A Critical Analysis of Financial and Operational Risks at Apple

This report provides a critical evaluation of financial and operational risk management within Apple Inc. It begins with a description of Apple's business, followed by a PESTEL analysis examining political, geopolitical, social, technological, environmental, and legal factors. The report then applies Porter's Five Forces model to assess competitive rivalry, the threat of new entrants, the threat of substitutes, and the bargaining power of buyers and suppliers. Ratio analysis, including profitability, liquidity, and capital structure analysis, is used to evaluate the company's financial performance and risk profile. The report concludes with recommendations for mitigating identified risks and offers insights into Apple's strategic positioning and operational challenges. The analysis highlights key risks related to political uncertainty, geopolitical factors, social trends, technological advancements, environmental concerns, and legal compliance, offering a comprehensive view of Apple's risk landscape.

A critical evaluation of the financial and operational risk management within Apple Inc

Contents
Part 3: Results, analysis, conclusions and recommendations....................................................2
Description of business..............................................................................................................2
3.1: PESTEL analysis:............................................................................................................2
Political Factor....................................................................................................................2
Geopolitical factor..............................................................................................................3
Social..................................................................................................................................4
Technology.........................................................................................................................5
Environmental.....................................................................................................................6
Legal...................................................................................................................................6
3.2: Porter five forces.............................................................................................................7
Threat of competition..........................................................................................................7
Threat to New Entrant.........................................................................................................8
Threat of Substitutes...........................................................................................................9
Bargaining Power of Buyers.............................................................................................10
Bargaining Power of Suppliers.........................................................................................10
3.3: Ratio analysis................................................................................................................11
Profitability Analysis........................................................................................................11
Liquidity Analysis.............................................................................................................14
Capital Structure/Solvency Analysis................................................................................18
Part4: Recommendations and Conclusion...............................................................................20
Part 5: References....................................................................................................................22
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Part 3: Results, analysis, conclusions and recommendations
Description of business
Apple has attained the position of being the largest information technology company
in terms of revenue owing to its unique consumer electronic products and services. It is also
attributed to be the second largest company involved in manufacturing of mobile phones
followed by Samsung (Angelique and Ellen. 2008). Apple Inc. has achieved a total worth of
US$700 billion in the year 2015 and has become the first ever company in the country to
realise such mark. The company also operates an iTunes Store that has became the world’s
largest music retailer. Apple is believed to be sold over more than a billion products
worldwide as of the year 2016. This is largely due to the high brand loyalty of the customers
for 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 Factor
In the domestic market, political uncertainty arises as President Donald trump is not
an experience politician exposed to concepts of solving political, social and economic issues
but a business man who is pro-capitalism and pro-American. Thus, changes in policy such as
corporate taxes reformed, protectionism policies and exiting the Paris agreement are geared
toward America economy. However, such policies are not beneficial if they are unsustainable
in the long run. As such, the management of Apple need to gain knowledge about the
political uncertainty that can occur due to legislative change. This is essential to identify the
significant operation risk in advance and implementing adequate strategies for overcoming it
(How Donald Trump is retooling politics for the 21st century, 2018).
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The protectionism policy of Donald Trump represent a significant commodity risk
due to tariff imposed on china products aluminium and steel that can impact the
manufacturing 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 suppliers
from the countries besides the US. The company is recommended to adopt the use of hedging
against such commodity risk for overcoming the potential impact of such risk on the products
and services of the company. Also, the outsourcing activities of the company carried out in
Asia 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 impact
on the stock market and this represents a significant market risk. The market risk is
specifically 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 of
confidence of the investors leading to capital outflows. This will consequently cause a decline
in the share prices of the company and a significant increase in equity risk. Thus, it can be
said that in the case of Apple Inc. the tax reformed policies and loss of investor confidence in
the US market represent an opportunity for the company to buy back their shares in the stock
market (Kim, 2018).
Geopolitical factor
Geopolitical climate represents operational risk that affects the company due to its
operations in the different geographical locations (Brett, 2017). The company conducts its
operations both in the USA and internationally, mainly in China and Europe. Apple Inc. has
to comply with different legal rules and regulations present in various geographical locations
of its operations (Fimarkets, 2018). For example, in china Apple Inc. could become the target
of growing anti-Americanism because the china government retaliates to US tariff by
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imposing similar tariff on US goods which could affect Apple Inc. profit in the particular
region and thereby impacting its market share in China (Mullaney, 2018).
