Risk Management Report
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Course:

BA (Hons)
Business Enterprise (Final Year)

Name:

WONG Ka-Low Carol

Student ID:

161225002

Course:

BA (Hons)
Business Enterprise (Final Year)

 

 

TABLE OF CONTENTS

 

introduction………………………………………………………………………………………………… 2

 

RISK MANAGEMENT PROCESS OF APPLE
INC……………………………………………… 2-3

 

PRODUCT & INNOVATION RISK
(INTERNAL RISK)………………………………………. 3-5

 

SUPPLY CHAIN RISK (EXTERNAL RISK)……………………………………………………….. 5-6

 

CONCLUSION……………………………………………………………………………………………………. 7

 

reference………………………………………………………………………………………………………. 8

 

 

 

 

Executive Summary

This
report examines the risk management strategies of Apple Inc. The research draws
attention to the falling sales of flagship products including iPhone, iPad and
Mac, and average market reaction to its new development of Apple TV and Apple
Watch. The internal risk of “Product & Innovation Risk” and external risk
of “Supply Chain Risk” will be analyzed in details with its likelihood, impact
and mitigation actions. This draws a conclusion that, (1) the annual revision
of flagship products maintain the market share but Apple failed to expand the
market of wearable mobile devices and home use customers; (2) the outsourcing
of manufacturing lines would lead to difficult quality control and high
dependence to the competitor’s supply of essential components of flagship
products. Moving part of the production line back to America should be
considered as an alternative mitigation action.

 

Part 1 – Introduction

In this
paper, I am going to analyze the risk management of Apple Inc. I will begin
with a general introduction of Apple Inc. and its risk management strategies in
part 2. The company’s current financial health status and challenges will be
identified. Secondly, I will then take a closer look on an internal risk of
“Product & Innovation Risk” and an external risk of “Supply Chain Risk” in
part 3 and 4. The likelihood, impact and mitigation actions will be examined. The
paper will end with a conclusion in part 5.

 

Part 2 – Situation Analysis of Apple Inc.

 

Apple
Inc. is a leading multinational enterprise to “design, manufacture and market
mobile communication and media devices, personal computers and portable digital
music players” (Apple Inc., 2016, p.22). As stated in the annual report 2016, Apple
also sells “software, services, accessories, networking solutions and third
party digital content” (Apple Inc., 2016, p.1). The featured products and
services are iPhone, iPad, Mac, iPod, Apple Watch, Apple TV and other software
and applications. All these achievements make Apple Inc. as one of the world’s
most valuable corporation.

 

The annual report 2016 of Apple Inc indicated that,
the total net sales declined 8% or USD 18.1 billion in 2016, compared to 2015 (Apple
Inc., 2016). The primary reason is the decrease in net sales of all three
flagship products iPhone, iPad and Mac, despite the number of sales and company
stock performance are both improving gradually since 2011. The sales of new
products Apple TV and Apple Watch increases mildly for 11% but its sales volume
is only around 5% of total net sales and not significant to represent new
flagship product of company. The shortfall of revenue of selling flagship
products is a key alert to examine the internal and external risks.

 

Sales figure of Apple Inc 2016, 2015, 2014

 

2016

Change

2015

Change

2014

Total
net sales

USD
215,639

-8%

USD
233,715

28%

USD
182,795

Net
sales by iPhone

USD 136,700

-12%

USD 155,041

52%

USD 101,991

Net
sales by iPad

USD 20,628

-11%

USD 23,227

-23%

USD 30,283

Net
sales by Mac

USD 22,831

-10%

USD 25,471

6%

USD 24,079

Net
sales by Apple TV, Apple Wat and other products

USD11,132

11%

USD
10,067 

20%

 USD
8,379

 

From
the Apple’s Annual Report 2016 (p.8-10), two risk factors have been identified to
explain the dropping sales of flagship products and slow growth of new
products:

l   To remain competitive and stimulate customer demand, the Company must
successfully manage frequent product introductions and transitions. (Product
& innovation risk)

l   The Company depends on component and product manufacturing and
logistical services provided by outsourcing partners, many of which are located
outside of the U.S. (Supply chain risk)

 

In the
following parts, I will examine these two risks and the related mitigating
actions. The risk management grid below summarizes the likelihood and impact of
these two risks.

