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A great deal has happened in the LEGO Group's approach to risk management based on strong support from top management (always needed to develop processes and methodologies) and a strong focus. They have demonstrated value from the efforts they've made. They also have explicitly embedded risk management in most of the key planning processes used to run the company:

• The Strategic Scenarios used in business planning

• The LEGO Development Process – includes Monte Carlo simulation of overall project risk/opportunity exposure

• The Customer Business Planning Process – AROP in collaboration

• The Sales and Operations Planning Process – tactical scenarios

• The Performance Management Process – bonuses based on results, not efforts

"All of this has worked," Hans says. "Based on actual data, we have had a 20 percent average growth from the period between 2006 and 2010 in a market that barely grows 2 percent and 3 percent a year. It has continued so 2006 to 2012 has a cumulative annual growth rate of 20 percent, leading to a tripling of the size of the company based on official public data. Beyond that, our profitability has developed quite significantly as well. We've grown from a 17 percent return on sales in 2006 to 34 percent return on sales in 2012. And it goes beyond that. If you go back a couple more years, in 2004 we were in dire straits and had a negative return on sales of 15 percent. We changed a number of strategies.

"Risk management is not the driver of these changes," Hans continues. "I'm not even sure it's a big part. But it's one part. It's a part that has allowed us to take bigger risks and make bigger investments than we otherwise would have seen. The Monte Carlo simulation has shown us what the uncertainty is and was a key element of changing the financial planning process to a more dynamic estimation approach. The risk tolerance has shown us how much risk we are prepared to take, between the board of directors and the corporate management team. This has meant that we have been prepared to make bigger supply chain investments than we otherwise would have done and have been able to achieve bigger growth than we ever imagined we could have."

Strategic Risk Management Lab Commentary

The development of strategic risk management at the LEGO Group provides a great example of how organizations can develop their ERM programs to incorporate strategic risk and make strategic risk management a discipline and core competency within. One of the key elements was integration. During discussions with LEGO management, when Hans was asked about the ongoing development of risk management at the LEGO Group, he replied that it was "naturally integrated." It is this integration of risk management in strategy and strategy execution, and the integration of strategy in risk management, that can elevate the value of ERM in an organization.

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