Navneet Bhatnagar and Professor Kavil Ramachandran of Indian School of Business (ISB) wrote this case that highlights the challenges faced by Mumbai based logistics firm Ketan Logistics Limited, a family-owned business. Emerging changes in the transportation industry and shrinking margins called for newer initiatives and processes. The greater challenge, however, came from within the group. The conflict between the aspirations of the next generation and the traditional ways of working by their predecessors posed a serious threat to the family business.
Ketan Logistics Limited (KLL) was a family-owned Mumbai based logistics firm. In 1986, Ketan Kumar Gupta and his four sons, Ravi, Vijay, Shiv, and Jiten co-founded the business that began as a modest operation. Following Ketan Kumar’s death in 1987, his sons divided KLL’s operations into four geographic zones and took charge of managing one zone each. The zones were classified as business units (BUs), while KLL’s corporate office continued to be in Mumbai. KLL had limited resources; thus, instead of owning a fleet, it preferred to hire vehicles from the market on a need basis. Company-owned vehicles were only deployed for key business clients who had dedicated long-term contracts.
Ravi led the company as its Chairman and Managing Director while his three younger brothers became whole-time directors. From his earliest days at KLL, Ravi had focused on financial discipline and developing relationships with bankers and customers. The four Gupta brothers together held a 60% stake in KLL in nearly equal proportions. In a span of three decades, KLL had emerged as an integrated, end-to end logistics service provider with a culture of high levels of service quality. With its head office in Pune, corporate office in Mumbai, the company had a wide market reach.
Ravi’s younger son Rohit, the Strategy Head of the company’s Western business unit was concerned about KLL’s strategic direction. The total size of the Indian transportation industry was estimated to be around INR 2,500 billion in 2014. The industry was quite fragmented and KLL had less than 1% market share. Significant shifts were taking place in the market. Big industrial clients who generated large volumes were moving towards consolidation. They had reduced the number of transport vendors. In addition, with advances in technology, customer expectations had increased and the room for error or inefficiency was shrinking fast.
Revving Up the Business
During 1990-2000 KLL expanded its operations through diversification and acquisitions of major industrial clients. The company made credit arrangements with a consortium of banks to fund its working capital requirements. By 2001, the company had offices located across India and touched INR 1 billion in annual sales. By 2005, KLL’s network expanded to include over 100 branch offices.
In 2006, KLL acquired a license to operate container trains that provided connectivity between major industrial towns and about 20 major ports. It implemented enterprise resource planning (ERP) software to improve efficiency and control systems. It undertook several welfare initiatives for its 3,400 employees, encouraged ideas and established a culture of meritocracy. In 2011, KLL offered end-to-end logistics solutions and undertook a major, corporate level quality management drive leading to ISO 9001:2008 quality certification. Clear policies and processes for all departments were laid out. Customer satisfaction was made the key organizational objective.
By 2011-12, the sales turnover of the company had reached the INR 15 billion mark. For 2013-14 sales stood at INR 18.41 billion and net profit was INR 198 million. KLL made bookings from over 1,200 cities and served over 7,000 destinations across the globe. It owned 550 road transport vehicles, two freight trains, and 600 containers. The company had more than 2,000 corporate clients spanning across industrial sectors. KLL won industry recognition and a number of awards over a period of years—a testimony to its superior service quality.
But when the transportation sector began to show signs of change, KLL could not stay unaffected. Intense competition in the Indian transportation industry, the slow pace of changes on the governance and professionalization fronts and above all, the lack of strategic direction from within KLL were some reasons that further aggravated its woes. The company was fraught with stagnant profits and revenue growth issues in the recent times. KLL tried to respond to the emerging needs positively. In 2014, through process improvement and automation initiatives, Rohit Gupta, the Strategy Head of the Western business unit of KLL targeted an improvement of more than 1% in KLL’s bottom line over a two year period, in one of the business units. Throttled Aspirations of Next Generation On completing their education, the next generation members were absorbed in KLL. Joining the family business was their default career option from a sense of duty and obligation. Rahul Mittal, the son of Kiran Mittal (Ketan’s daughter), was the first next-generation member to join KLL in 1999. Rohit joined next. Sharing Ravi’s responsibilities, Rohit and Rahul became joint heads of the Western business unit. Gradually, Vijay’s sons, Rakesh and Dinesh, Shiv’s sons, Pavan and Aman, and Jiten’s only son, Kamal, also joined the company. The only member of the next generation who did not join KLL was Ravi’s elder son, Mohan, whose love of technology drove him to establish his own computer software firm, independent of KLL.
Like Rohit, few others among the seven next-generation cousins at KLL were also discontented with the company’s stagnant situation. They felt they did not have the freedom to explore and experiment on their own even within the existing business.
Some members among the next generation wanted to explore entrepreneurial possibilities outside the family business. However, lack of adequate financial resources prevented them as the family ploughed most of the surplus back into KLL. There was no encouragement for the next generation industry, the slow pace of changes on the governance and professionalization fronts and above all, the lack of strategic direction from within KLL were some reasons that further aggravated its woes. The company was fraught with stagnant profits and revenue growth issues in the recent times.
The total size of the Indian transportation industry was estimated to be around INR 2,500 billion in 2014 and KLL had less than 1% market share. The big industrial clients who generated large volumes were moving towards consolidation and had reduced the number of transport vendors.
