists view ``globalization'' as a way to free the forces of competition that help to
channel the energies of people and resources of nations into activities that are likely to be
most productive (Oman, 1994, p. 9).

Organizations operating in the global marketplace are forced to operate in a

``high perceived uncertainty'' quadrant: globalization has increased the
complexity and the pace of ``change'' to which organizations must adapt and
over which they have no control (Robbins, 1983). With ``constant change'' as the
backdrop, organizations need to realize that their competitive strategy, which
was successful domestically, will not be adequate to manage global
competition. Apart from the resource-related factors, the risk factors (Tayeb,
1992) strongly tempt companies to go global. Investing in two or more nations
enables companies to offset the economic troughs in one against the peaks in
the others, thereby earning a net benefit.
Child (1981, cited in Ronen, 1986) concluded that, while macro-level variables
(organizational structure, technology, etc.) tend to become more and more
similar across nations, micro-level variables tend to maintain their cultural
distinctiveness. Thus, ceteris paribus, the cultural dimension forms the
backbone of organizations' strategies in their global balancing endeavors Socio-political
(Ronen, 1986). Therefore, organizations need to understand the cross-cultural structures as
issues which directly influence management practices. This necessitates determinants
maximizing peripheral vision and surpassing management biases which will
facilitate continuous strategic redesign. It is important to note that
globalization and regionalization (cultural literacy) are mutually reinforcing
and complementary and help organizations improve their effectiveness. 351
It is evident that organizations venturing into global markets face political
risk as one of the most devastating threats. It is well-known that host
governments may indulge in discriminatory tax regulations and exchange
controls, prescribe stipulations about local production, sourcing or hiring
practices, impose restrictions and in the extreme case may even resort to
expropriation without adequate compensation. Hence, organizations must
develop pre-investment as well as operating strategies for effectively
maneuvering the risk and for converting the threats into opportunities.
One of the biggest threats that global companies face is political risk.
Governments may take various actions against foreign firms (for political or
economic reasons) ranging from interfering in the firm's managerial policies to
outright nationalization and confiscation of its assets. Political instability and
corrupt and incompetent administrative machinery enhance the political risk.
The overriding question that firms must ask is: How can organizations absorb
the political risk into their system?
Companies that wish to go global need to take their blinkers off and maximize
their peripheral vision. Continued reliance on conventional wisdom will lead to
paradigm paralysis. Paradigm paralysis is, unfortunately, an easy disease to get
and is often fatal. More than a few organizations which were dominant in their
prime have succumbed to and died of it. The bottom-line on competing
successfully in the global arena, depends on making the critical link between
domestic experience and global strategy. Since organizational culture is
composed of practices more than values, it is somewhat manageable: they can be
managed by changing the practices. However, the same principle does not hold
true for a national culture.

Model development
The increase in the number of corporations becoming multinational
(subsidiaries under the parent's control, independent national markets) and
global (one single market, autonomous subsidiaries and pressures for cost
competitiveness and local responsiveness) operating over wider geographical
areas and under more diverse socioeconomic and cultural conditions has
resulted in greater uncertainty for managers. Uncertainty means that decision-
makers do not have information about environmental factors, which increases
the risk of failure for organizational actions. Information gathering is the first
step in the decision-making process. Failure is often due to incomplete or
superficial research by organizations, or delayed inflow of information. Based
on this information, decision-makers make choices about goals, budget
International allocations, personnel, and the ways in which work is to be done to improve the
Journal of Social effectiveness. This necessitates the allocation of weights, development of
Economics alternatives, evaluating the alternatives and selecting the best option. Decision
failure, in most cases, is because of organizational myopia and the thrust for
28,4 short-term monetary gains.
The environment is complex, with a large number of diverse elements that
352 interact with and influence the organization. The organizational environment
refers to all the elements existing outside the boundary of the organization
which have the potential to affect all or part of the organization. If there is one
certainty in modern business, it is that companies will have to build-in the
ability to adapt to change into the very structure of their organizations. It is not
merely the pace of change that has increased, it is also the status of change.
Instead of being seen as a threat, change must be considered the fundamental
condition on which the organization's strategy is based.
Organizations, as open systems suggest, are never in complete equilibrium
with their environment. Any view of absolute stability or full compatibility is
just a mirage. Depending on the organization's pace of adaptability, it may be
in a state that is close to or far from equilibrium. Essentially, the external
environment comprises socio-cultural, economic, legal, political and
technological variables, of which the socio-cultural and the political are the
controlling parameters. The factors in the social environment like structure,
social values and expectations, often influence the social matrix. Similarly,
governments at both national and local levels can affect companies, not only on
a day-to-day basis through laws, policies and its authority, but also at a
strategic level by creating opportunities and threats. Often political analysis is
necessary in managing change: finding who is antagonistic, who is supportive,
and what avenues need to be pursued for implementation.
The dynamic model, which is presented later in this section, is the
amalgamation of several other models. The remainder of this section will
outline the development of our model.

