Papa model risk management

Chapter 6

Strategic Risk Management at the LEGO Group Enterprise Risk Management page1image1113090016 page1image1113090400

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

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

LEGO Strategy

• LEGO mission

• “Inspire and develop the builders of tomorrow” • LEGO vision

• “Inventing the future of play” • Growth strategy • Innovation strategy

ERM at LEGO

• Risk management developed in 4 stages • Step1:Enterpriseriskmanagement

· Step2: MonteCarlosimulations

· 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

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ERM Step 1: Enterprise Risk Mgmt

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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

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?”

The PAPA Model

• Park, Adapt, Prepare, Act: PAPA • Park

• Adapt • Prepare • Act

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Risk Management ROI

• Strong support from upper management

• Efforts have resulted in value

• Many LEGO key planning processes now include risk management

• More visibility of enterprise risk • More opportunity to address risk

Summary

• Risk management is not risk aversion

• ERM allows LEGO to take risks when appropriate

• Grow

• Create value • LEGO strategic risk management mission

• “Drive conscious choices”