Review: The Smartest Guys in the Room

Title: The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
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This is a story of amazing arrogance, hubris and corruption. Enron was a poster child of capitalism. Voted the most innovative company in America for six years in a row, this company was a darling of Wall Street. For a long time, it could seemingly do no wrong. Year after year, the company announced steadily rising earnings which were rewarded by a steadily rising share price. Shareholders, many of whom were Enron employees, made millions.

The company played a major role in transforming a sleepy industry like natural gas into a more dynamic and innovative market. However, right from the beginning, the pressures that were later to lead people to engage in outright fraud were beginning to be felt. These pressures were initially contained. The company engaged in financial manipulations from the get go but these manipulations were not allowed to escalate. At a later stage, Enron became heavily dependent on financial irregularities in an effort to keep its share price up. Not that the company acted alone. Fraud on this massive a scale requires the tacit (and sometimes explicit) cooperation of other parties. Enron could get away with playing fast and loose on its balance sheet and income statement because its auditors signed off on those statements. Who were these gullible dupes? None other than the venerable firm of Arthur Anderson! Similarly, the analysts employed by many Wall Street firms played their part in hyping Enron's story. Even after they no longer believed that Enron was a good buy, they still kept hyping it to the larger public. What was the motive behind these deceitful acts? Fat consulting fees. Enron was one of the largest consumers of consultancy and underwriting services in the US and if companies did not play ball, they got locked out of these lucrative fees. We are talking tens of millions of dollars here.

The tale of Enron shows the corporate world at its worst. It shows people willing to do anything in order to make a quick buck. Enron's employees even acted against the long term best interests of their organization. This was highlighted by the California energy scandal. For a long time, Enron had argued in favor of deregulating the electricity market saying that the private sector would be more efficient and would result in lower electricity costs to businesses and consumers. California went the furthest in deregulating electricity. Enron's traders discovered that the spot price of electricity could be manipulated for increased revenues. The result? Rolling blackouts in California and massive profit for the firm. However, there was also a backlash against electricity deregulation that permanently foreclosed Enron's efforts to deregulate the national market. What happened to the traders who had manipulated the market and thereby doomed Enron's larger efforts? They got promoted. There is story after story of short term tactics being used at the expense of the long term. This manipulation even extended to the firm itself. Everyone from the chairman down treated Enron as their own piggy bank. No one considered controlling expenses until 2000 when the company had been in existence for almost 15 years.

All in all, The Smartest Guy in the Room is a cautionary tale of extraordinary greed, arrogance and hubris. A feeling that people working in Enron were masters of the universe; that they could do no wrong and an apparently unshakable belief that they could do whatever they liked without having to worry about a day of reckoning.

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Review: The Long Tail

Title: The Long Tail: Why The Future of Business is Selling More of Less
Author: Chris Anderson
Publisher: Hyperion
Pages: 267
ISBN: 978-1-4013-0966-4

Business books are a dime a dozen. Each purports to show the reader the path to business nirvana. Ever increasing earnings! Ever stronger competitive position! Yet there are very few which provide a genuine insight. A new way of looking at our business environment and the ways in which companies can interact with customers. The Long Tail by Chris Anderson is one such book. It examines the impact of the Internet on consumer choice and how companies can take advantage of this medium which has been in widespread commercial domain for more than 10 years now but whose impact is still being explored by both businesses and consumers alike.

Every transaction has an associated information flow. When I say transaction, I mean the give and take of objects or services of value between atleast 2 parties. It does not really matter whether the transaction has a monetary aspect or not. What matters is that a transaction has taken place. In this situation, there is also an associated information flow. Before the advent of computers and definitely before the Internet came in widespread use, there was generally a high cost of tracking and utilizing this information flow. One of the most important things that computers have done is that they have progressively reduced the cost of tracking and utilizing the information flow associated with transactions. However, while this gradually became clear on the business side (and there is still confusion amongst companies about this particular aspect and how best to utilize it), to-date, there has been confusion about the impact of the Internet on the consumer side. What has been clear is that the Internet is a great enabler of information to consumers and that it has potential to dramatically increase consumer choice.

What The Long Tail does is that it provides a framework to more properly address these two issues. Exactly how does the Net increase consumer choice and how do companies go about delivering that choice is specially addressed in this book. Mr. Anderson's basic thesis is that the offline world has a limited capacity to carry products. Thus a typical music store can only hold a certain number of titles no matter how large it may be. This hard physical limitation compels companies with an offline presence to make hard choices as to which products they will carry. As a result, only those products are chosen which have the potential to become blockbusters or at the very least perform at a certain minimum level. What the Internet does is that it removes this limitations and allows companies to carry a much wider choice of products. This is where the Long Tail concept comes in. While individually the products at the long tail may not sell much, collectively these products can sell as much as or perhaps even outsell the blockbuster products and who knows that a long tail product may end up as a blockbuster!

However, there is a note of concern that Mr. Anderson does not properly address. While it may be true that offering long tail products will enable consumers to choose products that they may prefer over the more mainstream ones, they do need a starting point from which to start their exploration. For unlike mainstream blockbuster products, long tail products require a much greater degree of exploration from the consumer. Companies can alleviate this aspect to some extent by tracking past purchases and offering recommendations much as Amazon does. However, this is still very much a field where there is a large degree of trial and error. The algorithms used to make such recommendations still need to be fine-tuned.

With this caveat aside, this is an important book. One that should be read by executives and entrepreneurs alike.