LEGO STRATEGIC RISK MANAGEMENT
The LEGO Group developed risk management in four steps (numbered in the order in which the steps were initiated) as shown in Exhibit 6.1:
• Step 1. Enterprise risk management was traditional ERM in which financial, operational, hazard, and other risks were later supplemented by explicit handling of strategic risks.
• Step 2. Monte Carlo simulations were added in 2008 to understand the financial performance volatility (which proved to be significant) and the drivers behind it to integrate risk management into the budgeting and reporting processes. During the past two years the use of Monte Carlo simulations was refined, as described later in this chapter.
Those two steps were seen mostly as damage control. To get ahead of the decision process and have risk awareness impact future decisions as well, LEGO risk management added:
• Step 3. Active risk and opportunity planning (AROP), where business projects go through a systematic risk and opportunity process as part of preparing the business case before final decisions about the projects are made.
• Step 4. Preparing for uncertainty, where management tries to ensure that longterm strategies are relevant for and resilient to future changes that may very well differ from those planned for. Scenarios help them envision a set of different yet plausible futures to test the strategy for resilience and relevance.
These last two steps were designed to move upstream – or get involved earlier in strategy development and the strategic planning and implementation process.
Strategic Risk Management Lab Commentary
This four-step approach is a good illustration of how organizations can develop their risk management capabilities and processes in incremental steps. It represents an example of how to evolve beyond traditional ERM and integrate risk management into the strategic decision making of an organization. This approach positions risk management as a value-creating element of the strategic decision-making process and the strategy-execution process.
In our research on high-performing companies, we've found that the LEGO Group, like those companies, achieves sustainable high performance and creates stakeholder value by consistently executing the strategic activities in the Return- Driven Strategy framework (for example, the focus on innovating its offerings toward changing customer needs) while co-creating value through its engagement platforms – that is, the online community, including its My LEGO Network, which engages more than 400 million people and helps its product development process; see Venkat Ramaswamy and Francis Gouillart, The Power of Co-Creation (Free Press 2010). Its strategic risk management processes incorporate distinct elements of cocreation by engaging its employees (internal stakeholders) throughout the strategic decision-making, planning, and execution processes, as well as engaging external stakeholders (suppliers, partners, customers). The LEGO Group's approach is a good example of how an organization can engage stakeholders in co-creating strategic risk/return management (see Mark L. Frigo and Venkat Ramaswamy, "Co-Creating Strategic Risk-Return Management," Strategic Finance, May 2009).