Cultural values and organizational effectiveness

Parsons (1960) suggests that values, as the evaluative aspect of culture,
constitute the core of the stabilizing mechanisms of the social system. They
maintain continuity because they tend to be more stable and resistant to change.
Thus, rather than searching for ``common'' cultural values, cross-cultural
management strategy should be based on the culture-specific core values.
Jackson (1995) posits that cultural values permeate organizations by
defining organizational processes, the use of rules, regulations, and roles that
are culturally acceptable (Figure 1). Ranson et al. (1980) suggest that, while the
economic, legal and technological dimensions influence the structural
configurations, the cultural values determine the range of organizational
responses to such constraints: they serve to provide meaning. Thus
effectiveness varies directly with the degree of adaptation to the core cultural
values, which, in turn, controls the resource availability.
 Socio-political
structures as
determinants

353

Figure 1.
Cultural values and
organizational
effectiveness

The key element for our model is the effectiveness dimension. We will argue
that for MNCs to be truly effective they must understand and adapt to the core
cultural values of the host country. By ignoring these values, they risk not
being able to secure the necessary resources for their organization. Thereby
they put the organization at risk of failure in the foreign venture. We will see
that one such MNC, Enron, was almost locked out of obtaining critical
resources due to their underestimation of the host country's culture-specific
core values.
Situational factors. The global manager is constantly involved in situations
in which there is a necessity to reconcile several factors that are not favorable.
It is obvious that the manager is located within the framework of several
situational factors and has to react to them accordingly. Since businesses
operate in a rapidly changing environment, it is important for top management
to ensure that they do not get trapped by inflexible plans but should
complement them by adaptable and ad hoc strategies.
Market deregulation, economic liberalization, and rapid advancement of
information technology have facilitated the convergence of technical, legal and
educational factors; differences have been, more or less, eliminated.
Nevertheless, the political and social structures still remain culture-specific and
unique. Thus, managerial actions (Figure 2) should be directed towards
amalgamating the organization with the local cultural and ideological structure
to reap rich benefits from the synergy. This is represented by the central
overlapping rectangle in Figure 2.
As there is an interdependency between the organization and its environment,
any changes in the environment or the system affect the other. There is a
constant pressure on the organization to respond to the stimulus and take timely
corrective action to survive. It has to be realized that there can never be a steady
state or an equilibrium between the organization and its environment.
Organizations, to start with, have to identify those elements of the
environment that threaten their existence most. This approach enables the firm
to ensure short-term ``proximity to steady state'' and engage in long-term
International
Journal of Social
Economics
28,4

354

Figure 2.
Situational factors

strategic planning. Since risk is all-pervasive in a turbulent environment,

organizations should seek to develop flexibility to attain stability.
Organizations grow strong by developing an ability to convert threatening
demands to opportunities and being prepared to absorb the shock.
The key element for our model is the importance of political and social
structures as situational factors. Organizations expend an enormous amount of
resources attempting to control or adapt to situational factors. We will argue
that focusing on political and social structures is paramount for global
strategizing. These two factors can quickly derail a company's global strategy.
We will see that Enron spent time and money attending to the org-economic
and technical structures, but to its detriment almost totally ignored the political
and social structures (Figure 2). MNCs must be aware of and analyze the
impact of all situational factors in order to remain flexible in the ever turbulent
global environment.

Organizational strategy: cultural congruence

Global companies, in general, face challenges in three broad areas: the strategic
planning aspects of their business, internal organization, and the interface
between internal and external aspects of their activities (boundary
management) (Tayeb, 1992). Interface activities require not only business
competence and negotiating skills but also the ability to cope with the national
and cultural diversities of the context. International firms have to adapt to their
hosts' way of doing business early on in negotiations to ensure success. Adler
(1981, cited in Jackson, 1995) suggests that management should strive for a
cultural synergy of the company's own culture with the desirable aspects of the
national culture.
Environmental requirements are not disembodied factors imposed on the
organization by impersonal or automatic mechanisms ± it is up to the people to
take into consideration and incorporate them into the organizational strategies;
the focus is not determinism but political and cultural factors that have to be Socio-political
appreciated. structures as
Lachman (1983) argues that only those adaptations that are consistent with determinants
and legitimized by the core values will be more effective. Thus, if an organization
engages in activities that oppose (or challenge) the local cultural values, culturally
based resistance may impede the inflow of resources that are required for effective
organizational functioning. Careful preliminary assessment of compatibility 355
between local core values and those underlying organizational structures may
prevent costly and sometimes irreversible mistakes of implementation of
structures and practices that do not match the local environments. Cultural
congruence is the adaptation of the corporate culture of the firm to the local
culture of the host country and is imperative for global success.
The key element of Lachman's work, for the purposes of our model, is the
boundary management dimension. This element is the key to cultural
congruence. It is the ``place'' in the organization where the internal (home country)
strategies and structures come in contact with the host country core cultural
values. We will show that this interface is where cultural congruence will occur.

