THE PAPA MODEL
When looking at the issues inspired by the scenarios, the LEGO Group uses what it calls a Park, Adapt, Prepare, Act (PAPA) model, as shown in Exhibit 6.4. Hans explains:
• Park: "The slow things that have a low probability of happening, we park. We do not forget about them."
• Adapt: "The slow things that we know will happen or are highly likely to happen, we adapt to those trends. In our case, this is a lot around demographics. We know children's play is changing, we know demographics are changing, and we know the buying power between the different realms or the different parts of the world is changing. Although we know children's play is changing, we also know it does not happen fast. So we adjust, systematically monitoring what direction it's moving in and following that trend."
• Prepare: "The things that have a low probability of happening, but, if they do, they materialize fast, we need to be prepared for this. In fact, this is where
Exhibit 6.4 LEGO's PAPA Model
we identify most of the risks that we need to put into our ERM risk database, make sure that we have contingency plans for them, and apply early warnings and whatever mitigation we can put in place to make sure that we can cover these should they materialize, but they are not expected to."
• Act: "Finally, we have the high-probability and fast-moving things that we need to act on now in order to make sure the strategy will be relevant. In our case, anything that has to do with the concept of connectivity (i.e., mobile phones, Internet, that world) – if we can see it, we move on it. We know that it is changing so fast, and it's changing the way kids play. It's changing their concepts and their view of the world."
Hans concludes, "This way, we have a kind of model of what we do, because we shouldn't, of course, be betting on every horse in the race. That's not profitable, and it isn't even doable."
Strategic Risk Management Lab Commentary
One of the challenges of risk management is to find ways to prioritize risks that make business sense. The PAPA model provides a good example of a framework that can prioritize risks and set the stage for the appropriate actions. Our research on high-performance companies (see Mark L. Frigo, "Return Driven: Lessons from High Performance Companies," and the book Driven: Business Strategy, Human Actions, and the Creation of Wealth by Mark L. Frigo and Joel Litman) found that companies that demonstrate sustainable high performance exhibit a "vigilance to forces of change" that allows them to manage the threats and opportunities in the uncertainties and changes better than other companies do. The approach used at LEGO is a great example of embedding this vigilance to forces of change in its strategy development and strategy execution processes. The scenario analysis approach used at LEGO provides an engagement platform for engaging stakeholders in the risk management process.