Running Head: ORGANIZATIONAL READINESS
Assessing Organizational Readiness
Enron was the majority owner of Dabhol which was a large combined cycle power plant situated on the western coast of the Maharashtra state in India. The project of Dabhol power plants was commenced in 1992 and took a total of nine years to begin operations of the plant. The total project cost of Dabhol was 2.9 million dollars, with Enron owning 65 percent of the plant followed by, Bechtel Enterprises owning 10 percent, General Electric owning 10 percent, and the state of Maharashtra Electricity Board owning 15 percent. Enron asserted that the Dabhol power plant is the largest gas-fired power plant in the world producing 2, 184 megawatts of electricity. The plant ceased operations in June 2001 that had arisen from a payment and contract dispute between the owners of the plant and the state of Maharashtra government. The paper will analyze the critical success factors (CSFs) as applied to the various facts found about the case study in “Politic, Institutions and Project Finance: The Dabhol Power Project”. The paper will also attempt to find the benefits of the project, organizational readiness, and risk culture of the company with facts stated in the case study. By analyzing the CSFs and other components project risk recommendations will be given after a thorough analysis of the criteria.
Critical Success Factors (CSFs) of Dabhol Power Project
The term critical success factors are used to define the elements or components that are mandatory for an organization or project to achieve its mission. They can also be considered as the critical factors or the needed activity to make sure that the company or organization meets with success. According to Freud (1988), critical success factors are those very few components that must meet with success or go well to make sure that the manager or the organization is successful, therefore, they represent the managerial of enterprise area that must be given continuous focus and attention to result in a high performance; CSFs also include the important or vital issues related to the organization’s present activities of operation and also towards it success in the future. The critical success factors are the basic and main elements that are necessary for an organization’s strategy to be successful; it basically drives the strategy to move forward which can either result in the breaking or making of the strategy.
The term itself of critical success factors apply to the facts displayed in the case study as; some of the factors were not properly analyzed and implemented which put the project at risk. Certain CSFs that needed to be recognized but were not was the political arena of India at that time, an example of this is seen in the case study where Enron entered arbitration and sought $300 million in compensation with the state government filing a suit in September to void the agreement with allegations of fraud and misrepresentation. The contractual agreements of Dabhol were not properly scrutinized by the Maharashtra State Electricity Board (MSEB) which led to further deteriorate and conflict between parties for the Dabhol project (Davis, 2003).
Project Benefits, Organizational Readiness, and Risk Culture of Enron
Enron was an American energy company based in Houston, Texas. Enron employed about 20,000 employees and was one of the largest electricity, natural gas, communications, and pulp/paper Company in the world. The company claimed revenues that amounted to $101 million dollars by year 2000. It was in 1992 that Indian experts came to the United States to find investors for the energy industry and help in India’s power shortage. Enron finalized a 20 year power purchase contract with Maharashtra State Electricity Board allowing Enron to construct a 2,015 megawatt power plant. The project would have benefited the Maharashtra state and Enron with supplying adequate electricity and increasing its profits in the power industry respectively.
Enron’s risk and corporate culture embraces the value of massive size, it is more likely seen as a strategy used to achieve a larger mission of the organization (Schuler, 2002). With a great amount of dedication to sheer size made the company more likely to use its extreme size to intimidate those who would question its approaches and its balance sheet practices. The values of risk induce Enron to develop an increased amount of partnerships in an aggressive manner to maximize its share value, as seen in Dabhol case (Enron owning 65 percent) by hides its debt.
The company showed some extent of organizational readiness in terms of defining their needs in regards to driving the institution to consideration in implementing a team and building a stronger teamwork, however, they did not apply safety culture to develop an appropriate strategy to address the needs of the organization. Enron also had difficulty in implementing organizational change in regards to the surrounding culture when initiating the Dabhol Project.
Project Risk Recommendations
Initial Categories of Risk
- Politicians in India are very powerful and the project managers should attempt to lobby politicians before the initial phase of the project like Dabhol in order to ensure for a successful execution of the project.
