ii d competitor analysis v3 ol

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COMPETITOR ANALYSIS – OLIVIER - SUNDAY

D. COMPETITOR ANALYSIS

1. LEAPFROG’S COMPETITORS

U.S. and Global Industry. The Electronic Learning Products segment

that is going to be analyzed in this section is a subset of the global toy

industry which is dominated by Mattel and Hasbro. These two companies

lead the US and global toy industries with $4.9 billion, and $3.1 billion in

2003 revenues respectively. (Chester, 2004) LeapFrog, with revenues of

$680 million in 2003, occupies the number three spot in the US toy industry

and the number eight spot in the global market. (Chester, 2004) The globaltoy industry is very fragmented. Mattel and Hasbro together account for

13.5% of global toy sales, and the top ten toy manufacturers combined

account for just 26.52%. (Chester, 2004)

Electronic Learning Products Industry. LeapFrog essentially

created the ELP category, and still has a commanding lead. “LeapFrog totally

dominated two product categories it had essentially created, preschool

electronic learning aids (ELA), in which it held a 77% market share, and non-

preschool ELA (for ages six to nine), with a 68% market share.” (Applegate,

Dede & Saltrick, 2002) In addition to the traditional toy manufacturers, other

competitors are beginning to enter the ELP market, like Sony, Hitachi,

Toshiba, Palm, Sega or Nintendo. LeapFrog also competes in the US

Education market (6% of their revenue in 2003), so we have briefly outlined

their competition in that market as well.

2. PRIMARY COMPETITORS

In 2003, 80% of LeapFrog’s revenues were derived from the US toy

industry. In July 2003, Mattel entered the market as a direct competitor to

LeapFrog. Vtech, primarily a maker of LCDs, also entered the market with a

product that has similar functionality. There are also several smaller

companies that will be discussed briefly. Although Hasbro does not produce

1

http://www.leapfrog.com/do/findpage?pageKey=home



yet a product that competes directly against LeapFrog, we have included

them in our in-depth analysis because it is likely they will enter the market in

the foreseeable future.

Company Product Market

Served

2003

Revenues (inmillions)

Rank in the

U.S. ToyIndustry

Rank in the

Global ToyIndustry

Mattel ELP and Toy $4,960.1 1 1

Hasbro Toy only 3,138.7 2 2

V-Tech ELP andElectronics

866.5 N/A N/A

LeapFrog ELP andEducation

680.0 3 8

Figure II.D.1: Competitors overview

A. MATTEL

Corporate Overview and strategy. Mattel, founded in

1945, designs, manufactures, markets and sells toy products to

retailers, distributors or directly to consumers worldwide. Mattel

is a single business toy company and the company’s business

level strategy is to serve mass markets for a wide range of age groups with

broad differentiation by its leading brands.

Mattel achieves its strategic position by building strong brands. It

currently offers a vast variety of toy products marketed under three business

brands – Mattel, Fisher-Price, and American Girl. In 2003, sales as a

percentage of Mattel’s overall revenue for these segments was 61%, 33%

and 6% respectively. (Mattel Annual Report, 2004) The Mattel brand

focuses on sales to children seven years old and older. Fisher-Price targets

infants and preschoolers and American Girl serves girls from age three and

up.

(1) VALUE DRIVERS

Brand/Reputation. Mattel, the world’s biggest toy manufacturer,

has created many long-lived brands such as Barbie, Hot Wheels and Fisher-

Price, which help to provide stability to the sales base. According to Forbes,

Barbie has become the strongest girls brand in the world. (Mattel’s Annual

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Report, 2003, p. 5) Fisher-Price is consistently on the list as one of the top

10 brands in the world for families with children (Close, 2004) In addition, the

Fisher-Price website offers a Grow-with-Me Parenting Guide featuring

parenting advice, child development, an age-by-age resource for toys, play

tips, and fun activities to establish an intimate relationship with the parents.

Quality. Many of Mattel’s products have received industry awards.

For example, in 2003, the PowerTouch Learning system won the Gold Seal

Award from Oppenheim Toy Portfolio. In addition, Fisher-Price is best known

for its dedication to “delivering durable, quality toys with long-time play

value and developmental attributes” (Howell, 2001) and has become a

trusted name for early childhood developmental products, including ELPs.

