1. Latin America
Expansion Strategy
LEAPFROG ENTERPRISES, INC.
Presented by:
Diana Chen | Patrick Gallagher | Ka-Wai (Gary) Hui | Le-Quyen Le | Amy Liu | Sarah Tate |
Eli Wall
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2. TABLE OF CONTENTS
INTRODUCTION
ABOUT LEAPFROG ………………………………………………………………………………… 2
STAKEHOLDER ANALYSIS ………………………………………………………………………… 3
CONSTRAINT ANALYSIS …………………………………………………………………………… 5
STRATEGIC GAP ………………………………………………………………………………….. 6
STRATEGIC ISSUES
STRATEGIC PLANNING ISSUES ……………………………………………………………………... 6
METHODOLOGY ………………………………………………………………………………….. 7
INTERNAL ANALYSIS
CORE COMPETENCIES ……………………………………………………………………………. 7
VALUE CHAIN ANALYSIS …………………………………………………………………………... 8
FINANCIAL ANALYSIS ……………………………………………………………………………… 10
EXTERNAL ANALYSIS
SIX-FORCE COMPETITIVE MODEL …………………………………………………………………. 11
STRATEGIC GROUPS ……………………………………………………………………………….12
EXTERNAL OPERATING ENVIRONMENT ……………………………………………………………..12
ANALYSIS OF STRATEGIC ALTERNATIVES
CRITERIA ………………………………………………………………………………………….. 13
FIRST ELIMINATION, COUNTRY COMPARISON …………………………………………………….. 14
COUNTRY PROFILES (SEE APPENDIX FOR MORE DETAILED REPORTS)
CHILE …………………………………………………………………………………….. 15
ARGENTINA ………………………………………………………………………………. 17
COSTA RICA ……………………………………………………………………………… 19
COLOMBIA ………………………………………………………………………………. 20
VENEZUELA ………………………………………………………………………………. 22
STRATEGIC ALTERNATIVES ………………………………………………………………………… 24
PROJECTIONS …………………………………………………………………………………….. 27
IMPLEMENTATION
TIMELINE ………………………………………………………………………………………….. 28
IMPLEMENTATION ISSUES ………………………………………………………………………….. 29
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3. INTRODUCTION
ABOUT LEAPFROG
History. Michael Wood founded LeapFrog in 1995 to fulfill the market’s need for educational toy products.
Unlike other toy companies, LeapFrog puts learning first, making its sole focus to develop products that will
provide “the most engaging, effective learning experience – for all ages, in school or home, around the world.”
With its Educational Advisory Board, LeapFrog depends on leading experts who specialize in learning
methodologies to guide the development of its products. The Board is responsible for tailoring the LeapFrog
learning experience to the latest trends in education. LeapFrog SchoolHouse then develops instructional
programs for the classroom to enhance the learning process.
In 1997 LeapFrog was acquired by Knowledge Kids Enterprises, an affiliate of Knowledge Universe, Inc.
The following year the company acquired the assets of Explore Technologies. This secured the proprietary
NearTouch technology that led to the development of the LeapPad system, which is ubiquitous in many of
LeapFrog’s products. The company went public in July 2002, raising $115 million through its IPO.
Products. Products are sold in three distinct business segments: United States Consumer, International, and
Education and Training. In the United States Consumer segment, LeapFrog reaches the domestic mass
market by selling directly to retail stores, bookstores, and electronics and office supply stores. In the
International segment, the company reaches consumers by selling directly to overseas retailers in the United
Kingdom, Canada, France, Mexico, Australia, Japan, and Korea. Finally, in the Education and Training
segment, the company reaches the school market by selling directly to educational institutions, teacher supply
stores, and through catalogs for educators.
Looking to the future, LeapFrog is well-positioned to take on the global educational toy market. It has the
breadth of products to satisfy educational needs all over the world.
Mission Statement.
“Become the leading brand for technology-based educational products for school, work, and home
use for all ages around the world”
Vision. LeapFrog strives to be a company with a reputation for educational effectiveness, innovation and the
respect of consumers, educators and business partners. Additionally, LeapFrog will aim to be a widely
recognized brand name in all of its markets and will be strongly associated with helping people learn in
interactive, interesting ways. Next, LeapFrog will be a company that is closely connected to its customers.
This connection will include consumer trust in the quality and effectiveness of LeapFrog’s products and the
feeling that the company genuinely cares about the “educational health” and progress of its customers.
LeapFrog products will be known for their educational effectiveness, fun, value, quality and innovation.
LeapFrog’s operations will be recognized as “world class” and will include innovative and respected research
and development, content development, manufacturing, distribution operations, innovative marketing, sales
service, timely shipping, and customer service with performance standards and measurement that are leading
in their fields, and all operations will be conducted at the highest level of ethical standards. Finally, LeapFrog
will be associated with helping kids, teens, adults and parents improve their lives by “Learning something new
every day.”
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4. Objectives. When considering various market opportunities for LeapFrog, it is crucial to keep LeapFrog’s short
run and long run objectives in sight. These objectives can be separated into internal and external issues:
Internal External
•Increase revenues and regain •Push existing products for greater
investor confidence penetration
Short run
Short run
•Streamline business processes •Acquire brand recognition around the
•Cut costs world
•Improve financial reporting
processes
•Expand on ESL products •Develop an international presence in
•Further develop U.S. Consumer electronic education toys industry
Long run
Long run
line •Focus on competitive advantages in
light of impending threats from
competitors
STAKEHOLDER ANALYSIS
In evaluating the effects of entering the Latin American Market, it is critical to consider the costs, benefits,
and risk and time preferences of all key stakeholders. We must assess their interests, and the ways in which
these interests affect the riskiness and viability of international expansion.
Internal Stakeholders
Shareholders. As a publicly traded company, the company’s shareholders are some of the most important
stakeholders. Shareholders will ultimately fund this venture and assume the financial risk of this investment.
In the twelve months following April 29, 2004, LeapFrog’s stock price dropped from $22.05 to $10.01. Given
LeapFrog’s sales slump in 2004, the pressure from shareholders to increase earnings growth has intensified.
Shareholders are concerned with short and long-term growth. Successful expansion into Latin America will
increase revenues and potential earning in the long-run. This will help retain investor confidence and facilitate
further stock appreciation.
Corporate Management. Top management must achieve its annual sales and earnings targets. They are important
stakeholders because they have the power to influence the implementation of this venture. As profit-sharing
leaders, they also assume financial risk in addition to the responsibility of the outcome. Capitalizing on this
growth opportunity will give them a first-to-market advantage in certain areas. Latin American expansion is
also in line with management’s short and long-term goals, which are increasing revenues and existing product
penetration, and developing an international presence and expanding ESL products, respectively. This is a
high priority project for managers since sales growth, profitability, and achieving LeapFrog’s mission to
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5. “become the leading brand for technology-based educational products around the world,” ultimately
determines their success.
External Stakeholders
Retailers. The primary objective of retailers is to stock their stores with profitable products in high demand.
Their time preferences focus on rapid turnover of inventory. Their concern with high profit margins and the
high price of LeapFrog’s products relative to other toys and games in the market increases their risks
associated with purchasing LeapFrog’s products. Given the volatile markets in Latin America, this is an
extremely high priority risk. Consumer behavior tends to switch to cheaper goods during an economic
downturn, making retailers less likely to stock their shelves with electronic goods. Retailers’ profit focus could
possibly conflict with LeapFrog’s interests if they attempt to increase profit margins by selling the products at
higher prices than suggested by LeapFrog, resulting in a decrease in demand. The retailers’ power and
influence stem from their importance to the products’ success in these new markets since they interface
directly with end consumers. Retailers stand to benefit in sales and marketing if they continue to serve
LeapFrog’s target market. For example, Carrefour is already an established retailer of LeapFrog products.
