The toy industry has to deal with some of the world's most fickle customers—children. Product life-cycles are short and, although some toys can become runaway successes, others can entirely fail to ignite. Supply chain management is also notoriously difficult: underestimate demand and shelves remain empty at crucial times, such as Christmas, but overestimate it and the surplus stock may be impossible to sell.
The Danish toymaker, Lego System A/S, has been more successful than most at managing these risks. Now in its 80th year, it is the world's fifth-largest toymaker and, after a rocky period early in the last decade, it has returned to strong growth.
The recognition that strategic risks, such as shifting demographics, regulatory change or the emergence of a new competitor, could derail this success has prompted the company to build a new, structured approach to strategic risk management on top of its existing operational risk processes.
"We found that a lot of the most important risks that we faced were linked to changes in the competitive landscape or the business landscape in which we were operating," says Hans Læssøe, senior director for strategic risk management at the Lego Group. With the full support of senior management, Mr Læssøe was tasked with developing a standardised approach to strategic management that could be embedded in the business and that would enable the Lego Group to test the resilience of its strategies against certain scenarios. "The aim is to build scenarios that do not try to predict the future, but describe possible outcomes and jog people's imagination about what could be the issues they will face."
Together with a small research team, Mr Læssøe developed four scenarios that describe possible economic, political and competitive futures up until 2015. These range from the relatively benign—slow and steady economic growth—to the near catastrophic, which Mr Læssøe has termed "Murphy's surprise". These scenarios were presented to the top management team, with the impact of each tested against the firm's current long-term strategy.
"We wanted management to test the resilience of their strategies against these possible outcomes," says Mr Læssøe. "The idea is that they think about the prerequisites for the Lego Group to be successful in these possible futures. It also helps to frame their minds so that, when they think about strategies in 2015, they do so with that time frame in mind rather than defaulting back to the world they see in 2010."
Although separate from the firm's existing operational risk processes, the outcomes from the strategic risk management are combined together into an overall enterprise risk management database. "This means that the risk of a fire in a factory is right next to the risk of losing the Chinese market through new regulation," says Mr Læssøe. "They're both assessed and they're both addressed in some way."
As with any risk management process, the success of Lego's approach depends on integrating it within the business and ensuring that it is relevant to the senior management responsible for decision-making. "You have to embed it within the process that business managers are doing anyway," says Mr Læssøe. "You don't want to make the strategic risk management process something that they do on top of everything else, but something that is part and parcel of the normal business planning cycle."
