ORR Innovation Awards 2011: Corporate of the Year
Suitably for a toymaker, this director uses scenarios to imagine doing business in a world that doesn't exist ... yet
Danish toymaker LEGO System has been making toys since 1932 but after a period of turmoil, it has only in the past few years returned to strong growth. This is thanks in some part to the success of the work conducted by its senior director for strategic risk management, Hans Læssøe.
Five years ago Læssøe started working on building a standardised approach to strategic risk management. At first this was established quite traditionally, but after some time he saw the company was approaching strategic risk management entirely from a damage control perspective rather than building risk management into the strategy decision-making process.
“A few years ago I realised that when you look at strategy risk, most of the risks we were working on were damage control,” says Læssøe. “We had already taken the risks and decided on our strategy but only started doing something about them afterwards.”
To embed a more proactive approach to strategic risk management, Læssøe started building risk management into planning through the use of scenarios.
To do this, Læssøe liaised with colleagues in the company’s consumer insight function – a long-term research function that looks into how children play, how demographics and cultures develop, and how the world develops – to search for a way to ensure the company was developing strategies that fit into a world that is rapidly changing.
The purpose of these scenarios is not to predict the future but provide images of plausible futures that inspire people’s imagination about what can happen
“We were able to present four distinctly different strategic scenarios about how the world could change in five years to shift the mindsets of the senior management to the largest extent possible, so they were able to base their 2010–2015 strategies on the world of 2015, not the world of 2010.”
Læssøe’s strategic scenarios range from the catastrophic, such as the Chinese market collapsing, to the more benign, such as slower economic growth in Western markets. However, none of the scenarios presented “a walk in the park”.
He says: “The purpose of these scenarios is not to predict the future but provide images of plausible futures that inspire people’s imagination about what can happen, to identify the risks that are black swans and that we would never see if we were assuming 2015 is going to be something close to 2010. We know it is not. If you are in doubt, just look at what a cell phone looked like five years ago and compare it with an iPhone 4. The world will change and we are aiming at the next generation of people who will use and operate next-generation smart phones. They are seven-year-olds. What will that do to the way they play and the way they see toys, and what they expect from them? We have to be aware of that and be prepared to adjust for it.”
Once the individual strategies have been drafted, Læssøe and his team test their resilience against all four scenarios. “We test how resilient they are, identify the issues that arise and decide what we can and will do about them. In this way, we aim to ensure we have robust strategies before we start implementing them and move them into projects.”
The programme has been so successful that senior management has ruled it is to become mandatory for all key strategies.
The scenarios are not static; Læssøe updates them annually to account for trends that are moving faster than others. Of specific interest are the economies of Brazil, Russia, India and China (BRIC), particularly as growth in Europe and the US looks set to remain slow.
“The BRIC countries are growing quite well, not as fast as before 2008 but still rapidly, at 8–12% a year,” he says. “They have different economies, different ways of thinking and different ways of working. The Chinese, Indians and the Brazilian people have a completely different mindset. China is a command economy – if the Chinese financial situation comes under duress and the government needs to do something and what they decide to do is reduce all salaries by 10% by Monday morning, they don’t have to ask anyone to do that, which makes it difficult for us to predict what could happen. Also in most of the Asian world, the community is viewed as being more important that the individual – it is a completely different mindset but something we need to think about in our growth strategy if we want to sell to those consumers.”
Once the company has decided on the strategies and business plans, Læssøe works with project managers to look more systematically at the risks and opportunities within them in a process designed in close collaboration with a ‘process expert network’ of highly experienced project managers. The scope is to identify and manage both risks and opportunities as well as covering those related to the project and those emerging from the project. However, the problem he faces with a lot of these risks and opportunities, similarly to operational risk in the financial services sector, is the lack of hard data.
“Financial services can look up the dollar exchange rate against the pound for the last 50 years and calculate close correlations with whatever other idea you can come up with but I am looking at what the risk is of being thrown out of WalMart for example, or a competitor launching a new rival product in the midst of our core portfolio or consumer group; what is the risk we are losing out on technology because of another issue. I don’t have any data,” he says. “To a large extent we are limited to estimating the probability of events happening using a variety of techniques, which mostly involves me talking to people to ask them what would happen in those specific scenarios.”
Læssøe uses elements of the Delphi Process periodically in a bid to help get all employees thinking about risk and uncertainty. “If they do that for just 10 minutes, once or twice a year, it starts to become habit, and it starts to be incorporated into the culture of the firm, which is the ultimate aim,” he says. “Risk management is primarily a mindset game as I see it”.
Læssøe also does not correlate risks in this process because there is so much uncertainty in it and the issues identified don’t affect specific individual projects as they are not granular enough.
However, the strategic scenarios he identifies are fed into an enterprise risk database that allows operational risk management to consider the impact of events such as a factory fire combined with new regulations in China, for example. He says: “In this database risks are linked to show the full impact of “If A happens, we are sure to get some share of X, Y and Z as well”. If we do not include these subsequent risks, we will be underestimating the real impact of a lot of them – and that is dangerous.”
He adds: “Focusing on both risks and opportunities changes the scope of risk management away from risk adversity, and it is a matter of ‘Don’t be scared, be prepared’. Ultimately you will need to take bigger risks than your competitors and be better able to get away with it – or you will ultimately lose the market.”
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