ERM adoption and implementation

ITS 835

Enterprise Risk Management

Chapter 6

Strategic Risk Management at the LEGO Group

School of Computing and Information Sciences

University of the Cumberland

Spring 2019

Introduction ➢ LEGO Group history

➢ Strategy

➢ Legacy risk management

➢ Enterprise risk management at LEGO:

1. Initial ERM

2. Monte Carlo simulation

3. Active Risk Assessment of Business Projects

(AROP)

4. 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 Management

Enterprise Risk Management (ERM):

➢ Strategic (Added 2006)

➢ Operational

➢ Legal

➢ Financial

➢ Hazard

➢ Employee Safety

➢ IT Security

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

Prepare Act

Park Adapt

Slow

Fast

Low High

Overall Strategic Responses

Likelihood

S p e e d o

f C h a n g e

P Prepare

A Adapt

P Park

A 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”

School of Computing and Information Sciences

University of the Cumberland

Spring 2019