 

Risk Management Grid

Impact

High

 

Product &
Innovation Risk (short term)
 

 

Medium

 

Product &
Innovation Risk (medium/long term)
 

Supply Chain
Risk
 

Low

 

 
 
 

 

 

 

Low

Medium

High

 

 

Likelihood

 

Part 3 – Product & Innovation Risk
(Internal risk)

 

Risk

Product
& Innovation Risk
“To remain competitive and stimulate customer demand, the Company
must successfully manage frequent product introductions and transitions.” (Apple
Inc., 2016, p.9)

Likelihood

Medium

Impact

Medium
(Medium term)
High
(Short term)

Mitigation

l  
Yearly new version of iPhone and iPad.
l  
Development of new product: Apple Watch, Apple
TV

 

Apple
products have been the synonyms of “Innovation”. The customers have been always
amazed by the new functions of the Apple products. The innovative design and
new products directly contribute to the enormous revenue of Apple Inc. After
six years since former co-founder Steve Jobs’ death, the customers are often
curious whether Apple can keep introducing new products and bringing new
revolution to the industry.

 

Likelihood & Impact

The
enterprise profit and revenues in 2016 were USD 46 billion and USD 215 billion
respectively. Both figures are double since the final year of Jobs’ leadership
in 2011. Apple’s market value is more than USD 600 billion, which is also more
than twice its level of 20111.
However, reviewing short term performance, Apple recorded 8% or USD18.1 billion
net sales decline in 2016, compared to 20152.
Comparing the net sales of flagship products in 2015 and 2016, the net sales of
iPhone, iPad and Mac have declined 10-12%. The decrease of net sales was USD
23.5 billion3.
From the financial revenue side, it is reasonable to classify the likelihood of
product and innovative risk as “Medium”. The risk is foreseen to highly affect
the profit in short term, especially by the market response to certain new
product or new version of flagship products. As the company has operating other
profitable side business and the profit has been increasing generally in past 5
years, the overall product and innovation risk in medium to long term is just
medium.

 

Mitigation

To
mitigate the product and innovative risk, Apple adopted 2 actions. One is
launching the regular new version for its flagship products – iPhone, iPad and
Mac. Another one is developing new products like Apple Watch and Apple TV.

 

Apple
has gotten into a yearly cycle to launch new model of iPhone and iPad, while
Mac is updated irregularly. Each time Apple launches new version, it will bring
new functions; and the production of older generation would be reduced. For
example, the iPhone 8 launched last year introduced the wireless Bluetooth
earphone. The iPhone X launched in November 2017 introduced new function of
FaceID. The key points of short fall of iPhone sales are the divided comments
from market on FaceID and wireless earphone. However, the iPhone successfully
maintains the iPhone market share in 12-18%. We could still argue the
mitigation action of annual launch of new version iPhone is successful.

 

Despite
regular update of flagship product, the second mitigation action to product and
innovation risk is the introduction of Apple Watch and Apple TV. This move aims
at expanding the market of wearable mobile devices and home use customers.  

 

Introduced
in 2015 September, Apple TV is a device to bring Apple App Store, Siri and multimedia
entertainment back home (Apple Inc., 2016). Apart from enjoying entertainment
apps and movies on TV, Apple TV enables “Siri remote at home to control the
operating system, and search and play the movies”4.
Apple Watch is the “smart watch supporting iOS, iTunes and all other major
mobile apps” (Apple Inc., 2016). It especially targets the sport markets.

 

The
introduction of Apple Watch and Apple TV is an iconic action to move away from
the pro market to the mass public market. However, these two items are
criticized lack of innovation and have no unique features compared to similar
products in the market. For example, Apple TV did not bring in important
breakthrough to the TV industry. The TV programmes offered by Apple TV are
linked to the library from existing major producers or platforms. Its
differentiations with competitors Netflix and Amazon are blur. The major
limitation of Apple Watch is its small screen which cannot display a lot of
words. Somehow it can be only considered as a remote to iPhone or iPad, within
an effective Bluetooth distance.

