Vihita Chemicals Pvt. Ltd.
The Annual General Meeting (AGM) of Vihita Chemicals Pvt. Ltd. (VCPL) was scheduled on
28th April 2017. Sitting in his office on the eve of 27th April, Mr. M. M. Patel – the founder and
chairman of VCPL - felt anxious. He was supposed to present VCPL’s strategic roadmap for the
next five years in the AGM. He felt conflicted between the two competing strategic choices –
staying on the conservative path of incremental growth or choosing a diversification based
aggressive growth strategy.
Industries like oil, agri-business, and pharmaceuticals, heavily depend on downstream channel
partners who supply critical raw material and semi-processed products. The role of the
specialized, value-adding suppliers (also known as intermediates manufacturers), such as VCPL,
has gained critical importance in the success and failure of these thriving industries who have
grown multiple-folds in the recent years, buoyed by the robust overall economic growth of India.
In the last 27 years, VCPL had grown steadily with strong R&D focus, international expansion,
and distinctive product portfolio1. However, in recent years, the competition had increased
many-folds in domestic as well as in the international market. The company was increasingly
feeling the need to diversify its business to other profitable product segments and markets. At
this stage of scaling-up of the business to a new level, the company was facing multiple strategic
challenges such as selecting the right product(s), identifying profitable and growing market
segments, creating and sustaining a positive international brand image, and competing with much
larger Indian and multi-national companies.
On one hand, Mr. Patel was content to notice the slow and steady growth of VCPL and the
commonsensical choice for him was to choose the conservative path of incremental growth
backed by strong R&D and niche product positioning. On the other hand, he could choose the
aggressive growth path of diversification and new market entry. Or, the optimum strategy lies
somewhere in-between these two extremities? Whichever option he chose would set the future
roadmap for the company. He must choose wisely.
1. Company Background
1
More details about the distinct character of VCPL’s product portfolio is provided later in the case study and in
Exhibits.
Commented [IR1]: I think we should aim at bringing growth
ANSOFF in the teaching note. Therefore, it will be better to tell
clearly that he was in doubt to find new markets or find new
products.
The case currently provides insufficient data on both. You have
shown that European market increased in size at the cost of
domestic market. You may read VNFPP and position the case
accordingly.
Show that increasing competition is making it difficult to grow or
even maintain share in the international market. Thus one is forced
to increase the domestic share.
You may give numbers indicating the expanding in new markets or
international is becoming difficult and domestic market is becoming
lucrative.
The question is what should be the products which vihita should
focus.
Once the data in case makes it clear to go for new product
development strategy, we should provide data on which products
are lucrative.
For that, we should give an idea of diseases and their volume and
growth both. We should then tell the drugs used in those diseases
and the salts etc. used to make those drugs. Then we should find
out what active ingredients are used in those drugs and give these
in separate tables.
We can also give the current products of vihita and the diseases
they cater to.
With these information and analysis, readers should be able to use
some framework such as BCG or Ansoff to decide which products
they should focus on depending upon its growth, competitive
scenario etc.
Please discuss.
Vihita Chemicals Private Limited (VCPL) is a leading developer, manufacturer and exporter of
Intermediates of Active Pharmaceutical Ingredients (API’s)2, fragrance intermediates, specialty
chemicals, and other customized chemical products. The company was founded in 1990 by Mr.
M.M. Patel, who is a qualified chemical engineer and the present chairman of the company.

Situated in Asia's largest chemical industrial estate, Ankleshwar, the Company began its
operations as a small-scale unit. Since then, it has grown into a team of 175 people with more
than 100 unique product offerings. A dedicated R&D team along with state-of-the-art
manufacturing facilities has helped the company to evolve into a healthy, developing enterprise.
A diversified portfolio of clients includes fast-growing industries like drugs and pharmaceuticals,
flavors and fragrances, bio-chemicals, customized chemical manufacturers and other
unorganized segments.

