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Financial and Operational Risk Management - PDF

   

Added on  2021-05-31

25 Pages5687 Words31 Views
A critical evaluation of the financial and operational risk management within Apple Inc

ContentsPart 3: Results, analysis, conclusions and recommendations....................................................2Description of business..............................................................................................................23.1: PESTEL analysis:............................................................................................................2Political Factor....................................................................................................................2Geopolitical factor..............................................................................................................3Social..................................................................................................................................4Technology.........................................................................................................................5Environmental.....................................................................................................................6Legal...................................................................................................................................63.2: Porter five forces.............................................................................................................7Threat of competition..........................................................................................................7Threat to New Entrant.........................................................................................................8Threat of Substitutes...........................................................................................................9Bargaining Power of Buyers.............................................................................................10Bargaining Power of Suppliers.........................................................................................103.3: Ratio analysis................................................................................................................11Profitability Analysis........................................................................................................11Liquidity Analysis.............................................................................................................14Capital Structure/Solvency Analysis................................................................................18Part4: Recommendations and Conclusion...............................................................................20Part 5: References....................................................................................................................22P a g e1 | 26

Part 3: Results, analysis, conclusions and recommendationsDescription of businessApple has attained the position of being the largest information technology companyin terms of revenue owing to its unique consumer electronic products and services. It is alsoattributed to be the second largest company involved in manufacturing of mobile phonesfollowed by Samsung (Angelique and Ellen. 2008). Apple Inc. has achieved a total worth ofUS$700 billion in the year 2015 and has become the first ever company in the country torealise such mark. The company also operates an iTunes Store that has became the world’slargest music retailer. Apple is believed to be sold over more than a billion productsworldwide as of the year 2016. This is largely due to the high brand loyalty of the customersfor the company developed on the basis of its high quality electronic products and services(Apple Inc. - The largest information technology company in the U.S, 2018). 3.1: PESTEL analysis:Political FactorIn the domestic market, political uncertainty arises as President Donald trump is notan experience politician exposed to concepts of solving political, social and economic issuesbut a business man who is pro-capitalism and pro-American. Thus, changes in policy such ascorporate taxes reformed, protectionism policies and exiting the Paris agreement are gearedtoward America economy. However, such policies are not beneficial if they are unsustainablein the long run. As such, the management of Apple need to gain knowledge about thepolitical uncertainty that can occur due to legislative change. This is essential to identify thesignificant operation risk in advance and implementing adequate strategies for overcoming it(How Donald Trump is retooling politics for the 21st century, 2018). P a g e2 | 26

The protectionism policy of Donald Trump represent a significant commodity riskdue to tariff imposed on china products aluminium and steel that can impact themanufacturing of electronic products and services by the company in short and long-term.The company in order to mitigate the risk need to identify and select other potential suppliersfrom the countries besides the US. The company is recommended to adopt the use of hedgingagainst such commodity risk for overcoming the potential impact of such risk on the productsand services of the company. Also, the outsourcing activities of the company carried out inAsia will reduce the impact of tariff changes on its performance (Wolf, 2018). In addition, the changes in the political policies and actions will have a huge impacton the stock market and this represents a significant market risk. The market risk isspecifically related to equity risk due to high volatility in the share prices of the company(John, 2018). The political uncertainty present in the US market can also lead to loss ofconfidence of the investors leading to capital outflows. This will consequently cause a declinein the share prices of the company and a significant increase in equity risk. Thus, it can besaid that in the case of Apple Inc. the tax reformed policies and loss of investor confidence inthe US market represent an opportunity for the company to buy back their shares in the stockmarket (Kim, 2018). Geopolitical factorGeopolitical climate represents operational risk that affects the company due to itsoperations in the different geographical locations (Brett, 2017). The company conducts itsoperations both in the USA and internationally, mainly in China and Europe. Apple Inc. hasto comply with different legal rules and regulations present in various geographical locationsof its operations (Fimarkets, 2018). For example, in china Apple Inc. could become the targetof growing anti-Americanism because the china government retaliates to US tariff byP a g e3 | 26

imposing similar tariff on US goods which could affect Apple Inc. profit in the particularregion and thereby impacting its market share in China (Mullaney, 2018).2 0 1 52 0 1 62 0 1 7938648661396600503374995254938587154849244764157061692817733150931365415199market segment by regionRest of asia pacificJapanChinaEuropeAmerica(Source: Statista (2018b), Revenue ofApple by operating segment from the first quarter of2012 to the first quarter of 2018 (in billion U.S. dollars)P a g e4 | 26

There is large impact of the geopolitical factors on the business operations of AppleInc . as more than 60% of total sales revenue is realised from overseas. This also imposes asignificant currency risk as it is exposed to fluctuations in the currency market. Themanagement of the company is adopting the use of hedging for mitigating the foreigncurrency fluctuations (Adninolfi, 2015). SocialAs technology is playing an increasingly vital role in our daily lives. The smartphoneculture has impacted the way we communicate, play, work and gather information. Thus,there is a growing demand for smartphones, as well as a consumerism culture existing toconstantly get newer and better smartphone.From a sociocultural stand point possessing Apple product considered as a statussymbol in many societies. Apple is an internationally recognizable brand, each time their newline of iPhone series is launched there will be news of queues showing its popularity as wellas loyal fan base owing to unique functionality and latest feature of the phone as well as thedesign.The Management has done a great job in advertising and marketing their product,creating very strong brand awareness in the international market. There is an operational riskthat a lack of advertising or bad marketing strategies will cause the brand to lose it appeal toconsumers, leading to a significant fall in sales of their flagship product. Thus, managementmust maintain or improve their marketing and advertising strategies to reduce model risk andpeople risk (Lombardo, 2017).TechnologyThe worldwide success of Apple Inc. is attributed to its use of innovative technologyat an increasing rate in comparison to its competitors. Thus, it is essential for the company toP a g e5 | 26

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