Business Finance
MAN 3503 St Petersburg College The LEGO Company Individual Case study

MAN 3503

ST PETERSBURG COLLEGE

MAN

Question Description

I’m trying to study for my Management course and I need some help to understand this question.

Read Chapter 6, Strategic Risk Management at the LEGO Group, starting on page 93. (which i have attached) Review the corporate culture and solutions and history of LEGO Group again. Then answer the questions below and submit your document to this dropbox.

  1. What are the benefits of incorporating Enterprise Risk Management with strategy and strategy execution as explained in the LEGO case?
  2. According to the case, how does scenario analysis assist a company to become better prepared for uncertainties?
  3. The case study focuses on four steps. Explain each step and provide an example of each.
  4. In your own words, describe the Strategic Risk Management Return on Investment at LEGO?

Details

  • Apply critical thinking.
  • Include a minimum of one quality SPC online library source to support your ideas as well as your textbook.
  • Do not copy or otherwise repeat the questions. Use short headings to identify the topic of the question.
  • Formal writing and all APA formats are required. Answer the questions in no more than 3 pages not including title page, and reference page. No abstracts are required.

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CHAPTER 6 Strategic Risk Management at the LEGO Group Integrating Strategy and Risk Management MARK L. FRIGO Director, Strategic Risk Management Lab, and Ledger & Quill Distinguished Professor of Strategy and Leadership, DePaul University HANS LÆSSØE Senior Director of Strategic Risk Management, LEGO Group H ow 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. In this case1 we describe strategic risk management at the LEGO Group, which is based on an initiative started in late 2006 and led by Hans Læssøe, senior direc- tor of strategic risk management at LEGO System A/S. It’s also part of the con- tinuing 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. This descriptive case provides a great example of integrating risk management into the strategy development and strategy execution. ABOUT THE LEGO GROUP Headquartered in Billund, Denmark, the family owned LEGO Group has 12,500 employees worldwide and is the second-largest toy manufacturer in the world in terms of sales. Its portfolio, which focuses on LEGO bricks, includes 25 product lines sold in more than 130 countries. The name of the company is an abbreviation of the two Danish words leg godt that mean “play well.” The LEGO Group began in 1932 in Denmark, when Ole Kirk Kristiansen founded a small factory for making www.it-ebooks.info 93 94 Implementing Enterprise Risk Management wooden toys. Fifteen years later, he discovered that plastic was the ideal material for toy production and bought the first injection molding machine in Denmark. In 1949, the brick adventure started. Over the years, the LEGO Group per- fected the brick, which is still the basis of the entire game and building system. Though there have been small adjustments in shape, color, and design from time to time, today’s LEGO bricks still fit bricks from 1958. The 2,400 different LEGO brick shapes are produced in plants in Denmark, the Czech Republic, Hungary, and Mexico with the greatest of precision and subjected to constant controls. There are more than 900 million different ways of combining six eight-stud bricks of the same color. THE LEGO GROUP STRATEGY To understand strategic risk management at the LEGO Group, you need to under- stand 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.2 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. r Growth strategy. The LEGO Group has chosen a strategy that’s based on a number of growth drivers. One is to increase its 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 into 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 r children). Innovation strategy. On the product side, the LEGO Group focuses on creat- ing innovative new products from concepts developed under the title “Obvi- ously LEGO, never seen before.” The company plans to come up with such concepts every two to three years. One of the latest examples is LEGO Games System, which consists of 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. www.it-ebooks.info STRATEGIC RISK MANAGEMENT AT THE LEGO GROUP 95 3 4 12 Active Risk & Preparing for Opportunity Enterprise Risk Monte Carlo Uncertainty Planning (AROP) Management Simulations Exhibit 6.1 Four Elements of Risk Management at the LEGO Group 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: r Step 1. Enterprise risk management was traditional ERM in which financial, operational, hazard, and other risks were later supplemented by explicit r handling of strategic risks. Step 2. Monte Carlo simulations were added in 2008 to understand the finan- cial 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 deci- sion process and have risk awareness impact future decisions as well, LEGO risk management added: r Step 3. Active risk and opportunity planning (AROP), where business projects go through a systematic risk and opportunity process as part of preparing r the business case before final decisions about the projects are made. Step 4. Preparing for uncertainty, where management tries to ensure that long- term 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 manage- ment into the strategic decision making of an organization. This approach positions risk management as a valuecreating element of the strategic decision-making pro- cess 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 www.it-ebooks.info 96 Implementing Enterprise Risk Management 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 