Risk Management Analysis: A Case Study of Apple Inc. Corporation
Executive summary
The environment within which companies operate is prone to challenges also generalized as uncertainties and any production venture initiated has aligned risks. In other words, business risks are inevitable and the only way to succeed is by accepting the occurrence or by remaining proactive and deciding on different risk management strategies. Risk acceptance is one way of managing risk but the method remains elliptical in the history of industrial growth since some risks are devastating and might result into company downfall.
Apple Company operates across international markets and serves global consumers in computer related products and services. The environment within which the company operates is full of uncertainties and these increases with emergence of new products that serve changes in production technology. The major risks faced by Apple Company other than operational and systemic risks include market risk, interest rate risk, country risk, foreign exchange risk, credit risk and political risk. Apple uses risk map to identify particular risks, access the depth of the identified risks, communicate possible mismanagement processes and enhance mitigation of the identified risks. In the entire mitigation process, company’s management puts in place techniques such as consumers’ satisfaction, employees’ motivation, fulfilling global production requirements and meeting the investment needs of shareholders.
Different risk management approaches applied by the company creates a platform for improved performance. The applied management strategies boost Apple’s global operations alongside ensuring expansion through product diversification. However, the stages of risk management face various challenges which include constant changes in production technologies, increase in competition, and changes in business cycles which result into lower consumption levels. The company therefore has to incorporate such challenges in its management strategies as a way of achieving risk management objectives.
Introduction
This paper is a case study built on different risk management strategies used by Apple Inc. Corporation. The paper focuses on the intense application of risk management strategies such as acceptance, risk transfer, risk avoidance and insurance of the business operation with reference to Apple Company (Deventer, Donald, Kenji Imai & Mark Mesler 87). Risk management as a process starts with clear identification of the risk category and the contributing factors. This goes hand in hand with clarifications as to whether a particular process will be determinant and able to produce the required solution. Such stages are relevant in controlling production processes and business operations of Apple Company.
Apple Inc. is a multinational corporation with its headquarters in Cupertion, USA. Apple Company was founded in 1976 as a computer manufacturing base. Today, Apple serves different global markets with products such as computers and computer applications, iPhones, iPads, iPods, MacBook, MacAir, and also gives after sale services such as repairs, maintenance and safe delivery of products to customers. Apple Company was started as a parent company with its initial target market concentrating within USA (Damodaran & Aswath 102). After various technological transformations and increasing demand across international boundaries, the company started expanding its location, establishing warehouses in other countries and making sure that the production processes meet different needs of consumers.
From the descriptions of the company’s operations and the kind of products delivered into various markets, one would think of Apple as a company inclined towards producing highly technological computer related products. The discussions on board therefore categorize Apple under computers and software industry since with any little change in technology, the company has to make adjustments in its products with an intention of making its computers and other related products relevant to current market demands (Damodaran & Aswath 164). To some extent, classifying Apple under manufacturing industries seems to wide and my not beat the logics of the company’s specialties and production specifications. Thus Apple as a manufacturing company remains under industries that deal in computers, computer applications, Phones and software products.
The production processes and the company’s improved performance are factors that highly contribute towards generation of finances and financial resources. The company has investors form different countries that make huge financial investments and obtain large dividends and capital gains at the end of every accounting period that runs from September 1st to August 31st every year (Deventer, Donald, Kenji Imai & Mark Mesler 138). Investors find the company fruitful and stand a chance to continue making their investments even during economic downturns. Coupled with the huge profits the company makes over and during the production periods, Apple Company never runs short of finances to execute its new production strategies. However, the company understands the nature of the environment in which it operates and therefore decided to set up a separate department to foresee the challenges that might act as berries towards the proposed production methods. The functions performed by risk managers entail conducting thorough search over the business environment for uncertainties, analyzing the risks in light of the proposed operations and developing mitigation processes with an aim of reducing diverse effects or completely eliminating the identified complexities.
Major risks the company is facing
Identification of risks is the first stage in risk management. As mentioned from the foregoing discussions, every business process has associated risks and reasonably, companies compete in their performances to reduce or eliminate some or all of the identified risk. In other words, it is really impossible for any company to operate in a risk free environment more especially if the industry has several competing firms.