 

The
sales of all products except 3 flagship products are USD 215 billion, USD 233
billion and USD 182 billion in 2016, 2015 and 2014 respectively. The slow
growth shows the market is still hesitated to the Apple Watch and Apple TV.
Besides, the total sales of Apple Watch and Apple TV is only around 5-7% of the
total sales of iPhone, iPad and Mac. In other words, Apple Watch and Apple TV
still cannot represent the new innovative products of Apple Inc.

 

The
invention of Apple Watch and Apple TV may be a good side business for Apple but
it is obvious not a best mitigation strategy to prove Apple Inc. is still the
most innovative company in the world. Nevertheless, its impact to revenue is
average.

 

Part 4 – Supply Chain Risk (External Risk)

 

Risk

Supply
chain risk
The Company depends on component and product manufacturing and
logistical services provided by outsourcing partners, many of which are
located outside of the U.S.

Likelihood

High

Impact

Medium

Mitigation

l  
Better quality control by moving the supply
chain back to America
l  
Significant investment in R

 

The
supply chain risk and uncertainty of relying on outsourcing partners are
considered as one of major external risk in the Apple’s Annual Report 2016
(p.10). As an American company, substantially all manufacturing is performed in
whole or in part by a few outsourcing partners, mainly in Asia. Not only the
final assembly, many “critical components of Apple products are supplied and
manufactured by outsourcing partners” (Apple Inc., 2016, p.6). Besides, the
management of logistic and transportation are also outsourced. The positive side
is, these outsourcing arrangement can reduce its operating costs and reduce the
direct control over production and distribution. The risks are diminished
control on the quality and quantity of products or services. It would make
negative impact to the company’s supply chain if those partners failed their
own part.

 

Likelihood & Impact

Interestingly,
Apple is depending on its business competitors as its outsourcing partners. Samsung,
as one of key competitors of Apple Inc, is the only company OLED displays and
NAND flash of smartphone and providing such essential components to make mobile
for Apple (Martin & Mickle, 2017 Oct 2). It is estimated that, Samsung is
making profit of USD 110 for each iPhone X that Apple sells (Martin &
Mickle, 2017 Oct 2).

 

It is
very likely that, a wide application of outsourcing would cause product quality
inconsistence. One typical example is the dual sourcing practice for two
versions of iPhone 7. The LTE telecommunication performance of a smartphone is
solely based on the modem chip but Apple decided to adopt the modem chips
manufactured by two electronic companies – Intel and Qualcomm for its flagship
product iPhone 7 in 2016. According to a test quoted by Forbes, “the Qualcomm
powered iPhone is able to establish stronger connections to LTE networks than
Intel powered iPhone” (Tilley, Oct 21, 2016). The performance gap is about 30%.
However, it is never easy for Apple to control the quality of important
components because the manufacture of these electronics like modem chip is an
extremely difficult task. There are only very limited number of companies with
the technology to manufacture certain types of electronic components. The more
complicated issue is that, Apple is now legally claiming Qualcomm charging too
much in licensing fees for its mobile technology. Some iPhones may face US and
China ban in Apple-Qualcomm legal tussle (King, Oct 14, 2017). The effect of
inconsistent manufacturing quality and inadequate quality control is directly reflected
on the reducing sales of all three flagship products.

 

Mitigation

In May
2017, the current CEO Tim Cook announced that, Apple will invest USD 1 million
to relocate the advanced manufacturing jobs in the US. Despite the details are
yet to be announced, the overall relocation plan would save the monitoring cost
along the supply chain. It is a good mitigation action to efficiently spot the
technical errors. In the long term, Apple should consider gradually reducing
the outsourcing of supply chain to exchange of better quality control of
manufacturing.

 

Part 5 – Conclusion

                              

The Apple
Inc. is an electronic giant designing, manufacturing and marking the mobile
communication, personal devices and other electronic products and services. Three
flagship products iPhone, iPad and Mac build up the innovative brand name of
company and their sales still contributes to a major part of company revenue.
However, the company is facing a shortfall of sales of flagship products in
2014-2016 and a slow growth of new products including Apple TV and Apple Watch.
This paper identified the company’s product and innovation risk and supply
chain risk as the major reasons behind, and examine its mitigating actions.

