Risk to expand the market of wearable mobile

      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……

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… 2 RISK MANAGEMENT PROCESS OF APPLEINC…..

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… 2-3 PRODUCT & INNOVATION RISK(INTERNAL RISK)…..

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…. 3-5 SUPPLY CHAIN RISK (EXTERNAL RISK).

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….. 5-6 CONCLUSION.

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8    Executive SummaryThisreport examines the risk management strategies of Apple Inc. The research drawsattention to the falling sales of flagship products including iPhone, iPad andMac, and average market reaction to its new development of Apple TV and AppleWatch. The internal risk of “Product & Innovation Risk” and external riskof “Supply Chain Risk” will be analyzed in details with its likelihood, impactand mitigation actions. This draws a conclusion that, (1) the annual revisionof flagship products maintain the market share but Apple failed to expand themarket of wearable mobile devices and home use customers; (2) the outsourcingof manufacturing lines would lead to difficult quality control and highdependence to the competitor’s supply of essential components of flagshipproducts. Moving part of the production line back to America should beconsidered as an alternative mitigation action. Part 1 – Introduction In thispaper, I am going to analyze the risk management of Apple Inc. I will beginwith a general introduction of Apple Inc. and its risk management strategies inpart 2.

The company’s current financial health status and challenges will beidentified. Secondly, I will then take a closer look on an internal risk of”Product & Innovation Risk” and an external risk of “Supply Chain Risk” inpart 3 and 4. The likelihood, impact and mitigation actions will be examined.

Thepaper will end with a conclusion in part 5.  Part 2 – Situation Analysis of Apple Inc.  AppleInc.

is a leading multinational enterprise to “design, manufacture and marketmobile communication and media devices, personal computers and portable digitalmusic players” (Apple Inc., 2016, p.22).

As stated in the annual report 2016, Applealso sells “software, services, accessories, networking solutions and thirdparty digital content” (Apple Inc., 2016, p.1).

The featured products andservices are iPhone, iPad, Mac, iPod, Apple Watch, Apple TV and other softwareand applications. All these achievements make Apple Inc. as one of the world’smost 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 (AppleInc.

, 2016). The primary reason is the decrease in net sales of all threeflagship products iPhone, iPad and Mac, despite the number of sales and companystock performance are both improving gradually since 2011. The sales of newproducts Apple TV and Apple Watch increases mildly for 11% but its sales volumeis only around 5% of total net sales and not significant to represent newflagship product of company. The shortfall of revenue of selling flagshipproducts 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  Fromthe Apple’s Annual Report 2016 (p.8-10), two risk factors have been identified toexplain the dropping sales of flagship products and slow growth of newproducts: l   To remain competitive and stimulate customer demand, the Company mustsuccessfully manage frequent product introductions and transitions. (Product& innovation risk) l   The Company depends on component and product manufacturing andlogistical services provided by outsourcing partners, many of which are locatedoutside of the U.S.