Technology. Mattel has a global IT infrastructure in place that

includes global finance, data warehousing, global reporting, electronic

transactional procurement and human resources systems in place. The

advanced IT systems not only improve Mattel’s supply chain but also

provided a 33% cost reduction in general accounting processing in 2003

(Krutick and Osur, 2004, p.29). In addition, Mattel is in the process of

enhancing the flow of customer sales information. Efforts include point-of-

sales reporting to help Mattel “make better short-term supply and product

decisions and align the company better with the just-in-time approach of

retailers.” (Krutick and Osur, 2004, p.29)

Geography. Mattel has a wide geographical reach to customers

worldwide. Currently the company has offices in North America, Central and

South America, Europe and Asia Pacific. 40% of sales, or $2.18 billion, come

from outside of the US. (Exhibit II.D.1)

Breadth of Line. Mattel leverages its core brands in connection

with the sale of non-toy products such as Barbie eyewear for little girls. The

company also introduces product extensions for core product lines year after

year. In addition, through the extensive characters from Mattel’s own

powerful brands, the company has the exclusive rights to create popular

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children’s entertaining or educational content which in turn immerses

children deeper in the brand experience.

(2) COST DRIVERS

Vertical Integration. In addition to outsourced manufacturing,

Mattel also has company-owned manufacturing facilities in low-cost regions

such as China, Indonesia, Malaysia, Mexico, and Thailand. (Krutick and Osur,

2004, p.14)

Scale, Scope and Learning Economies. Mattel broad range of

products and overall volume of products is allowing them to share R&D, SGA

and Manufacturing overhead cost between several product lines. Also,

Fisher-Price is already an established brand in the infant and preschooler’s

market. Therefore, Mattel’s ELP products can leverage the brand recognition

Fisher-Price has already developed and its expertise in the early child

development.

Low Input Costs. Mattel has successfully minimized their input

costs by: 1) Securing long-term contracts that only allow suppliers to pass on

actual raw material cost increases. This helps minimize price fluctuations for

raw materials. (Krutick and Osur, 2004, p.29), 2) Centralizing procurementand installing state-of-the-art IT systems to reduce transaction and

processing costs, and 3) Manufacturing or outsourcing products in lower-cost

regions.

(3) RESOURCES

Exhibit II.D.2 is the VRIO analysis that shows that Mattel’s leadership

position in the toy industry is sustainable based on a strong set of resources

and capabilities which includes brand names, broad networks of distribution

channels, supply chain management, diversification, and marketing.

Capital. As of September 2004, Mattel had total assets of $4.5 billion

and current assets of $2.5 billion including $331 million of cash. These

ample resources enable them to sustain their market leadership position.

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Information Technology. See Technology in Value Drives.

Established Brand and Awards. See Brand/Reputation in Value

Drives.

Mattel’s Properties. Mattel licenses characters from its own brands

for non-toy products such as Barbie eyewear for little girls. (Hoover’s Online,

2004)

Partners and Licensing Agreements. To complement Mattel’s

core brands and products with popular characters, Mattel has formed

strategic partnerships with many respected names in the entertainment

industry. These partners include Disney, Sesame Street, PBS, The Kids WB,

Sony Family Picture Entertainment, Nickelodeon, Warner Bro., and The Jim

Henson Company (Bear in the Big Blue House). (www.mattel.com,

11/19/2004)

(4) CAPABILITIES

Supply Chain Management. Supply chain management is one of

the key factors that determine net profits in the toy industry. Mattel’s

integrated supply chain management has enabled it to gain a reputation for

efficient logistics and timely product delivery. (Krutick and Osur, 2004, p.1) Through the coordinated efforts of the company’s information technology

initiatives, integrated supply chain management modeling, optimized

logistics and global auditing, Mattel managed to reduce the cycle times for

certain fast-track products from the typical 52 weeks to as low as 14 weeks.

(Krutick and Osur, 2004, p.29) In addition, Mattel has successfully brought

inventory levels to near-historic lows by improving the information flows

between manufacturers and retailers and by better aligning shipments with

retailer sell-through. (Krutick and Osur, 2004, p.28)

Broad Network of Distribution Channels. Through distributors,

partnerships, and direct relationships with retailers, Mattel has created a

broad network of distribution channels, allowing the company to sell Mattel’s

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http://www.mattel.com/


http://www.mattel.com/



products throughout the world. As mentioned previously, 40% of their

revenues come from outside the United States.