The company was launched with a single product named Guanidine Nitrate and the plant was
designed based on indigenous machinery. Guanidine Nitrate is colorless and water-soluble
chemical compound and is widely used in many pharma, agriculture and other chemical
industries.

Mr. Patel capitalized on the opportunities provided by the Indian government post the economic
liberalization. VCPL sustained itself by selling a single product and its derivatives majorly to
pharma industries in the domestic market for almost a decade. Up-to the year 2000, VCPL’s
underlying strategy to deal with the threat of new entrants had been to keep the costs low and
consumer loyalty high with superior quality. As the entire output is sold to business clients,
VCPL insisted on long-term contracts in return for providing attractive prices.

Pharma is a technology-based field and constant technological upgradation to match the

parameters that prevailed became essential; leading to increased overall expenditure. Rising
expenses from R&D, production and management cost, and the presence of a limited number of
domestic raw material suppliers presented additional challenges for maintaining sustainable
competitiveness.

2
All drugs are made up of two core components: the API, which is the central ingredient, and the excipients, the
substances other than the drug that helps deliver the medication to the system. The Active Pharmaceutical
Ingredient (API) is the part of any drug that produces its effects.
Noticing the market trends and threats of new entrants, Mr. Patel started in-house R&D
department in 2000. The company engaged Ph.D. qualified chemists with good work experience
with an aim to come up with new range of products for increasing the market share. In 2001, the
company selected a range of products based on catechol derivatives, which are used as
fragrance intermediaries. The initial product development process was very cumbersome and
involved designing a new route of synthesis for the catechol after a lengthy survey of literature
and available patents and experiments. Based on experimental inputs and after checking the
commercial feasibility of the product, the company decided to start commercial production of the
new products in 2002.

By this time, the company also decided to venture into international markets because the
competition in the domestic market was heating up and the margins in the international business
were much better. Mr. Patel observed that the low cost-high quality Indian chemical industry had
been becoming more attractive to the international companies and most of the Indian companies
were already becoming export-focused by this time. Moreover, he realized that VCPL might lose
out to the competition in the long term if they don’t establish their international footprints as
soon as possible.

Their first port of entry was Europe because the European Union (EU) was the largest
international chemical market at that time and the entry barriers for the international companies
were lower in EU as compared to the US market. Expanding into unchartered territories, they
faced the usual international business challenges such as language barriers, cultural differences,
non-availability of reliable distributors, and stringent environmental and quality controls (See
Exhibit 1 for International market’s share in VCPL’s business in 2005 and 2015).

Currently, the company produces more than 100 chemicals at its three manufacturing locations.
Almost 80% of VCPL’s product offerings are used as raw material in Pharma industries,
approximately 15% of the products are used in Flavor and Fragrances, and rest of the chemicals
are used in Agro, Paint, Cosmetics, and other assorted industries including unorganized sector.
An indicative list of VCPL’s product range and end-usage is given in Exhibit 3.
2. Commercial Classification of Chemicals

The chemicals industry can be classified based on various parameters such as value addition
(basic/specialty), end-use (water
treatment/construction/agrochemicals), process
(batch/continuous), etc. The widely accepted
classification of commercial chemicals was presented
for the first time in 1970 by Charles Howard Kline.
The Kline matrix (Hirsohi, 2000) classifies chemical
industry products on the basis of chemicals’ worldwide
production and their value addition. The chemical
industry products are divided into four categories by
this classification:

 True commodity: high production, high value-added & Branded Commodities (or Pseudo
commodity): high production, low value added.

 Fine chemicals: low production, high value added.

 Specialty chemicals: low production, low value added.

As of now, all of the products of VCPL fall into either specialty or fine chemicals category (See
Exhibit 7 for more clarification on the commercial classification of chemicals). Mr. Patel was
thinking whether entering branded and true commodities business will be a good move. The
company is contemplating to venture into the basic chemicals category to diversify its business
and ensure future growth avenues. Mr. Patel’s research team has done an analytical comparison
of 22 basic chemicals (commodity chemicals) v/s 22 specialty chemicals (Exhibit 8) to evaluate
the strategic choices.

