Apple and its suppliers case study

8B16M040

Teaching Note

APPLE AND ITS SUPPLIERS: CORPORATE SOCIAL RESPONSIBILITY Sun Hye Lee, Michael J. Mol, and Kamel Mellahi wrote this teaching note as an aid to instructors in the classroom use of the case Apple and Its Suppliers: Corporate Social Responsibility, No. 9B16M040. This teaching note should not be used in any way that would prejudice the future use of the case.

Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-03-22

SYNOPSIS In a 2014 documentary, Apple Inc. (Apple), the California-based multinational technology company known for its innovative hardware, software, and online services, was implicated in alleged human rights violations at Pegatron, a large Apple supplier that specialized in the assembly of iPhones. These allegations followed similar well-publicized violations in 2009, at Foxconn, another major Apple supplier. Although Apple had promised to overcome these issues, the situation had clearly proven to be difficult to overturn. The case explores Apple’s options in response to these new violations. Should it have neglected the accusations and pointed to its existing efforts? Could it have done more? Should it perhaps have revised its offshoring and outsourcing strategy? Was the blame attributed to Apple fair? The case offers insights into the complexity of corporate social responsibility issues in cross-border, inter-organizational settings. TEACHING OBJECTIVES The case offers students the opportunity to examine in depth the challenges Apple faces in managing offshore and outsourced operations, especially in terms of how these challenges affect corporate social responsibility (CSR) outcomes. Set against the backdrop of two major CSR failures, Apple is possibly the world’s best example for this purpose because of both the high expectations it faces and the plentiful financial and other resources it has available to tackle this problem. The lessons from this case study apply to a wide range of firms engaged in offshoring and outsourcing and to the management of CSR across institutional and organizational boundaries. POSITION IN COURSE This case can be used in courses at undergraduate, graduate, and executive levels. The case is most suitable in ethics and CSR courses but is also suitable in courses on strategic management, international business, and operations management. It can also be used in general courses and in more specialized courses, for

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Page 2 8B16M040 instance, in courses on global supply chain management, outsourcing, or CSR implementation. It is especially useful for highlighting the complexities of managing in a global context and across multiple levels of analysis. The case is best used a little later on in courses, when students are comfortable applying their knowledge to a relatively complex issue. RELEVANT READINGS Ruth V. Aguilera, Deborah E. Rupp, Cynthia A. Williams, and Jyoti, Ganapathi, “Putting the S Back in

Corporate Social Responsibility: A Multilevel Theory of Social Change in Organizations,” Academy of Management Review 32, no. 3 (2007): 836–863.

Ron Babin and Brian Nicholson, “Corporate Social Responsibility in Global IT Outsourcing: A Case Study of Inter-firm Collaboration,” in Information Systems Outsourcing: Towards Sustainable Business Value, Rudy Hirschheim, Armin Heinzl, and Jens Dibbern, eds. (Berlin: Springer Berlin Heidelberg, 2014): 431–449.

Lisa Jones Christensen, Alison Mackey, and David Whetten, “Taking Responsibility for Corporate Social Responsibility: The Role of Leaders in Creating, Implementing, Sustaining, or Avoiding Socially Responsible Firm Behaviors,” The Academy of Management Perspectives 28, no. 2 (December 2013): 164–178.

Jonathan Doh, “Offshore Outsourcing: Implications for International Business and Strategic Management Theory and Practice,” Journal of Management Studies 42, no. 3 (May 2005): 695–704.

R. Edward Freeman, Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). Sanjay Sharma, “Managerial Interpretations and Organizational Context as Predictors of Corporate Choice

of Environmental Strategy,” The Academy of Management Journal 43, no. 4 (August 2000): 681–697. Justin Tan, “Institutional Structure and Firm Social Performance in Transitional Economies: Evidence of