2 0 1 5 2 0 1 6 2 0 1 7
93864 86613 96600
50337 49952 54938
58715 48492 44764
15706 16928 17733
15093 13654 15199
market segment by region
America Europe China Japan Rest of asia pacific
(Source: Statista (2018b), Revenue ofApple by operating segment from the first quarter of
2012 to the first quarter of 2018 (in billion U.S. dollars)
There is large impact of the geopolitical factors on the business operations of Apple
Inc . as more than 60% of total sales revenue is realised from overseas. This also imposes a
significant currency risk as it is exposed to fluctuations in the currency market. The
management of the company is adopting the use of hedging for mitigating the foreign
currency fluctuations (Adninolfi, 2015).
Social
As technology is playing an increasingly vital role in our daily lives. The smartphone
culture has impacted the way we communicate, play, work and gather information. Thus,
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there is a growing demand for smartphones, as well as a consumerism culture existing to
constantly get newer and better smartphone.
From a sociocultural stand point possessing Apple product considered as a status
symbol in many societies. Apple is an internationally recognizable brand, each time their new
line of iPhone series is launched there will be news of queues showing its popularity as well
as loyal fan base owing to unique functionality and latest feature of the phone as well as the
design.
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 risk
that a lack of advertising or bad marketing strategies will cause the brand to lose it appeal to
consumers, leading to a significant fall in sales of their flagship product. Thus, management
must maintain or improve their marketing and advertising strategies to reduce model risk and
people risk (Lombardo, 2017).
Technology
The worldwide success of Apple Inc. is attributed to its use of innovative technology
at an increasing rate in comparison to its competitors. Thus, it is essential for the company to
continually innovate in its technologies by carrying out its R&D activities. This is essential
for maintaining its loyal customer base by reducing the risk of mass customer defections with
the use of better technology systems and processes. The competitors are also incorporating
the use of advanced technology solutions for development of their electronic products and
services such as Samsung. Thus, there is high technology risk on the company due to fierce
competition from the other electronic players
Apple’s manages the above risks by launching new IPhone series annually ensure
customers gets access to new up-to-date technology to create and maintain the strong brand
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loyalty. Thus, management mitigate competitor risk by having a good understanding of
consumer needs and developing product life cycle by adopting the use of latest technologies
(Alam, 2015).
Environmental
The manufacturing of touch screen by apple consists of 8 out of 17 rare earth metals.
It has also being revealed upon closer investigation that the production of smart phones
requires a total of 16 out of 17 rare earth metals (Brian R. 2015).
The implication is that raising demand of its smartphones will quickly deplete reserves that
could be used in other fields such as satellite and laser construction. In the long run, an
increase in demand for supply of rare earth metal to make smartphones will lead to the risk of
rapid increase in prices of rare earth metals.
The Management can in the short term hedge the prices of raw material to prevent any
sudden price movement that can negatively impact its profitability position. The management
is required to maintain its cost of operations lower for keeping a check on the price of its
products and marinating the customer satisfaction.
In the longer term, Apple need to reduce the usage of rare earth metals and incorporates the
usage of recycled materials to manufacture their products (Earl G. 2017).
Legal
The company due to its international nature of operations also faces significant issues
related to patent protection. Also, it has to comply with the accounting standards of different
countries for maintaining an effective internal control over its business operations. The
auditor judgements regarding the financial statements may vary in different countries
impacting the trust and confidence of the investors and shareholders. Also, the company can
face legal suit to issue such as explosion of iPhone.
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3.2: Porter five forces
Apple Inc. is mainly involved in a technology-related industry, using Michael porter's
five forces model. It will give an overview of the industry in which the company operates in
and identify the risks relating to its operations in the industry and mitigating the risk
identified.
Threat of competition
Firstly, competitive rivalry in the smartphone and smart devices industry is very
intense due to low switching cost and competitive pricing. There is a potential risk of loss of
market shares. Apple Inc. has managed to establish a strong brand loyalty to retain customers
which prevent customers from considering purchasing rivals brands (Ferguson, 2017). Apple.
The company needs to diversify into other product segments for reducing the risk of high
competitive rivalry. Apple’s recent revenue over the recent 3 years period indicates that its
flagship product the IPhone accounted for more than 60% of the company revenue by market
segment as shown in the chart below:
In
billions
US$
IPhone IPad Mac Services Others Total
revenue
IPhone
percentage
2015 155.04 23.24 25.47 19.92 10.07 233.74 66.3%
2016 136.71 20.63 22.84 24.35 11.13 215.66 63.4%
2017 141.33 19.22 25.84 29.98 12.86 229.23 61.7%
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2 0 1 5 2 0 1 6 2 0 1 7
155.04 136.71 141.33
23.24 20.63 19.22
25.47 22.84 25.84
19.92 24.35 29.98
10.07 11.13 12.86
Product Market Segment
Iphone Ipad Mac Services Others
(Source: Statista (2018a),Share of Apple’s revenue by product category from the first quarter
of 2012 to the first quarter of 2018.