They are also the leading retailer in Argentina. They risk their established relationship with LeapFrog by
taking part in this Latin American expansion and risk decreased demand from consumers during unexpected
economic downturns.
Distributors. Distributors serve as intermediary stakeholders that enable LeapFrog’s products to enter the Latin
American market. They are looking for reliable suppliers from which to buy. It takes quite some time to
develop the trust needed to carry a significant amount of a supplier’s product. The distributors’ distribution
networks and relationships with retailers make them important to the success of LeapFrog’s Latin American
venture. Distributors stand to benefit due to their established distribution channels and the increase in
business from LeapFrog. LeapFrog could possibly lead distributors into new markets in which the
distributors will benefit. Expansion and developing strong relationships with suppliers and retailers is of great
importance to distributors.
Competitors. LeapFrog must consider the reaction of competitors if they expand into new markets. With
increasing technological advances, availability of information and the shared multinational vision of many
competitors, competitors such as V-Tech are always keeping track of LeapFrog’s every move. Entry to Latin
American markets is open to competitors as it is open to Leapfrog. Competitors’ capabilities increase the
likelihood that any strategy LeapFrog tries to implement will be faced with hard competition immediately.
Like LeapFrog, competitors risk losing market share if they are slow to enter the market. This is why it is
crucial for LeapFrog to seize the opportunity and move into these markets while they are still unsaturated
with like products. Leapfrog should also develop competitive strategies to counter possible competition.
Consumers. Consumers want to please and educate their children. They want products to be available when
they need them, in the locations that are most convenient. Latin American consumers, especially children and
young mothers are increasingly becoming more focused on brands. They are developing brand loyalty as they
have less children and their standard of living increases. This is why LeapFrog needs to get its name out and
develop strong brand recognition. Consumers face volatile economies and currencies, especially in Argentina,
which makes it difficult for them to afford U.S. imports during economic crisis. As spending behavior
changes, LeapFrog is not a viable option for them. Consumers stand to gain in the current economic recovery
and promising years to come as inflation stabilizes and purchasing power strengthens. English is extensively
taught as a second language, so consumers would benefit from ESL products.
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6. CONSTRAINT ANALYSIS
The constraints that LeapFrog faces from entering Latin American markets, particularly Argentina and Chile,
can be divided into external and internal constraints.
External Constraints
Decline in birth-rate in most of the Latin American countries. As children are the ultimate users of LeapFrog’s
educational learning products, the declining birth rates will directly affect the size of target segments in the
targeted Latin American countries.
Low purchasing power of target population. Although most of the countries discussed in this report have declining
poverty rates, the majority of the target country populations still have low purchasing power. While LeapFrog
has relatively heavy monetary and non-monetary investment in product development and marketing, the low
purchasing power of target market may place high pressure on Leapfrog’s pricing strategy.
Intense competition. As major competitors (e.g. Vtech, Mattel, Hasbro and Otto Krau) have already started
providing similar products to the target segment and they have developed a relatively strong brand reputation,
these limit Leapfrog’s choices in marketing positioning and differentiation to successfully penetrate the
market and gain market share. Also, the strong presence of unbranded low-priced toys also places pressure on
Leapfrog’s pricing strategy.
Internal Constraints
Lack of experience in the targeted Latin American countries. Although LeapFrog has presence in the Mexican market,
they have no or relatively little experience in the primary target markets mentioned in this report. This will put
LeapFrog in a disadvantaged constrained position in issues of human resources, inventory and public
relations.
High risk of sole focus on educational learning products. Although focusing only on educational learning products may
allow LeapFrog to develop a strong market position in a specific niche market, it also increases the risks of
failure (e.g. actual demand is lower than forecasted, shift of consumers’ buying habits) at the same time.
Too broad range of target segments. While LeapFrog’s mission is to serve the school and home segments, strong
focus on both target segments at the beginning of market penetration will greatly increase associated risks and
costs. Therefore, it is suggested that LeapFrog focus first on one segment, and then gradually penetrate into
the other segment after gaining market share and brand reputation in one of the segments.
Relatively low level of investors’ confidence. Partially due to the decreasing return on equity and revenue growth,
investors may be reluctant to invest in developing new markets. This may increase LeapFrog’s financial
difficulty in developing brand reputation and gaining market share.
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7. STRATEGIC GAP ANALYSIS
The strategic gap is the discrepancy between a company’s internal capabilities and external opportunities. A
company has a positive strategic gap when there are external opportunities that they are not taking full
advantage of. A negative strategic gap occurs when a company does not have the internal capabilities to fully
capitalize on all the external opportunities that are available. Both of these strategic gaps can be small or large.
Analyzing a company’s strategic gap helps us realize potential growth opportunities and areas for
improvement.
In analyzing LeapFrog’s strategic gap in the Latin American market, we looked at both LeapFrog’s currently
available Spanish-language product mix and the existing opportunities in Latin America for the sale and
distribution of those products. We also considered the risk of entering new markets.
Current Capabilities Latin American Opportunity Gap Size
Existing Spanish-
Strong markets in Chile & Argentina Positive Large
language products
Strong relationships withIncreased presence of Walmart in
Positive Medium
Walmart Latin America
LeapPad sales tapering Untapped market potential for
Positive Medium
off in U.S. LeapPad product
Growing demand for English-
Available ESL technology Positive Medium
language learning products
From this overview, we can see that in terms of the Latin American market opportunity, LeapFrog has a
medium positive strategic gap. In order to capitalize on this gap, LeapFrog should look at expanding its
operations in Latin America, which we have outlined below.
STRATEGIC ISSUES
STRATEGIC PLANNING ISSUES
Currently, LeapFrog does not have a strong presence in the Latin American Toys and Games market. Before
it expands into Latin America, LeapFrog must address a series of strategic issues present in these markets.
After conducting research on many Latin American markets, we have identified key strategic issues as follows:
1. Political stability – This is an especially important issue for entering Latin American developing
nations because the political environment strongly affects international business success. Specifically,
if the government is supportive of open markets and foreign imports, then LeapFrog’s entrance into
that given market will be relatively smoother.
2. Economic stability – Do the consumers in the given target markets have the buying power to
purchase LeapFrog’s branded products? Can the country’s economic infrastructure support branded
recreational products such as LeapFrog’s?
3. Demographics – How do we identify which segments of the market LeapFrog should target? What
is the future trend for the future population breakdown? Are birth rates increasing or decreasing? Is
GDP per capital increasing or decreasing?
4. Demand – How much emphasis is placed on education and English as a Second Language (ESL) in
the given market? Have consumer habits shifted from generic toys and games products to more
branded products and/or electronic products?
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8. 5. Retail landscape – Who are the existing retailers in prospective countries? Which are the best
retailers to target for LeapFrog distribution?
6. Competitors – Who is already operating in the given markets? What market share do they hold?
What are their best performing products? How should LeapFrog act given that information?
7. Forecasting – What are LeapFrog’s potential risks and returns from entering given markets? How
will we mitigate these risks and maximize returns?
METHODOLOGY
To tackle these myriad of strategic issues, we conducted in-depth secondary and primary research into target
Latin American markets and identified, to the best of our resources, each country’s profile surrounding these
key issues. In this process, we used a top-down approach by looking at the overall market conditions before
narrowing down to industry specifics. From this information, we then extracted information relevant to
LeapFrog’s market entry and assessed each country’s market potential given this information.