3. Pharma Industry: Growth Drivers and Challenges

Pharma is currently the most important customer industry for VCPL. Exhibit 2 shows a typical
process flow of pharmaceutical manufacturing. The dosage form for a pharmaceutical contains
the active pharmaceutical ingredient (API), which is the drug itself, and excipients, which are the
substances of the tablet, or the liquid the API is suspended in, or other material that is
pharmaceutically inert. Companies like VCPL specialize in providing the unique specialty
chemicals as raw material to Pharma companies.

The chemical providers themselves must invest a lot in R&D to fulfill very high-quality
specifications. Thus, the sustenance of VCPL depends upon continuous investment in in-house
R&D but its relatively smaller size compared to the deep-pocketed Chinese competitors limits its
global competitive advantage. Moreover, the biggest overseas market of the company, the EU,
has seen a continuous decline in market size while witnessing a disproportionate rise in Chinese
companies’ chemical sales, at the same time (Exhibit 5 & 6). Consequently, Mr. Patel was
revaluating his company’s strategic growth options. Whether he should keep focusing on the
European market for future growth or train his eyes on the growing domestic market? Anyway,
in both the cases, VCPL has to find a way to compete with the Chinese companies.

Furthermore, the focus of Mr. Patel is on the future trends and growth drivers of the pharma
industry. He wants to re-evaluate his company’s product portfolio based on the market trends.
Exhibit 4 shows Indian pharmaceutical market segments by disease or ailment type. The
segments can further be broadly classified into two categories: Chronic Diseases and Acute
Diseases (See Exhibit 4).

 Chronic diseases are the kind of diseases that are long lasting in nature. They develop
gradually and stay over a long period of time.
 Acute diseases arise suddenly and stay for a short period of time.

A sedentary lifestyle with fast food habits has hampered physical activities of Indians, resulting
in an exponential increase in cardiovascular problems and diabetes. By 2020, an estimated 97
million Indians would be aged 60 or more and a number of people suffering from cardiac and
diabetes problems would swell to nearly 200 million (Indran, 2018). The above-mentioned
trends, though alarming, provide a glimpse into the pharma market’s future. Mr. Patel wants to
realign his product portfolio in line with the above-mentioned trends.

4. Decision
Mr. Patel is overwhelmed by the data and is finding himself under immense pressure to take the
correct decision for the company’s future wellbeing. He is sure that there are myriad of
opportunities in various sub-segments of specialty chemicals and end-use industry (including
pharmaceuticals) and that his company can easily modify its existing products to cater to their
respective needs. However, he is not sure about which industry he should enter first or whether
he should focus on the domestic or international market? Moreover, the larger question still
remains that should VCPL keep focusing on pharma industry and grow with incremental product
innovation or should it diversify its product portfolio to cater to other specialty or basic
chemicals end-use industries.
Exhibit 1: Geographical Breakup of VCPL’s Business in 2005 v/s in 2015

