Read the following case study and answer questions 1-3 based on the case study 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 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 perfected 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. Strategic Risk Management Lab Commentary One of the challenges of risk management is to find ways to prioritize risks that make business sense. The PAPA model provides a good example of a framework that can prioritize risks and set the stage for the appropriate actions. Our research on high-performance companies (see Mark L. Frigo, "Return Driven: Lessons from High Performance Companies," and the book Driven: Business Strategy, Human Actions, and the Creation of Wealth by Mark L. Frigo and Joel Litman) found that companies that demonstrate sustainable high performance exhibit a "vigilance to forces of change" that allows them to manage the threats and opportunities in the uncertainties and changes better than other companies do. The approach used at LEGO is a great example of embedding this vigilance to forces of change in its strategy development and strategy execution processes. The scenario analysis approach used at LEGO provides an engagement platform for engaging stakeholders in the risk management process. PROGRAMME BACHELOR OF COMMERCE IN FINANCIAL MANAGEMENT MODULE RISK MANAGEMENT (FINANCIAL MANAGEMENT 3F) TOTAL MARKS 20 MARKS STATEGIC RISK MANAGEMENT RETURN ON INVESTMENT 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 over all 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 ofERM in an organization

QUESTIONS

1. What are the advantages of integrating ERM with strategy and strategy execution as described in this case?[5]

2.How does scenario analysis as described in this case help an organization to prepare for uncertainties?[5]

3.How would you describe the "Strategic Risk Management Return on Investment" at LEGO?[10]