(Supply chain risk)  In thefollowing parts, I will examine these two risks and the related mitigatingactions. The risk management grid below summarizes the likelihood and impact ofthese 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  Appleproducts have been the synonyms of “Innovation”. The customers have been alwaysamazed by the new functions of the Apple products. The innovative design andnew products directly contribute to the enormous revenue of Apple Inc. Aftersix years since former co-founder Steve Jobs’ death, the customers are oftencurious whether Apple can keep introducing new products and bringing newrevolution to the industry.  Likelihood & ImpactTheenterprise profit and revenues in 2016 were USD 46 billion and USD 215 billionrespectively. Both figures are double since the final year of Jobs’ leadershipin 2011. Apple’s market value is more than USD 600 billion, which is also morethan twice its level of 20111.However, reviewing short term performance, Apple recorded 8% or USD18.1 billionnet sales decline in 2016, compared to 20152.Comparing the net sales of flagship products in 2015 and 2016, the net sales ofiPhone, iPad and Mac have declined 10-12%. The decrease of net sales was USD23.5 billion3.From the financial revenue side, it is reasonable to classify the likelihood ofproduct and innovative risk as “Medium”. The risk is foreseen to highly affectthe profit in short term, especially by the market response to certain newproduct or new version of flagship products. As the company has operating otherprofitable side business and the profit has been increasing generally in past 5years, the overall product and innovation risk in medium to long term is justmedium.  MitigationTomitigate the product and innovative risk, Apple adopted 2 actions. One islaunching the regular new version for its flagship products – iPhone, iPad andMac. Another one is developing new products like Apple Watch and Apple TV. Applehas gotten into a yearly cycle to launch new model of iPhone and iPad, whileMac is updated irregularly. Each time Apple launches new version, it will bringnew functions; and the production of older generation would be reduced. Forexample, the iPhone 8 launched last year introduced the wireless Bluetoothearphone. The iPhone X launched in November 2017 introduced new function ofFaceID. The key points of short fall of iPhone sales are the divided commentsfrom market on FaceID and wireless earphone. However, the iPhone successfullymaintains the iPhone market share in 12-18%. We could still argue themitigation action of annual launch of new version iPhone is successful.  Despiteregular update of flagship product, the second mitigation action to product andinnovation risk is the introduction of Apple Watch and Apple TV. This move aimsat expanding the market of wearable mobile devices and home use customers.   Introducedin 2015 September, Apple TV is a device to bring Apple App Store, Siri and multimediaentertainment back home (Apple Inc., 2016). Apart from enjoying entertainmentapps and movies on TV, Apple TV enables “Siri remote at home to control theoperating system, and search and play the movies”4.Apple Watch is the “smart watch supporting iOS, iTunes and all other majormobile apps” (Apple Inc., 2016). It especially targets the sport markets.  Theintroduction of Apple Watch and Apple TV is an iconic action to move away fromthe pro market to the mass public market. However, these two items arecriticized lack of innovation and have no unique features compared to similarproducts in the market. For example, Apple TV did not bring in importantbreakthrough to the TV industry. The TV programmes offered by Apple TV arelinked to the library from existing major producers or platforms. Itsdifferentiations with competitors Netflix and Amazon are blur. The majorlimitation of Apple Watch is its small screen which cannot display a lot ofwords. Somehow it can be only considered as a remote to iPhone or iPad, withinan effective Bluetooth distance.  Thesales of all products except 3 flagship products are USD 215 billion, USD 233billion and USD 182 billion in 2016, 2015 and 2014 respectively. The slowgrowth 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 thetotal sales of iPhone, iPad and Mac. In other words, Apple Watch and Apple TVstill cannot represent the new innovative products of Apple Inc.  Theinvention of Apple Watch and Apple TV may be a good side business for Apple butit is obvious not a best mitigation strategy to prove Apple Inc. is still themost innovative company in the world. Nevertheless, its impact to revenue isaverage.  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  Thesupply chain risk and uncertainty of relying on outsourcing partners areconsidered as one of major external risk in the Apple’s Annual Report 2016(p.10). As an American company, substantially all manufacturing is performed inwhole or in part by a few outsourcing partners, mainly in Asia. Not only thefinal assembly, many “critical components of Apple products are supplied andmanufactured by outsourcing partners” (Apple Inc., 2016, p.6). Besides, themanagement of logistic and transportation are also outsourced. The positive sideis, these outsourcing arrangement can reduce its operating costs and reduce thedirect control over production and distribution. The risks are diminishedcontrol on the quality and quantity of products or services. It would makenegative impact to the company’s supply chain if those partners failed theirown part.  