The dynamic model

No organization is self-sufficient; its survival depends on the type of relations it
establishes with the larger system of which they are a part. Organizations not
only are influenced by but also are affected by their environments. Galbraith
(1974, cited in Grandori, 1987) suggests that the presence of free resources
(inventory, spare HR, etc.) in the organization is critical to its survival under
conditions of uncertainty. Organizational effectiveness in these turbulent
environments is very difficult to measure. Ashby (1968, cited in Scott, 1987)
regards organizational effectiveness as follows:
There is no such thing as ``good organization'' in any absolute sense. Always it is relative; and
an organization that is good in one context or under one criterion may be bad under another
(p. 200).

Further, Hofstede (1980) argues for the non-universality of theory and thinking.
Specifically he posits that organizational design and management practices are
bound by cultural conditioning. While organizational effectiveness, in its broad
sense, is often seen as being relative to the organization and its environment, it
is never truer than in an international context. This forms the basis for the
development of the dynamic model.
The underlying logic behind representing the organization as the core of the
model, as seen in Figure 3, is that congruence of the core values of the organization
and the local culture is a necessary condition, but not sufficient. Every relationship
with another person is strategic and involves a component of power, however
repressed or sublimated. This means power and politics permeate the relationship.
By understanding their social roles, human beings gain the capacity to deal
effectively with others. Environmental factors greatly influence local cultures and
make them more or less open to cooperation or conflict.
International
Journal of Social
Economics
28,4

356

Figure 3.
The dynamic model

We can see that at the center of the model lies the organization. The
organization's strategy surrounds the organization and acts as the medium for
the boundary interactions. Thus, an organization's survival is a function of the
degree of flexibility/rigidity of this strategic framework. If the buffer, the
strategy, is truly effective, it will insulate the firm from local conditions. At the
same time it works as a conductor of local socio-cultural and political issues
into the firm. The strategy must work with and within the local culture to guide
the firm effectively. Separating the organizational strategy from the external
environment is a semi-permeable interface. It is through this interface that the
culture-specific core values are absorbed or repelled by the organization. These
core values exist in each of the four structures in the external environment.
Since there is a constant overlap of the different constituents of the cultural
environment, they are separated by dotted lines in Figure 3. However, the
political environment constitutes the most threatening factor; all the factors
have been represented as equal risk factors for generalization of the model.
This model serves as a useful guide not only to analyze and understand the
challenges facing the global companies but also to formulate an appropriate Socio-political
strategy for success and survival. structures as
Organizational culture may be learned and improved by people in order to determinants
increase their relational potential. The role of culture may be positive or
negative in relation to organizational effectiveness, commitment of people to
organization, individual and group role and so on. The role of power in
organizations is also partly conditioned by the culture that surrounds them and 357
provides inspiration, sanctions the set of rules, makes people more or less
dependent upon each other. The technical, educational, legal, economic and
political factors are enmeshed in the broader cultural matrix. Thus, it becomes
imperative for global organizations to focus on the cultural values (soft skills)
which would facilitate the adaptation to the hard competencies.
While this model is developed for multinational corporations (MNCs) of all
sizes, a note of caution is given to large MNCs. Pfeffer and Salancik (1978)
summarized the advantages of size :
Organizations that are large have more power and leverage over their environments. They
are more able to resist immediate pressures for change and, moreover, have more time to
recognize external threats and adapt to them. Growth enhances the organization's survival
value, then, by providing a cushion, or slack, against organizational failures (p. 185).