 

Apple
attempted to mitigate the innovation risk by regular revision of flagship
products and promoting new products like Apple Watch and Apple TV. The former
action remains Apple’s market share stably but its sales figure showed a
downside trend in longer term. The market also shows disappointments to the stagnation
of new products. The introduction of Apple Watch and Apple cannot be
distinguished from other competitive products and does not bring in new
business dynamic to push up the sales and company revenue.

 

On the
other hand, Apple is struggling with the threats of outsourcing the
manufacturing lines and relying on the electronic components from sole
suppliers or even its business competitors. The inconsistent of product quality
also contributes to the dropping sales of major products. It is a good attempt
for the company to consider bringing back part of supply chain back to US to
better control and monitor the manufacturing work and minimize the default risk.

 

 

Reference:

Apple Inc. (2016). “Apple Inc. Annual Report on Form 10-K 2016”.
Retrieved from http://investor.apple.com/secfiling.cfm?filingid=1628280-16-20309=320193#A201610-K9242016_HTM_SB51EFAA26E3F57518D7A81B3CF383D30

 

Apple TV
introduction https://www.apple.com/newsroom/2015/09/09Apple-Brings-Innovation-Back-to-Television-with-The-All-New-Apple-TV/

 

Towers Watson. (2013 August). “Another bit at the
apple – Risk appetite revisited”. Retrieved from https://www.google.com.hk/url?sa=t=j==s=web=1=rja=8=0ahUKEwi1pPLu_9jXAhVCmJQKHf83AO8QFgglMAA=https%3A%2F%2Fcas.confex.com%2Fcas%2Fica14%2Fwebprogram%2FHandout%2FPaper3284%2FRisk%2520Revisited%2520-%2520handout.pdf=AOvVaw2HY6XafzNX9S8ZRL-gzHzf

 

King, I. (Oct 14, 2017). “Qualcomm seeks China
iPhone ban, expanding Apple legal fight”. Bloomberg technology. Retrieved from https://www.bloomberg.com/news/articles/2017-10-13/qualcomm-seeks-china-iphone-ban-escalating-apple-legal-fight

 

Martin, T & Mickle, T. (Oct 2, 2017). “Why
Apple rival Samsung also wins if iPhone X is a hit”. Retrieved from https://www.wsj.com/articles/why-apple-rival-samsung-also-wins-if-iphone-x-is-a-hit-1506936602

 

Tilley, A. (Oct 21, 2016). “Two ways to make sure you
don’t buy the inferior iPhone with an Intel Modem”. Forbes. Retrieved from https://www.forbes.com/sites/aarontilley/2016/10/21/how-to-buy-iphone-7-intel-qualcomm-modem/#55cdc0156c79

 

“Apple
still a star without Steve Jobs, but doubts linger” (Oct 7, 2017) Agence
France-Presse. http://www.industryweek.com/companies-executives/apple-still-star-without-steve-jobs-doubts-linger

 

 

1 “Apple
still a star without Steve Jobs, but doubts linger” Agence France-Presse (Oct
7, 2017). http://www.industryweek.com/companies-executives/apple-still-star-without-steve-jobs-doubts-linger

2 “Apple
Inc. Annual Report on Form 10-K 2016”,  p.67-69 http://investor.apple.com/secfiling.cfm?filingid=1628280-16-20309=320193#A201610-K9242016_HTM_SB51EFAA26E3F57518D7A81B3CF383D30

3  Apple Inc. (2016). “Apple Inc. Annual Report on Form
10-K 2016”, p.68 http://investor.apple.com/secfiling.cfm?filingid=1628280-16-20309=320193#A201610-K9242016_HTM_SB51EFAA26E3F57518D7A81B3CF383D30

4 “Apple
TV introduction” https://www.apple.com/newsroom/2015/09/09Apple-Brings-Innovation-Back-to-Television-with-The-All-New-Apple-TV/