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Strategic Risk Analysis of Apple Inc.
Table of Contents
Key Source of Competitive Advantage. 3
Risk Identification and Analysis. 4
Mergers and industry consolidation. 4
Warranty/Product recall campaigns. 5
Supplier business interruptions. 5
Risk Evaluation and Treatment 6
Mergers and industry consolidation. 6
Warranty/Product recall campaigns. 8
Supplier business interruptions. 9
Key Source of Competitive Advantage
Apple Inc. is an American technology manufacturer that is a global leader in the industry of smart technologies and devices. The company is involved in the production and distribution of an array of technology devices, particularly those pertaining to personalized information technology. Some of the products that the company generates and sells include handheld communication devices, personal computers, and a variety of software products. The company has global operations in terms of both its production processes and marketing activities.
Apple operates in a highly competitive industry, which is prone to a variety of risks. One of the risk areas where Apple identifies itself as having a competitive advantage is in innovation and development of new products. The information technology and personalized devices industry, within which Apple operates, is characterized by a variety of product aspects, which make the industry highly competitive. Such features include short product life cycles, the introduction of new products frequently with continual improvement in characteristics, rapid evolution in industry standards, and price sensitivity amongst consumers (Apple, 2016). Consequently, companies must strive to develop new and innovative products at an attractive margin.
Apple posits that this feature is one of the sources of its competitive advantage, whereby the company has been able to develop unique products. The company sets itself apart from its major competitors through its ability to design and develop nearly all of the various solutions that it requires for its products. These solutions include hardware components, software, operating systems, and a variety of services. Consequently, Apple can develop products that are capable of comprehensively addressing consumer needs. To protect its intellectual properties, Apple has multiple patents, trademarks, and service marks. Thus, while Apple competes based on unique product features, its competitors use aggressive price cuts and imitate product features.
Risk Identification and Analysis
Strategic risks
Mergers and industry consolidation
Apple competes in an industry whose key product offerings are characterized by the integration of a variety of features. In this regard, one of the key features of Apple’s competitive advantage is its ability to develop comprehensive solutions for its products. Other companies which only produce a single or just two products are highly sensitive to operational aspects and changes in the companies producing the complementary products. Mergers and industry consolidation would be synergistic to the operations of such companies, thereby reducing these sensitivities. Such companies would also be in a position to develop comprehensive products. Moreover, as has been noted, consumers in this industry are highly price sensitive. One of the strategies currently undertaken by Apple’s competitors is aggressive price cuts. Mergers and industry consolidation would likely result in lowered costs of production (Shin-Etsu Microsi, 2015), enabling competitors to cut down prices even more, making their products more appealing to consumers.
New or foreign competitors
As has already been indicated, one of the greatest risks that Apple faces is the threat of competitors. This issue has been discussed extensively, highlighting some of the key antecedents that contribute to this threat. The key area of competition is in the smart phone segment, which is one of Apple’s most crucial segments. The iPhone, Apple’s smartphone, contributed to 63% of net sales and as such, competition that threatens this product’s market share threatens Apple’s overall performance. In the most recent report on smartphone sales for the year 2016, Apple led the last quarter, but by a very minuscule margin of 0.1% points against its closest competitor Samsung (Gartner, 2017). Apple had a market share of 17.8% regarding units sold. For the entire year 2016, Apple was second at 14.4%. Data shows that Chinese brands are slowly gaining tract, with the top three Chinese manufacturers (Huawei, Oppo, and BBK) having a combined market share of 19.4%. This proportion marked a 7.7 percentage point year-on-year increase.
Operational Risks
Warranty/Product recall campaigns
One of the most significant operational risks that Apple will face is product recalls and warranty claims. Warranty claims come at an expense to the company. Moreover, product recall campaigns particularly have adverse effects, which include major financial implications. This is because of the already sunk costs of the initial supply of products to the market, combined with the cost of replacing or repairing products. Apart from the financial implications, product recalls will also have adverse impacts on consumer perceptions of product quality. In the event of recalls, consumers may opt for substitute products in the market. Moreover, a perceived decline in quality would in turn negatively affect Apple’s brand identity, which is a key source of competitive advantage. This would make it difficult for the company to compete effectively.