Multinational Corporations in China,” Journal of Business Ethics 86 (2009): 171–189. Further Resources The instructor can draw on many other resources during, before, or after class. At the time of writing of this case the BBC Panorama program’s episode on Apple was available in full on the Internet.1 Fragments of the program and other videos on this topic were available from YouTube2 and similar websites. The length of these fragments varies and instructors can pick the fragment that best suits the needs of their class. Apple has produced various documents that address its CSR policies. Several academic pieces have looked at this issue, and the case study authors have also written about this issue. The case includes some useful websites that the instructor or students can explore. ASSIGNMENT QUESTIONS 1. Identify the multiple levels of analysis at play for Apple as it addresses the CSR challenges in its supply

chain. 2. Is Apple responsible for the alleged human rights violations that occurred? 3. Would onshoring, insourcing, or a combination of the two represent a suitable response to Apple’s

problems? 1 BBC News, “Apple’s Broken Promises,” BBC iPlayer, 1:00:00, December 18, 2014. Accessed March 7, 2016, http://www.pcmag.com/videos/2015/7/22/apples-broken-promises-pcmag-gr. 2 BBC News, “Apple Accused of Failing to Protect Workers,” YouTube video, 3:03, posted by “BBC News,” December 18, 2014, accessed December 17, 2015, https://www.youtube.com/watch?v=kSvT02q4h40.

Page 3 8B16M040 4. If Apple continues on the current path, what should it do differently? 5. Is it reasonable for Apple to apply different ethical standards to different countries? 6. Should firms such as Apple maximize their profits, or should they sacrifice some profits to do good? 7. Have these CSR problems at Apple had a meaningful impact on the bottom line? 8. What is the role of media, including social media, in shaping CSR expectations? 9. Does Apple face an industry-specific issue, or do the same issues appear in other industries? 10. If you were in the position of Jeff Williams, what, if anything, would you do differently? TEACHING PLAN Depending on the audience and the level of depth the instructor aims for, the case should be taught over 75 to 90 minutes. The instructor may start by showing a fragment from the BBC documentary (see the “Further Resources” section above). In our experience, it helps to begin the discussion by asking students their view of Apple and its products. Given that many students are likely to be Apple users, this discussion should not be very difficult. The instructor might ask “Were you aware of some of these issues with Apple’s products?” or “As an Apple customer, have you considered how your Apple product was produced?” or “Does knowing this background on Apple’s supply chain change your views of Apple as a company and of the Apple product you have purchased?” Many students might be aware of some of the basics of this case from news reports, but most students will not be familiar with the finer details of the case. Key Issues in the Case The most interesting and important issues in the case that should be brought out in class include the following:  The trade-off between being profitable and doing well for society at large  The challenges of matching CSR practices to CSR expectations  The challenges of managing and monitoring outside suppliers  The hard realities of managing CSR across institutional boundaries  The complexity of managing CSR issues across multiple levels Other issues include the following:  The nature of competition in the smartphone and tablet industry  The growth of China and other emerging countries as a manufacturing site, and the future of

manufacturing in developed countries  Inconsistencies in the identity of Apple  The role of media (including social media) in debates around CSR  The role of non-governmental organizations (NGOs) and transnational organizations in dealing with

CSR issues  The effectiveness of self-regulation in dealing with CSR issues A substantive discussion can then take one of numerous directions. We suggest several leading questions the instructor could pose and the content area of courses for which these questions are most suited (see Exhibit TN-1). An alternative to the usual question-and-answer approach is to follow a debate model, which we discuss below.

Page 4 8B16M040 ANALYSIS 1. Identify the multiple levels of analysis at play for Apple as it addresses the CSR challenges in

its supply chain. An alternative way of asking this question is the following: What levels of analysis are most important to understanding this case? A unique feature of Apple’s situation is the complexity of the problems the company needs to address. We suggest that four levels of analysis are most important here: (1) the key managers (their motives, preferences, and the efforts they invest in pursuing CSR issues); (2) the firm — Apple — (especially the huge demands from its stakeholders to engage in CSR); (3) inter-organizational relations (especially the co-operation between Apple and Pegatron, and between Apple and Foxconn, and the exploitation of inter- organizational dependence by Apple) and inter-organizational differences (between Apple and Pegatron and between Apple and Foxconn); and (4) the country level (especially the differences between the United States and China, in both what formal institutions are supposed to look like and what they actually look like). The section in the case titled “CSR Challenges” provides more detail on these levels. Based on our experience with teaching the case, students are likely to find it challenging to think through all of these levels simultaneously. The instructor should consider students’ abilities and position this discussion question either at the beginning of the class or at the end of the class. If used at the beginning of the class, the instructor can provide some guidance to students during the discussion. Students will then be primed to consider the multiple levels during the remainder of the case discussion. If used at the end of the class, this discussion question can be used to wrap up the class discussion. Instructors who want to link this question to a discussion of outsourcing and offshoring choices may find it useful to develop the table in Exhibit TN-2 together with students, or to simply present it to them. 2. Is Apple responsible for the alleged human rights violations that occurred?

