Apple’s Make or Buy Decision and Impacts to Shareholders

Apple’s Make or Buy Decision and Impacts to Shareholders

Introduction

A make-or-buy choice is one in which a corporation must determine whether to develop a product in-house or whether to get it from a third-party source. The idea behind it is to meet a specific need. Make-or-buy decisions, also referred to as outsourcing decisions (Hansen & Revellio, 2020), are made when faced with the choice of whether to create or purchase a necessary item or service in-house (Bustinza et al., 2019). These decisions weigh the costs and advantages of doing so against the costs and advantages of contracting with an outside provider for the resources in question. A true comparison of price must take into account all aspects of item procurement and storage in contrast to manufacturing the things in-house, which may include the purchase of new equipment as well as additional storage costs.

The term “shareholder” refers to someone who has acquired at least one share of a corporation’s stock in return for cash. Flammer, Toffel, and Viswanathan (2021) note that shareholders have the potential to profit when the firm is performing well and to incur a loss when the company is performing poorly. A large level of risk is therefore associated with the role of a shareholder. In some cases, the behaviour of a corporation can affect the interests of shareholders in that corporation (Chen & Feldman, 2018). When it comes to stocks, the value is decided by the number of people who are interested in acquiring them. When a firm does well, the stock price rises, and there are fewer shares available for purchase, the stock price increases. People are less likely to acquire shares of a firm that is operating poorly or that is facing severe difficulties (Bourveau, Lou, & Wang, 2018), and they are more likely to sell stock that they already possess when a company is performing poorly or suffering major difficulties.

In this paper, the general aim to present financial and non‐financial factors that Apple should consider in the make or buy decision. The paper also looks at how the company’s decisions may affect the long‐term interests of shareholders. From the background provided, the case study shows how Apple is in a critical point in decision making. The decision to manufacture products in-house could mean losing money to the competition, while a policy to continue outsourcing or buying from third-party suppliers could lead to poor public relations. In this challenge, Apple must consider the business, financial, non-financial, political and every other aspect of consequences. This paper will present the best approach for Apple based on business decisions and best practices.

Financial and Non‐Financial Factors that Apple Should Consider in the Make or Buy Decision

When making the decision to make or buy, extreme caution should be exercised, with consideration given to both the long-term and short-term benefits (Doran et al., 2020). Manufacturing and purchasing both have advantages and disadvantages; however, firms prefer to outsource functions where they do not have a core competency or where the cost of acquiring components or services from outside vendors is significantly less expensive than the cost of manufacturing the components or services in-house (He, Liang, & Wang, 2020). The following financial and non-financial factors will be examined in relation to how they apply to Apple in its decisions to make or buy.

Financial Concern: Costs

In business, a make-or-buy decision relates to the procedure of deciding whether to produce a product in house or to acquire it from an external supplier. This decision depends on the results of a cost-benefit analysis. The situation arises when, according to Fan, Chen, and Zhao (2022), a manufacturing organization is confronted with diminishing capacity, experiences difficulty with current suppliers, or observes a shift in demand. The make-or-buy choice contrasts the costs and advantages that accrue from manufacturing an item or service domestically with the costs and benefits that occur from subcontracting goods and services internally. The management of Apple must weigh the advantages of acquiring experience against the advantages of building and nurturing that same knowledge within the organization in order to make an informed cost-benefit comparison between the two options.

MAKE BUY

Cost of making in-house Cost of buying (outsourced product)

Storage requirement costs

Legislative costs

Production costs

Monitoring costs

Waste disposal costs

Extra labor costs (Tsa et al., 2018) Ordering costs

Purchase price cost (Borg et al., 2019)

Shipping costs

Sales tax charges

Inventory holding costs

When Apple chooses to manufacture components in-house rather than outsource them to third-party vendors, it can expect to save money while increasing capital investments. This is true regardless of whether the company chooses to manufacture components in-house or outsource them to third-party vendors.

Financial Concern: Tax Implication

Once any tax charges are integrated into the arrangements, tax considerations on both setting up and managing the making or outsourcing agreement must be evaluated to ensure that the accommodations achieve the anticipated cost reductions. It’s also crucial to think about whether taxes are properly managed and paid, and if the framework is as tax-efficient as feasible (Kopp et al., 2019). Depending upon the nature of services, the framework of the arrangement, and the character of both the supplier and the customer, each create or outsource agreement will generate distinct tax difficulties.

