Internationalization- Apple Case study
Organizations have found it necessary to operate in the global market space to cope with the ever-growing competition for both customers and raw materials. Companies have employed different strategies to penetrate the international market in search of greener market horizons. The major strategy known to businesses entering the global market is through globalization. Globalization is the situation in which a company establishes other branches in foreign counties that they wish to operate. The essence of globalization is for a company to reach a bigger target market to reduce unnecessary shipping costs. Another reason for globalization is to ensure that a company goes near the source of raw materials to eliminate the excessive costs of importation.
Companies that do not establish branches on the countries they wish to penetrate can also run a business in that country without having a physical presence. In the current world of technology, companies can conduct businesses without entirely being in contact with customers. Smartphones and the internet have made reduced the globe to a village which has improved how companies conduct business.
Apple company, for instance, doesn’t have any branches in any of foreign countries but yet considered an international company. The criteria employed by Apple is through outsourcing their activities to foreign companies in other countries which conducts the operations on behalf of Apple. Outsourcing is the process in which a company contracts another company to perform its operation on its behalf (Oshri et al., 2015). The client company thus concentrates on other activities such as growth strategies that will improve the shareholding for the owners.
This paper entails discussing the opportunities and risks that emerge as a result of outsourcing in Apple. The risks of outsourcing will be greatly analyzed followed by mitigation strategies that the company can employ to avoid such risks from occurring.
Apple Company Background
Apple was established in 1976 as a company for selling computers. The founder of Apple company who is still the CEO, Steve Jobs believed in a company that would dominate the computer industry (Stanko, 2015). The company broke its boundaries in 2001 after the introduction to the iPod, am a music selling platform. The idea for the company to invest in the music industry gave it an upper hand in world competition.
In 2007, the company launched its first iPhone mobile devices. The mobile industry became more successful such that the company gained customers across the globe. Competition in the current computer market is stiff thus requiring great attention in the field of market analysis. As such, the company decided to outsource some of its manufacturing activities to Chinese companies Samsung and Foxconn so that it can focus on other growth-related activities (Jung, 2016).
Apple being a consumer goods company requires a lot of knowledge while analyzing the value of the consumable goods it deals with. Evaluating the value of its products and consumers becomes very difficult for Apple competes with many companies throughout its products and services it deals in. Apple has ever since been very proactive in its advertisement campaigns where has boosted its customer base and increased customer retention.
The company’s CEO is very iconic for the face of the company. Jobs is seen as the main architect for many Apple products that they introduce and to their success as well. The strategies and methods foregone by the company are the decision made by the top management which is very impressive at Apple.
Outsourcing in Apple
Introduction
Profitability is the key metric that every company in the world deems best. Profitable companies can continue investing and acquire while non-profitable companies will never invest further thus slowly sinking their economy into the abyss of no return. Even though profitability is the main motivator of every company, it can slowly lead to the economic sabotage of the company and can result in the creation of a fierce competitor. The unchecked pursuit for profitability in a company can affect the shareholder value and hence downsize the shareholding. This is what happened to Apple after the shareholders observed the perils the stock value as it plummeted from its high of $700 billion to $566 billion reducing the shareholder value by $150 billion.
Company executives are seen to continue reporting profits in terms of percentage thus getting compelled to award and motivate behaviors that promise high-profit margins. What managers and strategizes fail to understand is that profit margin is not more important than profit volumes. Instead, companies should focus on implementing strategies that can result in increased profit volume rather than focusing on the basic profit margin.
International companies that invest in manufacturing, engineering, and assembly have progressively declined their profit and shareholder value since they mainly focus on outsourcing to tiger companies. The only opportunity that these companies target is the reduction in overhead costs and the profits that they will gain after disposing of the related assets. This strategy, however, increases the chances of creating a fierce competitor who will one-day burst-out to add competition in the market (Mols, 2019).
The primary methodologies employed by organizations and economic analysts to measure a company’s profitability is the Internal Rate of Return (IRR) and the Rate of Return on Net Assets (RONA). These methodologies describe profitability as ratios thus allowing us to counterbalance differences and associate the profitability between different industries.
IRR motivates companies to invest in smaller, faster wins rather than investing in long term activities that can lead to losses. According to Patrick and French (2016), IRR inadvertently allows companies to invest smaller activities that payoff is faster rather than funding programs and activities that will never pay off at all. RONA, on the other hand, motivates companies to reduce the number of assets they have on their books (Caballero et al., 2016).
Organizations have a higher gain when the shed of some of the operations so that they can concentrate on other activities that multiples the profit margin. Of course, there are several ways in which companies dispose of their operations to strictly focus on the profit bringing activities. Some of the giant international organizations such as IBM chose to dispose of their commodity business units while others such as Dell, Apple, Cisco, Amazon, and HP prefer to outsource specific operations. The strategy of outsourcing a section of the operations allows an organization to tactfully withdraw in that operation and then sell the assets associated with that activity.