We started with all of the countries in Latin America and narrowed them down to 5 countries based on GDP
per capita and general economic factors. From there, we identified two primary markets and three secondary
markets for LeapFrog to seriously consider as viable markets to enter. For the two primary markets, we
obtained retailing and market trends information specific to the Toys and Games industry.
INTERNAL ANALYSIS
CORE COMPETENCIES
LeapFrog is in a league of its own when it comes to educational toy products. The company positions itself as
more of an educational learning center than a traditional toy company. Education comes first for LeapFrog
whereas its main competitors Fisher Price-Mattel and Hasbro primarily focus on toys and games, and V-Tech
is primarily a technology company that happened to dabble into educational games.
The Design, Development, and Marketing Process. While other toy companies’ biggest concern is market demand,
LeapFrog is preoccupied with creating the most effective learning tool for kids today. Learning always comes
first at LeapFrog and this is reflected in the unique way products make their way from the design room to
market. The process starts with a rigorously proven learning methodology developed by LeapFrog’s own
education experts. This content is then delivered as a learning experience in toy-form through the use of
technology.
Education Advisory Board. Sound education principles are the core values of LeapFrog’s brands and products.
All of LeapFrog’s content and curriculum is based on a proprietary method of learning developed by their
own education specialists with the assistance of the Education Advisory Board. These experts help LeapFrog
identify what children are learning currently and how they learn most effectively.
International Market – English as a Second Language. LeapFrog’s unique international consumer strategy includes
the creation of LeapFrog products in foreign languages as well as marketing English-language products as a
tool for learning English as a Second Language (ESL). Aside from entering the international toy market,
LeapFrog is creating its own niche market by offering ESL products for selected countries such as Japan,
Korea and Mexico. Not only is LeapFrog aiming for the international consumer market, it also aims to
distribute directly to the public and private schools of these countries. Because education is at the heart of
LeapFrog’s business concept, it hopes to become an internationally recognized classroom brand for English
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9. as a Second Language learning tools. As our society continues to globalize, there will be increasing pressure
for foreign children to learn English as a skillful asset. International demand for LeapFrog products is
expected to grow as a result of this trend.
Education and Training (SchoolHouse Division). Aside from tapping the traditional consumer market to promote
its products, LeapFrog has also developed a SchoolHouse division in 1999 that offers supplemental pre-
kindergarten through 8th grade school curriculum programs. These programs incorporate the company’s
proprietary technology personal learning tools (PLTs) as well as research-based instructional principals. The
SchoolHouse division curriculum provides over 6,000 pages of interactive content that includes instructions
and assessment for subjects such as early literacy, math, science and special education.
Advertising and Marketing. LeapFrog has a vision of becoming the brand that parents and educators will seek to
supplement a child’s learning needs. In researching target markets, LeapFrog has to investigate the traditional
toy market as well as consider the education trends of that region. In addition to network and cable television
advertisements, LeapFrog also looks to education institutions to establish their brand as an essential tool for
classroom learning.
VALUE CHAIN ANALYSIS
LeapFrog’s primary activities involve manufacturing, research and development, distribution, and marketing.
LeapFrog is the global leader in educational toy products. The company creates value from its cutting-edge
proprietary technology, an expert education board, as well as creative product designs. LeapFrog has also
strengthened its business by forming partnerships with popular labels such as Disney and creating brand
awareness among the general public through advertising. In addition, LeapFrog’s manufacturing operations in
China and Hong Kong produce products at a lower cost, thus giving them a greater margin on sales in the US
consumer market. Furthermore, LeapFrog’s current activities involve seeking new products and staying ahead
of market demand and competitor advances.
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10. Inbound Logistics. Leapfrog’s current manufacturing operations are conducted overseas. The company in-house
deals with logistics primarily associated with technology development, since product transportation
procedures are already taken care of through a carrier service partnership. The procurement department
works within LeapFrog’s headquarters to coordinate supplementing raw materials for the manufacturing
process.
Operations. Leapfrog employees conduct initial product research and development at the company
headquarters. The creative design department first manufactures a prototype which is then presented before
the board for approval. The design team is then either improves the product or sends it overseas to be
manufactured in bulk. LeapFrog’s strategy stresses selling an idea within the company first, in order to
produce truly high quality educational toys.
Outbound Logistics. The manufacturers in Asia are required to collaborate with LeapFrog, who determines
which retailers the finished products will go to. LeapFrog is also pursuing its vision of globalization by selling
their products in retailers around the world. In order to achieve this goal, the company has equipped its
products with foreign-language integration capabilities. By developing existing products in different languages,
LeapFrog is able to gain additional value without incurring extra cost when expanding into foreign markets.
The company is currently exploring a variety of potential target markets to fully capitalize on its Spanish-
Language platform.
Marketing and Sales. LeapFrog’s product line stresses the importance of “Learn Something Everday”. While
development and manufacturing departments both create a layer of value, sales and marketing teams also
produce value by generating product awareness among the respective age-groups. LeapFrog currently sells its
products via their online store, as well as through promotional catalogs and television advertising. By
encouraging brand recognition, LeapFrog hopes that its products will come to penetrate every household,
creating value not only for itself but for every school-aged child as well.
Service. LeapFrog increases product value by providing customer service for its products. Through this process,
LeapFrog consumers are not only paying for the value of the product itself, but also for the help-services
provided as well. This segment of the business enables the company to gather consumer opinions from the
end users and communicate it back to the design or manufacturing rooms. Frequent buyer interactions also
help LeapFrog stay ahead of consumer demand, so that it is able to offer successful products.
Human Resource Management. LeapFrog management stresses the importance of education to its employees. In
order to ensure that LeapFrog receives maximum value along its production chain, company employees work
as a team to guarantee the quality and content of all LeapFrog merchandise. LeapFrog team members are
constantly reminded of the company’s vision to provide educational learning toys to every household around
the globe. Because every employee is chosen for their passion for LeapFrog products, they are able to provide
the company with extra value by generating enthusiasm and efficiency.
Technology development. LeapFrog is the leader in providing cutting-edge educational toys. Constant product
innovation and discrete technological design are two of LeapFrog’s strongest competitive advantages. This is
a business that seeks value from being an innovator and always staying one step ahead of the game. Since
products in the toys and games industry have a relatively short life cycle, originality becomes especially
important in adding value for the company. With each new product line, LeapFrog gains value from brand
recognition and hyped up consumer demand for its novel technology.
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11. FINANCIAL ANALYSIS
To determine LeapFrog’s financial strength, we have analyzed a number of financial ratios. We then
compared and contrasted LeapFrog’s ratios with those of Hasbro and Mattel, LeapFrog’s two main
competitors. It is worth mentioning that Hasbro and Mattel are not perfectly comparable to LeapFrog
because of their respective sizes and breadth of products in the toy market. They are also not directly
comparable because neither of the companies focuses directly on educational toys as LeapFrog does.
Ratio LeapFrog Hasbro Mattel
Diluted EPS 0.53 0.51 0.56
Return on Equity -0.99% 12.59% 18.64%
Revenue Growth -7.89% 0.41% 3.86%
Price/Book 1.92 2.15 2.68
Diluted Earnings per Share (EPS). EPS is commonly used to evaluate a company’s financial performance. It
measures the total net income per number of outstanding shares. (Diluted earnings per share considers the
total number of shares if all convertible securities were exercised.) Because of the potentially volatile nature
of EPS, it is important to evaluate its historical movement. Looking at LeapFrog’s past quarterly and annual
data, it is apparent that the company is recovering from a dip in earnings in 2004; it has a strong current EPS
(3Q 2005) of 0.53, up from 0.33 same time last year. Hasbro currently has an EPS of 0.51 and Mattel has an
EPS of 0.56. All three companies find themselves in a comparable range with respect to this measure.