Product Development/Technology Innovation Mattel has proven

in the past that it was able to innovate constantly. For instance, John Handy,

vice president of product design at Mattel Inc., observed, “We’re just one

good idea away from going out of business.” (Johnson, 2001, p. 112)

Integration skills Mattel has a strong track record for successfully

integrating acquisitions.

Diversification. Mattel has a high level of diversification as it also

dominates in many other categories in the toy industry, such as Barbie

Collectibles or 100% Hot Wheels for adults, magazines or books to

complement its American Girl products, and baby products sold under

Fischer-Price brand.

Marketing. Much of Mattel’s success can be attributed to its

marketing capabilities. Mattel demonstrated this capability with the success

of the Barbie brand which has created more than $3.6 billion in retail sales

worldwide. The Barbie website is the #1 website for girls and receives 31

million visits per month. (Source?)

(5) CHALLENGES AND WEAKNESSES

Mattel is weak in the ELP market temporarily as the introduction of the

PowerTouch learning system under the brand of Fisher-Price is about five

years behind of LeapFrog. While LeapFrog has already published more than

60 books for their LeapPad system, PowerTouch only has 18. Furthermore,

in October 2003, Leapfrog filed a lawsuit against Fisher-Price for

infringement of LeapFrog’s patent. The lawsuit seeks a court order to “stop

Fisher-Price from selling PowerTouch” and “unspecified damages for being

‘irreparably injured’." (www.cnn.com, 10/08/2003) A negative outcome from

this lawsuit would be a tremendous setback for Mattel in the ELP market.

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B. HASBRO

Corporate overview and strategy. Hasbro was

founded in 1923 to distribute fabric remnants and school

supplies. In the 1940’s they introduced their first toys, doctor

and nurse kits. In 1964, they introduced the world’s first

“action figure,” G.I. Joe. (Hasbro website, www.hasbro.com)

Today, they produce a dizzying array of toys for kids of all ages, and have a

distribution system that spans the globe.

In the 2000, 2001 and 2002, Hasbro’s revenue kept declining. Since

then they have seen increases in sales and profitability, and have realigned

their strategy: For 2004, “the company’s principal business strategies focus

on: growing core brands, developing new and innovative toy and game

products, and increasing operating margins by optimizing efficiencies within

the company.” (Hasbro 2003 Annual Report, p. 23)

At the corporate level, Hasbro operates as a Single Business in the toy

industry. Their business level strategy is Broad Differentiation. They are

divided into three segments: U.S. Toys (34% of revenue), Games, (28% of

revenue) and International (38% of revenue). (Exhibit II.D.3.) Much of

Hasbro’s growth over the years has come via product extension acquisitions.For instance, in September 1984, they acquired Milton Bradley, and its

subsidiary Playskool, making Hasbro the largest toy company in the world at

the time. In 1991, they acquired Tonka Corporation and the Tonka

Corporation, which brought the Tonka, Play-Doh, Easy-Bake Oven, and

Parker Brothers (makers of Nerf footballs, and Monopoly) brands with it.

(1) VALUE DRIVERS

Brand/Reputation. Hasbro has many brands with international

appeal such as G.I. Joe, Tonka, Transformers, and Trivial Pursuit. Many of

these brands are classics, well outliving the average toy life of 1-2 years.

Having these classic brands helps smooth sales fluctuations and makes

Hasbro less sensitive to fads. “Our research indicates the power of strong

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brands continues to be instrumental in shaping the toy industry. Established

brands within a diversified portfolio have advantages in securing shelf space,

attracting consumers, and generating incremental revenues from licensing

that further extends the brand (eg., film, DVD, television, consumer

products).” (Close, 2004, p. 6)

Quality . Hasbro has a long operating history, which has given them

expertise in the design and manufacturing of toys and games that have

appealed to children and adults for generations like Scrabble and Monopoly.

Breadth of Line. Hasbro has a very broad offering of products that

ranges from board games to stuffed animals. Also, Hasbro has a couple

products that appeal to toy collectors. Toys that become collectibles increase

value in that buyers are less price sensitive, and new versions can help

alleviate the seasonality in the toy industry. Two examples of Hasbro

products that appeal to toy collectors are G.I. Joe and Star Wars figures.

Geography Similar to Mattel, Hasbro has brands that are popular

throughout the world.