Exhibit.2: Stages of Pharmaceutical Manufacturing

Exhibit 3: Vihita Chemicals’ Product Range
VCPL Products (Chemicals)
1 (1R,2R)-1, 2-Cyclohexanedimethanol, (R,R)-1
2 (1R,4R)-4-(3,4-Dichlorophenyl)-1,2,3
(S)-N-tert-Butoxycarbonyl-3-
3 Saxagliptin - Diabetes Drug
hydroxyadamantylglycine
4 1-(2',5'-Dimethoxyphenyl)-2-aminoethanol
1,2,3,9-Tetrahydro-4H-carbazol-4-one, 1,2,3,9-
5 Ondansetron - Cancer Treatment Drug
Tetrahydro-9-methyl4H-carbazol-4-one
6 2-(2-Ethoxyphenoxy)-ethyl bromide
7 2,3,4-Trimethoxybenzaldehyde
2,3:4,5-Bis-O-(1-methylethylidene)-D-
8 Topiramate - Seizures Treatment
fructopyranose
9 2,5-Dimethoxybenzaldehyde
2-{{[2'-Cyano-(1,1'-biphenyl)-4-yl]-methyl}-
10
amino}-3-nitrobenzoic acid ethyl ester
11 2-Amino-4-methyl pyrimidine, Sulfamerazine
2'-Amino-5'-chloro-2,2,2-trifluoroacetophenone
12
hydrochloride
13 2-Bromo-4-methyl-1,3-thiazole-5-carboxylic acid
14 2-Chloro-2',5'-dimethoxyacetophenone
15 2-Chloro-3,4-dimethoxybenzaldehyde
16 2-Chloro-4,6-dimethoxy-1,3,5-triazine
2-Deoxy-2,2-difluoro-D-erythro-pentafuranose-1-
17
ulose-3,5-dibenzoate
18 2-Methyl-2-propyl-1,3-propanediol
3-(1-Piperazinyl)-1,2-benzisothiazole
19
monohydrochloride
20 3-(4-Chlorobutyl)-1H-indole-5-carbonitrile
21 3,4-(Methylenedioxy)-6-methylbenzyl chloride
22 3',4'-(Methylenedioxy)-acetophenone
23 3,4-(Methylenedioxy)-bromobenzene
24 3,4-(Methylenedioxy)-toluene
25 3,4-Dihydroxy-5-nitrobenzaldehyde, 5-Nitrovanillin
26 3,4-Dihydroxybenzoic acid
53 Carbamidine thiocyanate
End Use (Drug/Usage)
Lurasidone - Drug for Schizophrenia
Sertraline Hydrochloride -
Antidepressant Drug
Midodrine - Hypotension Drug
Tamsulosin - Muscle Relaxant
Trimetazidine - Anti-Ischemic Metabolic
Agent
Idarubicin Fluoro glycogen - Metabolic
Treatment
Candesartan - Hypertension Treatment
Sulfamerazine - antibacterial agent
Efavirenz - HIV Treatment
Febuxostat - Arthritis Treatment
Midodrine - Hypertension Drug
Fenoldopam mesylate - Antihypertensive
Agent
Pemetrexed
Ezetimibe - Cancer Treatment
Gemcitabine HCl - Cancer Treatment
Carisoprodol - Muscle Relaxant
Ziprasidone - Antipsychotic Medication
Vilazodone - Antidepressant
Sitaxsentan - Heart Disease
Cinoxacin - virus infections treatment
Cephalotaxine - Antibacterial
Sitaxentan - Hypertension Drug
Entacapone - Parkinson's Disease
Treatment
Erlotinib - Cancer Treatment
Nucleic Acid protector in the extraction
of DNA
VCPL Products (Chemicals) End Use (Drug/Usage)
27 3,4-Dimethoxyphenol Thaliblastine - Cancer Treatment
3-[(Dimethylamino)-methyl]-1,2,3,9-tetrahydro-9-
28 Ondansetron - Cancer Treatment
methyl-4H-carbazol-4-one hydrochloride
3-{[(2-Methoxy-2-oxoethyl)-amino]-sulfonyl}-2-