Return on Equity (ROE). ROE measures a firm’s total net income per dollar invested by stockholders. It is used
to evaluate the profitability of a company. LeapFrog’s ROE at the end of 2004 was -0.99% while Hasbro and
Mattel have respective ROE ratios of 12.59% and 18.64%. LeapFrog’s low ROE may be a result of its less
than average earnings performance from the previous year. This ratio alone cannot indicate LeapFrog’s long-
term success and firm value because it may change once 2005 fiscal data is published. LeapFrog just launched
new products such as the FLY Pen in 2005, and we can expect its revenue to increase from last year. Also,
LeapFrog has had a historically strong ROE of around 20% from 2002 to 2004, and this only dropped
dramatically after their slow year in 2004.
Revenue Growth Rate. Revenues are important indicators of how well a company’s sales are doing. It is also
very important to consider revenue growth rates because they serve as predictors for future growth.
LeapFrog’s revenue growth rate since the previous year was -7.89%. This is surprising considering that the
company’s 5-year growth rate is 54.87%. LeapFrog experienced a sales slump in 2004, but we do not expect
this slump to continue as LeapFrog enters the 2005 shopping season and releases new products in 2006.
Hasbro’s revenue growth rate since the previous year was 0.41% and Mattel’s revenue growth rate was 3.86%.
These are relatively modest figures for both companies according to historical figures.
Price-to-Book Ratio (P/B Ratio). Similarly to the P/E ratio, the P/B ratio measures how aggressively the market
values a company. LeapFrog’s P/B ratio of 1.92 is significantly lower than both that of Hasbro and Mattel,
which are 2.15 and 2.68, respectively. Therefore, either LeapFrog is not seen as performing as well as its
competitors, or it is undervalued by the market. LeapFrog’s P/B ratio was higher in both 2002 and 2003
although it has been steadily declining since then.
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12. EXTERNAL ANALYSIS
SIX-FORCE COMPETITIVE MODEL
Potential Entrants
(Threat of New Entrants: High)
Existing Rivalry Buyers
Supplier
(Market Share & (Bargaining Power of
(Bargaining Power:
Brand Reputation: Retailers & Ultimate
Low)
High) Consumers: Medium)
Substitutes
(Threat of Substitute Products: Low)
Suppliers (Bargaining power of suppliers) – Low (Leapfrog can get their supplies from a variety of suppliers
at a competitive price.)
Substitutes (Threat of substitute products) – Low (Although there is a variety of toy products available in
the targeted Latin American countries, they may not substitute Leapfrog’s products which have a strong
educational emphasis.)
Buyers: The Ultimate Consumers (Bargaining power of the ultimate consumers) – Medium (Although
there are relatively strong competition in Chile’s toy market, there are no existing educational toy companies
in Argentina. So if the ultimate consumers want to purchase toys for educational and learning purposes, they
may not have many choices.)
Buyers: The Retailers (Bargaining power of retailers) – Medium (Although there are many players in the
department store and hypermarket industry, not all of them have toy sections or sell children’s products.
Therefore, the retailers with experience in selling children products’ have relatively higher bargaining power
than other retailers.)
Potential Entrants (Threat of new entrants) – High (As there is a trend for both high-tech companies and
toy companies to produce educational toys and games, there is a high level of competitive threat from the
high-tech and toy industries.)
Existing rivalry – High (Those who have penetrated into the Latin American markets might have already
obtained market share and built a relatively strong brand reputation.)
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13. STRATEGIC GROUPS
A strategic group is the collection of firms that operate in the same market environment using similar
strategies, such as product development, target markets, and pricing policies. A firm’s position within its
strategic group is based on its core competencies in relation to the group. LeapFrog operates within two
distinct strategic groups which include the toys and games market and the electronics market.
Toys and games. In Toys and Games, LeapFrog’s top competitors include Mattel and Hasbro. As the top two
toy makers in the world, both Mattel and Hasbro share plenty of shelf space with LeapFrog, utilizing Wal-
Mart, Target, and Toys “R” Us as their main distributors. These two companies began as purely recreational
toy manufacturers. However, recently they have made advances into the educational sphere as well. For
example, Mattel has made a strong move into the educational toy market with its new partnership with
Scholastic Entertainment in early 2005, producing Read With Me DVD! and PowerTouch learning system.
This new talking book technology, however, is currently being sued by LeapFrog for patent infringement.
Electronics. In the Electronics strategic group, LeapFrog’s main competitor is VTech Holdings. Traditionally,
VTech has focused its efforts on developing cordless phones, pagers, and personal digital assistants. Recently,
it has shifted its focus towards its Electronic Learning Products due to poor performance in its
telecommunication products lines. Although not as large as Mattel or Hasbro, VTech is a strong competitor
to LeapFrog because it targets the same infant to high-school market segment with similar technology-based
learning toys as LeapFrog does. Most recently, VTech’s new electronic learning products, V-Smile and V-
Pocket, have been well-received by consumers and are viewed as a major threat to LeapFrog’s position as the
leader in the educational technology sector.
Toys & Games Education Technology
Mattel & Hasbro V-Tech
LeapFrog
Right now, LeapFrog maintains a strong position in both strategic groups by focusing on its electronic
educational toys niche. However, since its three main competitors are moving into the same education sphere
as LeapFrog from their respective toys and electronics groups, LeapFrog must recognize these advances as
potential threats and response accordingly to ensure that its competitive advantages are maintained.
EXTERNAL OPERATING ENVIRONMENT
Before making any strategic recommendations for LeapFrog’s Latin American operations, it is important to
first understand the external operating environment of the business. One of the key factors in analyzing this
environment is assessing to what extent the industry, in this case the electronic learning toys industry, is
fragmented, emerging, maturing, declining, and/or globalizing.
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14. Category Definition To What Extent?
Fragmented This is an industry in which no firm has overpowering
Industry market share and can strongly influence the industry
outcome. Usually fragmented industries are populated
by a large number of small and medium sized firms. Not at all High
Emerging Newly formed or re-formed industries that have been
Industry created by technological innovations, shifts in relative
cost relationships, emergence of new consumer needs,
or other economic and sociological changes that elevate
Not at all High
a new product or service to the level of a potentially
viable business opportunity.
Maturing Industries that pass from periods of rapid growth to
Industry more modest growth. The market is totally saturated,
demand is limited to replacement demand, and growth
is low or zero. Not at all High
Declining Industries that are treated as those that have
Industry experienced an absolute decline in unit sales over a
sustained period, which is characterized by shrinking
margins, pruning product lines, falling R&D and Not at all High
advertising and a dwindling number of competitors.
Globalizing An industry in which the strategic positions of
Industry competitors in major geographic or national markets are
fundamentally affected by their overall global positions.
Such an industry requires firms to compete on a Not at all High
worldwide basis or face strategic disadvantages.
ANALYSIS OF STRATEGIC ALTERNATIVES
CRITERIA
In order to decide which Latin American countries to go into, we assessed each target market based on the
following criteria:
GDP Per capita • economic stability and purchasing power
Education Levels • size of market, key players and EFL
• age, family size, socioeconomic status
Demographics • current and future population trends
Consumer Behavior • buying trends, preferences
Retail Landscapes • key players and possible distributors
• government support of open markets and
Political Stability foreign imports
• market share, key competitive products
Competitor Presence • marketing and distribution channels
Toys & Games Market Trends • Industry size, key players and market share
14

15. FIRST ELIMINATION
To decide which countries to assess in the first place, we ranked the various countries based on GDP. Then,
we chose the countries with the highest GDPs and best business environments to further research.