Complementary products. Complementary products provide

increased exposure to Hasbro brands. For instance, they can license their

characters to companies that make apparel, bedroom accessories, software,

movies, and any number of other products. Having a wide array of products

more fully immerse children in the brand experience, which leads to greater

value than could be achieved by each product individually.

(2) COST DRIVERS

Scale, Scope and Learning Economies. Hasbro benefits from many

economies of scale, scope and learning. Their position as the number two toy

manufacturer in the world means that they can manufacture in high

volumes, which reduces total cost. In addition, their long operating history

means that they have gained tremendous expertise in developing new toys

and product extensions that will appeal to consumers.

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Low input costs. Because of their size, Hasbro is able to negotiate

for low prices on raw materials based on volume. In addition, over the last

couple years, they have cut $200M in overhead costs, and trimmed their

workforce down to 6,000 employees from 10,000. (Krutick and Osur, 2004,

p.30)

Organizational practices. So far, Hasbro has been successful at

executing on multi-year restructuring plans. Like previously mentioned, a

recent change in organization accompanied with lay-offs drastically reduced

their costs.

(3) RESOURCES

We have included a VRIO analysis in Exhibit II.D.4.

Capital . Hasbro has a strong balance sheet. They have been able to

generate enough working capital over the last couple years to internally

finance product development and at the same time increase their dividend

to shareholders, thereby increasing shareholder value. They also have a

large marketing budget, which will allow them to advertise, which has been

shown to drive increased revenues, even outside the holiday season.

(Johnson, 2001)Brand . As described under Value Drivers, Hasbro has a strong product

portfolio and numerous brands with worldwide appeal and proven longevity.

Hasbro Properties. Hasbro has developed characters in their games

and toys that can be licensed to entertainment companies and other

companies that produce complementary products. This increases brand

awareness and demand for Hasbro products.

Licensing Arrangements. They have licenses with entertainment

companies to be the “master producer” of toys for theatrical releases. In

2004, they are the “master producer” of toys for Pixar’s The Incredible’s and

Dreamwork’s Shrek II.

(4) CAPABILITIES

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To Susan K: I’ve not touched that part as I know you’re working on it

Distribution/Supply Chain Management

Product Development/Technology Innovation

Hasbro has developed the capability to constantly “re-invent” core

brands with product extensions to keep them “fresh.” This gives them a

sustainable competitive advantage that is difficult to imitate.

Diversification.

Sales and Marketing

Organizational Practices

Ability to implement cost-cutting measures

Long track record of managing market disruptions (as opposed to

LeapFrog, who stumbled)


Hasbro has a volatile earnings history. As mentioned earlier, they

faltered in the years 2000 through 2002. Part of their problem stemmed from

being overly reliant on licensing, which tends to be more variable in nature.

For instance, they incurred heavy losses on Star Wars action figures after therelease of Phantom Menace due to a very high (20%) royalty that Hasbro has

to pay to Georges Lucas

(http://www.fool.com/dtrouble/1999/dtrouble991102.htm, November 2,

1999). Because of this, one of their objectives is to decrease the percentage

of their revenue that comes from licensed products, and increase their focus

on their core brands.

(6) COMPARE AND CONTRAST

To Susan K: I know you have ideas here!

Similarities:

Both have strong product portfolios with well-known brands.

Contrasts:

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http://www.fool.com/dtrouble/1999/dtrouble991102.htm


http://www.fool.com/dtrouble/1999/dtrouble991102.htm



Growth at Mattel and Hasbro largely driven by acquisition in the past.

Hasbro may be limited in its ability to make acquisitions right now because

of restrictions on their cash.

C. VTECH

Corporate overview and strategy. VTech

Holdings Limited (VTech), founded by Chairman Allan

Wong in 1976, is a technology company that designs, manufactures, markets

and sells telecommunication products from cordless phones to set-top box

for satellites as well as ELPs through an international distribution network. It

is also a pioneer in China-based contract manufacturing services. Revenues

generated by each product lines are: telecommunications products

(US$680.2 million), ELPs ($130.7 million), and contract manufacturing

services ($97.3 million) respectively. As a percentage of sales, these are

75%, 14% and 11% respectively of the company’s total revenue in the

financial year ending on March 31, 2004. (See Exhibit II.D.5.) VTech has

become the largest supplier of corded and cordless phones in North America

and one of the leading ELP providers in North America and Europe. (VTech’s

Annual Report, 2004, p.3)

VTech is a dominant unrelated company as it has a 0.75 specialization

ratio and a related ratio (0.14) smaller than half of the specialization ratio

plus one (0.87). VTech’s breadth of offering - having a broad scope of

products, technologies and services – allows the company to be a cost

leader. VTech’s corporate headquarters, R&D team and manufacturing

facilities are located in Hong Kong and China to take advantage of lower

production costs.

