Mahesh Garudachar is an aggressive and hyper ambitious entrepreneur. He is 35 and has already had a few failed start-ups in his life. His only employment, after he got his Engineering degree, was as an Executive Assistant to a highly successful entrepreneur who developed and successfully marketed a household product. This was immediately after he graduated. Mahesh was extremely impressed by the methods developed and implemented by his mentor/boss. The strategy developed by the latter was so successful that many others in India have copied it.
Having seen the insides of a business from the top, Mahesh decided that he too should become an entrepreneur and with borrowed funds from his family leveraged to high debt from a commercial bank started a small scale industry manufacturing an industrial consumable item for which the project report was obtained from a public sector Industry Development Corporation which predicted high demand. By the time the product was ready for launch, the rules of the game changed and import duty was slashed enabling Chinese equivalents to be available at lower prices than his manufacturing cost. He closed down the unit and went into the then hot potato, “dot com” ventures, with a series of start-ups, all fated to fail.
It was during this period that he met some European entrepreneurs, who suggested that he work with them as a supplier of goods for direct marketing into the USA and Europe, sourcing the goods from Indian manufacturers and distributing them via the Internet/post/courier. He agreed and did so well that within three years, he paid off all his loans, and was cash rich to the extent of over Rs. 15 crores. By that time, he had also become a Non Resident Indian, by setting up an office in Dubai, “Universal Logistics Dubai” operating out of Dubai, to save on Indian Income tax as, all his income was from overseas.
His wife, however, was not keen to shift out of India - neither were his parents who were shell-shocked and in severe depression following the death of their elder son, a Captain in the Indian Army, in an anti-insurgency operation in Kashmir.
He was already filthy rich; making more money almost on a daily basis and to pay income tax in India was galling for him. He had to single-handedly handle all the logistics as the information and database was too valuable to be shared with employees. He decided then, that the future lay in selling off his business to his associates and returning to India with a hefty bank balance. He decided to do this, after first setting up a few businesses in India, which would enable him to be active and launch him into a high growth business environment.
He roped in a close friend, Ashok Damodar, a classmate from his college days. Ashok was already a partner in his current business, handling the Indian end of the logistics and traveling the world for sourcing. With his wife Gayathri and Ashok as his fellow directors and himself as the Chairman, he formed a holding company called Universal Holdings Pvt Ltd, (UHPL) based in Hyderabad. The objective of the holding company was to start up new, commercially viable subsidiary enterprises; after they became viable, take them public and get out, to start new ventures. The companies were to be completely debt free and operating from funds given by the parent as equity.
UHPL hired a small office and started the process of recruitments. An Executive Assistant for the Chairman, a Human Resources Executive, a Finance Manager and a Company Secretary were employed to build up the businesses.
The areas into which Mahesh decided they would operate were as follows
A global trading company, sourcing from anywhere and supplying to customers anywhere, preferably UH-branded but also unbranded commodities.
An advertising agency which would provide all the services needed for the group companies as well as be self-supporting by getting outside clients.
A global packaged-food trading company, which would outsource manufacture for UH-branded products to be targeted at the overseas Indian consumers.
A company to seek and exploit opportunities in rural Indian markets.
The logic behind each of these businesses were as follows
Ashok was already trading in a small way in chemicals and doing reasonably well. Ashok was also a great negotiator and salesman with wide ranging contacts. He could spear-head the trading operations from Hyderabad.
Mahesh already had some experience in advertising, during his stint as an employee and had interacted with a number of advertising professionals to develop various advertising materials for their product and company.
Ashok’s friends included some people who were already manufacturing and marketing packaged food products in India and were looking for ways to expand. It was Mahesh’s experience during his travels that good quality packaged food products for the Indian Diaspora was inadequate.
Mahesh came from a farming family whose grandfather had migrated to Hyderabad to seek employment and a better livelihood. Mahesh wanted to return to his roots and purchase some agricultural land and eventually, become a gentleman farmer.
The new Company Secretary soon registered the new subsidiary companies, all as private limited companies. They were all named with the word “Universal” to start with as follows.
Universal Traders Pvt. Ltd.
Universal Advertising Pvt. Ltd.
Universal Packaged Foods Pvt. Ltd.
Universal Agriculture Enterprises Pvt. Ltd.
Since Mahesh had to be in Dubai to handle the day-to-day affairs of the sourcing and distribution for his existing business, Gayathri became his point person at Hyderabad. Gayathri who, prior to joining the group, as a full time employee/director, was working with the Indian arm of an American IT company as a team leader. She was a Computer Engineer from a prestigious institute of engineering. She was made responsible to get all the companies staffed and operational.
She set out to do this and first appointed a Chief Operating Officer. He was to oversee all the employees and their functions and set up systems and processes for the parent company as well as for the subsidiaries. It was decided that the parent company would provide all administrative support to the subsidiaries, which would be staffed exclusively by operational personnel only. The subsidiaries would be charged a fee for the services rendered.
The next step was to hire places for each company, as well as hire/buy furniture for them. No expense was to be spared for decorating the offices to reflect a high profile modern organization. Money was of no criterion, and a special task force of four people were hired with experience in “administration” and they were let loose.
For six months, this process went on without any revenues being generated and the funding coming entirely from the parent company, which was receiving money from Dubai as equity and in turn, financing the subsidiaries as equity.
In the meanwhile, the HR function was stepped up with a full time HR manager supported by a team of five executives and recruitment went at full speed for the parent company as well as for the subsidiaries.
Ashok was made Director in Charge of UTPL and UPFPL. The other two companies were to be under the direct charge of Mahesh, and Gayathri was made responsible for the complete computerization operations of the group. It was intended that the group would strive to be paperless and all employees connected to each other through networks available on a 24/7 basis.