GDP per capita (2004)
7000
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5000
4000
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Through this initial analysis, we have identified Chile, Costa Rica, Venezuela, Argentina, and Colombia as
good markets to conduct further analysis on.
COUNTRY COMPARISON
Next, we looked at the five markets along the main criteria of political stability, economics, demographics,
retailers, and competitors. The factors that indicate a strong operating environment are highlighted in green,
the medium opportunity factors are in yellow, and the factors with poor implications for LeapFrog are
highlighted in red.
Political Stability Economics Demographics Retailers Competitors
•Stable gov’t, High GDP, sound Educational Department Strong existing
Chile
Chile
open market fiscal policies focus, improved stores and competitors
policy living standards hypermakets
Lax gov’t policy, Improving since Decreasing birth Walmart and No existing
Argentina Costa Rica Colombia Venezuela
anti-American, 2003 rate, increased indigenous educational toy
against open mkt toy spending retailers companies
Stable gov’t, Growing GDP, Small affluent Walmart owns Mattel, Corp. de
backed by the large national mkt., Western largest retail Supermercados
U.S. debt influence market share Unidos (CSU)
Relatively high Recovering but Declining birth Department Mattel,
corruption, unstable, poverty, rates, increasing stores and unbranded toys,
uncertain future income inequality education hypermarkets black market
Anti-American Non-transparent Declining birth Shrinking retail Mattel, black
sentiments, policies, growing rate, 80% live mkts, growing market
unstable future gov’t interference in poverty black market
From this analysis, Chile and Argentina appear to be the most optimistic markets, with Costa Rica coming in
a close third. Below are more detailed analyses of these five markets followed by recommendations for
LeapFrog’s Latin American expansion.
15

16. COUNTRY PROFILES
CHILE
Strengths Weaknesses
•Open market economy, stable gov’t •Decreasing birth rates
•80% of toys and 100% of video •Recovering economy
games are imported •Short product life cycles for toys
•Growing education awareness •Heavy piracy for video/PC games
Opportunities Threats
•Retail consolidation led to more credit •Highly competitive toys and games
•Increasing Internet penetration market (both branded & unbranded)
•More shelf space for toys in both •Presence of VTech as strong
department stores & hypermarkets competitor in educational learning
products (ELP)
CHILE MARKET OVERVIEW
Chile proves to be an attractive market for LeapFrog given its reputation for sound regulatory policies, free
trade agreements, growing purchasing power, increasing focus on education, and established retail landscape,
as outlined below.
ECONOMICS  GDP (purchasing power parity per capita): US$ 10,893.46
 Annual GDP growth rate: 6%
 Consumer expenditure on education: US$ 890.64 (highest in LA)
 Free market orientation
 Decreasing percentage of population living below poverty
 Growing upper and middle classes (48% fall into A/B category)
 Toys and games industry expected to grow 77% between 2003-2008
POLITICAL  Main political parties committed to integrating Chile into world economy
ENVIRONMENT through bilateral and multilateral trade agreements
 Secure contractual agreements (strongest in LA)
 Few restrictions concerning foreign investments and imports
 Average import tariff of 2% in 2004
 Platform Investment Law: multinational corporations’ earnings from
international operations are tax exempt in Chile
DEMOGRAPHICS  Declining birth rates due to higher living standards and health care
 Higher education grew 157% from 1999-2003
 Education-related spending grew 833.6% (8.6% of household inc. in 2005)
 96% of all children enter Chile’s education system
EXISTING  Branded toys make up 60% of toys and games sales
16

17. COMPETITORS  Non-branded toys make up 40% of toys and games sales
 VTech in market with children’s computers priced from US$38-233
 Major competitors (market share):
o Mattel (23.2%)
o Hasbro (16.8%)
o Otto Kraus (6%)
 Smaller domestic players have adopted niche strategies to stay afloat
o Otto Kraus: produces toys too expensive for imports, focuses on
institutional market
o Ludik: produces wood construction toys
o Imexporta: infant’s educational computer niche, retails VTech’s
educational computers
RETAIL  Branded toys mainly sold through department stores
ENVIRONMENT  Department stores accounted for 50% of toys sales value in 2003
o Popular because they offer store credit
o Major department stores are:
 Falabella
 Ripley
 Almacenes Paris
 La Polar
 Parque Arauco
 Hypermarkets accounted for 20% of toys sales value in 2003
o Major hypermarkets are:
 D&S Lider (bought Carrefour): owns 15% market share of toys at
retail level
 Cencosud
 Many specialized toy stores forced out of business
 Department stores and hypermarkets try to import directly from manufacturers
so they can offer lower prices to consumers
 Institutional market sells toys directly to corporations that buy toys for their
employee’s children as part of compensation package
 Major cities to target: Santiago, Puente Alto, Temuco
TOY MARKET  Video games growing rapidly among high-income consumer group
TRENDS o Accounted for 7.8% of toys and games industry in 2003
 High prevalence of piracy – accounts for 70% of video game sales or an
equivalent of US$15.6 million
 Quality and safety of toy products are of much higher concern now
 Children are increasingly brand-sensitive about the toys they want
 Multinational toy brands must engage in heavy television advertising to fight for
market share
17

18. ARGENTINA
Strengths Weaknesses
• Recovering economy • Stagnant trend for toys
• Spend on brand name products • Low disposable income
• American and indigenous retailers • Social and political instability
• Parents’ toy spending increase, • Consumers spend for subsistence
though family shrinks
Opportunities Threats
• Upper class rapidly increasing • Anti-American sentiments
• More television and internet usage • Reluctance to open-trade policies
• Brand awareness via Book Fair in • Peso depreciates
Buenos Aires • VTech potentially enter
• Higher education
ARGENTINA MARKET OVERVIEW
Argentina has been long inflicted with social, political and economic instability, but there are periods during
which Argentina functions like a robust growth country and investment opportunities are nourished. The
inconsistency of its socio-political and economic environment coupled with noticeable potential to grow
solicits further analysis before determining whether Argentina is a viable market for Leapfrog.
*Data are 2004 figures unless otherwise indicated.
ECONOMICS  GDP (purchasing power parity per capita): US$ 12,884
 Annual GDP growth rate: 9.0%
 Consumer expenditure on education: US$ 2.16 billion (2005)
 Moving from free-market orthodox policies
 Population living below poverty is declining
 Population of upper class growing fastest
 Toys/games industry expected to be smaller part of consumption in years 2005-
2015
POLITICAL  Current President pushes for government to be more active in controlling
ENVIRONMENT economic conditions; departs from free market policies.