- More effort needs to put in project management processes which include the initiation, planning, execution, along with control and validation. The two phases proposed plan was poorly constructed and executed. The plan needs to stay within budget and financial matters need to be worked out more adequately which resulted in both Enron and the central Indian government to fail in seeking financial assistance from the World Bank for Dabhol.
- There were too many contractual risks involved in the initial and second contract. The MoU was one-sided in favoring Enron, also the company needs to give details about the project cost which is required by Indian law, and however these details were absent. MoU needs to specify when the 20 year contract would begin and end and should include specification as to when the electricity supply and payment would start.
The risk breakdown structure (RBS) is the hierarchically organized representation of the recognized project risks that are arranged by the risk category. The RBS will aid in analyzing the when risk might occur; it is valuable to better comprehend when a certain project needs to receive special inspection. The RBS can aid a project manager and the risk manager to better comprehend any recurring risks and the amount of those risks that may lead to issues which affect the status of the project (Gray & Larson, 2008).
The RBS of the Dabhol project produced a hierarchical structure under different names to describe the several sources of risk. Each of these structures contains at most three or four hierarchical levels to give a description of the types of risks faced by the Dabhol project.
|RBS Level||Level 1||Level 2|
|Project Risk||Development Environment Risk||Development systemManagement methodsWork Environment|
|Economical Risk||Contractual terms & conditionsPartnership & Joint venturesSuppliers and vendors|
|Technology Risk||Scope DefinitionTechnical interfacesPerformanceTest and acceptance|
|External Risk||LegislationExchange RatesRegulatoryPolitical|
Analyzing the RBS above, it was developed using a prioritized list of the top three most potential critical risks. Among these were the economic risks, development environment and technological risks which are explained in depth below.
Basically, economic risk is the probability that macroeconomic conditions will affect an investment especially those made in a foreign country; conditions include: exchange rates, government regulations, or even political stability. According to the case study, Eron had also experienced an economic risk which was harmful to their investment. The price of the power from Dabhol plant was far more than what consumers can afford in the area or even more than the state of Maharashtra could afford. This is potentially the most critical of the three appointed risks mentioned. For example, power from Dabhol was four times more expensive than other domestic power plants in 2001. The first phase of the plant began its operations in 1999 of May and within one month of the operations MSEB had began to raise concerns about their ability to pay $20 million US dollars on a monthly bill (Custom Book, 2011). Additionally, individual customers were unable to pay for power as well.
Development Environment Risk
After economic risk this is the second most critical risk which concerns that the development of the project will cause some sort of destruction to the natural environment that it is surrounded by through calamitous environmental pollution. According to the case study, the local communities and Indian interest groups had strongly opposed the Dabhol project due to its development risk. Many of the communities had similar concerns which were outline in the economic risk section due to the deficiency of lucidity in the development process and the total cost of power. Additionally, the project had displaced a total of 2, 000 people with a seizure of land without any prior notification or compensation to the people. The environmental concerns of the project included: pollution of fresh water, contamination of salt water which could affect fishing communities, and diversion of fresh water for the project.
This risk concerns the technical or performance limitations that put the project in danger. The technological risks of the Dabhol project were considered minor to equity investors. For example, according to the case study, Bechtel had immense experience in various power and LNG projects. As it was expected the project did not suffer greatly from major technological difficulties during its construction and the initial operations of the project.
Customs Book. (2011). BUS 519: Project Risk Management Case Pack 2011. New York: John Wiley &Sons.
Davis, H. A. (2003). Project Finance: Practical Case Studies (2nd Ed.). London, UK: Euromoney Institutional Investor PLC
Freund, Y. P. (1988). Critical success factors. Strategy & Leadership, 16, pp. 20-23. Retrieved July 19, 2013. DOI: 10.1108/eb054225
Gray, C. F. & Larson, E. W. (2008). Project Management: The Managerial Process. Boston, MA: McGraw-Hill, Inc.
Schuler, A. J. (2002). Does corporate culture matter? The case of Enron. Enron’s Corporate Culture. Retrieved July 19, 2013 from, http://www.schulersolutions.com/enron_s_corporate_culture.html