Leapfrog Strategic Analysis

Table of Contents

Major SWOT issues identified 3

Strengths 3

Weaknesses.......................................................................................................................................................5

Opportunities 7

Threats 9

Strategy Selected 12

Strategic Alternatives 14

Strategy Selection Criteria 18

Information Systems/Infrastructure 24

Controls 25

Brief Management Summary

LeapFrog Enterprises, Inc. was founded in 1995 in Emeryville, California. They design and develop products that are technologically and educationally based for consumers from the time they are infants until they complete grade school. Their products are available domestically and internationally. In order to further expand the distribution of their products, LeapFrog plans to partner with Disney Interactive Studios to develop and release games based on the LeapFrog educational model for use on popular gaming systems such as Wii, XBox, and Playstation. LeapFrog's strategy for future growth is to decentralize their distribution and game delivery system from being exclusively proprietary to being compatible with systems consumers already own and use for entertainment purposes. This will allow LeapFrog to take advantage of the popularity of these gaming systems, as well as to reach new consumers who might not otherwise consider LeapFrog products for their children.

Current Company Problem

A key issue for LeapFrog is bridging the gap between education and entertainment. While their products are highly educational, their products are not entertaining enough to keep children interested once the novelty of the product wears off. An identified weakness in LeapFrog's current operating strategy is the short product lifespan, on average, about two or three years. LeapFrog currently depends on the shorter product lifespan, coupled with the continual release of new products, to combat the affect of product age on consumer interest. LeapFrog's electronic gaming competition includes Nintendo Wii, Xbox360, and PS3, which all use a single console for their products and games. LeapFrog's learning products, however, each require the consumer to purchase a separate platform with which to run the software. This reduces LeapFrog's overall perceived and real consumer value for their products and has the potential to alienate the lower-income segment that may not be able to afford to update their electronic learning equipment as frequently.

Major SWOT issues identified

Strengths

Name Recognition

LeapFrog has leveraged itself as a fun and functional education provider, and because of this, is widely recognized as an internationally accepted maker of learning tools by parents and educators.

Learning Path System

This system, which connects through the company's Scout and Violet products, allows LeapFrog to develop a close relationship with the customer and user. Based on personal learning information of each child, Learning Path makes recommendations for advanced learning software for that specific child, with the goal of maintaining a long-term learning partnership

Strong Cash Flow

Although sales during the first three quarters of 2009 were hard-hit by residual inventory from 2008, net sales in the fourth quarter alone rose an impressive 36.9% at $188.6 million. Primary factors contributing to this rapid increase were the absence of 2008 inventory, as well as the unprecedented sales from LeapFrog's new Tag and Scout lines, and their software based books. LeapFrog has since reduced its inventory levels, and continues to actively market these new products under their largely successful new Learning Path strategy, which has substantially lowered the company's marketing costs.

In 2009, a major reduction in LeapFrog's cost structure reduced LeapFrog's operating expenses by 31.1%, or $75.3 million. This has dramatically lowered LeapFrog's cost of doing business. As the company continues to gain valuable market share, these strategies, lines, and operations overhauls will be a strong source of cash flow and savings in the future.

Brand Equity

LeapFrog also has excellent brand equity, held in both their name and in their logo, which allows it to be a strong contender in the market place, therefore giving it a competitive advantage.

Product Portfolio

Because LeapFrog has a broad range of educational development activities, it can successfully reach children with different learning types, including: tactile and kinetic, visual, and auditory.

Patents

LeapFrog also prides itself in individual child development, allowing the child to develop at their desired rate. LeapFrog strives to maintain a portfolio of patented products. These patents contribute to their competitive advantage.

Educational Connections

LeapFrog's School House has allowed them to be the fastest growing K-12 instructional software publisher, which has increased their market size and overall brand awareness, as well as made them known as an educational partner.

Strong Marketing Strategy

LeapFrog succeeds through direct marketing on LeapFrog.com. Sales through this channel are strong, and provide the added benefit of generating user/company connectivity through the Learning Path System. This helps LeapFrog target specific users based on current usage and estimated future need, and can keep users loyal to the company.

Strong Product Lines

LeapFrog also does well by inventing new lines of products. The Scout toy line has become a large franchise for LeapFrog, and acquires consumers at a young age. This increases the customer lifetime value.

Attractive Balance Sheet

LeapFrog did well by reinventing their cost structure and focusing on fewer and more strategic projects to