Thus large multinational companies sometimes become complacent, and tend

to overlook the critical cultural barriers in the global strategy. This model
reiterates the need to pay strict attention to local conditions when working in
the global marketplace.
Role of government. Host government's role, in international business, is
essentially that of a catalyst ± to facilitate organizational goals by way of
encouraging policies that would create more demand in the long run.
Organizations sometimes ignore the legitimate role that governments play in
shaping the context and the structure surrounding them that stimulate (or
subdue) their competitive advantage. Host governments especially can quite
easily nullify an MNC's source of competitive advantage. Governments at all
levels (local, state and national) affect the resource transactions of organizations in
two general capacities. First, as a source of authority specifying what types of
negotiations and exchanges can legally occur among organizations. Second, as
parties that directly engage in transactions with organizations, exacting resources
from some and providing them to the others. Therefore, in international dealings
it is essential to take account of governments' special powers and the unique role a
government plays as an organization among organizations. It is obvious that
foreign organizations requesting special treatment from governmental agencies
must justify their claims on the grounds that they may serve the public interest.
Modern societies face the dominating feeling of entitlement, the erosion of
consent and the growing dissatisfaction of employees with how they are
treated. There is also a general decline in confidence in organizations, which is
due to a general notion that the economic enterprise, the government agency,
the trade union, the political party, the church, are essentially undemocratic in
their decision-making practices.
International One may have to accept the fact that full stability and security are never
Journal of Social attainable and that progress towards common wellbeing offers more problems
Economics than ready solutions. In the present world, the revolution of rising aspirations
is challenging the political, religious and economic establishments virtually
28,4 everywhere and the problem of human alienation has assumed greater
importance. The contingency approach is a necessity under all organizational
358 circumstances; universal principles may serve only as guidelines to formulate a
good organizational prescription for a given set of circumstances. As was
stated previously, the notion of ``perfect'' fit is a myth and in many
organizations there is probably too much striving within the framework of
managerial thinking to look for certainty instead of accepting the unavoidable
limits of our knowledge and ability to control events. Failure to achieve
congruence with the local cultural values may not be contextual but may,
possibly, be a deliberate organizational strategy.
Therefore, instead of dreaming about complete elimination of uncertainty, it
seems more pragmatic to reinforce elements of mutual trust and base the
process of guessing on a firm socio-organizational platform that will encourage
organizational wisdom and cooperation. This implies that organizational
strategy should be reactive, that is, not as a formal plan of action rigidly
formulated and implemented but as a flexible process of decision making
responding to changing situations, which in turn is based on the experience
actually gained in the process of change. Decision making should focus on the
basic contradictions appearing in any decisional activity.
The misfit between the organization and the local government causes a
continuous power struggle which, obviously, involves a moral and social cost.
Hence the organization should work for the transformation of those power
relationships into mutual trust and cooperation; that means flexibility and
inventiveness become a necessity. Thus, organizational models have to be
continuously confronted with reality. Organizations should learn from
observation and practice but have to admit their cognitive limitations because
of the rapidly changing environmental dynamics (time and space). Quantity of
knowledge does not automatically transform into quality of knowledge;
organizations need to shift continuously between the general and the specific to
enhance their learning. When organizations are faced with numerous external
constraints like entry and exit barriers, limitations on information flow, the
difficulty of securing the political and social support needed to legitimize their
activities, organizational inertia becomes the critical parameter for
environmental selection. Organizations, oblivious of these constraints, may
become the scapegoats of the local political and economic policies.

Implications: the Enron case

The case of the Enron Power Project at Dabhol, in Maharashtra (India) is being
studied to understand the various strategic and cross-cultural management
issues in a dynamic environment. Since 1991, many interesting developments
have taken place in the industrial landscape of India. The transformation from
a protected dispensation to a liberalized or a partially liberalized set-up has Socio-political
brought radical changes in the general working of industry and, importantly, in structures as
the mindset of the industrialists and the so-called regulators. The thrust of the determinants
entire structural reforms program has been to improve the climate for
investment, thereby promoting opportunities for growth and international
competitiveness of Indian industry.
In India, energy prices continue to be administered and are used mainly as 359
social policy instruments. Electricity prices are heavily subsidized for some
classes of users, especially small farmers and households, while industrial
electricity prices generally more than cover costs. Analysis of the consumption
pattern (Pillai, 1995) of electricity in various categories indicates that, while the
consumption of electricity in domestic as well as agricultural sectors has
constantly increased, the share of the industrial sector has declined over the
years. Thus, even higher prices for industry would not fully match the
subsidies of domestic and agricultural consumption. The growth in power
consumption is estimated at around 9 percent per annum and the installed
capacity had reached about 80,000MW by December 1994 (Ramachandran,
1995). To cater for this growing demand, an additional capacity of 131,000MW
will have to be created by 2007. Thus, while the Indian power sector needs huge
capacity additions to meet the growing demand, the State Electricity Boards
(SEBs) have such credibility problems today that not even the Indian financial
institutions are willing to lend to the SEBs as they are perceived as poor credit
risks. It is in the background of this looming power shortage (and shortfall in
resources) that the Ministry sought to introduce private participation in the
power sector and offered incentives to lure foreign investment.