 Differs from IMF on matter of economic policy, but arranging to sign contracts
to re-finance majority of public debts
 Although departing from free trade, President strive to maintain good relations
with US government and Brazil
DEMOGRAPHICS  Gradually declining birth rates
 Growing higher education, especially among women
18

19.  97% literacy rate; most people get free primary education
 Decline in quality of public education fosters growth of private education (25%
of students)
 Over 250,000 children under age 14 participate in labor force
 The White population (85%) is financially better off than non-whites
EXISTING  Peso devaluation makes imports very expensive, leads to exporting
COMPETITORS  Increased sophistication of traditional toys; adopt technologies
 Neighborhood stores became popular because they require less travel
 Traditional toy retailers gained bargaining power due to good relationship with
local manufacturers
 Growing penetration of video games
 Major competitors (market share in 2003):
o Mattel (24.5%) – Barbies & Hot Wheels
o Hasbro and Lego (9.1% and 4.6% market share before withdrawing in
2003)
 Small local companies grew as a result of peso devaluation
o Ruibal Hnos (10.9%) – indoor games similar to Monopoly
o Lionel’s (10%) – diversified, including educational toys
o Dimare (8.2%) – diversified, self-manufactured, imports
o Antex Andina (7.3%)– target older girls
o Others: Caupur, Caffaro Hnos, Yetem
RETAIL  Domestic toy specialists account for 50% of market share in toys
ENVIRONMENT o Consumers are conservative and don’t change spending habits
o Low penetration rates by supermarkets
 Supermarkets/hypermarkets/discounters hold 40% market share in 2003; chains
exist in large cities
o Carrefour
o Wal-mart
o Toys R Us – imports expensive, switching to locally manufactured
products
o Coto – local chain
 Department stores increase to holding 5% market share in 2003
 Large chains like Carrefour, Wal-Mart and Coto allocate 5-12 aisles to toys and
games, depending on the season
 Supermarkets allocate 2 – 3 aisles to toys and games, depending on season; offer
significant discount after high season
 Expensive toys, ranging from US$10-14, are usually bought on short term credit
for lower income groups
TOY MARKET  Video games sales increased by 16% in 2003
TRENDS o Targets affluent consumers, players 6-years-old to adults
o Software piracy extremely prevalent, but there is a lack of government
enforcement
o Main players: Nintendo leads, followed by Sony and Microsoft
o Electronic retailers hold 65% of market share; ability to maintain
competitive prices
o Largest electronic retailers are Fravega and Garbarino
 Consumers prefer brand name products if they can afford them
 Pre-school toys projected to increase by 133% by 2008
19

20.  Parents want value-added toys, i.e. educational
 Argentinean children’s consumption pattern likely to reflect that of children in
Mexico because television programs are transmitted down from Mexico
 Retailers continue to increase advertising during Dia de Ahijado in May so sales
are less cyclical
COSTA RICA
Strengths Weaknesses
• Strong emphasis on education • Small population: 4.16 million
• Political stability • Past Financial problems: $270M
• American & European influence Debt in 2003 and Public Debt
• High GDP Per Capita: $9,454 controlled 55% of the GDP
• 19% of Costa Rica’s population is • Consumers spend at subsistence
the 0-9 year-old age bracket level, so prefer inexpensive toys
Opportunities Threats
• Walmart purchased a 33% interest • Foreign investors entering with
in retail chain CARHCO (controls emphasis on technology sector
124 CSU chains in Costa Rica) • Child preferences change rapidly
• Mattel/Fisher Price is only main • Potential for competitors to enter
competitor in Costa Rica. the market and open relations with
established retailers like Wal-mart
• Reluctance for open-trade policies
COSTA RICA MARKET OVERVIEW
Costa Rica has long been inflicted with financial problems, but beyond its flaws, the country is rapidly
improving with investment opportunities and a recent emphasis on education. The political stability,
unsaturated toy and retail market, and strong Western influence have made Costa Rica a viable market option
for LeapFrog. The education market in Costa Rica presents a potential opportunity for LeapFrog to enter the
country. Leapfrog needs to take advantage of its current partnerships to get its products in the biggest
retailers with extreme visibility.
ECONOMICS  GDP (purchasing power parity per capita): US$ 9,454
 GDP is expected to increase by 3.2% (2005)
 Annual GDP growth rate: 3.9%
 Consumer expenditure on education: US$ 400 M (2005), US$ 350 M (2004)
 The economy is booming; the government has implemented a 7-yr plan with a
major focus on the high tech industry
 Imports and exports play a large role; main export and import partners are the
United States, Mexico and Brazil.
POLITICAL  Push for government to take more active role in economic conditions and open-
20

21. ENVIRONMENT market policy
 High political stability draws foreign investors to the country.
 Traditionally good ties with the United States
 Stable democracy since 1948
 Significantly reduced duties and import taxes in past decade; tariffs are 0-15%, but
luxury items (ie. cars) can be subject to rates up to 80%.
DEMOGRAPHICS  Poverty rate declined from 32% in 1991 to 18.5% in 2003
 Children aged 0 to 9 years comprise 18.75% of total population
 Birth rate declined from 20.5% in 1999 to 17.4% in 2003
 Increased higher education, especially among women
 96% literacy rate; most people get free primary education
 23% Internet penetration
RETAIL  Walmart acquired a 331/3% interest in CARHCO from Dutch retailer Royal Ahold
ENVIRONMENT NV in 2005
o CARHCO is Central America's largest retailer, with 363 supermarkets in
Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica
o CARHCO controls 124 retail stores in Costa Rica with its biggest chain
being Corporaction de Supermecados Unidos (CSU), which controls all of
the stores.
 CSU operates several retail formats inlduing Mas X Menos and Pali discount stores,
La Unión supermarkets, Hiper Más hypermarkets and warehouse giant, Maxi
Bodgea outlets.
COLOMBIA
Strengths Weaknesses
• Strong emphasis on education • Small population: 4.16 million
• Political stability • Past Financial problems: $270M
• American & European influence Debt in 2003 and Public Debt
• High GDP Per Capita: $9,454 controlled 55% of the GDP
• 19% of Costa Rica’s population is • Consumers spend at subsistence
the 0-9 year-old age bracket level, so prefer inexpensive toys
Opportunities Threats
• Walmart purchased a 33% interest • Foreign investors entering with
in retail chain CARHCO (controls emphasis on technology sector
124 CSU chains in Costa Rica) • Child preferences change rapidly
• Mattel/Fisher Price is only main • Potential for competitors to enter
competitor in Costa Rica. the market and open relations with
established retailers like Wal-mart
• Reluctance for open-trade policies
21

22. COLOMBIA MARKET OVERVIEW
Colombia’s market attractiveness is comparatively lower than the major target markets (i.e. Argentina and
Chile). Although Colombia has one of the highest GDP growths in Latin America, the uncertainty of its
major exports, political instability, and its widespread poverty and income inequality make Colombian a less
favorable target market.
ECONOMICS  One of the highest GDP growth in Latin America
o 2004 GDP = US$281.1 billion
o 2004 GPD per capita = US$6,600
 Economic reforms contributed to economic recovery
 Growth in private consumption = 4.0%
 Widespread & rising poverty (from 50% to 64% in 1997-2003) &
income inequality (Gini Index = 57.6)
 US as the main partner for Colombian exports (42.1%) and imports
(29.1%)
 Uncertainty of future oil exports and coffee
POLITICAL ENVIRONMENT  Growing political uncertainty - constitutional ban on Uribe’s request
for re-election
 National corruption = 6.3 (ranked 72nd among 130 countries)
DEMOGRAPHICS  2nd largest Spanish-speaking population
 Relatively young population (50% population under 25; 21%
population in the “babies & infants” category)
 Decline in birth rate (20.82 per 1,000 population) and fertility rate
 Relatively high literacy rate (92%)
 Increased consumer expenditure on “sports goods, toys and games”
 Parents tend to spend more on each child
TECHNOLOGY  Increased emphasis on modern communication services
 Relatively low PC (5.3%) and Internet (3,585,688 users) penetration
 Radio has highest penetration among all means of media
EXISTING COMPETITORS  Mattel/ Fisher-Price is major competitor
o Has own offices & warehouses in Colombia
o High brand reputation
o Different products for children at different ages
 Other competitors include the “black market” and unbranded low-
priced toys from Asia
RETAIL ENVIRONMENT  Growing number of national and international retailers
 Hypermarkets/supermarkets (Exito, Carulla Vivero, Carrefour,
Panamericana, Alkosto – K-Tronix, La 14 – Cacherreria La 14)
 Department stores (Iserra)
 Toy specialty stores (Pepe Ganga)
MARKETING  Radio has most widespread penetration among Colombian population
 Evening TV and weekend newspaper have high potential as effective
marketing channels
 Increase popularity in magazine (e.g. mothers’ magazine)
 Sponsorship has shown to be an effective marketing tool (E.g. Malta,
Bon Flan and Fruitino)
22

23. VENEZUELA
Strengths •Weaknesses
• Toy outlets expected to grow sales • Political instability (Chavez)
by 60% over the next four years • Unemployment is 11.8% (2005)
• Retailers Makro and Exito already • Around 80% of all Venezuelans
target younger customers live in poverty; this decreases
• Parents spend more on children as participation in the retail market
socio-economic levels rise • Lower classes (SEL) are increasing
as percentage of the total popl’n.