Supplier business interruptions
The other operational risk that the company faces is interruptions in the business activities of its suppliers. Two major aspects of Apple’s supply posit the risk. Firstly, for some of the parts that the company relies on, it has to compete with other market participants. Consequently, this makes Apple susceptible to industry-wide shortages of such parts (Apple, 2016). The second aspect of supply relates to some of Apple’s components, which Apple indicates are custom and not commonly used by its competitors. Further, these components are usually only available from one source. In such cases, Apple would be affected by delays in production or delays in shipment. Moreover, the company would also experience material adverse impacts if suppliers decided to focus their production efforts on the common components. Importantly, Apple’s outsourcing partners in Asia manufacture nearly all of the company’s products. Consequently, the company is highly sensitive to issues affecting these partners.
Risk Evaluation and Treatment
Mergers and industry consolidation
Mergers in the consumer electronics industry are primarily being driven by key industry characteristics and trends, including the high level of competitiveness and rapid advances and changes in technology. Consequently, some companies are unable to remain competitive on their own and they are opting for mergers as a source of strategic competitive advantage. Another driver of mergers and acquisitions is the time and cost barriers involved in setting up in a new market, and particularly time. According to Vish (2009), setting up in new markets is a time-consuming affair, but through a merger or acquisition, a company can do so quickly. This gives such a company an advantage in terms of new product introduction and capturing the market. Finally, mergers and acquisitions are also being driven by cross-industry consolidation trends. As technologies become ubiquitous and highly integrated, the definitive lines between industries are becoming blurred. An apt example is Samsung’s move to acquire Harman International Industries (The Deal, 2016). Such a move provide Samsung a viable and competitive entry route into automotive electronics, which could increase its appeal as consumers continue to seek integrated and comprehensive product solutions.
The most viable strategy to overcome the above risk is risk acceptance. Already, Apple engages in risk sharing/transfer, since a good majority of operations are outsourced. Risk retention is thus the only remaining alternative since the company cannot avoid or reduce the issue of mergers and acquisitions (Borghesi & Gaudenzi, 2012). This risk treatment method will also have important implications for the other key risks, particularly that of new/foreign competitors. The other inherent risk strategy method, risk-sharing, would have an impact on supplier business relationships.
This risk retention strategy will be implemented by continuing with current business strategies and operations. This will involve continually seeking competitive advantage from the current sources of competitive advantage, particularly strong brand image, and innovation. The company will seek to develop new products in collaboration with other players outside its industry or adopt research and development within those industries.
New or foreign competitors
The key antecedent to this threat is the growth of Chinese tech companies. The financial boom in China, as well as in emerging markets, has driven the growth of Chinese competitors. The main hindrance to the entry of a new competitor into the industry is financial costs of setting up. The economic growth in China, however, as well as government financing support the establishment and growth of Chinese manufacturers. Another key driver is the demand for low-cost smartphones in emerging markets, coupled with a growing demand for premium smartphones (Jones, 2016). According to Gartner (2017), the growth of one of these companies, BBK, has been driven by its focus on features of quality, design and strong branding. For Oppo, high-performance front cameras and a fast charging battery promoted growth. These two manufacturers continue to hold the second and first position in China respectively (Gartner, 2017).
This risk is by far the greatest risk that Apple faces. The risk treatment of this threat will involve increase and retention strategies. This will involve Apple become more aggressive in competing within these markets. The strategy will definitely affect other risk areas particularly that of mergers and industry consolidation, by pacifying these threats as well. Moreover, this strategy is expected to have benefits in other risk areas as well, since an increase in quality will result in a reduction in warranties and product recalls.
The implementation of this strategy will involve continued research and development to identify innovative product features and aspects. The company will seek to develop new products ahead of its competitors and make these products more affordable. The company will also seek to release low-end products, to cater for demand in emerging markets.