VTech strategy can be summarized as “growth by innovation”.(VTech’s Annual Report, 2004, p.7) VTech plans on achieving its strategic

position by leveraging its major competitive advantages: “Lean operating

structure”, “well-integrated R&D”, “strong distribution networks” and

“efficient supply-chain management”. (VTech’s Annual Report, 2004, p.7)

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North America

19.4%

O t h e r s 1. 3 %Europe

76.3%

A s i a P a c i f i

c 3. 0 %

rce: VTech 2003/2004 Annual Report

VTech has been a key player on the Electronic Learning Product

market since 1999 when it was already

introducing thirty-three new products in that

category

(http://www.vtech.com/press/news.php?id=168,

February, 1999). As Figure II.D.1 shows, VTech’s

ELPs are especially strong in Europe, and still

surprisingly weak in Asia Pacific for a company

based in Hong-Kong. In 2004, the company also

began to lay the groundwork in Latin America,

Scandinavia, Central and Eastern Europe and Asia Pacific for new market

expansion.

Of all the ELPs developed by VTech, V.Smile, released in October 2003,

competes directly with LeapFrog’s LeapPad. V.Smile is a TV game console

that combines “education and entertainment for children in the 3-7 years old

category” (VTech’s Annual Report, 2004, p.5)

(1) VALUE DRIVERS

Technology. VTech being the “largest supplier of corded andcordless phone in North America” (VTech’s Annual Report, 2004, p.3) can be

definitely qualified as a “technology” company. As mentioned previously,

VTech’s management strategy is to ensure “growth by innovation” and

VTech is using its very favorable geographic location to foster innovation

while keeping its R&D expenses to a reasonable 3.6% of the total group

revenue (VTech’s Annual Report, 2004, p.10).

Delivery. Two of the major competitive advantages for VTech are

“strong distribution networks among major retailers in North America and

Europe” and “efficient supply chain management that optimizes working

capital and ensures on time product delivery” (VTech’s Annual Report, 2004,

p. 7) Moreover, in 2003, VTech committed $12 million for the implementation

a new global enterprise resource planning (ERP) system to enhance its

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Figure II.D.1: VTech’s ELPRevenues by Regions

http://www.vtech.com/press/news.php?id=168


http://www.vtech.com/press/news.php?id=168



supply chain management and management processes. (VTech’s Annual

Report, 2004, p. 11)

Geography. As a Hong Kong-based company, VTech has preferential

access to the Chinese market, one of the markets with the greatest long-

term sales growth opportunities for the toy industry according to the

analysts. (Krutick and Osur, 2004, p.29). In fact, VTech also sees mid-term

growth potential in the Chinese market and has already made VTech’s ELPs

available in major department stores and retail stores including Carrefour,

Walmart, and Jusco in parts of China. (VTech’s Annual Report, 2004, p. 8)

(2) COST DRIVERS

Low Input Costs. As a low-cost producer, VTech achieves low input

costs via low overhead and production costs since majority of VTech’s

human resources and facilities are located in China.

Scope Economies. VTech can achieve economy of scope through

shared fixed costs and resources with its other divisions. In addition, VTech’s

ELP business unit can leverage the company’s established name in the

telecommunication industry and expertise in audio technology. Additionally,

both the ELPs and telecommunication products can leverage contractmanufacturing services at its state-of-the-art facilities in China. Indeed,

VTech’s has a Contract Manufacturing organization that provides

manufacturing services for audio equipments, power supplies and wireless

products.

Scale Economies. Even though VTech has business units in

unrelated industries, the company achieves economies of scale for parts and

components (i.e. LCD screens and speakerphones for V.Smile and telephones

or pagers).

(3) RESOURCES AND CAPABILITIES

Overall, VTech’s sustainability in the ELP market is not very solid.

(Exhibit II.D.6.)