29 Tenoxicam - Pain Relief
thiophenecarboxylic acid methyl ester
30 3-Hydroxy-4-methoxybenzoic acid, Isovanillin Galantamine - Dementia Treatment
31 3-Methoxybenzyl alcohol, 3-Methoxybenzyl chloride Sarpogrelate - Diabetes Treatment
32 3'-Methoxypropiophenone Tapentadol - Pain medicine
33 4-(2,3-Epoxypropoxy)-carbazole Carvedilol - Heart Disease Treatment
34 4-(Methylamino)-3-nitrobenzoic acid Dabigatran - Anticoagulant
35 4-[(4-Methyl-1-piperazinyl)-methyl]-benzoic acid Imatinib - Cancer Treatment
36 4-Bromo-5-(bromomethyl)-veratrole Pinaverium - Gastrointestinal Treatment
37 4-Chloro-4'-hydroxybenzophenone Fenofibrate - Cholesterol Reduction
38 4-Chloroguaiacol, 4-Methylguaiacol Flavor and Fragerance Agent
4-Fluoro-a-(2-methyl-1-oxopropyl)-t-oxo-
39 Atorvastatin - Cholesterol Control
N,diphenylbenzenebutanamide
Bisoprolol, Fesoterodine - Hypertension
40 4-Hydroxybenzyl alcohol
Treatment
4-Methoxy-3-(3-methoxypropoxy)-benzoic acid,
41 Aliskiren - Hypertension Treatment
Isovanillyl alcohol
42 4-Methylcatechol Fragrance Intermediate
5-(1-piperazinyl)benzofuran-2-carboxylic acid ethyl
43 Vilazodone - Antidepressant
ester Hydrochloride
44 5,6-Dimethoxyindanone Donepezil - Dementia Treatment
45 5-Ethyl-2-pyridineethanol Pioglitazone - Diabetes Drug
46 6-Chloro-5-(2-chloroethyl)-oxindole Ziprasidone - Schizophrenia Medication
47 6-Fluoro-3-(4-piperidinyl)-1,2-benzisoxazole Risperidone - Antipsychotic
48 6-Nitrohomoveratrole Gastrointestinal Drug Intermediary
Octinoxate, Paclitaxel - Sunscreen,
49 Anisaldehyde dimethylacetal
Cosmetics Intermediary
Swainsonine, Fondaparinux sodium,
50 Benzaldehyde dimethylacetal
Rosuvastatin - Cancer Medication
51 Bicyclo[2.2.1]hept-5-ene-2-carbonitrile Fragrance Intermediate
Travoprost, Zileuton, Ketorolac,
52 Bromoacetaldehyde dimethylacetal
Doxofylline - Ocular, asthama medicine
79 2,4,6-Trimethoxy benzaldehyde Pharma and Fragerance Intermediary
 54 endo-9-Methyl-9-azabicyclo[3.3.1]-3-nonylamine Granisetron - Cancer Treatment 80 2,4-Dihydroxybenzophenone Pharma and Agro Intermediary
exo-Bicyclo[2.2.1]-5-heptene-2,3-dicarboxylic
55 Fragrance Intermediate 81 2,4-Dimethoxybenzoyl chloride Pharma and Agro Intermediary
anhydride
Guanidine carbonate, Guanidine hydrochloride,
56 Organic Compound, cosmetics 82 2,5-Dichloropyridimidine Pharma Intermediary
Guanidine nitrate, Guanine
Fragrance and Paint Industry
57 Hydroquinone dimethyl ether 83 2-Bromo-4-chlorophenol Pharma Intermediary
Intermediate
Used for syntheses in the
58 Malonic acid methyl ester potassium salt 84 2-Hydroxybenzyl alcohol Pharma Intermediary
pharmaceutical