Opportunities Threats
• Chavez enacted reforms, including • Lifted restrictions on black market
increasing education spending • The retail industry was hit hard by
• Children are increasingly exposed economic pressure in recent years.
to mass media, especially television • Mattel has ten years of sales in
• Rising Internet penetration Venezuela & office in Caracas;
distributes straight from Mexico.
VENEZUELA MARKET OVERVIEW
The Venezuelan economy is down 25% from 1999 due to recent social and political instability, and the oil
crash in the 1980’s. Currently, some financial numbers are improving for the country, but they tend to be
unstable in growth. Leapfrog should keep its eye on Venezuela, particularly after the Chavez administration
ends in 2006 because Chavez has implemented a number of reforms to help boost the economy. Leapfrog
should wait to enter the Venezuelan market until economic stability has been attained.
There are several barriers to entry for Venezuela. One is the dominating competitor Mattel, which has been
present in Venezuelan stores for around ten years. Another is the relatively high tax rates, accompanied by
anti-US sentiments from the President. Also, the black market has been thriving recently due to increased
poverty and reduced enforcement of restrictions. This is a large problem for the retail industry because
Venezuelans can buy imitation products which function just as well as branded products at a highly reduced
rate. However, the economy shows signs of future sustainability and political instability should actually be
remedied with the conclusion of the Chavez administration. In conclusion, Leapfrog should watch the
Venezuelan market to determine the precise moment at which entrance would be most profitable.
ECONOMICS  GDP (purchasing power parity per capita): US$5,800 (2004)
 GDP real growth rate was 16.8% in 2004.
 Venezuelan investments are estimated to be 12.9% of the gross domestic
product.
 Education expenditures were US$825 million this year.
 The composition of the gross domestic product is broken down into three
sectors: 0.1% agriculture, 46% industry, and 53% services.
23

24.  United States accounts for 32.9% of imports and 56.3% of exports.
 The official monetary unit of Venezuela is the Bolivar and the inflation rate is
around 22.4%.
 The unemployment rate is relatively high; 11.8% for 2005, although this is
down from a roughly estimated 17% last year.
 Venezuelan budget includes US$26.97 billion in revenues and US$30.7 billion
in expenditure, along with US$2.6 billion in capital expenditures.
POLITICAL  At the helm of the country’s politics is President Hugo Chavez, a leftist
ENVIRONMENT populist who has been in power since February of 1999.
 Relations between the United States’ Government and the Venezuelan have
been relatively fragile since the 2002 two-day coup which sought to remove
Chavez.
 Chavez is highly critical of the US Free-Trade Area of the Americas.
 The tax brackets are as follows: 5% for raw materials, 10% for intermediate
goods, 15% for capital goods and semi-finished products, and 20% for
finished goods.
 All imports are assessed a 2% customs-handling charge. Taxes also include a
15% Value Added Tax based on the calculation of the CIF import price (cost,
insurance, and freight).
DEMOGRAPHICS  The total estimated population of Venezuela in 2005 was around 25,375,281.
 In 2005, the population of children ages 0-4 was estimated at 2,846,000
(10.78% of total population), the population of children ages 5-9 was
estimated at 2,798,000 (10.6% of total population) and the population of
children ages 10-14 was estimated at 2,752,000 (10.42% of total population).
 Women in Venezuela are typically giving birth at an older age than they used
to. The average age was 22 in 1990 which grew to 26 in 2003.
 The present birth rate is about 18.79 births per 1000 people. The fertility rate
is about 2.4 children born per female.
 In 2003, 64% of the population over 15 years of age had primary or no
educational attainment at all, 21% of the population over 15 years of age had
secondary studies and only 15% of the population over 15 years of age had
higher education.
 Students enrolled in primary and secondary schooling for the 2002-2003
school year numbered 4,786,445 and 512,371 respectively. This was a 3.9%
overall growth from the previous school year.
 The population percentages by ethnicity were as follows for 2003: 66.71%
Mestizo (mixed blood from European white, Amerindian and African
origins), 20.57% White, 10.35% Black, and 2.37% Indian.
 Internet penetration in 2005 was about 12.2% of the population; around
3,040,000 people are internet users.
24

25. RETAIL  Roughly 80% of Venezuelans live in poverty and this drastically reduces the
ENVIRONMENT amount of people who participate in the retail market.
 Mattel has a sales and marketing office in Caracas, which decides which
distributors to sell to, and how to target different regions of Venezuela.
 The largest retailer, Makro, controlled around 60% of the total sales for
hypermarkets in Venezuela in 2003. A marketing technique used by Makro is
a flyer sent in the mail to all of their customers which shows some specials
the company will be offering that month.
 Exito is a distant second to Makro, but is the only significantly large
competitor. They have recently been gaining market share in the industry
and they plan to open outlets in less densely populated, rural parts of the
country to target a new class of Venezuelans.
 A new mall called El Centro Comercial El Tolon opened in 2003 in Las
Mercedes. This mall is five stories, created 1,000 new jobs at inception, has a
large food court, and enough parking for 1,500 cars.
STRATEGIC ALTERNATIVES
After evaluating our target countries based on the strategic issues that impact market entry decisions, we have
narrowed down three viable strategies for LeapFrog in the Latin American market:
Strategy 1: Stay out of Latin America
Strategy 2: Go into all five countries
Preferred Strategy: Go into Chile & Argentina now and the others later
Below we have outlined the three options and weighed each strategy based on the level risk of following that
strategy and the potential return that could be generated by that strategy.
Strategy Risk Return
Stay out of Latin America
Low High Low High
Enter all five target markets
right away Low High Low High
Enter Chile & Argentina now
Watch other markets Low High Low High
If LeapFrog is extremely risk averse, it could choose to stay out of the Latin American market altogether and
just continue its operations in Mexico. However, this also means that it is forgoing a large opportunity to
capture market share in Latin America and a source of potentially large revenues. On the other hand, if
LeapFrog chooses to pursue all five target markets at this time, there is a high level of risk associated with that
expansion and the potential return is uncertain due to fluctuating political and economic conditions in some
countries. However, we have identified that the best strategy for Leapfrog at this time is to enter Chile and
Argentina first, because we have identified through our analysis of key strategic issues that these two countries
have the highest market potential for LeapFrog.
25

26. STRATEGY 1: STAY OUT OF LATIN AMERICA
The strategy to stay out of Latin America altogether (except Mexico) would produce less than optimal results.
This is because LeapFrog already has the existing Spanish-language platforms developed that can be
transferred to the Latin American market at a low cost. If LeapFrog forgoes this opportunity just to reduce
risk, then it will lose out on a very large potential market, especially since Latin America is rapidly growing
economically. Therefore, we have decided that the disadvantages of this strategy outweigh the potential
advantages, and LeapFrog should, in fact, enter Latin America.