KLL tried to respond to the emerging needs positively. In 2014, through process improvement and automation initiatives, Rohit Gupta, the Strategy Head of the Western business unit of KLL targeted an improvement of more than 1% in KLL’s bottom line over a two year period, in one of the business units.
Throttled Aspirations of Next Generation
On completing their education, the next generation members were absorbed in KLL. Joining the family business was their default career option from a sense of duty and obligation. Rahul Mittal, the son of Kiran Mittal (Ketan’s daughter), was the first next generation member to join KLL in 1999. Rohit joined next. Sharing Ravi’s responsibilities, Rohit and Rahul became joint heads of the Western business unit. Gradually, Vijay’s sons, Rakesh and Dinesh, Shiv’s sons, Pavan and Aman, and Jiten’s only son, Kamal, also joined the company. The only member of the next generation who did not join KLL was Ravi’s elder son, Mohan, whose love of technology drove him to establish his own computer software firm, independent of KLL. Like Rohit, few others among the seven next-generation cousins at KLL were also discontented with the company’s stagnant situation. They felt they did not have the freedom to explore and experiment on their own even within the existing business. Some members among the next generation wanted to explore entrepreneurial possibilities outside the family business. However, lack of adequate financial resources prevented them as the family ploughed most of the surplus back into KLL. There was no encouragement for the next generation family members to start new ventures within the business, other than those identified by the seniors as contributing to KLL’s overall growth. Therefore, those among the new generation members with entrepreneurial aspirations suppressed them and continued with their routine work at KLL.
Organisational Issues
KLL faced several organizational challenges; one was a general concern about the way the organization was responding to market opportunities.
Each of the brothers had different ideas about growth and also wanted to retain independence in decision making in their own regions. There was a lack of clear, collectively accepted policies on various issues across the organization. Within the business domain of KLL, there was little exploration of new business opportunities as family members were confined to their comfort zones and followed the path of least resistance.
They also had different thoughts with respect to their own performance, compensation, roles, career and growth of their children. Salaries of family members were based on their years of experience, independent of the quantum and quality of their contribution. There was also no clearly defined mechanism for assessing the performance of individual family members or business units.
By 2011-12, the sales turnover of the company had reached the INR 15 billion mark and for 2013-14 it was INR 18.41 billion. Its net profi t was INR 198 million. KLL made bookings from over 1,200 cities and served over 7,000 destinations across the globe.
The four Gupta brothers were very sensitive to maintaining parity in terms of compensation, shareholding, and control of the business, irrespective of their individual contribution to KLL. The same principle of parity was applied to members of the next generation and this became a major bone of contention among family members. The enterprising members who perceived themselves to be contributing more than others to KLL’s business wanted to be proportionately compensated and rewarded. Equal compensation and reward mechanism lowered their morale as they saw no real incentive for their added contributions to the company. Ironically, those who held most steadfastly to the principle of parity in compensation were against extending it to Rahul, the son of Ketan’s daughter. This view was rooted in the traditional norms practiced in India, wherein daughters had no inheritance rights over their parental wealth and property.
Young members who had high aspirations thought that they could earn more if they could establish their own businesses. Most of them had formal education in business and wanted to utilize their learning to improve systems and processes at KLL. However, proposals that called for organizational change were invariably dropped because of differences of opinion among family members. In 2012, the family even hired an external consultant to suggest organizational changes to improve KLL’s functioning. However, his recommendations for changes on various fronts remained on paper due to a lack of agreement between family members.
Bumpy Road Ahead Rohit was close to completing an executive MBA program at a prestigious business school. He had learned about many tools and techniques that could benefit KLL. Though all of them appreciated his efforts at analyzing the business and various issues, he did not win their support for initiating any real change. He realized that there was a lot of resistance to change as everyone was content in their comfort zones, and nobody wanted to upset anybody else. Disheartened by the lack of positive response from his family members, Rohit considered quitting KLL.
He was in a difficult position. Leaving the family business to set up his own venture was not easy. Apart from obtaining the family’s permission, where would he get the funds from? Rohit wanted to start a logistics business that leveraged information technology at its core.
Rohit had recently shared his concerns and ideas with his childhood friend and businessman Amit Goyal. He intended to follow the asset-light business model to keep his initial fixed costs low. Goyal was instantly taken with the idea of setting up the venture. He proposed an equal partnership. Rohit would bring the technical know-how and industry expertise, while Goyal would provide all the funds with no strings attached.
Still, the decision was a complicated one, and his mind wavered. Being the eldest of all the cousins actively involved in the family business, his request to pull out would undoubtedly have serious repercussions. He knew that he risked being labeled a “deserter”. He was also worried that his decision might trigger a chain reaction among the next generation. Moreover, the family would hold him responsible for triggering a “rebellion” among the next generation members.
Though launching a new venture appeared to be the clearest and independent way forward for himself, Rohit was not sure whether it would be good for the family and KLL. Other family members might raise issues of conflict of interest, given that Rohit’s new venture would also be in the logistics business. The turbulence caused by Rohit’s move might drive KLL even faster down the path to destruction. What would happen to the legacy created by his grandfather, father, and uncles over 30 years?
Rohit was in a quandary about which was the best way forward. At the top of his mind was his responsibility to his family and particularly to his father. Could he convince the seniors to accept the changes and work towards a successful turnaround of KLL? How could they be made amenable to change? The next moment, he was thinking about his own future. Why should these concerns for KLL and the family hold him back from realizing his true potential? His mind raced as he considered the options.