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Brand. For instance, VTech’s brand is not a very solid resource and it

doesn’t benefit from a strong recognition in the minds of consumers as

shown by our survey (Exhibit II.D.7).

Licensing Arrangements. Like Mattel and LeapFrog, VTech also

obtains agreements to license popular cartoon characters such as Winnie the

Pooh, Scooby-Doo and Spiderman to enhance attraction and the recognition

of its products.

May need to add a couple more here, but we would need to modify the

table in the exhibit as well. In terms of resources, they have access to a low-

cost and qualified workforce, and have access to their in-house contract

manufacturing organization. In terms of capabilities, they are able to

innovate and design new products (the V.Smile is innovative).

Though because VTech is based in Hong Kong, resources to develop

and support products and contents for the China market, market that

represents a significant opportunity for the toy maker, are less concentrated.

??

The company also focuses on people development to ensure

employees’ skills are kept up to date for company’s success. (VTech’s

Annual Report, 2004, p.7)


VTech does not have strong brand recognition in the ELP market. Due

to the competitive nature of the industry, VTech has lost some shelf space in

the US market. The company hopes to regain the shelf space in the US

market with the introduction of V.Smile. Lastly, VTech’s R&D professionals,

design engineering and product development team are located in Hong Kong

and China. Hence, the company is not able to respond efficiently to the US

and European markets, which account for over 90% of their revenue in the

ELP business unit. (See Figure II.D.1.)

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D. MISCELLANEOUS COMPETITORS IN THE ELP MARKET

Publications International, Educational Insights, and Oregon Scientific

all have products that have similar form and functionality to one or more of

LeapFrog’s products.

“Publications International had great success in 2003 with its Story

Reader interactive books and it's following up with the debut of its

ActivePoint stylus-driven book.” (Lebhar-Friedman, 2004, p. 23) At a price of

just $16.99, its much cheaper than its competitors.

Oregon Scientific is a subsidiary of Hong Kong-based IDT Int’l Ltd,

which specialized in developing LCD technologies. In 2003, IDT had sales of

$309M and net income of $19.2M, which were up 7.9% and 8.1%

respectively over 2002. (Hoovers Online) ELP’s like the “Big Brain Book –

Talking storybook” accounted for $56.7M in sales. (Hoover’s Online)

Educational Insights is a private company, founded in 1962, that

focuses on providing items to supplement kids education. They sell their

products primarily through school supply stores and educational toy

retailers. In 2002, they had sales of $25M, which was down 2.0% from the

previous year. (Hoover’s Online) Their sales peaked at $45.6M in 1994, and

have declined for the past four years. (Hoover’s Online)These companies are small relative to Mattel, Hasbro and LeapFrog,

but they demonstrate that smaller players can compete successfully in this

market, albeit with varying degrees of success.

E. COMPETITION IN THE EDUCATION MARKET

As mentioned in the introduction of this section, LeapFrog also

competes in the education market. Their product to address this market is

named “LeapTrak” which bundles the LeapPad platform with assessment

software. This solution is marketed directly to schools. There are no direct

competitors selling a LeapPad-like device in this market. They compete

primarily against substitutes: book publishers, software publishers, human

tutors and teachers, etc. Specifically, they compete against textbook

publishers such as Harcourt, McGraw-Hill, and Scholastic Corporation and

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4,960.1 3138.7 866.5

537.6 157.6 40.8

Cash (in $ mil.) 1,152.7 520.7 70.4* Source: Hoover's Online

Table II.D.1 Comparisons of Financial Strength and Sze

Mattel Hasbro VTech

Revenue (in $ mil.)

Net Income (in $ mil.)

Financial

electronic educational material and service providers such as Knowledge

Adventure, PLATO Learning Inc., and Renaissance Learning. (AR, p. 12)

3. WILLINGNESS-TO-PAY FRAMEWORK

The results of our Willingness-to-Pay analysis are shown in ExhibitII.D.7. We conducted a survey to compare the Value, Price and Cost for three

different Electronic Learning Products: one from LeapFrog, one from Mattel

and one from Vtech. The results show that LeapFrog has been able to deliver

the best Buyer’s value.

4. FINANCIAL COMPARISONS OF COMPETITORS

I believe Amy is working on this. So I stopped here as the following

section depends on this one.

