Strategic Risk Management at the LEGO Group
Frigo, Mark L., Laessoe, Hans, Strategic Finance
How can organizations manage strategic risks in a volatile and fast-paced business environment? Many have started focusing their enterprise risk management (ERM) programs on the critical strategic risks that can make or break a company. This effort is being driven by requests from boards and other stakeholders and by the realization that a systematic approach is needed and that it's highly valuable to include strategic risk management in ERM and to integrate risk management within the fabric of an organization. Some companies are at the forefront of this evolving movement.
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In this article we describe strategic risk management at the LEGO Group, which is based on an initiative started in late 2006 and led by Hans Laessoe, senior director of strategic risk management at LEGO System A/S. It's also part of the continuing work of the Strategic Risk Management Lab at DePaul University, which is identifying and developing leading practices in integrating risk management with strategy development and strategy execution.
The LEGO Group Strategy
To understand strategic risk management at the LEGO Group, you need to understand the company's strategy. This is consistent with the first step in developing strategic risk management in an organization: to understand the business strategy and the related risks as described in the Strategic Risk Assessment process (see Mark L. Frigo and Richard J. Anderson, "Strategic Risk Assessment,"Strategic Finance, December 2009).
The LEGO Group's mission is "Inspire and develop the builders of tomorrow." Its vision is "Inventing the future of play." To help accomplish them, the company uses a growth strategy and an innovation strategy.
Growth Strategy: The LEGO Group has chosen a strategy that's based on a number of growth drivers. One is to increase the market share in the United States. Many Americans may think they buy a lot of LEGO products, but they buy only about a third of what Germans buy, for example. Thus there are potential growth opportunities in the U.S. market.
The LEGO Group also wants to increase market share in Eastern Europe, where the toy market is growing very rapidly. In addition, it wants to invest in emerging markets, but cautiously. The toy industry isn't the first one to move in new, emerging markets, so the LEGO Group will invest at appropriate levels and be ready for when those markets do move. It will also expand direct-to-consumer activities (sales through LEGO-owned retail stores), online sales, and online activities (such as online games for children).
Innovation Strategy: On the product side, the LEGO Group focuses on creating innovative new products from concepts developed under the title "Obviously LEGO, never seen before." The company plans to come up with such concepts every two to three years. The latest example is LEGO Games System, which is family board games (a new way of playing with LEGO bricks) with a LEGO attitude of changeability (obviously LEGO). The company also intends to expand LEGO Education, its division that works with schools and kindergartens. And it will develop its digital business as the difference between the physical world and the digital world becomes more and more blurred and less and less relevant for children.
Now let's look at the development of LEGO strategic risk management.
LEGO Strategic Risk Management
The LEGO Group developed risk management in four steps, as shown in Figure 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 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.
Those two steps were seen mostly as "damage control. …