The events leading to the problem

The story of Dabhol began in Houston, Texas in late 1991, with a visiting
delegation from the Indian Ministry of Power (Edwards and Shukla, 1995). The
Houston-based firm had quickly cut a $2.8 billion deal that enabled then Prime
Minister P.V. Narasimha Rao to boast of a big name foreign investor, in return
for which India gave the company enviable contract terms. Fully backed by the
political masters in Delhi, the Congress party's Chief Minister in Maharashtra,
Sudhakar Rao Naik signed the Memorandum of Understanding (MOU) on June
30, 1992.
The Dabhol project was a joint venture of Enron, which owns 80 percent of
the project, and General Electric Capital Corporation and Betchel Enterprises,
Inc., which each own 10 percent. Enron was to develop a 2,015MW gas-fired
power plant at an estimated cost of $2.8billion, which was to be the largest
single foreign investment ever committed in India, and the biggest independent
power project in the world. Unfortunately, the fast-growing liquefied natural
gas (LNG) specialist did not have the most gracious of welcomes in India.
Besides the state government's political gymnastics, the project has been
battered by bomb blasts, riots and has been through 30 government agencies,
170 formal approvals, nine court cases and 39 months of grueling negotiations.
International Financial pressures
Journal of Social The Ministry of Power and the government-run Central Electricity Authority
Economics (CEA) did much of the decision making in negotiating the deal with Enron. After
getting the approval from the central government for foreign investment
28,4 proposals, Rebecca Mark (CEO of Enron Corporation) and the rest of the Enron
team returned to Bombay to negotiate a Power Purchase Agreement (PPA) with
360 the state government and local electricity board. Meanwhile, the World Bank's
confidential report (Edwards and Shukla, 1995) to the central government on the
feasibility of Dabhol inferred that an LNG-based project was not economically
viable and the project therefore would not be financed by the Bank. The report not
only inflicted a big blow on the future of the project, but also provided the much-
needed substantiated research for the political opponents of the project. The World
Bank economists argued that coal and domestic oil are cheaper alternatives and
that the SEB would be forced to substitute expensive Dabhol power for cheaper
existing supplies during periods of low demand. This controversy led to the
project being split into two phases; Phase I to be financed independently of World
Bank support and Phase II to be financed conditional on World Bank reporting.
On average, transmission and distribution losses run at 25 percent (Mathew,
1996) of all power generated in India. To circumvent the poor creditworthiness
of the Electricity Board, the Finance Ministry suggested a counter-guarantee of
payment for the power, from the central government.

Political pressures
A series of vicious ethnic riots, fueled by a local militant nationalist party (Shiv
Sena, which is the present ruling government), swept the city. The party used the
local suspicion and fear of the project as a political campaign platform for the
ensuing elections, which attracted publicity and criticism to the Dabhol project.
There was a cultural problem too, creeping into the case. Popular belief in India
is that any dealings with foreigners are bound to be either unfair or
disadvantageous to India. Enron became the victim of a heady mix of politics and
business when the militant party used Dabhol to smear the previous government's
reputation. The new government (Shiv Sena-BJP alliance) set itself the mission to
prove that the Enron deal was crooked on technical, social and environmental
grounds, since legally the project was on solid ground (Maniyal, 1995).
The state government scrapped the 2,015MW project as being ``anti-people'';
it also alleged that:
. the contract was awarded without competitive bidding;
. the power plant threatened to damage the coastal environment;
. the company padded project costs and extracted outrageously profitable
terms by bribing the earlier government (Enron Power Project in India
Steams Ahead, 1996-97).
The state government also claimed that the state did not need 2,000MW of
additional power and that the Enron deal would impose an additional burden
(Kanavi, 1996) on Maharashtra State Electricity Board (MSEB), leading to Socio-political
closure of its plants. Despite making such strong allegations, the review structures as
committee, headed by the Deputy Chief Minister, has never made the contents determinants
of the report public.
On January 8, 1996, the Maharashtra government reversed its August 3 1995
decision to scrap the entire project and cleared the controversial project at a
tariff of Rs 1.86 per unit (kWh) instead of Rs 2.40 as agreed initially. Dabhol 361
Power Corporation (DPC) would use naphtha as fuel instead of imported
distillate in Phase I of the project. A 35 percent reduction in per megawatt cost
in rupee terms and a 29 percent reduction in total project cost have been
reached. The state Electricity Board or nominee would have a 30 percent equity
stake and there would be additional safeguards for environmental protection.
The Chief Minister justified that the re-worked proposal would result in a gain
of Rs 25,000 crores (1 crore = 10 million) due to the lowered tariff. The total
capacity has been revised from 2,015MW to 2,450MW and it was decided that
Enron would not stop after the first phase but would continue until the end of
the entire project. The agreement reached by the committee with Enron on the
future of the Dabhol project is unique because both sides seem to have emerged
winners. However, surprisingly, Enron was included on Multinational
Monitor's ``10 Worst Corporations of 1995'' list for its role in the Dabhol project
(Controversies, December 19, 1996).

