After losing its way early this decade, Lego A.S. looked to strategic risk management as part of its efforts to rebuild its bottom line.

Today, the Billund, Denmark-based toy manufacturer known for its colorful building blocks wouldn't dream of embarking on a major initiative without first conducting a strategic assessment.

Partly as a result of strategic risk management efforts that began in 2006, the 80-year-old family-controlled company has enjoyed tremendous success. Despite a stagnant toy market overall, Lego has tripled its revenue since 2004.

The efforts grew from sales that stagnated in the late 1990s and early 2000s when the tightly held company lost its focused approach to strategy and growth and was destroying shareholder value, said Hans Læssøe, Lego's senior director of strategic risk management.

At the time, the company had no specific strategic risk function beyond the intuition of individual managers, he said. But in 2006, Jesper Ovesen, then chief financial officer of Lego, directed Mr. Læssøe to develop a formalized strategic risk management process for the company.

The aim was to avoid the mistakes of the past and help manage the uncertainties of operating in a global marketplace.

Rather than take a big-bang approach, Mr. Læssøe introduced strategic risk management incrementally.

Although Mr. Læssøe had been at Lego for some 25 years, he had no experience in risk management at that time. He set about reading everything on risk management that he could lay his hands on, but Mr. Læssøe said he gained the most knowledge from the experience of other companies.

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In particular, he valued the exchange of knowledge with his peers at other European firms through the European Council of Strategic Risk Management, a network organized by the Conference Board Inc.

The first step was to establish a specific process to address strategic risks under the company's enterprise risk management umbrella. Lego also looked to establish centralized ERM reporting.

During this initial phase, Mr. Læssøe drew on the collective “brilliance” of some 35 specialist middle managers who contributed to a database of risks and their handling that Mr. Læssøe compiled.

Once this stage was under way, Mr. Læssøe began to look at adding proactive tools to help Lego's most senior managers in their decision-making processes.

These tools included Monte Carlo simulations to better understand volatility in financial performance and to help define risk tolerance. The next big project was the creation of what Lego calls its active risk and opportunity planning process, a consistent and systematic way to prepare the business case for large investments and projects.

More recently, Lego devised a scenario testing process — known as preparing for uncertainty — to test the resilience of strategic decisions.

Collectively, these steps are aimed at moving risk management up the management chain, getting senior executives involved earlier in Lego's strategic planning. The tools and processes now are used for all major projects and strategic challenges.

For example, Lego applied the SRM process to its challenge of growing its business in Asia.

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“Rather than just relying on gut instincts, we can expand in Asia knowing the risks and opportunities, avoiding most black swans,” or major, unforeseen events, Mr. Læssøe said.

That strategic risk assessment process, Mr. Læssøe said, has enabled Lego to “dodge a few bullets.” For example, the process allowed the company to reduce the effect of higher oil prices, which affect the price of materials and logistics. It also has helped to avoid disruptions by carefully managing transitions from one outside provider to another, he said.

But the strategic risk assessment process also has helped Lego seize opportunities, Mr. Læssøe said.

“As a company, we are now more aggressive and able to make larger investments than in the past,” he said. “The strategic risk management process enables us to focus on opportunities and take bigger chances because we have defined risk tolerances and we can measure and compare our exposures.”

For example, after undergoing a strategic risk assessment, Lego was confident enough to invest and expand in the competitive U.S. toy market; it enjoyed record growth of 25% in that market during 2011, despite generally flat growth of the market overall.

The company also was able to identify the potential for higher demand of its Ninjago toy line.

“We were able to build additional capacity and have the audacity to plan for higher sales by using insight gained through risk management,” Mr. Læssøe said.

While he has spent the past six years shaping and implementing Lego's strategic risk framework, he said he anticipates such work will never be complete.

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“Strategic risk management is still a relatively new area, and the world we operate in is constantly changing,” he said.

Mr. Læssøe said that next year he wants to expand the SRM process within Lego, a move that would involve more than 200 people as their departments started using SRM.

“If we are to apply it to more explicit risks in the organization, then we will need a more simplified process,” he said.

“Risk management is not just about the top layer of a group. It should be part of what you do as a company every day. You want to see a natural approach to risk management where people ask about uncertainties, rather than only focusing on sales or profit targets,” Mr. Læssøe said.

Lego also is considering using scenario testing for strategic risks beyond those covered by the strategic changes, such as investment in new technology, production facilities or product development.

As far as Mr. Læssøe is concerned, strategic risk management is intended to “support conscious choices,” not to make business decisions for management.

“As a strategic risk manager, you cannot own the risks or opportunities, as this would essentially lead to you owning the strategy, which is in the hands of the line of business. We own the processes, the databases and the reporting; and it is our duty to "speak up' if something goes astray, but we do not make the business decisions.”

This story is from the September 10, 2012, issue of the weekly print edition of Business Insurance, a special issue featuring how corporations and other entities are implementing strategic risk management.

Copies of this issue, which includes a data poster featuring statistics on how SRM is being used, are available for $100 by contacting our Single Copy Sales department at 888-446-1422.

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