Since these companies all operate in the retail industry, the following

ratios are the most relevant: total revenue, return on equity, operational

ratios (e.g., working capital, accounts receivables turnover, inventory turns),

and debt to equity. This is the sentence from Brian. Need to confirm that we

cover all these below

Exhibit II.D.8 compares the key financial ratios of Leapfrog’s major

competitors - Mattel, Hasbro and

VTech – based upon 2003 data.

Table II.D.1. Need the full

hyperlink for source on this table,

check formatting, right justified,

use commas.

Financial Strength and Size. Mattel continues to be the leader in

terms of the total revenue, net income and cash (cash on hand? Cash

available?). Both Mattel and Hasbro are single businesses in the toy

industry. But only 14.3% of VTech’s business is in the ELP market. Therefore

VTech is considered a relatively small player in the toy industry compared to

Mattel and Hasbro. (Mattel’s and Hasbro’s % of revenue in ELPs is small too.

16




Would it make more sense to say something else? Like, their total revenue is

a lot smaller than Mattel or Hasbro? )

Profitability. Historically Hasbro has the highest gross profit margin

and Mattel is in-line with the industry. However, Mattel shows a significant

improvement in its net profit margin, ROA and ROE in 2003 as a result of

supply chain improvements, cost reduction from its IT initiatives, reduction of

excess manufacturing capacity, and a streamlined organization structure.

(Mattel’s Annual Report, 2004, p. 7)

Working Capital Management. Mattel outperforms both the

industry and Hasbro in working capital management. Mattel has

experienced significant improvements in its accounts receivable turnover

since 2002. This was driven by “lower accounts receivable resulting from

shorter payment terms to the? customers, and improved cash collections.”

(Mattel’s Annual Report, 2003, p.38) The trends of the inventory turnover

ratios for Mattel and Hasbro both show signs of better-managed inventory.

This can be attributed to the continued improvements in supply chain

management.

Liquidity Ratio. As both Mattel and Hasbro continue their efforts in

reducing debt and inventory levels, the results are shown in the decreasing

trend of liquidity ratios. Both Mattel and Hasbro have done better than the

industry average over the past three years. Can we talk about the liquidity

ratios? Ie. Which ratios were used?

Debt Management. Both Mattel and Hasbro show sign of

improvement in debt management, even though both companies have a

higher debt to equity ratio than the industry average. As mentioned before,

both companies are committed to reducing debt. Mattel repaid $187 million

of debt in 2003. Hasbro’s debt to equity ratios (is there more than one

ratio?) are higher than Mattel though we’ve seen debt reduction as the

company work toward its goal to reduce debt.

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5. IMPLICATIONS OF THE ABOVE FOR THE INDUSTRY, RIVALRY, AND LEAPFROG’S STRATEGY

A. IMPLICATIONS FOR THE INDUSTRY

Although the ELP market is still growing, the competition in this market

is expected to become much more intense over the next few years. This will

lead to increased price pressure and the constant need for innovation and

brand building. We would also expect to see some consolidation in the

industry as the larger players (ie. Hasbro) buy their way into the market by

acquiring one or more of the smaller players. LeapFrog, Inc. recognizes that

the industry will become much more competitive:

“We believe that we are beginning to compete, and willincreasingly compete in the future, with makers of popular game platforms and smart mobile devices such as personal digitalassistants. These companies are well situated to competeeffectively in our primary markets. Additionally, we arebeginning to cross over into their markets with products such asour Leapster platform and iQuest handheld device. Many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition and substantially greater financial, technical and marketingresources than we do.” (LeapFrog 10K December 31 2003, p. 36)

B. IMPLICATIONS FOR RIVALRY

LeapFrog was the pioneer in the ELP market, however, with the

entrance of Mattel and VTech rivalry is becoming much more intense. As

mentioned above, we would expect to see some consolidation in the market,

as well as some new competitors. Some competitors will most likely exit the

industry as well (ie. Educational Insights).

C. IMPLICATIONS FOR LEAPFROG’S STRATEGY

Given the changes that are occurring in the toy industry and the ELP

market, LeapFrog will increasingly find itself competing against companies

with strong resources and capabilities in this market. Also, LeapFrog has

core competencies in making learning engaging, and a vision to be an

educational products company. As will be discussed in the internal analysis,

they have built capabilities in these areas that would be valuable in other

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industries, most notably, the adult education market. This would also also

decrease their reliance on the toy industry and ELP markets.

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