After the success of the hospital at Chennai, Dr. Reddy expanded to Hyderabad. After a slow pickup which included losses for the first four years, the hospital finally seemed to have picked up by making a profit of Rs. 100,478,000 in the year 1994. But on closer examination of the financial statements, we can see that the apparent profit is actually due to interest waiver given by the financial institutions, as well as a result of profit from sale of assets. Thus to find actual profit as a result of hospital medical operations, we subtract these two components from the net profit and find that there is actually a net loss of Rs. 4,864,000 for this year as well. Thus, before deciding to further expand its operations, Apollo must look at the possible reasons for failure of its Hyderabad initiative, so as to select an expansion policy which could avoid/correct these shortcomings. The reasons could be: 1. High Cost of Fixed assets – Most of the machinery used was too expensive and much of it wasn’t used/needed much in the Indian context.
The maintenance of these machines greatly increased the operating costs as well. The hospital was not able to cover these costs through its operations, hence, incurring losses. . Presence of private hospitals with lower prices and greater accessibility– Unlike Chennai, prior to the entry of Apollo in Hyderabad, other private hospitals with lower prices and having more accessible locations already existed in Hyderabad. Even though, their services were probably not at par with the international standards Apollo was aiming at, the average Indian consumer, with a per capita income much lower than the Western standard was a lot more sensitive to price differences than to differences in quality standards.
Also, its far from the city location could also be working as a disadvantage against Apollo by making it hard to reach. 3. The medical center opened along with the Hyderabad could have been seen as a threat by the other clinics and doctors with established practices. As a result, Apollo lost their trust early on and hence, their was a reluctance among said doctors and clinics to refer patients to Apollo. References being the initial means of attracting patients, Apollo, Hyderabad was unable to build a customer base comparable to the one in Chennai; thus, not allowing it to go from losses to gains in 5 years.
The Expansion Strategy There are three possible expansion strategies available to Apollo: Licensing; HMO; Building new hospitals. In my opinion, Licensing seems to be the best option for Apollo at the moment. The reasons for this include: 1) Lower capital investment: Equipment being their major fixed cost and its maintenance forming a major chunk of their operating expense, licensing would cut their financial liability considerably, as well as decrease the financial risk involved.
This will help them to expand in several large cities and grow at a much faster rate. 2) Licensing would allow building a stronger network of specialists and consultants. It would be beneficial to both parties as Apollo could get their specialist services with a lower level of investment and the doctors could maintain their own practice by seeing Apollo as a partner rather than a threat and enjoying the advantage of the Brand name of Apollo.