co- creation by engaging its employees (internal stakeholders) throughout the strate- gic decision-making, planning, and execution processes, as well as engaging exter- nal 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).3 ENTERPRISE RISK MANAGEMENT (STEP 1) The evolution of ERM toward strategic risk management is represented in Exhibit 6.2. Strategic risk was missing from the ERM portfolio until 2006. To fix this, based on his then 25 years of LEGO experience and a request from the CFO, Hans Læssøe started looking at strategic risk management. “I was a cor- porate strategic controller who had never heard the term until then,” he says. The company had embedded risk management in its processes. Operational risk—minor disruptions—was handled by planning and production. Employee health and safety was OHSAS 18001 certified. Hazards were managed through explicit insurance pro- grams in close collaboration with the company’s partners (insurance companies and brokers). Information technology (IT) security risk was a defined functional area. Financial risk covered currencies and energy hedging as well as credit risks. And legal was actively pursuing trademark violations as well as document and contract management. But strategic risks weren’t handled explicitly or systematically, so the CFO charged Hans with ensuring they would be from then on. This became a full- time position in 2007, and Hans added one employee in 2009 and another in 2011. Exhibit 6.2 The LEGO ERM Umbrella: Adding Strategic Risk Legal Financial ERM IT Security Employee Safety Hazard Strategic (added 2006) Operational www.it-ebooks.info STRATEGIC RISK MANAGEMENT AT THE LEGO GROUP 97 Strategic Management Lab Commentary Risk The 2006 situation is common. Even though strategic risks need to be integrated with risk management, many organizations don’t explicitly assess and manage strategic risks within strategic decision-making processes and strategy execution. A recent study by the Corporate Executive Board found that strategic risks have the greatest negative impact on enterprise value: “strategic risk caused 68 per- cent of severe market capitalization declines.”4 But the LEGO Group’s approach shows how strategic risk management can be a key to increasing the value of ERM within an organization. It also shows how executive leadership from the CFO played an important role in the evolution of ERM as a valuable management process. Finally, Hans came from the business side and had the attributes neces- sary to lead the initiative: broad knowledge of the business and its core strategies, strong relationships with directors and executive management, strong communication and facilitation skills, knowledge of the organization’s risks, and broad acceptance and credibility across the organization. (For more, see Mark L. Frigo and Richard J. Anderson, Embracing ERM: Practical Approaches for Getting Started, at www.coso.org/guidance.htm, p. 4.) Also, the risk owner concept at LEGO provides a good example of the impor- tance of understanding who owns the risks as well as defining the role of risk man- agement in the organization. The idea of “risk owners” was important to ensure action and accountability. Hans’s charge was to develop strategic risk management and make sure the LEGO Group had processes and capabilities in place to do this. But as senior director of strategic risk management, Hans doesn’t own the risk. He can’t own the risk, because this essentially would mean he would own the strategy, and each line of business owns the pertinent strategic risks. Hans trains, leads, and drives line management to apply a systematic process to deal with risk. The mis- sion of Hans’s strategic risk management team is to “drive conscious choices.” This is just like budgeting functions: They don’t earn the money or spend the money, but they support management to deliver on the budget or compare performance against the budget. MONTE CARLO SIMULATION (STEP 2) In 2008, Hans introduced Monte Carlo simulation into the process. A mathemati- cian by education (MSc in engineering), he started defining how Monte Carlo simulation could be used in risk management. Now it’s being used for three areas: 1. Budget simulation. The business controllers were asked for their input about volatility, which is combined with analyses based on past performance of budget accuracy. Managers said this helped them understand the financial volatility, so it was part of the financial and budget reporting in 2012. In fact, the first analyses directed top management’s attention to a sales volatility that was known but that proved to be much more significant than every- one intuitively believed. During the past two years, this approach has been refined as described by Hans: “We actually stopped this. It was found that www.it-ebooks.info 98 Implementing Enterprise Risk Management the volatility of the business is so significant that we have stopped budget- ing altogether, as the process took a lot of effort—too little value as con- ditions changed. Today (2014) we use an estimate process where a small team of lead controllers defines a preliminary estimate for board of direc- tors discussions. In March (each year) we do a detailed estimate on which we base KPIs, targets, bonus criteria, et cetera. Monthly, we then update the estimate, and hence our financial planning process is more dynamic . . . and we do not need the budget simulation anymore.” 2. Credit risk portfolio. The LEGO Group uses a similar approach to look at its credit risk portfolio so it can have a more professional conversation with a credit risk insurance partner. 