Analysis of the Enron case

The environment poses challenges to organizations and managers need to
understand and interpret these challenges in order to determine an appropriate
response. This is critical for the organization under conditions of both stability
and change, since their initial and continued existence depends, to a great
degree, on its response to those contexts. Pressures from various sectors of the
environment forced the Dabhol Company to redesign and restructure the entire
project in order to cling to it. The Dabhol power project's collapse came at an
acutely embarrassing time for the Indian government. Internationally, India
had been carefully building the confidence and trust of the foreign financiers
and companies, as it needs to secure long-term economic growth.
The Enron case proves, to the international investor community, that there
are uncertainties in the whole system. This is a case of a contained change
(Stacey, 1993) rather than an open-ended change which involved a lot of risk
and very little uncertainty. The ripples in the environment (caused by political,
economic and social forces predominantly) caused fissures at the organization-
environment interface (Figure 3). As is evident, the problem was the myopic
stance of Enron towards an obvious change in the environment. The outcomes
are predictable but the inability of the managers to foresee and adapt to the
change led to the collapse of the original structure of the project. There have
been classic cases of MNCs in India (like Coca-Cola's departure) from which
new entrants can learn. Thus, the argument boils down to the fact that the
change could have been intelligently maneuvered to Enron's favor.
International Turning again to Figure 3, we can see how this model represents the Enron
Journal of Social case. Enron sits at the very center of its environment. The environment here is
Economics the global environment. Enron's strategy, structure and organizational control
are all influenced by the global environment it competes in. It is surrounded by
28,4 its global strategy which works like a buffer/conductor between the
organization and its environment. The strategy is the mechanism which allows
362 the organization to fit with its environment. In this case, Enron's strategy was
to enter into a joint venture arrangement with the Indian government. The
choice of a joint venture was the result of the Indian government's refusal to let
Enron have a wholly owned subsidiary. Often in joint ventures the choice of
partner is made using a variety of criteria: local market knowledge, access to
capital, proprietary technology, etc. In the case of Enron, the joint venture
partner (the Indian government) was chosen to gain access to India's market.
The partner in this case was not only party to the joint venture, but also a vital
part of the environment. On the surface, it would appear that Enron would have
the upper hand. In order to gain access to the Indian market, they included the
government in the deal, thereby keeping a potential threat close to them. Now that
the government had a stake in the venture, they should do everything to keep it
afloat. Unfortunately for Enron, their partner's other interests got in the way.
We can see from Figure 3 that there is a semi-permeable interface located
between Enron's strategy and the external environment. This interface allows
the local culture to ``seep'' into Enron's strategy. Just outside the strategy lie the
local culture-specific core values. These are the values which define the local
culture and should be the most salient to the organization. These core values
are found in each of the structures of the culture: social, political, economic, and
legal-technical. While each of these structures is important to Enron, the social
and political were most important to their effectiveness in the Indian
environment. Enron ran into difficulties when the interface between their
strategy to build the Dabhol facility became non-permeable especially in terms
of political and social structures. They did not allow the core cultural values in
these two structures to intermix with their organizational strategy. In fact they
ignored them, and in doing so risked losing the entire project.
By all accounts, Enron was in an enviable position. Their joint venture
partners should have given them the insider's view of India. With the
government a part of the new organization, DPC, the company should have
been the perfect blend of Enron's technology and Indian market know-how.
The interface between the organization and the environment should have been
semi-permeable. In that way, signals from the environmental structures could
pass through to the organization to be ``de-coded'', analyzed, and changes made
to the strategy if necessary. Therefore, when signals such as the World Bank
report reach the organization appropriate steps could be taken. Enron, it seems,
was simply not receiving any of these signals. Alternatively, if they were
receiving them, they were simply ignoring them.
The dynamic model works only when the interface is semi-permeable. When
this is true, the organization at the center is able to continually adjust itself (and
its environment) so that there is a fit between the firm and the environment. Socio-political
Successful global firms know that, if they do not adapt themselves to the specific structures as
environmental structures (socio-political especially) and cultures they operate in, determinants
they will fail. The interface is the communication point between the company
and its environment. It must remain open if organizations are to succeed. For
Enron, they began with a semi-permeable membrane allowing signals from the
environment to reach the organization. Nevertheless, once the $2.8billion MOU 363
was signed, they sealed the interface. Thus, the non-permeability of the interface
``sealed'' Enron's fate.