A close discussion with the company’s risk management department reveals six important categories of risk that the company faces repeatedly (Lore, Marc & Borodovsky 201). Amidst other challenges generalized under operational hiccups, the major risks faced by Apple Company include credit risks, country risks, foreign exchange risks, interest rate risks, political risks and market risks. The impact of the mentioned risks is predominantly felt at either production or delivery stage of the manufactured products. Some of the risks become hindrances to the general industrial growth and therefore the need to intervene through proper mitigation processes. Proper description of risks Apple Company faces as follows.
Credit Risk
Credit risk otherwise known as default risk majorly occurs when individual workers or borrowers of the Apple Company fail to meet their contractual obligations to pay loan interests or principle amounts of their loans. This risk category remains the concern of investors who in most cases decide to hold company’s bonds in their classified portfolios. In some instances, Apple Company decides to issues bonds as a way of generating finances for investment purposes. In such a case, investors may want to hold bonds especially if they feel that the issued current bond price is low. By holding bonds, investors would wait until the market demand for the company’s bonds are high hence selling them back to the company at relatively higher prices. Apple Company experiences significant challenges when it comes to debt collection since most company debtors have developed a culture of defaulting in payment and, or failing to meet the loan requirements. The bonds issued by Apple Inc. Corporation are classified as corporate bonds and according to the research conducted, corporate bonds unlike Government bonds have the highest default but at the same time pays a higher interests rate.
The company management reveals that their bonds have higher interest rates and investors consider them to be junk bonds. In that case, investors have the tendency to classify the company bonds in terms of investment grade and the amount of return the bonds will offer. Based on the classification processes, the company may end up losing if a competing firm in the same category offer bonds at relatively higher interest rates that the Apple’s prevailing market rates. The risks associated with issuance and reissuance of bonds significantly affect business operations and long term growth of Apple Company since investors are the main source of company’s finances(Lore, Marc & Borodovsky 231). On the same time, some investors and other lending companies fear lending funds to such big companies like Apple since the rate of default in loan repayment is considered extremely high.
Country Risk
The objective of Apple Company is to create a production base in different countries across the world. However, the company has not been in a position to fully meet this objective since some of the countries in which Apple operates in default and fails to honor their financial commitments.Failure by a specific country to meet its financial obligation according to Apple’s management is the main cause of retarded performance since all financial instruments of the country and other countries relate to active participation of trading partners (Haslett & Walter 109). Some of the roles played by countries include ensuring secure environment for establishment of different companies, developing policies to enhance stable economic operations and stable currencies as well as reducing the number of industrial legislations to enhance free economic participation. In such a case, the risk of operation will have impact on stock exchange, bonds issuance, country’s mutual funds, options and futures issued in a particular country. If a country experiences regular deficit in trade, the economy experiences low growth rate and this eventually affect the performance of any foreign company established within the country. This effect is felt by Apple Company mostly in developing economies where strict regulations put by the governments raise prices of products and other financial instruments, keeping consumers and investors away.
Foreign-Exchange Risk
Apple Company invests in different countries across the world. As noted, every country has its own currency which compares differently to the company’s domestic currency (dollars). When Apple Company decides to invest in foreign countries, the company management is compelled to take into consideration currency exchange rates which tend to change prices of the assets as well as prices of goods and services offered for sale. In addition, fluctuations in foreign exchange rates affect Apple’s investment in foreign countries since the effect applies to all financial instruments (Haslett & Walter 181). For example, As an America Company investing in Canadian stock market, the company might end up making significant losses even if the Canadian dollar appreciates against American dollar since the former is weaker in foreign exchange market.More predominantly, changes in foreign currency exchange rates affect return on sales and the levels of profit the company makes within global markets. In some countries, the company makes higher profits while in others, the level of profits are much lower than projected. Foreign-exchange risk also affects the company’s growth by reducing the urge to establish and continue in serving international markets.
