The major risks Apple is exposed to
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According to Form 10K report of Apple Inc. in the year of 2009, there are several risks exposed to Apple. All these risks could be concluded by international business risk management framework (Miller, 1992)
The environment level
On the environment level, Apple has encountered economic conditions risks and regulatory risks.
Economic conditions could materially adversely affect Apple (Form 10k, 2009)
The uncertainty of current global economic environment poses a huge risk to company through consumers and business aspects. Firstly, the bad global economic conditions could decrease the demand of company`s products and services, because of the decreased income and lack of confidence, such as tighter credit policy, increase of unemployment, negative financial news and depreciation of asset values. Secondly, demand could be expected to be materially different from Apple, as a result of the generally prices raise of goods and services sold outside the U.S. market to offset the strengthening effect of U.S. dollars. Finally, other factors probably affect company`s performance by increase of fuel costs, negative conditions in the real estate and mortgage markets, increase of labor and healthcare costs, tighter access to credit, and other macroeconomic factors that might affect consumer spending behavior.
1.1.2 Political & regulatory uncertainties
Unfavorable results of legal proceedings could materially adversely affect Apple. (Form 10k, 2009)
Laws and regulations in many countries related to mobile communications and software security requirement usually change including the restrictions on production, manufacture, network carriers rights, distribution, software functions and usage, which pose negative effect on company`s productions design and application experience. Moreover, these changes also create extra cost on the productions promotion because it increases the related adjustment cost to satisfy the requirement of local regulations that is not included in the original cost. Furthermore, a big problem about regulatory uncertainties is the limitation and barriers to enter into some markets. Although, this condition is improving nowadays, it is still negative for company`s productions and services promotion in these countries, such as the inefficient audit system of China decreases the promotion rate of company`s products and services. Finally, it is obvious that the tax policy could directly affect Apple`s performance. Different countries have different tax rates, and even change in certain time, which increase the tax risk for Apple.
The industry level
In the industry level, there are three major risks for Apple, including raw material risk, market risk and competing risk.
Raw material risk.
As an original design company, Apple must focus on the raw material choice. Such as property, dimension, longevity, price of every components. Although most components are generally available from multiple sources, certain key components rely on the upstream manufacturers. Therefore, the industry wide shortages and significant commodity pricing fluctuations pose material negative effect on company`s performance. On the other hand, because of the components are purchased from upstream manufacturers, the products will be restricted by the raw material supply. For instance, a key component of a certain product delays 3 months to be provided, the whole product plan will be negatively affected which is depended on company itself.
Although, the market share of Apple is gratifying, especially in mobile communication devices, and portable digital music and video players markets, Apple still needs to confront two major risks in market. Following the development global expansion of Apple, the activities related to interest rate and foreign currency increase at an amazing rate. Therefore, the uncertainty of interest rate and foreign poses a material negative effect on company`s performance.
Firstly, interest rate risk. Because Apple is exposed to interest rate fluctuations in many advanced developed countries, Apple`s interest income and expense is most sensitive to fluctuation in interest rates of these countries. Therefore, these changes directly affect the interest earned on Apple`s cash, securities and costs related to foreign current hedges.
Secondly, foreign currency exchanges rate risk. Generally, Apple is a net receiver of currencies, since then, because of the changes in exchange rates, the net sales and gross margins of Apple as expressed in U.S. dollars would be negatively affected by these changes. Moreover, Apple should adjust its products prices to local market when the exchange rate has changed, usually U.S. dollar is strengthen, which causes the negative effect on sales from local competition with lower prices. Meanwhile, Apple`s contracts with financial institutes to protect Apple against exchange rate risk lead to increase the prohibitive economic cost of hedging particular exposures.
Apple is confronted by aggressive competition in all areas of its business (Form 10k, 2009).
