Two benefits of incorporating Enterprise Risk Management (ERM) with strategy

Read Chapter 6, Strategic Risk Management at the LEGO Group, starting on page 93. Answer the questions below.

Discuss at least two benefits of incorporating Enterprise Risk Management (ERM) with strategy and strategy execution as discussed in the LEGO case.
Using information from the case, how does scenario analysis help the company to become better prepared for uncertainties?
The case study focuses on four steps. Explain each step and provide an example of each. The example can reflect information from the case or outside of the textbook.
Has the LEGO strategy worked? Use examples inside and outside of the textbook to answer this question.
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. Review the sample LEGO paper in Additional Tools.
Formal writing and APA format are required. Answer the questions in no more than 3 pages not including title page, and reference page. No abstracts are required in this class.
Submit the document to the dropbox.
HINT: See Additional Tools in the Table of Contents for a sample APA formatted paper.

Check the START HERE for a list of sources that cannot be used in this class. The list applies to all assignments in this course.

ANSWER

Strategic risk management at the LEGO Group

LEGO Group ERM

Enterprise risk management (ERM) entails exploring and responding methodically to the potential events that lead to risks in achieving strategic objectives and opportunities to gain competitive advantage (Viscelli, Hermanson, and Beasley, 2017). This has been a wide-firm strategy that aims to identify, examine, and prepare for potential dangers, threats, losses, and another potential for harm that may interrupt the organization’s objectives and operations, thus leading to losses. It takes a holistic approach and requires management-level decision-making. LEGO group has been on the front line to utilize ERM to shape the firm’s general risk position through a systematic method that is necessary, and that is exceedingly valuable to implement strategic risk management.

Benefits of incorporating Enterprise Risk Management (ERM) with strategy and strategy execution

Enterprise risk management enables creation of a more risk-focused culture within the organization. LEGO Group was able to share risk information within the organization’s operations which allowed for better insights and decision making regarding risks. ERM enable the company to assess risk, which helps the senior executives to stay on track and make appropriate decisions. According to Fraser, Simkins, and Narvaez (2014), the ultimate goal of the ERM process is to boost the company’s ability to identify, monitor, and manage risks that might influence the organization’s ability to meet the core objectives. Through the ERM and Monte Carlo simulations, the company has been able to control damages and handle strategic risks that hinder achieving strategic objectives. (Frigo and Læssøe, 2014). This is because the ERM has effectively detected potential risk events and offers an early warning. They track the potential risk likelihood or vulnerabilities changes and potentially information the organization to change the risk profile. The management has effectively understood which risks are important and how they are linked to strategic planning and specific operations within the organization.

Enterprise risk management has played a major role in strategic planning and strategy development. LEGO Group has been able to develop organizational strategies and actions that increase the company’s probability of reaching its expected results. Strategic planning has improved the ability of the company to develop appropriate responses, enabling advantageous developments and reducing related financial losses. For instance, preparing for uncertainty has been designed to improve strategic planning and strategy development within the company (Frigo and Læssøe, 2014). The management attempts to warrant that long-term plans are resilient and applicable for imminent changes.

Scenario Analysis

Scenario analysis is an assessment approach utilized to identify and measure the potential incidence of operational risk events. Scenario analysis helps organizations perceive the risks more widely and explore different scenarios that might challenge the sources of risks and assumptions. For instance, at Lego Group, scenarios have helped envisage a set of varying yet reasonable characteristics to test the approach for relevance and resilience. During the scenario analysis session, the management team discusses and agrees on the key drivers of uncertainty and discusses the scenario’s descriptive elements and major success factors. Concerning issues inspired by scenarios, Lego uses the PAPA model to look at scenarios, prioritize risks and set the direction for desired actions (Frigo and Læssøe, 2014).

Four Steps

LEGO group relies on four risk management steps. The first step is enterprise risk management. Enterprise risk management has focused on operational risks, hazards, and other risks supplemented by an explicit approach to strategic risks. Enterprise risk management shows its effectiveness in increasing the value of the organization. It has trained, led, and driven line management of LEGO group to utilize an organized process to handle risks. The second step is Monte Carlo Simulation. This is a model utilized to forecast the likelihood of various outcomes. Montel Carlo plays a significant role in explaining the impact of risk and uncertainty in forecasting and prediction models. For instance, in the LEGO Group, a budget simulation was done by business controllers to evaluate performance of budget correctness (Frigo and Læssøe, 2014). This approach is also utilized in assessing the credit risk portfolio to have more proficient interaction with a credit risk insurance colleague.

The third step is active risk assessment. Active risk assessment of business projects has effectively handled opportunities and risks in business projects. This includes identifying, assessing, handling, reassessing, following up, and reporting. He fourth step is preparing for uncertainty. LEGO has added preparing uncertainty as a systematic approach for describing and testing strategies. The PAPA model, inspired by scenarios, has played a major role in the overall strategic response. LEGO also relies on four strategic scenarios, a five-hour workshop where the parties involved focus on a specific approach.

LEGO strategy

The LEGO Strategy has worked since the strategic risk management return on investment grew from 17 percent in 2006 to 20 percent in 2010 (Frigo and Læssøe, 2014). The top executives in the company have continued to support strategic risk management and made it a strong focus for the company. The strategy has proven successful due to growth in numbers which has exceeded the industry standard. The company states that its profitability has grown significantly, with a 34 percent return on sales in 2012 from 17 percent in 2006 (Frigo and Læssøe, 2014). In 2020, its financial performance indicates that its consumer sales grew 22 percent for the full year. According to Statista, the net profit of LEGO group grew to 1,786.7 million euros in 2021 from 295.8 million euros in 2009. Therefore, these financial performances and return on investment indicate that LEGO’s strategy has worked.

References

Fraser, J. R., Simkins, B., & Narvaez, K. (2014). Implementing enterprise risk management: Case studies and best practices. John Wiley & Sons.

Frigo, M. L., & Læssøe, H. (2014). Strategic risk management at the Lego Group. Implementing Enterprise Risk Management: Case Studies and Best Practices, 93.

Viscelli, T. R., Hermanson, D. R., & Beasley, M. S. (2017). The integration of ERM and strategy: Implications for corporate governance. Accounting Horizons, 31(2), 69-82.