Threat to New Entrant
Secondly, a natural barrier to entry exists in the form of high capital requirements to
enter into the market and high cost of brand development to consistently compete for market
share. Thus, there is a low threat of new entry in the industry (Ferguson, 2017). As such, its
market share has been increasing over the 3 year period.
Market share
in %
Samsung Apple Huawei OPPO Others
Q1/2015 24.6 18.3 5.2 2.2 49.7
Q2/2015 21.3 13.9 8.6 2.8 53.4
Q3/2015 23.3 13.4 7.6 3.2 52.5
Q4/2015 20.4 18.7 8.2 3.6 49.1
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Q1/2016 23.8 15.4 8.4 5.9 46.5
Q2/2016 22.7 11.7 9.3 6.6 49.7
Q3/2016 20.9 12.5 9.3 7.1 50.2
Q4/2016 18 18.2 10.5 7.3 46
Q1/2017 23.3 14.7 10 7.5 44.5
Q2/2017 23.3 12 11.3 8.1 45.3
Q3/2017 22.3 12.5 10.5 8.2 46.5
Q4/2017 18.4 19.2 10.2 6.8 45.4
(Source: https://www.statista.com/statistics/271496/global-market-share-held-by-
smartphone-vendors-since-4th-quarter-2009/)
However, the barrier to entry is declining due to technological advancement, potential
new entrants are entering into the market competing with Apple Inc. for market shares. Apple
have to manage this risk by developing a strong brand name and maintaining customer
loyalty with their after sales services. Overall with high natural barrier to entries and
technological advancement the industry will eventually developed into an oligopolistic
market structure (Ferguson, 2017).
Threat of Substitutes
In addition, increasing number of substitutes is entering the market such as Google
and OPPO, which can negatively impact the market share of Apple in the long-term.
However, there is relatively lower threat of substitute products and services for Apple Inc. as
the substitutes have limited features in comparison to Apple Inc. products. Many customers
would prefer to use Apple products because of their more advanced and innovative features.
Thus, the aggressive R&D will effectively mitigate and overcome the risk posed by the
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substitute products and services to the long-term growth and development of the company
(Ferguson, 2017).
Bargaining Power of Buyers
The industry in which apple operates in has a relatively low switching cost, which
result in strengthening the bargaining power of buyers as a key force for Apple to consider.
There are essentially two types of bargaining powers: the individual bargaining power of
buyers and the collective bargaining power of buyers. For Apple, individual bargaining
power is relatively low as the loss of a single customer will not have a considerable impact on
its revenue. On the other hand, the collective bargaining power of customers is a strong force,
as the defects in products can led to loss of faith of customers.
Apple emphasis on building strong brand loyalty through consistently developing new
and unique products through R&D, such as the recent Air pods and Apple Watch,it has been
able to maintain its market share and diversify. In addition, apple has also acquired many
other companies to gain software and patent rights to stay relevant (Maverick 2018).
Bargaining Power of Suppliers
The bargaining position of Apple suppliers is reduced due to high number of potential
suppliers for component parts for its products. The company at present is having a list of
more than top 200 suppliers on a global level. The bargaining power of suppliers is very low
due to low switching cost from one to another supplier. In addition, Apple is a major source
of revenue creation for most of its parts suppliers, and therefore supplier’s wants to continue
their association with the company over a long-term. This strengthens Apple's position,
conversely weakening suppliers bargaining power which enable apple to buy in bulk with
cost savings (Ferguson, 2017).
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3.3: Ratio analysis
Ratio analysis helps to analyse the financial performance of the entity and helps the
users of the financial statements to take decisions on the basis of entire performance of the
company. In this report financial performance of the company has been examined using ratio
analysis for last three years (Brealey, Myers and Marcus, 2015). In order to the make the
comparative analysis it has been decided to perform the ratios analysis of Apple Company
and its main competitor Samsung. The ratio analysis has been conducted for years 2015, 2016
and 2017. The financial data for both the companies has been taken from the annual reports
for the last three years as required in the ratio analysis.
Ratio analysis is being divided in many parts and these parts are as follows:
 Profitability Analysis
 Liquidity Analysis
 Capital Structure or Solvency Analysis
Profitability Analysis
Profitability analysis helps to evaluate the ability of the entity to use the resources for
making the revenue. This analysis tells how company make use of resources such as assets,
shareholder’s equity and other resources to earn the sales revenue. In order to make the
profitability analysis there is need to calculate some profitability ratios such as net profit
ratio, gross profit ratio, return on equity and return on assets (Brigham and Michael, 2013).
Profitability Analysis
Financial
Data
Apple Inc. Samsung Electronics Co. Ltd.
2015 2016 2017 2015 2016 2017
USD in millions KRW in millions
Net Revenue 233,7 215,6 229,2 200,653,4 201,866,7 239,580,0
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