Interest Rate Risk
Either change in investment values compel Apple Company to raise or lower interest rates paid to investors and other lending institutions. For example, in 2008, changes in bond prices made the company to pay higher interests to bond holders. This means that when interest rates are high, the company makes higher compensation to bond holders. High payment to bond holders and other stock holders reduces company’s earnings and the amount paid to other stakeholders. Fluctuations in interest rates destabilize industrial production since many finances is used to settle debts and other company loans. According to the company’s financial report of 2008, the proposed industrial adjustments for the period commencing 2009 could not be met due to an earlier huge payment to investors through dividends and returns on investor’s equity.
Political Risk
Governments have the tendency to change their financial policies which at times affect individual levels of earnings and proportionate consumption levels. Such changes in financial policies are felt highly in most developing countries. Even though developing countries make regular adjustments in their financial policies in order to keep at par with the changes in economic conditions, such financial changes affect foreign companies and Apple is not an exception. As observed, most developing countries lack proper foreign investment since their economies are not yet stable to support to the increasing needs of foreign companies.
Market Risk
Market risk is considered by Apple Company as the most familiar of all risks the company face. Market risk also known as market volatility describes the day-to day changes in either stock prices of commodity prices. On the part of stock prices, such changes make it hard for the company to predict future stock prices and the amount to locate to cater to the changes in financial markets. The company must therefore keep its investors aware of the changes in financial market through an informative action alongside allocating enough finances to settle the debts and other financial obligation. On the side of product and service prices, changes in market conditions may sometimes force the company to raise prices in order to keep pace with current economic developments. The changes in commodity prices might create a shock in levels of sales the company makes at the end of the production cycle. The main objective of the company is to develop products that meet the taste of consumers and deliver such products at reasonably cheaper prices. This would mean that raising prices of the company’s products and services would be contrary to the stated objectives.
Risk Map
Risk map is an assessment tool that gives company detailed information of the observed risk in light of frequency, impact and possibility of mitigation. As mentioned earlier, the process of risk management follows from identification, assessment, communication and then mitigation. The entire process form risk identification to mitigation is generally known as risk mapping and follows a complete diagram as shown below.
Apple Company uses above model to provide proper solution to the most common risks mentioned earlier. Individual risk can be traced from the point of its generation to mitigation process. The matrix below is used by the company to classify each risk category and depending on the impact and frequency of occurrence; the company is in a position to find the most befitting management strategy.
The use of the above matrix allow the Apple company to classify risk according to their chance of occurrence and the impact the each risk category has on company’s performances. At the highest level, market risk has the most prevalent impact since the risk category directly affect the actual performance of the company. Reduction in market prices or an increase in commodity prices affect directly affect purchase of products which eventually leads to accumulation of goods in different warehouses. A company makes significant losses due to a reduction in amount of sale (Chappell & Christopher 149). The company must act promptly to ensure control of market risks as a way of mitigation. At the lowest level, the company faces financial risk. Apple Company makes high profits, sells its securities across international markets, gets finances form various governments and therefore experiences very minimal effect from financial risks. Other risk categories are as stated within the diagram above.
Objective of the company’s risk management
Apple company risk management department retains full responsibility through risk identification, risk access, communication and management. The entire goal risk management is to make sure that the company operates in a risk free environment and controls that largest share of the global market. This comes after the proposed strategy by managers to create an environment that propels high industrial performance and growth indifferent departments. The company’s risk management identifies any form of risk and takes proactive measures to ensure that the company faces the least of the identified risks. The proposed mitigation processes in most cases depend on the nature and magnitude of the identified risks.
Process the company uses to manage its risks
After identification of the various risk categories, the company’s risk management acts variedly in determining the most prudent format that can be used as a base for mitigation. Risk control is the sole aim of the entire process of risk management. As stated by the company’s management, apple work within the brackets of its objectives of becoming the leading producer and supplier of computer and computer application alongside ensuring complete revolution in mobile phones. Currently, Apple Company enjoys global product leadership in its business environment, being the largest manufacturer of computer related products (Chappell & Christopher 214). Apple company initiate processes that enhance its performance, making the company to become a market leader, continue introducing new products into the market, ensuring highest customer satisfaction, lowering employee turnover while maintaining highest employee satisfaction as well as expanding the company through diversification in various investment portfolios. All these operation strategies as applied by the company enhance growth and helps in reducing some of the common risks the company faces.
