International executive MBA program

Module X 3BS313A Investment Decision Making

doc. Ing. Miroslav Špaček, Ph.D., MBA

Apple Inc. Risk Management Assessment

CHEIZER ARANTES ROMEIRO

Prague, December 2019

Contents
Introduction .................................................................................................................................................. 3
Actions Taken by the Firm in Managing Recent Risks................................................................................... 3
Market risk ................................................................................................................................................ 3
Competition risk ........................................................................................................................................ 4
Operational risk......................................................................................................................................... 4
Credit risk .................................................................................................................................................. 5
Inventory risk ............................................................................................................................................ 5
Advise to Improve Risk Management ........................................................................................................... 5
Risk management alignment and integration .............................................................................................. 6
Corporate social governance enhancement ................................................................................................. 6
Strategy alignment and corporate culture ................................................................................................... 7
Adverse selection process............................................................................................................................. 7
Moral Hazard ................................................................................................................................................ 7
Principal-Agent Problem and Their Mitigation ............................................................................................. 8
Conclusion ..................................................................................................................................................... 8
References .................................................................................................................................................... 9

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Introduction
Apple Inc. is a multinational company that deals with technology that performs a designing,
development, and sale of electronics and computers. It deals with both hardware, that is the sale
of iPhone, MacBook and iPod amongst other electronics and at the same time, it deals with
software development of the same products.

In attaining its profitability, the firm faces challenges, ranging from management, operational,
financial and another risk that affects its liquidity and may extend the same to its shareholders. In
this study, an analysis of various risks will be assessed, its viability in the management, liquidity,
and profitability of the firm will be discussed. Risk management including the mitigation will also
be assessed in relation to the operating capability of Apple Company.

Actions Taken by the Firm in Managing Recent

Risks
Despite strong growth over the last decade, Apple management has recently experienced
competition risks, operational risks, credit risk, inventory risk, and market risk. Through all this
risk, the management through its operational unit managers tends to strive and devise various ways
to mitigate the same risk to reduce its impact in the firm's operations.

Market risk
Mobile technology companies are dynamic and one of the most effective industries that experience
changes. The market share of Apple is gratifying, and it has a huge consumption in terms of mobile
technology, digitalization and video and music players in the market. From its strategy to meet the
global economy, there is an increased risk base that entails interest rate that is the cost of borrowing
in an internalities market and foreign exchange risk when it comes to repatriation of profits from
a global Branch, (Rothaermel, 2013). In this case, an increase in firms' risk has led to a decline in
the performance of the company and in the same way it has also led to a reduction in its overall
profits.

The firm is exposed to interest risk as there are changes in the operational and economic activities
and development in various countries that are an affiliate market to the company. In this case,
Apple interest is sensitive to the firm's income and expenditure. It, therefore, affects the firm’s

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level of profits directly and has led to lactation in securities rating and foreign currency within the
firm. It is through hedging that will help to minimize the level of risk and firm’s ability to control
profits repatriation when it comes to the reporting of the firm's performance.

Since the firm operates in different countries, there is also a reduction in its level of performance
when it comes to exchanging of firm’s currency from local where the firm operates to an
international currency that is needed by the business. This exchange affects the level of net sales
and gross profit margins as the management needs to change the currency from the local currency
to US dollars which are the standard rate. In this case, it is perceived to have a high cost of
exchange and, in the long run, it will lead to a loss due to repatriation.

Competition risk
Since it is a multi-national company, the firm faces much competition from mobile communication
and computer services. All the competitors come from small and mid-size enterprises and the
produces they offer also faces risk from the Android and other mobile technologies within the
industry.

Introduction of new products leads to an increased level of competition and from the competitors,
the firm faces the risk of losing to competitors in terms of its pricing strategy and the affordability
of the products, (Kaplan, 2012). Apple products in the market are deemed to be expensive and this
has led to a higher risk from other competitive companies and in this case, it has reduced the market
share of the firm. Due to rapid technologies and changes in the industry, then this shows that the
business is highly competitive. If the firm is unable to compete effectively, then its financial and
operational conditions will affect the business materiality and in the long run, it increases the risk
profile of the company.