Warranty/Product recall campaigns
The key driver of this trend is defects in the quality of products. Apple supplies integrated products whose defect may stem from any of the variety of features. Thus, defects may be due to bugs in the software. Alternatively, defects may also be in the products or components that the company receives from its outside suppliers (Apple, 2016). Finally, product quality issues may also occur in the services that the company sells, due to problems with online components. Another key sub driver of warranty issues is the fact that Apple outsources much of its production and distribution activities. This outsourcing reduces the company’s control over the quality of its products as well as its flexibility in responding to such issues.
The most appropriate risk treatment strategy for this risk is to avoid and reduce the frequency/severity of these risks. Unlike the previous two risks, which the company has minimal control over, the company exercises a level of control over this risk item. The company thus has an opportunity to engage in risk control techniques to treat this risk. The use of these approaches will also affect other risk issues, particularly supplier business. There may also be an impact on the two strategic risks since increases in quality would reinforce the company’s brand position relative to merged enterprises and foreign competitors.
The implementation plan for these risks will involve working together with suppliers at all stages of the manufacturing process to ensure compliance with production standards and regulatory standards. The operations of outsourcing partners will be reviewed. Moreover, current warranty arrangement plans with these partners will be sustained or new ones developed.
Supplier business interruptions
The final risk component is interruptions in supplier business. One of the key drivers of this risk is the variety of components used as product inputs. Some disruption may occur due to industry-wide shortages occasioned by increased aggressive competition. Another important driver relates to external factors (PESTEL) affecting suppliers. The rapid rate of technology change and product quality requirements also have a capacity to interrupt supplier business. Other issues include natural calamities, commercial disputes, political instability, social and public health issues, and environmental concerns (Apple, 2016). Moreover, financial problems may also hamper supplier business, albeit Apple has made investments and prepayments to forestall such problems.
The risk treatment strategy for this issue is similar to that for warranties. It will involve avoidance and reduction. These strategies will be deployed in a similar man to those of recall treatment. Consequently, they are expected to have an impact on the risk of warranty and product recall.
The implementation plan for this risk will involve a PESTEL analysis of each of the key outsourcing partners and suppliers. By understanding the external environmental influences on these partners, the company will be in a better position to choose partners who present a lower level of risk. High-risk partners will be avoided. Moreover, the company will also work closely with identified suppliers to ensure that they have the right resources that will enable them to continue producing the components that Apple requires.
References
Apple. (2016). Form 10-K. Cupertino: Apple Inc.
Borghesi, A., & Gaudenzi, B. (2012). Risk Management: How to Assess, Transfer and Communicate Critical Risks. Berlin: Springer Science & Business Media.
Gartner. (2017, February 15). Gartner Says Worldwide Sales of Smartphones Grew 7 Percent in the Fourth Quarter of 2016. Retrieved from Gartner: http://www.gartner.com/newsroom/id/3609817
Jones, C. (2016, February 21). Apple’s iPhone: Market Share Vs. Profits. Retrieved from Forbes: http://www.forbes.com/sites/chuckjones/2016/02/21/apples-iphone-market-share-vs-profits/#3a0f7c9346f8
Shin-Etsu Microsi. (2015, December 4). Mergers, acquisitions, and change in the global electronics industry. Retrieved from Shin-Etsu Microsi: https://www.microsi.com/mergers-acquisitions-and-change-in-the-global-electronics-industry/
The Deal. (2016). M&A The Necessary Driver for Global Growth in 2017. The Deal. Retrieved February 16, 2017, from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjg-pTYu5TSAhVLLsAKHWB9Ba8QFggbMAA&url=http%3A%2F%2Fwww.thedeal.com%2Fpdf%2FTheDeal_Intralinks_M%26A.pdf&usg=AFQjCNGcb2dXDsOAfD-3iD8NPnBgVw4mtw&sig2=mRr0D0B_58M4YM1sy
Vish, V. (2009). Computer Industry Mergers and Acquisitions: Determinants of Short-Term Value Creation. Wharton Research, 56.
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