The major business including personal computer, music player, video player, mobile communication devices and related services are highly competitive. All these markets exist powerful competitors and numerous SMEs. From products property to products exterior, and from market share to after sale service, all competitors have aimed Apple. Therefore, in order to keep and expand the advantages from other competitors, Apple spares no effort to spend heavily on R&D. Apple spent totaled $1.3 billion, $1.1 billion and $782 million in 2009, 2008 and 2007, respectively, on research and development which illustrates the huge competitive pressure to Apple. In other words, Apple`s future financial condition and operating results are substantially dependent on its ability to continue to develop and offer new innovative products and services in each of the markets it competes in (Form 10k, 2009).
Global markets for personal computers, mobile communication devices, digital music and video devices, and related peripherals and services are highly competitive and subject to rapid technological change. If Apple is unable to compete effectively in these markets, its financial condition and operating results could be materially adversely affected (Form 10k, 2009).
The firm level
To Apple itself, there are three major risks mentioned in the form 10k of Apple, which are
International operation, credit risk, and inventory risk respectively.
1.3.1 International operations risk
Apple derives a large and increasing portion of its revenue and earnings from its international operations (Form 10k, 2009). The different regulation and culture might raises the operate cost. Meanwhile, anyone of these operations has possibility to violate local regulations and laws, which increase the risk of international operations management. Moreover, Apple`s financial condition and operating results also could be affected by risks related to international activities. Such as changes in local economic, labor, political and exchanges rate situation. All these macro changes could affect Apple through its international operations.
1.3.2 Credit risk
Credit risk for Apple, focuses on the detention and even invalidation on credit purchase for Apple services. Online store is one of the most important income approaches of Apple. Apple spent a lot of effort to sustain the online store`s advantages, and gain a great income from that. However, the main payment approach, credit pay, usually fails because of random or artificial reasons. Such as Bank problems and individual, co-operate fraud. These credit risks create significantly negative effect on Apple`s finance performance.
1.3.3 Inventory risk
Due to the huge sales across the world, the inventory risk has become more significant for Apple.
The phenomenon of products shortage has been usual, not only because of the demand forecasting, capacity of manufacturing, but also the inventory ability and effectiveness. The huge demand for a certain product of Apple always could be offset during several months which pose materially negative impacts on Apple`s sales.
International business risk of management framework of Apple.
2. What other major risks do you feel Apple is exposed to but have not been identified or elaborate on by Apple itself? Why is Apple exposed to these risks?
The Form 10K of Apple has demonstrated several aspects of risks, which is very comprehensive and accurate. Apple has been confronting risks from environmental, industrial and firm specific level. All these risks are interrelated and interacted, to some extent. However, there are still some aspects that Apple annual report neglected.
Firstly, the CEO of Apple is Steve Jobs, who is the ultimate pitchman of Apple has encountered health problem. Although Tim Cook did a great job leading Apple in Jobs absence, the influence power of Apple had decreased at that moment. Apple`s brand is over concentrated on Jobs himself that might pose a real risk in Apple`s future. The media focused a lot on his health when his absence happened at that moment, and many reporters and analysts speculated Jobs` health, which created negative impacts on Apple. Therefore, because of Jobs back to work and success of IPAD`s publish, this crisis ended. It is foreseeable that Apple would suffer huge losses after Jobs` leave especially there were no decent successors.
Secondly, the legal rights risk of Apple appears increasingly nowadays. Plagiarism and crack have been accelerating this risk. Many other companies began to imitate Apple`s products and ideas, and added more special functions on their own products even with a lower price. These products have a strong lethal to customers. On the other hand, the problem of crack is also troubling Apple. Following the development of crack technique, many series of Apple`s products has been cracked, which means there are a huge profit losses for Apple. This legal rights risk is related with competition and regulatory risk.
Finally, Apple is a company that focuses on customer experience, which is a key value proposition of Apple. This proposition is great for Apple definitely. However, because of over confidence of brand itself and failed negotiation with other co-operate companies, Apple demonstrated estrangement to customers on some issues. For instance, renowned software company Adobe refused its software to Apple PC platform that made the customers feel uncomfortable, because of Apple`s unco-operation with Adobe. Clearly, this hastily activity posed negative effects on Apple`s PC sales.