3. Consolidation of risk exposure. You could multiply the probability and impact of each risk and add the whole thing up. Risk management isn’t about aver- ages (if it were, no one would take out an insurance policy on anything). With a Monte Carlo simulation, the LEGO Group can calculate the 3 percent worst-case loss compared to budget and use that to define risk appetite and risk report exposure vis-a`-vis this risk appetite, as shown in Exhibit 6.3. Risk Tolerance As a privately held company, the LEGO Group can’t look at stock values, so it looks at the amount of earnings the company is likely to lose compared to budget if the worst-case combined scenarios happen. Not all risks will materialize in any one year, because some of them are mutually exclusive; but a huge number may happen in any one year, as we have seen during the global financial crisis. Hans Net EaR Company Risk Exposure (Gross and Net) Gross Effect of mitigation Exhibit 6.3 Monte Carlo Simulations and Risk Appetite at the LEGO Group EaR www.it-ebooks.info 3% of simulations STRATEGIC RISK MANAGEMENT AT THE LEGO GROUP 99 computes a net earnings at risk (EaR), and corporate management and later the board of directors use that net earnings at risk to define their risk tolerance. They have said that the 3 percent worst-case loss may not exceed a certain percentage of the planned earnings (the percentage is not 100). That guides management toward understanding and sizing the risk exposure. This process has helped the LEGO Group take more risks and be more aggressive than it otherwise would have dared to be, and to grow faster than it otherwise could have done. Strategic Risk Management Lab Commentary Risk tolerance is a difficult area for organizations to address. The approach used at the LEGO Group provides a good example of deriving risk tolerance (the term LEGO uses rather than risk appetite) in an actionable and systematic way. It also shows an approach that fosters intelligent risk taking and that avoids being too risk averse while maintaining discipline on the amount of risk undertaken. Hans has actually had cases where he recommended taking on more risks to meet elusive targets. He uses an analogy to communicate the idea of taking risks and not being too risk averse: “I used the (very normal) traffic picture . . . ‘Guys, you are getting late for the party, yet you are still cruising at 40 mph on the highway. Why not speed up to the 70 mph you are allowed to drive—if that will more likely take you to the party in time?’” What we’ve discussed so far is more or less damage control because it’s about managing risks already taken by approving strategies and initiating busi- ness projects. Hans decided he wanted to move beyond damage control and be more proactive so he could create real value as a risk manager. He came up with a process he calls active risk and opportunity planning (AROP) for business projects. AROP: ACTIVE RISK ASSESSMENT OF BUSINESS PROJECTS (STEP 3) When the LEGO organization implements business projects of a defined minimum size or level of complexity, it’s mandatory that the business case includes an explicit definition and method of handling both risks and opportunities. Hans says that the LEGO Group has created a supporting tool (a spreadsheet) with which to do this, and it differs from the former approach to project risk management in several areas. Hans has the following to say on each: r Identification, “where we call upon more stakeholders, look at opportunities as well as risks, and look at risks both to the project and from the project (i.e., r potential project impact on the entire business system).” Assessment, “where we define explicit scales and agree what ‘high’ means to avoid different people agreeing on an impact being high without having a r shared understanding of the exposure.” Handling, “where we systematically assign risk owners to ensure action and accountability and include the use of early warning indicators, where these are relevant.” www.it-ebooks.info 100 Implementing Enterprise Risk Management r rr Reassessment, “where we explicitly define the net risk exposure to ensure that we have an exposure we know we can accept, the reason being that we have seen people ignore this step, and hence do too much or too little to a particular risk; here, we ask them to deliberately address whether or not they can and will accept the residual risk—and know what it is they accept. From time to time we see the individual risks being accepted, but then, when we do the Monte Carlo simulation on the project (yes, we use it here as well), we see that the likelihood of meeting the target is still too low—and more risk mitigation or opportunity pursuit is called for and included in the project.” Follow-up, “where we keep the risk portfolio of the project updated for gate and milestone sessions.” Reporting, “which is done automatically and fully standardized based on the data.” Common Language and Common Framework The most important point is that the people who address and work with risks get a systematic approach so they can use the same approach from Project A for Project B. The one element that project managers really like is having the data in a database. They don’t receive just a spreadsheet model. Data are entered into the spreadsheet as a database, and all the required reporting on risk management is collected from that data, so project managers don’t have to develop a report—they can just cut and paste from one of the three reporting sheets that are embedded in the tool. All the reports are standardized. That’s good for the project managers, but it’s also good for the people on the steering committees because they now receive a standardized report on risks. They don’t have a change between layouts of probability/impact risk maps or somebody comes up with ...
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Running head: MAN 3503

