RM -2

ITS 835 Chapter 6

Strategic Risk Management at the LEGO Group Enterprise Risk Management

Professor Michael Solomon

Introduction

• LEGO Group history • Strategy • Legacy risk management • Enterprise risk management at LEGO

• Initial ERM • Monte Carlo simulation • Active Risk Assessment of Business Projects (AROP) • Preparing for Uncertainty

• The PAPA model • Risk management ROI

LEGO Group History

• Headquarters in Billund, Denmark • Family owned • Second largest toy manufacturer (globally) • Founded in 1932

• Iconic bricks first introduced

• Bricks manufactured since 1958 fit with one another

• 2400 different brick shapes • Manufactured in plants across four countries

LEGO Strategy

• LEGO mission • “Inspire and develop the builders of tomorrow”

• LEGO vision • “Inventing the future of play”

• Growth strategy • Innovation strategy

ERM at LEGO • Risk management developed in 4 stages

• Step 1: Enterprise risk management • Step 2: Monte Carlo simulations • Step 3: Active Risk & Opportunity Planning (AROP) • Step 4: Preparing for Uncertainty

• Order is by initiation sequence • Steps 1 & 2 are damage control • Steps 3 & 4 are proactive

ERM Step 1: Enterprise Risk Mgmt

ERM Step 2: Monte Carlo Simulations

• Monte Carlo simulation • Method of evaluating the effect of input variances on a model of

a complex system

• In short, it helps to see how input variances affect outcomes

• Helps to define risk tolerance • Implemented in three areas

• Budget simulation

• Credit risk portfolio

• Consolidation of risk exposure

ERM Step 3: AROP

• Active Risk Assessment of Business Projects (AROP) • Formal approach to defining and handling project risk • Includes multiple steps

• Identification

• Assessment

• Handling

• Reassessment

• Follow-up

• Reporting

ERM Step 4: Preparing for Uncertainty

• Preparing for Uncertainty • Defining and Testing Strategies

• Workshops precede strategic planning sessions • Four scenarios

• Agree on two key drivers of uncertainty

• Describe each of four quadrants of 2x2 matrix

• Define strategic issues

• Actions to take • “who is doing what by when?”

The PAPA Model

• Park, Adapt, Prepare, Act: PAPA • Park

• Adapt

• Prepare

• Act

Risk Management ROI

• Strong support from upper management • Efforts have resulted in value • Many LEGO key planning processes now include risk

management

• More visibility of enterprise risk • More opportunity to address risk

Summary

• Risk management is not risk aversion • ERM allows LEGO to take risks when appropriate

• Grow

• Create value

• LEGO strategic risk management mission • “Drive conscious choices”