3. How is Apple managing their risks? What are their explicit and implicit risk management strategies?
Clearly, the environmental risks cannot be managed by Apple, which are exogenous variables for Apple. Apple`s risks management mainly focuses on industry and firm level.
For raw material risk:
Apple uses some not common custom components to the rest of products, and new products would introduce custom components from only one source until Apple has evaluated. If there is a new technology, Apple just use this technology when it has become matured and manufacturing capacity success to satisfy Apple`s demand. In addition, in order to decrease the losses of key component detention and even invalidation, Apple creates partnerships with many powerful companies to supply alternative plan for products if the evaluation system fails the original plan.
For market risk:
Apple provides a meaningful assessment of the interest rate risk related to Apple`s investment portfolio. With this assessment approach, Apple decreases the risk of interest rate change. Meanwhile, Apple creates a meaningful assessment of the foreign currency risk related to certain of Apple`s foreign currency to assess the potential effects of exchange rate change. Actually, these two assessment approaches are effective for market risks.
For competition risk:
Apple invested more money on R&D in order to sustain the advantages. Meanwhile, Apple provides more customer experience through integration of its products. For instance, connect with different products with software to share and control; enhance online customer experience through the plentiful applications and contents. It is clear that Apple tends to be difficult to be imitated.
For international operations risk:
Apple has used several professional financial tools to reduce this risk. Such as foreign currency forward and option contracts, in order to hedge certain exposures to fluctuations in exchange rates. Although this hedging effect cannot offset the negative effect on Apple, it really works on a portion of the risk especially in the limited time.
For credit risk:
Apple has used a long-term supply agreement strategy to reduce credit risk. This strategy could provide a sustainable income guarantee for Apple in a long term. However, if there is a economic recession during the agreement period, it might pose materially negative effect on Apple`s performance.
For inventory risk:
Apple has used a relative inventory record method to manage the losses of inventory, including cancellation and transport, to provide more effect and efficient inventory distribution.
From the risk management list above, it is clear that approaches for market, international operations and inventory risks belong to the explicit strategies which provide certain tools to solve the problems and reduce the risks. On the other hand, strategies for raw materials, competition and credit risks consist of implicit ones.
Why do you think a particular project/undertaking/practice is an implicit management of a particular type of risk that Apple is facing? How would you assess Apple`s risk management strategies?
When the iPAD published at 2010, some Apple fans ridiculed iPAD as a useless stone. From functions, the picture shows the small difference between iPAD and stone. For some fans, Apple has been questioned because of the disappointing design of iPAD. Similar comparison and taunt has become popular across the world. Undeniable, some of these comment come from the competitors, Apple still makes a big sale of iPAD.
This reputation risk or product risk has been addressed well in the past several months. Jobs uses its usual promotion technique to advertise his product. This mighty confidence and outstanding market strategy reduce the risk into minimum to avoid the mortality of iPAD. The strategy of Idol effect on products makes iPAD shiny. This psychological strategy largely helps the promotion of iPAD. Certainly, iPAD has always been a good consuming device.
Apple`s strategies are always mighty. One important issue is the outstanding design and refreshing customer experience. The assessment to Apple`s strategies mainly focus on the customer experience and shareholder`s profits. If both of these two strategies make good performance, the products will be in great demand across the world and attract more investment for sustainable development of Apple.
What risks is Apple not managing or not managing enough? Why? What are the implications of this lack of attention to a particular risk or set of risks? What risk management stratifies would you recommend to this company? How will these strategies help?
Price risk managing is not managing enough by Apple. As mentioned above, many competitors imitate Apple`s products even with lower prices. As a result of this phenomenon, a large number of customers will choose alternative products from other competitors that would be a large market for every company. For instance, in China, similar products of iphone, iPAD, iPOD are popular, which makes a significantly negative effect on Apple`s profits. Due to the regulatory system of China, it is impossible that suppress all these similar products. However, Apple could design some products suitable for China markets with fashion appearance and low price. Like other multinational operations published certain products in China market have already made more profits and established customer honesty which is very meaningful for the development of future.
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