The 1986 Tax Reform Act streamlined the tax law, expanded the tax revenue, and removed a number of tax shelters and favors. The Tax Cuts and Jobs Act of 2017 established a single rate of tax of 21%, down from the previous 35% (Gale et al., 2018). Given the huge and substantial tax reductions to corporate earnings, investment income, inheritance tax, and other areas, the tax overhaul measure was viewed as a lopsided win by the affluent, banks, and other companies. The plan lowers the tax rate on corporate revenue returned to the US from overseas. Apple, which is considering creating more of its goods in-house rather than outsourcing, is a significant benefit of the Republican tax reduction measure.

Financial Concern: A Manufacturing-Focused Strategy

Executing a thorough make-or-buy analysis can potentially provide a competitive edge in specific cases, according to the authors (Kite, 2018). When it comes to maximizing the value it provides to consumers and shareholders, Apple, for example, can use its core service and capabilities. A make-or-buy choice method may also be used to preserve flexibility while making decisions. Apple is better positioned to endure the turmoil that comes with a stock market correction. Apple must take into consideration both the internal and external contexts in which it operates in order to enjoy the benefits of its investments. The culture in which such decisions are made, as well as the aims of the individuals involved, must also be taken into account when determining whether or not the decisions and their implementation will be long-term.

Apple’s focused manufacturing is founded on an idea made by Kulkarni, Verma, and Mukundan (2019) that jobs that are simple, repetitive, and homogeneous in nature will produce competency. Additionally, every main functional unit in production must share the same goal, which should be drawn from the company’s overall strategy. The convergence of activities can result in a manufacturing process that accomplishes a restricted number of things exceptionally well (Olhager & Feldmann, 2018), hence providing an extremely effective competitive weapon.

Image 1: The summarized concept of a focused factory manufacturing approach

(Source: Leal, Fleury, & Zancul, 2020)

When it comes to the metrics that are used to exhibit flawless competence in manufacturing, Apple does not do well across the board. It has its strengths and weaknesses like every other firm. Image 1 above shows how companies use a focused manufacturing strategy to acquire competitive advantage. Several widely accepted elements should be taken into account when evaluating industrial performance. Villena and Gioia (2020) considers looking at rapid turn-around times, the ability to develop new items quickly, the ability to respond quickly to volume fluctuations, the ability to invest minimally and thus earn higher returns on investment, as well as the ability to reduce operational expenses. In order to accomplish some industrial performance measures, trade-offs must be made; for example, certain activities must be abandoned in order to achieve the attainment of others.

Trade-offs must be made while achieving certain industrial performance metrics. Because of the intrinsic limitations imposed by equipment and process technologies, it is impossible to achieve similar perfection in all of these activities. For example, short delivery cycles in exchange for a modest inventory investment are two trade-offs that, by their nature, are self-explanatory (Wilson & Daugherty, 2018). Although they are less evident, other trade-offs exist that are just as genuine as the more prominent ones, even if they are less obvious. In the process of formulating industrial strategies, it is necessary to make implicit judgements on a variety of issues. Managing the manufacturing function inside a plant can help it become a competitive weapon by beating expectations in one or more of the measures of manufacturing performance that are tracked. Outsourcing and focused manufacturing work well together in order to ensure that Apple focuses on its strengths and contracts help where it is weaker.

Non-Financial Concern: Protection of Market Share in China

In order to diversify their supply chains away from China as a single source of supplies, companies in the Western world are expanding their operations by developing manufacturing facilities in other Asian nations such as India, Vietnam, Thailand, and Indonesia. China +1 is a strategy where firms like Apple expands certain activities to other nations while maintaining China as its primary supplier source or customer base (Torsekar & VerWey, 2019). A variety of variables, including but not limited to those mentioned below, may drive enterprises with an interest in the lucrative Chinese market to diversify their supply chains. These considerations include, but are not limited to, the following: Rising corporate expenses in China, uncertainty arising from the US-China trade war, and, more recently, border limitations resulting from the Covid-19 agreement must all be taken into mind. By retaining China as a key trading partner, Apple is sure to protect its market share in Asia while keeping popularity back home.