Lessons learned by Enron

At first glance, the Enron case seems fairly clear cut. The Dabhol Company had
an MOU, backed by a number of clearances, which was a legally binding. Indian
officials admitted that the Rao administration bent various investment rules to
woo Enron since it was the first major foreign investor to come into the country.
Further, the central government had given the counter-guarantee in favor of the
company, though in reality behind this strategy lurked India's power shortage.
In addition was the fact that India desperately needed foreign investment. India's
social situation is very volatile and, reflecting this risk, interest rates for Indian
ventures have risen. Three critical factors arise here with the first being whether
Enron was fully aware of the financial credibility of India in the international
market. Second, a shocking report from the World Bank revealed another doubt
about the feasibility report Enron originally used. Finally, one must wonder if
Enron had considered alternative sources of financing.
Enron took an unwavering stance that the Dabhol documents were to be
reviewed and cleared by more than 27 Maharashtra and central government
agencies. Venturing into foreign markets is a risky business fraught with
uncertainty. Enron's decision to continue with the project work was legally
valid and, in essence, it had nothing to do with politics. However, the critical
factor was that Enron had to give due consideration to the state government,
who was its primary customer. The company had to negotiate the Power
Purchase Agreement (PPA) with its customer and also maintain relations and
build its image for its future deals in the country. Enron overlooked the fact
that power and politics permeate deals with governments. India is known for
its political instability, which is a strong environmental force that induced a
sweeping change across the future of the project.
Enron's construction plans incorporated environmental concerns and the
proposal received environmental clearance from India's Ministry of Environment
and Forests in November 1994. Nevertheless, the company failed to gauge the
gravity of the situation and adapt to the circumstances. There was more of a
social concern from the local villagers, which, in turn, raised the fundamental rule
of globalization: focus on the cultural differences. Enron should have learned to
expect the unexpected.
Enron's most important gain has been the restoration of its reputation.
MSEB's commitment to buy 90 percent of the available power meant that
International Enron's profit has been untouched. Further, the fact that the re-negotiated
Journal of Social agreement did not change Phase I of the original project amounts to an
Economics admission by the state government that Enron did not significantly pad its costs.
28,4 Lessons learned by the state government
Enron served the state government with legal notice that it would pursue
364 arbitration in London to seek compensation for the costs incurred, the
remobilization of the contracts and the banks, and the interest on the bank debt
already disbursed. Faced with a bill of at least $300M, the state's bureaucratic
machinery was left with no other alternative but to re-negotiate the deal. The
state government kept on firing despite running out of ammunition. In
addition, this stance boomeranged. India will, over time, lose many billions of
dollars of potential foreign investment for the luxury of playing domestic
politics with the national economy.
The Enron controversy has brought out several issues, related to strategic
management, which pose a threat to the very existence of the Dabhol Company.
There are many more projects that are in the pipeline with the Indian
government at different stages of finalization. If the present situation were to
continue, there could be utter chaos on the policy front. On the one hand,
government agencies will try to push forward every single project without any
set standards and criteria essential to carry out rigorous and honest appraisal
of projects. On the other hand, with no basis for carrying out a fruitful dialogue,
the increasingly suspicious people's organizations will continue to resist each
and every project, on every single ground, and with all possible might. In the
ensuing confusion people and their interests will be the ultimate sufferers.
The dramatic growth in demand for power in India has placed tremendous
pressure on the central government to search for quick solutions to this
snowballing problem. The inherent capacity limitations have led to the
introduction of private participation (by inviting MNCs) in the power sector.
MNCs have been in the eye of many a storm in developing countries (for
example, the Bhopal disaster in 1984). However, in the new era of structural
adjustments and liberalization, privatization and globalization of developing
economies, a new positive image of MNCs is being gradually cultivated.
Linda Powers (Vice President, Global Finance, Enron Development Corporation)
claims that the MNCs provide vital development assistance to developing
countries. This claim of MNCs of being the development messiahs and the
misinterpretations that are put forth to support this claim may create entry
barriers and even threaten their expansion programs. This stance of Enron led to
complacency, inflexibility and their Indian deÂbaÃcle.
Constant reliance on rules would lead to the rules becoming ends in
themselves instead of means to ends. As a consequence of being compelled to
obey rules they did not originate, employees lose the capacity for independent
thought. The result is trained incapacity. Every industry has an underlying
structure or a set of fundamental economic and technical characteristics which
gives rise to various forces in the environment. Knowledge of these underlying
sources of competitive pressure provides the groundwork for a strategic Socio-political
agenda of action. The strategist, wanting to position his/her company to cope structures as
best with its industry environment or to influence that environment in the determinants
company's favor, must learn what makes the environment tick.
The responsibility for the Dabhol deÂbaÃcle rests squarely with the CEO and
the top management team of Enron Corporation. At every stage, they had an
opportunity to shatter their existing paradigm and make the deal a smooth 365
execution. Unfortunately, there were clashes of ego, beliefs and avoidance of
the apparent truth. There are substantial gains for the rest of India too. The
resumption of the project could restore confidence for the international investor
as well as other foreign companies.
The most important question that pops out of the case is ``Who won
ultimately?'' The answer is no one really. The net result was a loss of precious
time for both sides as a result of political posturing, the worth of which will be
extremely difficult to estimate. Environmental dynamics is not just a game of
checkers; it is much more complicated than that sort of game. The Enron case
could serve as a very important model for the central government, other state
governments, and for other global companies venturing into India.