59 Methyl 4-(bromomethyl)-benzoate Eprosartan - Hypertension Treatment 85 3,4-Dihydroxybenzaldehyde Fragrance and Pharma Intermediary

60 Methyl 6-methylnicotinate Etoricoxib - pain killer 86 3-Amino-2-thiophenecarboxylic acid methyl ester Fragrance and Pharma Intermediary

61 N,N-Dimethylformamide dibutylacetal Pharma Intermediary 87 3-Methoxyphenol Food Additive, Flavoring Agent

62 N,N-Dimethylformamide diisopropyl acetal Pharma Intermediary 88 4-Bromoanisole, 4-Bromophenetole, 4-Bromophenol Fragrance and Pharma Intermediary

Zaleplon, Imatinib, Itraconazole,

63 N,N-Dimethylformamide dimethylacetal Elvitegravir - Cancer and psychotic 71 Piperonylic acid Fragrance and Pharma Intermediary
treatment
66 N-Hydroxyphthalimide Reagents - Pharma Intermediary 72 Sesamol Paroxetine - Psychotic Treatment

67 N-Hydroxyurea Zileuton - Asthama Treatment 73 Sodium stearyl fumarate Tablet Lubricant

Sitagliptin, Tigemonam, Trybizine,
Disinfectant and Fragrance
68 O-Benzylhydroxylamine Reagents - Heart, Bacterial infection and 75 Syringaldazine
Intermediary
other treatments
Fondaparinux sodium - Blood Clot Organic Compound - Pharma
69 O-Benzylhydroxylamine methane sulphonic acid 76 Veratryl alcohol
Prevention Intermediary
Organic Compound - Pharma
70 Oxalyl dihydrazide 77 a-Bromo-2-chlorophenylacetic acid Clopidogrel - Heart Disease Treatment
Intermediary

78 [(4-Methoxy-3-nitrobenzyl)-sulfonyl]-acetic acid Herbicide Intermediary

* The above list of VCPL’s products is not exhaustive.

Exhibit 4: Indian Pharmaceutical Market Segments

The segments can further be broadly classified into two categories: Chronic,
Acute
Chronic and Acute Segments
Chronic Acute
 Cardiovascular  Anti-infective
 Anti-Diabetic  Pain Relief/Analgesic
 Gastrointestinal
 Respiratory
 Vitamin and Mineral
Deficiency
Source: IBEF, 2018
Exhibit 5: Worldwide Chemical Sales: Geographical Breakdown

Exhibit.6 EU Share of Global Chemical Market

Exhibit.7 Commercial Classification of Chemicals

Chemical Industry Value Chain

Parameters True Branded Specialty
Commodities Commodities Chemicals
Chemistry Production of Development Modification of
Molecule of Molecule Molecule
Focus Economy of Operations Customer/Market
Scale
Structure Centralized Somewhat Decentralized
Decentralized
Technology Process Process & Product &
Technology Product Application
Technology knowhow
Capital Intensity High Moderate Low
Source: (Hirsohi, 2000)

Exhibit.8 Basic Chemicals v/s Specialty Chemicals – An Analytic Comparison

Parameters Basic Chemicals Specialty Chemicals

Qualitative
Product type Specification based Performance/functional product
Structure Simpler molecule Single molecule/formulation
Production Continuous Mainly batch
Price determination Supply – demand balance Performance
Volume and Value Medium to high volume products with Low to medium volume products with
lower price realization higher price realization
Value addition Low to medium Medium to high
Plants/Facilities Costly, not able to vary product Small, inexpensive, able to switch
products
Labor requirements Minimal, rely on automation Costly, rely on innovation
Key Success Access to secure and cost effective raw Strong R&D leading to new product
Factors material, operational efficiency development, high performance-to-
price ratio
Quantitative (FY11-FY17)
Revenue Growth
6% 15%
(CAGR)
Raw material cost
62% 54%
to sales
R&D expense to
~0% ~1-2%
sales
Employee cost to
5% 7%
sales
EBITDA margin 11% 15%
Profit Margin 4% 8%
ROCE 12% 24%
RONW 11% 20%
Source: Adapted from (JM Financial, 2017)
Works Cited
Hess, W. T., Kurtz, A., & Stanton, D. (1995). Kirk-Othmer encyclopedia of chemical technology (Vol. 4th Edition).

Hirsohi, E. (2000). How to Manage for Maximum Profit. Aromatics, 52(5-6), 131-141.

IBEF. (2018). Pharmaceuticals: January 2018. India Brand Equity Foundation.

Indran, N. R. (2018, April 19). India's count on Lifestyle Diseases to grow more than 80% by 2020. Retrieved April 19,
2018, from Indian News and Times: http://www.indiannewsandtimes.com/2015/03/25/indias-count-lifestyle-
diseases-grow-80-2020/

JM Financial. (2017). Indian Specialty Chemicals: Growth Catalyst. JM Financials Institutional Securities Ltd.

Pollak, P. (2007). Fine Chemicals: The Industry and the Business. John Wiley & Sons Ltd.