Monday, April 26, 2010

Story of Samadhan vs Modern

Posted on Feb, 01, 2010

Dear All,

Let’s start this week with a story:
There was one small village with small economy. There were 2 hotels in village. One was owned by conservative owner and was named “Samadhan Lodge”. While other was owned by more aggressive owner named as “Modern Lodge”. All of a sudden a circus came in a village. Village’s economy started to grow. People from surrounding villages started coming to this village for circus. Suddenly demand for rooms in hotel started rising. Obviously there was competition in both hotels and both hotels started earning much more than they used to.

Samadhan Lodge took benefit of added income and made his Lodge more clean and improved on service. While aggressive Modern Lodge owner went for expansion plan and took loan that was to be repaid in 5 Years. He built a new building in record 6 months time and provided equally good facilities to customers. Modern Lodge threw a huge party while inaugurating his new facility. He got compliments from villagers as aggressive, growth oriented or even as visionary.

After a quarter from inauguration Modern hotel booked huge profits and shared his success story to villagers. Villagers complimented him as real visionary and exemplary entrepreneur. While they openly criticized the Samadhan lodge as old fashioned, sluggish, orthodox minded.

Modern Lodge’s owner started to think more aggressive. There was one more piece of land next his 2 buildings he made that as target and ambitiously planned to go for 3rd building. This time he had to pay more as the land owner knew that Modern Lodge is going to make big profits out of it. But Modern Lodge was super aggressive. He took some personal loans and Another Loan that was to be repaid in 10 years.

In the next quarter Modern Lodge’s picture was looking fantastic. He was now owner of 2 Lodges that were running soaring his profits and one more lodge under construction. People started giving him compliments as great visionary “Right decision in right time”. Also people started criticizing Samadhan Lodge as stupid, foolish, orthodox. Another 2 months went. In all this time Samadhan Lodge was doing well in terms of revenue however he was not ready to expand.

Meanwhile, circus that had came to village decided to move out to another district as they always do. Now the demand that was created by circus reduced dramatically. This sent shock waves to Modern Lodge while Samadhan Lodge was ok as nothing had changed for him. Modern Lodge faced challenge to repay loan EMIs and hence he was left with no option but to increase rates to cover up his EMI. This step further fuelled problems for him as customer preferred same service for lower price in Samadhan Lodge.

Things started changing rapidly Modern Lodge’s owner started getting in pressure and he called few of his friends for advice. They advised him to sell off 2nd and 3rd building. However Modern Lodge made it a prestige issue and continued it with some price cuts. As few more months went Modern Lodge’s problems started going worse. He started defaulting on Loan EMIs and this even ruined his personal life. People started criticizing him greedy, bad timer, while they started to praise Samadhan Lodge as stable one with feet on ground.
Finally after few more months Modern Lodge had to foreclose the loan and surrender both ready buildings and 3rd building that was under construction to bank. Bank obviously started public auction for the buildings and sold them at very low rate. One of the buyers among those was Modern Lodge but again he just bought only 1 Building, as traditionally there were only 2 Buildings Hotels in village.

Conclusion : The story above does not mean that business should not expand but it says that expansion should not be based on misleading signals.

Thanks have a great week and good time ahead..

1 comment:

  1. Dear All.. Think twice. I hope you all understand what we are speaking about here. I hope that these high salaries in IT and BPO is not just Circus though I am sometimes afraid that it is so. Anyways as we discussed last week on curbing the inflation, the only way to do so is by increasing interest rates. As you are aware RBI has increased CRR by 75 points next step will be banks increasing Interest Rates and will be obviously an increase in EMIs on Loans. But this is the only way for Central banks to cut inflation. So increase in rate of interest is better as it will reduce risk of hyperinflation. On the other hand if central bank won’t increase interest rates in long-term inflation will touch sky. So Thanks to RBI for Interest Rates Hike. It shows responsible monitory policy.

    Thanks have a great week and good time ahead..