Operational risk
From the Form 10 k, 2018), it indicates the Apple generates a large portion of revenue through
international operations. Due to differences in culture and legislative requirements, it indicates that
the operational cost of firm management is high. Therefore, due to a change in culture and
legislative requirements, in setting up a new business in an international market shows that the
firm incurs in high cost of operation and this may affect the profits of the firm. Since these costs
are treated as sunk costs, then it needs that more operational management and international
activities have an increased level of risk in the business.

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Changes in the firm's status also have an implication on the political, economic, social,
technological, environmental and legal impact on the business. Apple in its operations needs to
assess the above factors as it has a great implication on firms’ profitability and change management
needs to be adopted.

Credit risk
In the purchase of Apple services, there is more focus that is placed on credits as they are deemed
to be expensive. The online store is one of the main approaches that is considered by the business,
there is more risk that is placed on default as the business operates. Credit risk due to default by
the customers reduces the level of firms profit and in the long run, it will affect its profitability and
at the end, it increases the level of bad debts in the organization.

Inventory risk
Due to the increased level of demand, firms need to supply its products and ensures that during the
decline period, they produce more products. High pricing increases the tied-up capital as there is
less movement of stock that is produced. This has also led to a reduction in the firm's level of
operation as its working capital is deemed to be ineffective and has led to a more impact on the
sales volume of the firm.

In managing the above risk, the firm has offered some mitigative ways, in this case, the risk
management team identified the risk and mitigate the firm’s level of risk through diversification
and increasing the mitigating factors in the business.

Advise to Improve Risk Management

In improving the risk management of Apple Company, the following are the risk management
advice that is deemed rational to the management of Apple Company:

i) Reduce performance variability to unacceptable level;

ii) Variance in the level of performance, especially to the negative trend is deemed as an
indicator of risk. In this case, the management needs to perform a risk assessment
process to identify the systematic approach to mitigate this risk. It should also approach
this risk by offering measures that determine the volatility, magnitude, and persistence
of the risk to the major events of the organization.

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After identifying the possible source, then the main agent of Apple Company is also called to
develop a response rate and perform a high impact event to help in managing risk and creates a
vulnerable error that needs to reduce the firm level of risk. It should also increase the critical
learning process to its management team, and this will help in risk identification and measures that
might affect the risk management process

Risk management alignment and integration

In assessing the level of risk, its magnitude needs to be assessed to determine the viability of the
risk in the organization. In this case, it is important for the management to ensure that through the
risk, CEO individual interest should be subordinated within the organizational interest. In this
process, integration of risk means that crucial management strategies, including capital
expenditure and firms’ level of stock, needs to be assessed with the main aim of planning and
performing risk management process (Dhillon, 2009).

Then after integrating the risk, then the maximum allocation of capital and efficient capitalization
and profits repatriation needs to be done. This will help to mitigate the risk that is faced by the
company and in the long run, it will help in creating focused importance in risk management.

The risk that has common profile needs also to be integrated and managed collectively to help in
reducing the cost of risk management. This needs to be done through the formulation of an
enterprise risk management response that will help in providing resources of risk management and
help in mitigating the risk in the organization.

Corporate social governance enhancement

In the process of doing business in the organization, community and stakeholders needs to be
integrated into the system of risk management. In this process, it will help in elevating the risk
management strategy in different lengths and depths in society. It is also through a supportive and
collective agreement that will help the firm mitigate the risk especially those risks that are
culturally related to the business. This will help to align the risk appetite of the business to the
community with the aim of providing an opportunity and cost seeking behavior that will help in
risk management.