Likelihood & ImpactInterestingly,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 andNAND flash of smartphone and providing such essential components to make mobilefor Apple (Martin & Mickle, 2017 Oct 2). It is estimated that, Samsung ismaking profit of USD 110 for each iPhone X that Apple sells (Martin , 2017 Oct 2).  It isvery likely that, a wide application of outsourcing would cause product qualityinconsistence. One typical example is the dual sourcing practice for twoversions of iPhone 7. The LTE telecommunication performance of a smartphone issolely based on the modem chip but Apple decided to adopt the modem chipsmanufactured by two electronic companies – Intel and Qualcomm for its flagshipproduct iPhone 7 in 2016. According to a test quoted by Forbes, “the Qualcommpowered iPhone is able to establish stronger connections to LTE networks thanIntel powered iPhone” (Tilley, Oct 21, 2016). The performance gap is about 30%.However, it is never easy for Apple to control the quality of importantcomponents because the manufacture of these electronics like modem chip is anextremely difficult task. There are only very limited number of companies withthe technology to manufacture certain types of electronic components. The morecomplicated issue is that, Apple is now legally claiming Qualcomm charging toomuch in licensing fees for its mobile technology. Some iPhones may face US andChina ban in Apple-Qualcomm legal tussle (King, Oct 14, 2017). The effect ofinconsistent manufacturing quality and inadequate quality control is directly reflectedon the reducing sales of all three flagship products.  MitigationIn May2017, the current CEO Tim Cook announced that, Apple will invest USD 1 millionto relocate the advanced manufacturing jobs in the US. Despite the details areyet to be announced, the overall relocation plan would save the monitoring costalong the supply chain. It is a good mitigation action to efficiently spot thetechnical errors. In the long term, Apple should consider gradually reducingthe outsourcing of supply chain to exchange of better quality control ofmanufacturing.  Part 5 – Conclusion                               The AppleInc. is an electronic giant designing, manufacturing and marking the mobilecommunication, personal devices and other electronic products and services. Threeflagship products iPhone, iPad and Mac build up the innovative brand name ofcompany and their sales still contributes to a major part of company revenue.However, the company is facing a shortfall of sales of flagship products in2014-2016 and a slow growth of new products including Apple TV and Apple Watch.This paper identified the company’s product and innovation risk and supplychain risk as the major reasons behind, and examine its mitigating actions.  Appleattempted to mitigate the innovation risk by regular revision of flagshipproducts and promoting new products like Apple Watch and Apple TV. The formeraction remains Apple’s market share stably but its sales figure showed adownside trend in longer term. The market also shows disappointments to the stagnationof new products. The introduction of Apple Watch and Apple cannot bedistinguished from other competitive products and does not bring in newbusiness dynamic to push up the sales and company revenue.  On theother hand, Apple is struggling with the threats of outsourcing themanufacturing lines and relying on the electronic components from solesuppliers or even its business competitors. The inconsistent of product qualityalso contributes to the dropping sales of major products. It is a good attemptfor the company to consider bringing back part of supply chain back to US tobetter 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 TVintroduction 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 theapple – 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 ChinaiPhone 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). “WhyApple 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 youdon’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  “Applestill a star without Steve Jobs, but doubts linger” (Oct 7, 2017) AgenceFrance-Presse. http://www.industryweek.com/companies-executives/apple-still-star-without-steve-jobs-doubts-linger  1 “Applestill a star without Steve Jobs, but doubts linger” Agence France-Presse (Oct7, 2017). http://www.industryweek.com/companies-executives/apple-still-star-without-steve-jobs-doubts-linger 2 “AppleInc. Annual Report on Form 10-K 2016”,  p.67-69 http://investor.apple.com/secfiling.cfm?filingid=1628280-16-20309=320193#A201610-K9242016_HTM_SB51EFAA26E3F57518D7A81B3CF383D303  Apple Inc. (2016). “Apple Inc. Annual Report on Form10-K 2016”, p.68 http://investor.apple.com/secfiling.cfm?filingid=1628280-16-20309=320193#A201610-K9242016_HTM_SB51EFAA26E3F57518D7A81B3CF383D304 “AppleTV introduction” https://www.apple.com/newsroom/2015/09/09Apple-Brings-Innovation-Back-to-Television-with-The-All-New-Apple-TV/