Ashok, during his periodic visits to Hyderabad, would address small groups of employees of his vision and get to know them individually. During these meetings, he would talk about his past and hopes and how he wished that the employees were considered as important assets and not vassals. While back in Dubai, he would constantly be on the phone with his key people during and after office hours. He would talk for long periods of time about various thoughts that would occur to him and keep apologizing for taking up so much time.
Now we shall see what was happening in each subsidiary company.
Universal Traders Pvt. Ltd.
The HR Executive (HRE) was given the job of hiring a General Manager who was to decide on how he would build his team.
The HRE promptly suggested to Gayathri and Ashok that she could steal a very good man from her previous employers. He was interviewed by both and found suitable. He promised that he would move with customers in Europe and the USA for three specialty textile items. He also brought along with him, his previous assistant with experience in web sourcing and marketing.
The first item that the new GM brought on board was an item (BB Tape), which he said could be sold in Europe for US $4.50 per Kg. He suggested that before he joined, and during the notice period with his current employer, some one visit China to tie up sourcing. The Assistant promptly located three sources and Ashok visited China and found that the item could be sourced at US $0.38 per Kg. Samples were manufactured to rigid specifications and sent to the prospective customers. In the meanwhile, the GM joined duty and started following up. Two other items were also identified, to be sourced from within India and also China and the sampling process started. All this took three months from the time he joined UTPL.
In the meanwhile, another very interesting development took place. Mahesh wanted to buy a safe with an electronic lock and went looking for it in Dubai without any success. He promptly advised Ashok, already in China to look out for manufacturers of the same. He decided on branding the safe as Unisafe and arranged for outsourced designs for packaging, logo etc. and also arranged for the trademark to be registered. This gave the idea to hire a legal team to handle such work, which was, but natural to increase as business grew and one senior lawyer was duly appointed.
Since it was felt that it would be a cakewalk to market the safe in Dubai and also in India, orders for three container lots for staggered delivery on an advance payment basis were placed on the Chinese supplier. The first shipment was to be sent to Dubai to be marketed directly under the supervision of Mahesh.
The packaging material was duly designed, and arrangements were made in China to get them manufactured there and handed over to the manufacturer of the safe. Ashok visited China a few times to ensure that the manufacturers of the safe, as well as the packaging material, were meeting quality parameters.
The GM wished to appoint an agent in Dubai who was known to him from his previous dealings. This agent was a respected clearing and forwarding agent besides being a wholesaler of a range of products. He was located in one of the free trade zones and had a team of salespersons marketing his products in the gulf region.
Perfect. The GM visited Dubai and got Mahesh and the agents together and everything was tied up bar a written agreement.
Since marketing could start only after the goods arrived in Dubai, a lot of promotional material was ordered to be produced in Hyderabad. Brochures, operating manuals, warranties were all printed and sent to China to be packed and dispatched along with the goods.
In the meanwhile, due to the summer vacation break there was a lull in activities in Europe and business plans were drawn up assuming the purchase price at the known price for the BB tape,and the presumed sale price as indicated by the GM. Similar business plans were drawn up for marketing the Unisafes on the assumption that the three container lots will be sold without any problem, if only, the sales force could be trained to replicate what Ashok’s old company in India had done.
The business plans showed such a rosy picture that the company was expected to be off and running and self financing besides paying dividends to the parent company in just a few months’ time. A team of marketing persons to sell the Unisafe in India was hired and sent off into the field to set up a proper distribution channel.
All this was costing money and the supply side was beginning to show strains as all the other companies were also drawing large sums to set up and get off the ground.
Just as the summer vacation in Europe came to an end and the prospects conducted quality tests on the product, another product came to the attention of the GM which too could be sourced in India and sold to various companies in the Far East and Europe and efforts to tie up the sourcing were initiated.
The news, when it came, was completely devastating. The price that the customers were willing to pay for BB Tapes was not US $4.50, but $0.45. There was a typo in the early communications between the GM and his prospect, based on which all the euphoria was generated.
Desperate attempts to get the suppliers to reduce their price further failed and the margins simply did not offer an attractive enough cushion for international trading with all its attendant overheads. This was such a devastating development that the GM simply withered away totally demoralized, as he became the butt of all jokes within the group. His heart was simply not on the job, though he put up a brave front and tried to divert his attention to the other products in the basket.
In the meanwhile, the container of Unisafes had reached Dubai, and the GM went there to launch the same. The dealer network there, promptly asked for consignment basis sales as; they did not find much scope for the product for sale ex counter. The strategy of direct sales to the various offices in the Emirates was then considered, and they came up with the problem of dealing within the free trade zones, where security is very high and the number of calls that could be made per day considering the peculiar local needs, were just not adequate to generate enough business. Except for a few units, the stock remained with the agent accumulating stocking charges and rent.
In India, the scene was slightly better but only slightly so. The product could be sold but against other imported safes being sold at much cheaper prices by other importers. The margins again could not finance the kind of overheads that were already built into the operations.
The GM in the meanwhile sought to return to his earlier employer who readily accepted him and he left. Similarly, the team hired for the local marketing sought and found other employment elsewhere and quit. Another experienced GM was appointed who required six to nine months time to set up a completely new operation and after three months, he too decided to seek his fortunes elsewhere and quit.
The other two containers meant for the Indian market, already paid for, landed up and had to be taken delivery of and stocked at a considerable expense in a storage facility.
As this report is being written, the stock in Dubai remains unsold and has been diverted to Hyderabad and some stocks of the local variety have been sold at distress prices.
The company is now staffed by one trader, doing some local trading and just managing to meet his costs. That is, however, unable to support the infrastructure already built.
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