How can organizations manage strategic risks in a volatile and fast-paced business environment?

How can organizations manage strategic risks in a volatile and fast-paced business environment?

Fe b r u a r y 2 0 1 2 I S T R AT E G IC F I N A N C E 27


By Mark L. Frigo, CMA, CPA, and Hans Læssøe

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 strate-

gic 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.



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 Læssøe, senior director of

strategic risk management at LEGO System A/S. It’s also

part of the continuing work of the Strategic Risk Manage-

ment Lab at DePaul University, which is identifying and

developing leading practices in integrating risk manage-

ment 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 strate-

gic 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 mar-

kets, 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 tradi-

tional 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 inte-

grate risk management into the budgeting and reporting


Those two steps were seen mostly as “damage control.”

To get ahead of the decision process and have risk aware-

ness impact future decisions as well, LEGO risk manage-

ment added:

Step 3. Active Risk and Opportunity Planning

(AROP), where business projects go through a systematic

risk and opportunity process as part of preparing the

business case before final decisions about the projects

have been made.

Step 4. Preparing for Uncertainty, where manage-

ment tries to ensure that long-term strategies are relevant

28 S T R AT E G IC F I N A N C E I Fe b r u a r y 2 0 1 2















Figure 1: Four Elements of Risk Management at the LEGO Group

for and resilient to future changes that may very well dif-

fer 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 getting involved earlier in strategy devel-

opment and the strategic planning and implementation


Strategic Risk Management Lab Commentary:

This four-step approach is a good illustration of how

organizations can develop their risk management capa-

bilities and processes in incremental steps. It represents

an example of how to evolve beyond traditional ERM and

integrate risk management into the strategic decision

making of an organization. This approach positions risk

management as a value-creating element of the strategic

decision-making process and the strategy-execution


In our research on high-performance companies, we’ve

found that companies like the LEGO Group achieve sus-

tainable high performance and create stakeholder value

by consistently executing the strategic activities in the

Return Driven Strategy framework (for example, the

focus on innovating its offerings toward changing cus-

tomer needs) while co-creating value through its engage-

ment platforms (the online community, including its My

LEGO Network, which engages more than 400 million

people and helps its product development process). Its

strategic risk management processes incorporate distinct

elements of co-creation by engaging its employees (inter-

nal stakeholders) throughout the strategic decision-

making, planning, and execution processes, as well as

engaging external stakeholders (suppliers, partners, cus-

tomers). 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,

and Venkat Ramaswamy and Francis Gouillart, The Power

of Co-Creation, 2010).

Step 1: Enterprise Risk Management The evolution of ERM toward strategic risk management

is represented in Figure 2. Strategic risk was missing from

the ERM portfolio until 2006.

To fix this, based on his then 25 years of LEGO experi-

ence and a request from the CFO, Hans Læssøe started

looking at strategic risk management. “I was a corporate

strategic controller who had never heard the term until

then,” he says. The company had embedded risk manage-

ment in its processes. Operational risk—minor

disruptions—was handled by planning and production.

Employee health and safety was ISO 18001 certified.

Hazards were managed through explicit insurance pro-

grams in close collaboration with the company’s partners

(insurance companies and brokers). IT security risk was

a defined functional area. Financial risk covered curren-

cies and energy hedging. And legal was actively pursuing

trademark violations as well as document and contract

management. But strategic risks weren’t handled explicit-

ly or systematically, so the CFO charged Hans with ensur-

ing 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.

Strategic Risk Management Lab Commentary:

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. 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 busi-

ness side and had the attributes necessary to lead the ini-

tiative: broad knowledge of the business and its core

Fe b r u a r y 2 0 1 2 I S T R AT E G IC F I N A N C E 29







Figure 2: The LEGO ERM Umbrella: Adding Strategic Risk



strategies, strong relationships with directors and execu-

tive 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 Start-

ed,” published by the Committee of Sponsoring Organi-

zations of the Treadway Commission (COSO) at, 2011, p. 4.)

Also, the risk-owner concept at LEGO provides a good

example of the importance of understanding who owns

the risks as well as defining the role of risk management

in the organization. The idea of “risk owners” was impor-

tant 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 manage-

ment, 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 supports line man-

agement to apply a systematic process to deal with risk.

This is just like budgeting functions: They don’t earn the

money or spend the money, but they support manage-

ment to deliver on the budget or compare performance

against the budget.

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