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MAN 3503 Individual Case study

Name
Course
University

MAN 3503

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Benefits of strategy and Enterprise Risk Management
The LEGO case has given a clear illustration of how an organization should undertake
their risk management. Based on their approach, other than merely engaging in enterprise risk
management, an organization should incorporate this process with strategy (Frigo, n.d). This
approach is deemed as beneficial because it moves the firm from a reactionary position with
regards to risks giving it an upper hand. Thus other than reacting to the hazards that the
organization encounters, the incorporation allows them to plan. The integration and adoption of
strategic risk management in the operations of the organization has enabled the company to be
vigilant in their activities and elevated the value of ERM to the organization. With it, they can
prioritize risks, and choose the most appropriate action to take.
The execution of this process yields numerous benefits to the organization. On the one
hand, instead of [pp-the helping the company to be risk-averse, it has helped them to understand
their operations better, take bigger chances and increases their growth significantly. The
company, through risk tolerance, gets to know the number of risks they are ready to take, make
more significant investments and get bigger returns. Through this insight, the company has been
well prepared to deal with issues before they arise. Strategic risk management has also enabled
the company to take the risks which are necessary and which have helped them to create value
and grow.
Scenario Analysis in preparation for Uncertainties
The LEGO Company has come up with a framework that seeks to ensure that their firm
not only reacts to the risks that they face but prepare in advance to enhance their operations and
performance of the firm(Frigo, n.d). The identification and analysis of potential scenario
analysis are one of the ways that the company seeks to prepare for any uncertainties they face in

MAN 3503

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the future. Through this strategy, the company can identify possible scenarios that could result
from a rapidly changing environment. The company then goes on to review each situation and
determine the opportunities and risks it presents.
Through these scenarios, the company can envision various possible futures that the
company could face and through tests, ensure that their strategies are relevant and resilient. The
goal of this process is to ensure that the approach that the company adopts is relevant to the
changing world when compared to the original plan.
LEGO’s four steps of SERM
In order to enhance the process of risk management and ensure that the process was not
in reaction to risk events, the LEGO Compa...

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