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Strategy alignment and corporate culture
It is also a rationale for the business as it operates in a different environment to offer a positive
culture with its strategic alignment to mitigate the risks that are culturally aligned. In this case, it
shows that the firm needs to create focus and risk control, clarify on risk-taking and risk avoidance
behaviors, risk exposure tools, risk accountability, and management and facilitates a timely risk
identification for effective risk management.

Adverse selection process

Apple Inc. is a market leader in the business having different access to the market information as
that of its competitors. In its marketing, the adverse selection process that the firm has an impact
on is the demand of its consumers and the new products in the market. In this process, the
information related to the demand for Android devices cannot be known with assurance by the
competitor

This lack of information creates incongruency when it comes to the demand and supply analysis
by the company. It also shows that in the process, there is a reduction in the level of sales and in
this case, it has led to firm’s failure to manage the risk that is associated with the demand and
revenue projection.

At the beginning of 2018, Apple found itself in a position not able to determine with assurance its
sales in the next project year as the industry is dynamic. With various brands in the industry, a
change in the market demand is as a result of variation in the consumer preferences and demand
of products in the industry, (Khan, 2015).

Therefore, in this case, it is a rationale for the management to utilize various sales and perform a
risk projection that will help in covering up a lack of adequate information about the expected
demand. It should also offer a risk profile that will help in managing the changes in demand and
offers assurance to the management on issues related to demand.

Moral Hazard
Apple faces a moral hazard risk when it comes to the contractual agreement in the parties that
enters into a transaction with the company. The most common moral hazard that has affected the

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company is the user and the producer manual in terms of product warranty and guarantee. In this
case, consumers tend to provide false information, and this has affected the good faith action of
the firm in contract execution.

The improvement that needs to be made when it comes to this is the use of signatory and voice
recognition to increase the enforceability of the contract. Employing the biometric system like the
use of fingerprints will help in managing the risk and increase contract enforceability.

Principal-Agent Problem and Their Mitigation

In the reporting of the profits, there is a conflict that exists between the shareholders and the
management as every provision that has been made affects the operations in terms of dividends
share. In this case, this has widened the risk of capital access and it has increased the business
failure, ("Apple Reports Fourth Quarter Results," 2018).

In order to manage this risk, the firm management in the admission of new shareholders have
management representative and shareholders representative in terms of audit and this will in
providing quality assurance of the information.

Conclusion
The management of risk is certainly not a new concept, yet surprisingly, little attention is given
risk management within most of today’s projects. However, turning a blind eye to the unknown is
no longer a valid reason for not implementing a risk management plan. Likewise, there is a growing
recognition that early, up-front identification of project risk, leads to a far better chance of project
success than simply ignoring risk altogether. In summary: creating a deterministic project schedule
and cost estimate is no longer enough when managing a project.

What is needed is a formalized, uniformly adopted means of identifying, tracing and responding
to project risks. Such formalized approaches and methodologies have become generally agreed
upon by recognized project management bodies, and publications that, arguably, cannot be ignored
or disputed. Formalized risk management alone is a not the silver bullet of a project management.
However, adoption of a true risk management process from project start to the end does bring
additional structure and process to the overall project management plan.

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References
Apple Organizational Chart and Market Plan – Bus 100 Apple J Wade. (n.d.). Retrieved from
“https://sites.google.com/site/bus100jwade/apple-organizational-chart-and-market-plan”.

Apple Reports Fourth Quarter Results. (2018, November 1). Retrieved from
“https://www.apple.com/ke/newsroom/2018/11/apple-reports-fourth-quarter-results”.

Dhillon, G. (2009). Managing and controlling computer misuse. Information Management & Computer
Security, 171-175.

Kaplan, R. S. (2012). Managing risks: a new framework. Harvard Business Review, 48-60.

Khan, U. A. (2015). A critical analysis of internal and external environment of Apple Inc. International
Journal of Economics, Commerce and Management, 955-961.

Rothaermel, F. T. (2013). Strategic management: concepts. New York: McGraw-Hill Irwin.

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