Deficiencies of the model

The model clearly illustrates the various constraints that organizations
confront when they go global. Though the model is seasoned, in the sense that
it is developed based on the experiences of the MNCs that had globalized, it
fails to address some issues that concern the success of global companies.
The first deficiency lies in the timeframe the model addresses. It does portray
the long-term perspective of the companies since their relationship with the
environment is very fluid. The problems discussed focus more on the entry stage
and there is not much emphasis on companies that are already in the global area.
This is addressed by the fact that the model is a dynamic one which stresses
ongoing interaction between the organization and its environment.
Second, we argue that, though culture, in general, and politics, in particular,
are the critical environmental variables that determine the company's survival,
our model does not assign weights to the other variables (economic, legal,
technological, and educational). These variables are country-specific and have
to be identified through elaborate research. It is suggested that each variable
needs to be studied in light of the country in which the organization is seeking
to enter. At that time weights can be assigned based on the relative importance
each of the variables has to the organization.
Finally, though the model raises the intangible costs attached to these
cultural variables, it provides a qualitative treatment of the problems. ``Profit''
(and thus sustainable competitiveness) being the long-term goal of global
companies, firms planning to enter a market need to conduct ethnographic
studies, long interviews, several visits to the host nation, and also identify
similar case studies to complement the model.
International Future research
Journal of Social Looking to the future, there are several avenues to further this research. The
Economics first avenue will be to empirically test the model. This will likely occur using a
qualitatively based method such as in-depth interviews and case studies. These
28,4 methodologies are preferred, as they will bring out the nuances of the model. In
addition to this research stream, it is also possible to begin to understand the
366 various cross-cultural management issues that organizations face in entering
new markets.
This model also suggests that we should start at the interface between the
organization's strategy and the core values of the culture. This interface needs
to be understood in more depth. We also need to glean the cross-cultural
management issues derived from its permeability.
A third area of future study involves a further investigation of the
capabilities that would enable a global company to achieve cultural value
congruence and hence succeed in the pursuit of its corporate goals. This model
suggests that cultural congruence is essential for a firm's global strategy to be
effective. It does not, however, give prescriptions on achieving that congruence.
Further research is needed to explore the various options open to firms as they
attempt to find harmony between their corporate culture and the local culture.
In addition to these main areas of future research a number of interesting
research questions have come from this model. We have simply listed them
here for the reader's interest:
. What are the criteria for designing actions in conditions far from certainty?
. What should be the agenda for sustaining future competitive advantage?
. What determines success or failure in global competition?
. What management (or leadership) style fits the model?
. How can individuals, groups and the organization as a whole work with
the paradoxes of environment?
References and further reading
Controversies [online] (1996). Available: [Link]
19 December.
Court Rules in Favor of Dabhol Power Company, Dabhol Construction to Resume [online].
Available: [Link] For immediate release:
2 December, 1996.
Edwards, B. and Shukla, M. (1995), ``The mugging of Enron'', Euromoney, October, pp. 28-33.
Enron Power Project in India Steams Ahead [online] (1996-97). Available: [Link]
[Link]
Grandori, A. (1987), Perspectives on Organization Theory, Ballinger Publishing Company, Cambridge.
Hofstede, G. (1980), ``Motivation, leadership, and organization: do American theories apply
abroad?'', Organizational Dynamics, Summer, pp. 42-63.
Jackson, T. (1995), Cross-Cultural Management, Butterworth-Heinemann, Oxford.
Kanavi, S. (1996), Enron ± The Second Coming [online]. Available: [Link]
APER/COUNTRIES/india/[Link] (15 January).
Lachman, R. (1983), ``Modernity change of core and peripheral values of factory workers'', Socio-political
Human Relations, Vol. 36 No. 6, pp. 563-80.
Maharashtra Clears Enron Project [online] (1996). Available: [Link]
structures as
960113/12/[Link] (9 January). determinants
Maniyal, M. (1995), India ± Economy: Enron in a Spot, Tries Public Defence [online]. Available:
[Link]
Matejko, A.J. (1986), In Search of Organizational Paradigms, Praeger, New York, NY. 367
Mathew, K.M. (1996), Manorama Yearbook 1996, Malayala Manorama, India.
Oman, C. (1994), Globalization and Regionalization: The Challenge for Developing Countries,
OECD, Paris.
Parsons, D. (1960), Structure and Process in Modern Societies, Free Press, Chicago, IL.
Pfeffer, J. and Salancik, G. (1978), The External Control of Organizations: A Resource Dependence
Perspective, Harper & Row, New York, NY.
Pillai, S.M.C. (1995), ``Privatization in emerging scenario'', The Hindu Survey of Indian Industry
1995, Madras.
Ramachandran, S. (1995), ``Vital role for private sector'', The Hindu Survey of Indian Industry
1995, Madras.
Ranson, S., Hinings, C.R. and Greenwood, R. (1980), ``The structuring of organizational
structures'', Administrative Science Quarterly, Vol. 25, pp. 1-17.
Robbins, S.P. (1983), Organization Theory: The Structure and Design of Organizations, Prentice-
Hall, Inc, Englewood Cliffs, NJ.
Ronen, S. (1986), Comparative and Multinational Management, John Wiley & Sons, New York,
NY.
Scott, W.R. (1987), Organizations: Rational, Natural, and Open Systems, Prentice-Hall, Inc,
Englewood Cliffs, NJ.
Stacey, R.D. (1993), Strategic Management and Organizational Dynamics, Pitman Publishing,
London.
Tayeb, M.H. (1992), The Global Business Environment: An Introduction, Sage Publications,
London.