To expand its supply chain locally, Apple has, for example, began relocating a tiny portion of its manufacturing to India and Vietnam in 2017 (Lee, 2020), citing worries about the company’s over-reliance on Chinese manufacturing as justification. Apple has been able to maintain a significant portion of its manufacturing base in China as a result of the country’s dominance in the company’s global supply chain. Chinese manufacturers are responsible for the assembly of around 90% of Apple goods (Torsekar & VerWey, 2019). Product components, such as circuit board assembly and glass production are sourced from third-party suppliers in close to 50% of the company’s total product components (Paskaleva, 2018). Apple also relies on Chinese vendors to manufacture key components including charging accessories, cables and related components, and batteries as well as spare parts. In the wake of rising trade tensions between the United States and China for more than a year, Apple, as well as other major IT competitors such as Intel and Hewlett and Packard, began to feel the heat of the Trump administration’s China-opposed manufacturing strategy ( ). A big setback for Apple’s whole supply chain occurred when the Covid-19 pandemic broke out, as its assembly plants and component suppliers were forced to close their doors for months at a time, leading to production delays and an overall lack of Apple products around the world.

Non-Financial Concern: Political Considerations

For the great majority of Western multinational corporations (MNEs), seeking and exploiting new avenues of expansion, particularly by doing business with key players in other nations and developing markets such as China, is a fundamental prerequisite for further growth. This tendency has been even more obvious in recent years as a result of contemporary technology, which is fast increasing the number of local Western managers who are communicating with stakeholders in emerging nations on a global scale. Developing markets are taking on or asking for new positions, and the power balance between them is shifting, causing the world’s public policy and nonprofit organizations to be “shaken up.” As the world’s largest trading country, China overtook the United States in 2013 for the first time, and it is rapidly gaining ground as the most significant bilateral trading partner for numerous countries across the world (Liu, 2021). In the twenty-first century, new power ties will arise, and they will have an influence on a wide range of critical accords, including the Paris Agreement.

How the Company’s Decisions May Affect the Long‐Term Interests of Shareholders

The profitability of Apple as a firm in which a shareholder has invested his or her money is the primary concern of the shareholder. Investors at Apple want the company to make considerable amounts of money so that they may benefit from increased share prices and dividend payments in the future. In each project in which they are involved, they are more concerned with the overall success of the organization in which they are working. While investors have a broad range of rights, stakeholders only have a limited set of rights, which may be found expressed in the shareholders’ agreement or the corporate bylaws of a business (Zumente & Bistrova, 2021). When it comes to protecting and furthering his or her interests, the average shareholder, who is often not involved in the day-to-day operations of the company, relies on a number of different parties. This is because the average shareholder is not involved in the day-to-day operations of the company. To safeguard and advance his or her interests, the ordinary shareholder must rely on a number of different parties. Members of the board of directors, as well as workers and executives, are included in this group. Each of these parties, however, has its own set of interests, which, in certain cases, may be at odds with the interests of the shareholder in question. It is the shareholders that choose who will serve on the board of directors of a corporation.

The board is responsible for managing and controlling the operation of the organization as well as making corporate decisions that are in the best interests of the owners. As a result, the board of directors is directly accountable for safeguarding and administering the interests of the corporation’s shareholders and stockholders. The board structure of a firm contributes to shareholder protection since it sets checks and balances and guarantees that there are no conflicts of interest between board members and corporate management (Ezzamel, Xiao, & Yuan, 2020). If a competent board of directors is to be effective in their duty, they must be both impartial and proactive when it comes to making policy decisions and dealing with management. This aids to ensure that management’s major focus is on increasing shareholder wealth rather than on maximizing shareholder wealth. The interests of the firm’s shareholders are more likely to be advocated for or protected by someone who is more unbiased, or who is apart from the management of the company. As an illustration, suppose you have a board of directors that is wholly or largely composed of top executives. Such a board would be plagued with conflicts of interest, and the preservation of shareholder value would most likely be low on the priority list.