Conclusion
Risk management is a process that requires proper planning and understanding of the company’s business environment. Proper planning of the execution processes allows company managers to know in prior some of the challenges that might arise and thus creating a base to counteract such challenges. In risk management process, Apple faces stiff competition from other companies and this makes the company to allocate more finances with an aim of enhancing delivery of products that outmatch its competitors (Chappell 214).Apart for stiff competition, constant changes in technology make some of the products released by the company obsolete. This compels the company to study movements in market trends and design products that are relevant. The changes are technology makes production systems incompatible and any plan to improve in industrial system is outperformed by constant system updates. In addition, the interests and preferences of stakeholders changes regularly(Chappell 215). Consumers taste for the company products changes and the recent past, Apple has tried producing making changes in their products so as to meet consumer taste requirements. Any improvements made on the company products are out-fashioned once a new product comes into the market.
At certain levels, general changes in business cycles tend to pose a threat in Apple’s control process. During recession periods, consumers reduce their consumption levels of the company’s product. In such periods, the company experiences lower capital growth due to reduced sales. Lower capital growth will mean that the company is incapable of meeting the objectives of investors of higher returns on investment(Chappell 215). The urge to control credit risk and any other related risk might not be met by the company at such a time.
Other than changes in business levels, the mitigation processes applied by Apple Company is only possible with improved external business environment. Tariff policies created by different countries affect business operations of Apple Company since tariffs and other tax cut policies reduces consumers’ willingness to purchase products from other countries.
In terms of increased competition Apple should take the first step to improve on its products or deliver into markets products that are distinct. In addition, the company should make proper investment by purchasing the required production technologies as well as employing highly skilled labor within its departments. Precisely, since Apple Company operates in a market full of firms producing similar products, the need to retain customers arises and the Apple Company must make proper investment to ensure release of quality products, products that sells highly in various market segments(Chappell 218). Otherwise, the company risk losing potential customers to other companies which might also result into total collapse in performance levels. As objected by risk management department, Apple Company keeps regular records of its competitors and identifies the most appropriate approaches to counteract their impact and control of market shares.
Apart fromensuring proper financial allocation to take control of changes in production processes, the company should facilitate employment of individuals with technical skills in different areas of production. Apple Company’s production processes are linked to high innovation plans and in order to maintain current standards of performance and even make further improvements, the company needs to develop a base for opportunity identification and investing in innovation processes through proper recruitment strategies. Employing workers who have knowledge on the use of current technologies become significant in reducing instances of systemic risks.
In addition, Apple Company can initiate programs that would enhance growth such as making follow up on credit worthiness of loan applicants and on ability of bond bearers to respond promptly when the bond periods have matured for reimbursement. As observed some loanees take time to make repayments while others end up not paying at all. The company management can make follow up by checking the loan history of every applicant and ensuring that only those who can manage their loan obligations get access to company loan offers.
In general, the production role played by Apple Company is one of the important steps in reducing some of the risks associated with poor response by consumers on company products. The company is completely inclined towards achieving its mission of making consumers feel part of the company by incorporating consumer interests and changing demands within the product cycle. Through questionnaires and feedback mechanisms, Apple Company is able to determine the production gaps, develop the company’s weaknesses and apply those steps that will give the required level of output. The most critical areas the company must consider while developing its risk management strategies area the market position of competitors, the response consumers give to the designed products, the level of legality and the stance of investors on the issued bonds and other company shares. These areas are important in industrial development and any company that takes necessary steps and responds to such requirements ends ups making greater improvements in any field of production.
Work Cited
Chappell, Christopher. The Executive Guide to Enterprise Risk Management: Linking Strategy, Risk and Value Creation. , 2013. Internet resource.
Damodaran, Aswath. Strategic Risk Taking: A Framework for Risk Management. Upper Saddle River, N.J: Wharton School Pub, 2008. Print.
Deventer, Donald R, Kenji Imai, and Mark Mesler.Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management. New York: Wiley, 2013. Print.
Haslett, Walter V. Risk Management: Foundations for a Changing Financial World. Hoboken, N.J: John Wiley & Sons, 2010. Print.
Lore, Marc, and Lev Borodovsky.The Professional’s Handbook of Financial Risk Management. Oxford: Butterworth-Heinemann, 2000. Print.