Advantages Disadvantages Payoff
 Low risk incurred  Saturation of current  Losing large revenue
 No additional market markets potential in order to
entry costs  Forgoing large market decrease risk
 Focus on existing markets opportunity for existing  Possibility of improving
 Use resources toward Spanish-language product development
research and development platforms
for new products  Inconsistent with vision of
becoming global leader in
education toy market
 Competitors gain edge by
advancing into Latin
America first
STRATEGY 2: ENTER ALL FIVE TARGET MARKETS
If LeapFrog decides to enter all five markets at once, it would be expending a large amount of resources into
markets that have uncertain futures. This is extremely risky because the large investment may not bring
optimistic returns. Also, if LeapFrog focuses its attention solely on Latin America, it may be cause a burden
on other areas of the business that require attention. As a result of putting all its efforts into Latin America,
LeapFrog might also overlook other foreign markets which may have stronger potential.
Even though LeapFrog could gain first-mover advantage by entering all five markets now, the risks incurred
by this strategy far outweigh expected returns. A better strategy would be to enter the stronger markets first
and then wait and see how the other markets stabilize within the next five years. At that time, LeapFrog can
make a decision on whether or not these countries are viable markets to enter.
Advantages Disadvantages Payoff
 Take advantage of existing  High risk incurred due to  Bearing high risk in return
Spanish-language products unstable political and for potential for uncertain
 Create brand recognition economic conditions in revenue gain and global
 Fulfill globalization vision target countries name recognition
 Stay on par with or ahead  Large costs for entering  Focus on investing in new
of our competitors five markets markets could mean
 Capitalize on first-mover’s simultaneously overlooking other
advantage  No retail infrastructure in business processes that
all of the target countries could be improved
 Neglect other potential
markets (opportunity cost)
26

27. PREFERRED STRATEGY – ENTER CHILE & ARGENTINA NOW
Given that staying out of Latin America is forgoing a large opportunity and that going into all five target
markets is too risky, then going into the strong markets of Chile and Argentina first is a happy medium
between the two more extreme alternatives. LeapFrog can reconsider entering the other markets in the future
after assessing LeapFrog’s performance in Chile and Argentina and observing changing political and
economic conditions over the next five years.
Advantages Disadvantages Payoff
 Gaining foothold in Latin  Incur some level of risk  Test out strong Latin
American market due to uncertainty American markets while
 Venturing into new,  Strong competitors incurring some risk
unsaturated market already exist in these associated with market
 Capitalizing on existing markets entry
Spanish-language  Increase brand recognition
technology by expanding into new
 Target markets have markets
established retail channels
 Test product success in
more stable countries
 Save resources for other
markets and for
developing new products
27

28. PROJECTIONS
We made projections on the performance of LeapFrog in Chile and Argentina according to our strategy. This
revenue projection is based penetration ranging from 0.55% to 1.10% of the current markets in Chile and
Argentina within five years, assuming that LeapFrog enters the markets by 2006. Based on these assumptions,
we designed a sensitivity analysis with respect to three varying levels of penetration. The more aggressive
LeapFrog's marketing strategies are, the more likely it will successfully penetrate the two Latin American
markets and be able to obtain a larger market share.
Another assumption used is the fact that successful penetration during the first year will cause a sudden jump
in revenue as shown in the graph, but revenue in the years thereafter will increase at a more moderate rate and
growth will eventually plateau. The reason is that it will become more difficult to capture market share at the
same rate as in the initial years because competition will grow while the number of consumers will remain
relatively constant. For each country, the projection assumes that the country’s economic, social and political
arenas will be relatively sound with no shock strong enough to deter further investment in that market.
Chile & Argentina: Projected Revenue 2006-2010
7
6
5
Revenue (Millions of Dollars)
4
Optimistic
Medium
Pessimistic
3
2
1
0
2006 2007 2008 2009 2010
Year
In the optimistic case, we assumed that we would be able to capture 1.1% share of both Chile and Argentina
markets. The base case (medium) projection is based on if we capture 0.70% in each market. In a pessimistic
scenario, we will have captured only 0.55% of market share in both markets. These projects were based on
LeapFrog’s performance in the Mexican market and assumptions formed using the limited financial
information we had. These revenues may vary, and LeapFrog may not achieve the same penetration in both
the Chilean and Argentinean markets.
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29. IMPLEMENTATION
The implementation scheme is based on our recommendations. Implementation begins with entrance into the
Chilean and Argentinean markets, followed by a period of observation for possible problems that arise in
those markets. These two markets are favored as the first Latin American markets to enter because of their
potential to be strong market bases in Latin America. Furthermore, if penetration in these markets does not
favor Leapfrog, we can conclude that entrance into other secondary Latin American markets will likely fail.
Thus, it is pertinent that careful observations be made and alternatives are prepared for these two countries
before Leapfrog enters other Latin American markets.
Once Leapfrog has a strong revenue base in these two countries, it can expand product offerings in those
markets. Although product line expansion may occur simultaneously with expansion into the secondary
markets, the time for product expansion is contingent on how strong Leapfrog's consumer base, brand
awareness and brand image in the Chilean and Argentinean markets. Since Leapfrog's product may have
saturated the target market in these countries, introducing more products may not increase sales revenue
significantly, especially if gain in sales result mostly from cannibalization of its own products.
Finally, implementation leading up to this point in the Chilean and Argentinean markets means that
Leapfrog's strategy is overall very successful. Based on the return to investment so far, further observation is
necessary to come up with new strategies to strengthen Leapfrog's presence in Chile and Argentina.
IMPLEMENTATION TIMELINE
Enter Chile & Argentina markets
Expand Product Line
Observe Latin America Market, Landscape and
Future Strategic Implications
Enter Costa Rica, Colombia, and Venezuelan markets
Observe Market, Make Necessary Changes,
View Other Potential Markets
2006 2007 2008 2009 2010
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30. IMPLEMENTATION ISSUES
There are several problems that can emerge when implementing these market entry strategies:
 Bad reception: Consumers in Argentina may not respond positively due to the anti-American capitalist
sentiments, or parents may perceive educational toys to be unimportant. To account for this, LeapFrog
could:
o Enter market via channels that are accepted by domestic consumers. Distribution via
indigenous retailers will implicitly signal to domestic consumers that LeapFrog is non-
threatening and works to cooperate with domestic retailers.
 Changes in economic policies: Policy changes can easily disrupt regular business activities, which
usually adversely affect sales of high-priced imports.
o If changes in policies can be forecasted, it is in LeapFrog's best interest to lobby to
government officials on the basis that LeapFrog's products improve the country's overall
education level. Also, be prepared to accept the worse case scenario.
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31. APPENDIX TABLE OF CONTENTS
PROJECT OUTLINE
ORIGINAL PROJECT PROPOSAL ………………………………………………………………….. 31
RESEARCH INFORMATION
CONSULATES ………………………………………………………………………………………33
BUSINESS COMPANIES ……………………………………………………………………………..33
RESEARCH QUESTIONS ……………………………………………………………………………..34
COMPETITOR INFORMATION
MATTEL …………………………………………………………………………………………….35
VTECH ……………………………………………………………………………………………. 37
HASBRO ………………………………………………………………………………………….. 39
RETAILERS
SEARS …………………………………………………………………………………………….. 40
WAL-MART ………………………………………………………………………………………...41
CARREFOUR ……………………………………………………………………………………….44
OTHER (TOYS-R-US, TARGET) …………………………………………………………………….. 45
COUNTRY PROFILES
CHILE …………………………………………………………………………………………….. 46
ARGENTINA ………………………………………………………………………………………. 56
COLOMBIA ………………………………………………………………………………………. 69
COSTA RICA ……………………………………………………………………………………… 78
VENEZUELA ……………………………………………………………………………………….. 84
INTERNET STATS …………………………………………………………………………………………. 90
ORAL PRESENTATION ………………………………………………………………………… attached
31