The main interests of shareholders can be summarized to include short-term profits, long-term profitability, strategic influence, and minimal risks. Some shareholders desire to see the value of their investment increase as rapidly as possible, but others do not care about how quickly the value of their investment increases. Typically, Garcia-Torea, Fernandez-Feijoo, and de la Cuesta (2016) found that these sorts of investors are concerned with short-term profits and seek for companies that appear to have a strong likelihood of increasing in value in the near term. In spite of the fact that all investors prefer to see the value of their assets improve over time over time, these short-term shareholders often hold on to their ownership interests for less than a year on average. Because a shareholder’s primary goal is to influence a growth in the firm’s worthwhile also repaying his investment — as well as any profits produced from the investment — as rapidly as possible, it is not taken into consideration when such investments are made.

Despite the fact that all shareholders want to see a return on their investment, many are more concerned with long-term growth than they are with short-term earnings. Similarly to the short-term perspective shareholder, the long-term perspective shareholder wishes for the firm’s value to rise since doing so will raise the value of their ownership in the company; however, they wish to keep their investment in the company for the long term (Armour, et al., 2017). The likelihood that shareholders will achieve their objectives will increase if they push for long-term growth and sustainability. Many people find that receiving regular dividend payments, which serve to recompense them for continuing to invest in the company, is another source of incentive.

Several reasons exist for this, including the desire of many shareholders to be able to influence the company’s governance in order to achieve their own personal aims and aspirations over the long term. According to the level of ownership a shareholder has in the company, she has a significant impact on the strategic decisions made by the corporation. Shareholders in privately owned corporations, as opposed to investors in publicly traded corporations, have greater influence on the direction of the company than shareholders in publicly traded corporations in terms of voting rights. Major decisions can be taken by shareholders who have a majority vote without consulting with the other shareholders, although minority shareholders have the right to be notified and consulted before such decisions are implemented (Orekhov et al., 2020). It is normally possible for an investor to negotiate the amount to which he or she will have influence within a company when making a financial investment in that firm’s stock.

One of the most significant concerns of shareholders is the reduction of risk to the greatest extent possible. All shareholders have the same goal in mind: to reduce the degree of risk associated with their investment in the company. During the investing process, shareholders look for investments that have the lowest potential of generating financial loss and take whatever steps are necessary to avoid their money from being lost as a result of the process (Garcia-Torea, Fernandez-Feijoo, and de la Cuesta, 2016). Investors who lose faith in a business’s capacity to manage risk while also creating shareholder returns will sell their shares in the company as soon as they are able to do so.

In addition to the financial perks that come with being a shareholder, there are some responsibilities that come with the position. It is the shareholders of a corporation who are in charge of brainstorming and determining what powers they will offer to the corporation’s directors, including the ability to appoint and remove them from their positions in the corporation. Aside from that, shareholders have the ability to select how much the directors are compensated in terms of compensation and bonuses. Another benefit that shareholders have over the board of directors is the ability to make choices in situations when the directors do not have authority, such as when altering the company’s constitution. Finally, but certainly not least, the financial accounts of the firm are reviewed and approved by the company’s shareholders. Because of the changing nature of the business environment, the Board of Directors and senior management may be obliged to alter the company’s strategic direction. Whenever this circumstance occurs, it will have a substantial influence on the stockholders of the company involved. A decision by Apple’s board of directors will have the most immediate impact on shareholders in the form of lower dividends in the short term. On the plus side, the actions made today may help to protect the long-term returns of the company’s shareholders, while the banks will be more confident that loans made to the company previously will be returned from bigger earnings in the future.

Conclusion

In this discussion, the key findings include an observation on the financial as well as non-financial factors that dictate the decision to buy or build in-house. The most important financial factors that Apple should consider in the make or buy decision are costs and a manufacturing-focused strategy. These two factors directly affect profitability. The non-financial concerns include political issues and protecting the market share of China and Asia as a whole. Non-financial factors influence decision making through policies and other issues that affect operations. Undoubtedly, Apple is in a critical point in decision making. The decision to manufacture products in-house could mean losing money to the competition, while a policy to continue outsourcing or buying from third-party suppliers could lead to poor public relations. By considering the business, financial, non-financial, political and every other aspect of consequences, it is recommended that Apple continues with its current hybrid strategy of using a manufacturing focused approach to produce some products and relying on China +1 tactic to continue dominating China and Asia.

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