At first, outsourcing is seen as a win-win situation that cannot face any rejection from the stakeholders. The collective advantage of outsourcing is that the company sells the related assets thus increasing the finances of the company. Also, through outsourcing, the company will significantly reduce the costs of production due to the elimination of overhead costs which will significantly increase the profit earnings and the shareholder value. What companies fail to understand is the long-term effects of outsourcing which will gradually create a fierce rival thus affecting the profitability of the company which will then result in reducing the shareholder value for a long-term basis. This is a matter worth considering for every company before outsourcing all or part of their key operations.
Once an organization has come into a conclusion of outsourcing to it can never roll back to the initial state since it will have broken its supply chain and sold its assets for that activity. It is worth noticing that the process of retaining its initial status is very costly keeping in mind that the assets involved were disposed and the intellectuals who ran the outsourced activity have seen be disposed of.
Effects of Outsourcing for Apple
Today companies that outsourced a segment of their activities to other companies have unwittingly created fierce rivals in the competitive market. In our case example, Apple has collectively created rivals as a result of their outsourcing strategy. The emerging rivals out of the outsourcing were Samsung and Foxconn who grew their competitive wings ever since Apple outsourced a segment of their operations to these companies (Mann, 2016). Since its association with Apple, Samsung grew its revenues by 11,461 percent while Foxconn increased its revenues by 6,002 percent. This is a clear indication of the environment that Apple created for these companies due to outsourcing enabled them to grow to bigger competition and hence becoming the competitors.
To understand how Samsung and Foxconn came into being one of the giants in the industry, it is better to go back to the new millennium when Apple introduced the iPad and iPod. The company was the alternate computing company from the Wintel Alliance which comprised of IBM, Microsoft, HP, and Dell. For sure Apple had a cult-like following since it became iconic in the industry even having fewer revenues by then.
After the introduction of other commodities such as iPhone and iTunes, the company made huge profit margins whereby at the end of the year 2009, they made a profit of over $170 billion from the previous $5 billion. As a result of observing the profit margin created by Apple, Samsung became ambitious of joining the industry as a rival.
For over 10 years as a client company with Apple, Samsung and Foxconn had a strong base in the supply chain and manufacturing since they had acquired the relevant skills and popularity in the market. Samsung’s main activity was to create smartphones for Apple which gave them a direct entry in the market to compete with their rivals (Doval, 2016). This is what happened in 2008 when Samsung started venturing in the manufacture of smartphones and tablets. Their smartphone products such as Galaxy S3 and S4 became the top-selling in the market thus imposing stiff competition with the rivals. This situation resulted in a reduction in sales for the Apple Company which later led to a continuous fall of the shareholder value.
Responses of Global Financial Institution
Global financial institutions are the financiers whose key stakeholders are the governments of member countries. The issue of global outsourcing has affected the international economy and thus triggering the interference of the global financial institutions in this matter. The responses for the financiers include regulating the outsourcing activities that are likely to result in the fall of an industry in a given country.
The World Bank, for instance, regulates how international organizations engage in outsourcing by setting standards and limits of investments. Globalization can negatively affect the economy in other countries since it increases competition in the host county.
Conclusion
Outsourcing can affect the profitability of an organization regardless of the industry. The main focus of every organization when outsourcing is to reduce the overhead costs for the company. Even though the reduction of overhead costs can lead to an increased profit margin, the process can result in the emergence of a rival company. This situation happened to Apple where they outsourced some of their activities to Samsung and Foxconn who later rose to become the major competitors for Apple in the computer industry. My advice to managers and shareholders is to avoid outsourcing the key activities for the company and outsource the segments that can less affect the overall objectives of the company.
References
Caballero, R. J., Farhi, E., & Gourinchas, P. O. (2016). Safe asset scarcity and aggregate demand. American Economic Review, 106(5), 513-18
Doval, E. (2016). Is outsourcing a strategic tool to enhance the competitive advantage?. Review of General Management, 23(1), 78-87
Jung, M. (2016). Moving factories overseas and impacts on domestic jobs: the case of Samsung. Chapters, 273-287
Mann, R. J. (2016). Design Patent Damages after Samsung v. Apple. Criterion J. on Innovation, 1, 197
Mols, N. P. (2019). The internal competitor: buyer motives and marketing strategies. Journal of Strategic Marketing, 27(5), 405-416
Oshri, I., Kotlarsky, J., & Willcocks, L. P. (2015). The Handbook of Global Outsourcing and Offshoring 3rd Edition. Springer
Patrick, M., & French, N. (2016). The internal rate of return (IRR): projections, benchmarks, and pitfalls. Journal of Property Investment & Finance, 34(6), 664-669
Stanko, A. (2015). The history of Apple company. Збірник тез Ⅷ всеукраїнської студентської науково-технічної конференції „Природничі та гуманітарні науки. Актуальні питання “, 1, 97-98.
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