ITS 835 Chapter 6 Strategic Risk Management at the LEGO Group Enterprise Risk Management Professor Miguel Buleje Introduction LEGO Group history Strategy Legacy risk management Enterprise risk management at LEGO Initial ERM Monte Carlo simulation Active Risk Assessment of Business Projects (AROP) Preparing for Uncertainty The PAPA model Risk management ROI 2 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 No Stock Market / regulatory implications Family owned Global manufactory footprint, Plants in Europe primarily, but one plant in MX 2400 shapes currently produced 3 LEGO Strategy LEGO mission “Inspire and develop the builders of tomorrow” LEGO vision “Inventing the future of play” Growth strategy Innovation strategy Couple of diff. strategy Growth – to increase market share. Focused on locations with lower penetration rates. Example USA example. As it was 1/3 of penetration/sales per capita in Germany. Goals was to increase sales. Innovation – keeping up with change in the industry and trends. Kids change and how they play. LEGO has an strategy to follow the trend. Example going into the digital world, but still maintaining what they produced originally. 4 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 5 ERM Step 1: Enterprise Risk Mgmt 6 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 Monte Carlo: - Forecasting Model Probability Simulation Tool Technique / tool use to understand the impact of risk / uncertainty in financial / project management, cost and other forecasting models. As a result one would be able to tell how LIKELY the resulting outcomes are. 7 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?” ...

1. ITS 835
Chapter 6
Strategic Risk Management at the LEGO Group
Enterprise Risk Management
Professor Miguel Buleje
Introduction
LEGO Group history
Strategy
Legacy risk management
Enterprise risk management at LEGO
Initial ERM
Monte Carlo simulation
Active Risk Assessment of Business Projects (AROP)

2. Preparing for Uncertainty
The PAPA model
Risk management ROI
2
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
No Stock Market / regulatory implications
Family owned
Global manufactory footprint, Plants in Europe primarily, but
one plant in MX
2400 shapes currently produced
3

3. LEGO Strategy
LEGO mission
“Inspire and develop the builders of tomorrow”
LEGO vision
“Inventing the future of play”
Growth strategy
Innovation strategy
Couple of diff. strategy
Growth – to increase market share. Focused on locations with
lower penetration rates.
Example USA example. As it was 1/3 of penetration/sales per
capita in Germany.
Goals was to increase sales.
Innovation – keeping up with change in the industry and trends.
Kids change and how they play. LEGO has an strategy to follow
the trend.
Example going into the digital world, but still maintaining what
they produced originally.

4. 4
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
5
ERM Step 1: Enterprise Risk Mgmt

5. 6
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
Monte Carlo:
- Forecasting Model
Probability Simulation Tool
Technique / tool use to understand the impact of risk /
uncertainty in financial / project management, cost and other
forecasting models.
As a result one would be able to tell how LIKELY the resulting
outcomes are.
7

6. 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

7. “who is doing what by when?”
The PAPA Model
Park, Adapt, Prepare, Act: PAPA
Park
Adapt
Prepare
Act
2x2 Matrix
10
Risk Management ROI
Strong support from upper management
Efforts have resulted in value as a result of implemented Risk
Management.

8. Many LEGO key planning processes now include risk
management
More visibility of enterprise risk
More opportunity to address risk with positive outcomes.
Summary
Risk management is not risk aversion. But capitalizes on
identifying & managing any risk.
ERM allows LEGO to take risks when appropriate
Grow
Create value
LEGO strategic risk management mission
“Drive conscious choices”
Read the Chapter and see you online for great discussions
around the LEGO case and this chapter.
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