To answer this question, we suggest having students consider the players and the dynamics at each level discussed above. For example, at the institutional level, problems with enforcing existing regulations and the perceived widespread use of these practices throughout China might explicitly and implicitly nudge both employers and employees to accept and tolerate poor practices. At the inter-organizational level, students should consider the relationship characteristics of the two parties. Because Apple does not have any ownership over Pegatron, students might argue that Apple lacks any direct control over what happens in the factories and therefore does not bear any responsibility. However, students need to understand that Apple might, depending on the relationship’s dynamic, have some, albeit indirect, control in terms of such factors as the level of dependence, bargaining power, and switching costs. The instructor should encourage students to tease out the non-ownership control mechanisms that Apple can apply. At the organizational level, Apple has more financial resources than any other company in the industry, which should allow it more flexibility to deal with CSR issues. The instructor can encourage students to explore whether the stakeholders of each company should share the responsibility for their ignorance, indifference, or even participation in this problem. And finally, at the individual level, the class could discuss more micro-level factors, such as the personal motives, values, and dedication of the managers who actually supervise the workers in factories and the managers of Apple, such as Williams who was directly involved in decision-making processes on outsourcing, procurement, and CSR.

Page 5 8B16M040 By bringing these levels together, students should become aware that the answer to the question is not straightforward. Although it is true that these are Apple products, Apple’s influence over the actual practices of its suppliers located in China does have its limits. 3. Would onshoring, insourcing, or a combination of the two represent a suitable response to

Apple’s problems? One way to answer this question is to discuss the advantages and disadvantages of the four different governance modes noted in Exhibit TN-2: domestic insourcing, domestic outsourcing, offshore insourcing, and offshore outsourcing. The discussion of this question offers a good opportunity for students to understand and differentiate these four governance modes. The pros and cons can be discussed in terms of costs, level of control, compliance, co-operation, communication, and labour costs, as can be seen in Exhibit TN-3. The discussion may be finalized by comparing the advantages and disadvantages of the different governance modes. The instructor may also extend this discussion to a more conceptual level, by introducing the concepts of production and transaction costs as promoted in transaction cost economics: Production costs are lower with outsourcing and especially offshore outsourcing, but transaction costs are lower with insourcing and especially domestic insourcing. The outsourcing discussion can also be approached in terms of resources and capabilities. For example, it can be argued that while Apple had strong resources and capabilities in research and development and in marketing, its suppliers were particularly strong in manufacturing; thus, Apple should not involve itself in production, as suggested by Ram Mudambi’s “smile of value creation,”3 which the instructor might choose to illustrate during class. It is therefore not obvious that insourcing is the answer. The discussion about whether to continue offshoring is much less obvious. In our experience, some students believe strongly that automation, or robotization, and returning activities to the United States is the answer, while others want to stick to the existing governance mode of offshore outsourcing. Both options have advantages and disadvantages, and several unknown factors are at work, such as how quickly labour costs will rise in China and the pace of technological change in robot technologies. 4. If Apple continues on the current path, what should it do differently? The option of Apple continuing on its current path is essentially an alternative to the options of onshoring, insourcing, or a combination of the two. It might be a good idea for the instructor to start this discussion by enumerating what Apple had been doing so far, such as publishing a responsibility report, providing suppliers with a code of conduct, and monitoring suppliers through an audit. Apple could have several additional options. The instructor may need to guide students to broaden their view beyond firm-level solutions to seek solutions at the industry level or even broader. For example, Apple could benchmark the practices of other industries, such as the garment and food industries. Because those industries have dealt with similar issues for a long period of time (e.g., Nike’s historical issues with child labour and sweatshops), their responses may offer a way forward. Firms in these industries have recently decided to collaborate to set up industry standards and enforce suppliers to adopt unified rules and requirements. Also, many NGOs have additional information and long-standing and extensive experience in handling labour issues and workers’ rights in emerging and developing countries, and are often ready to help and co-

3 Ram Mudambi, “Offshoring: Economic Geography and the Multinational Firm,” Journal of International Business Studies 38, no. 1 (2007): 206, accessed February 21 2016, http://astro.temple.edu/~rmudambi/Publications/Mudambi-Offshoring- overview.pdf.

Page 6 8B16M040 operate. Apple could also approach local NGOs that specialize in defending and promoting labour rights and have a presence in host countries to advise and help deal with region-specific challenges such as child labour and racial or gender discrimination. Students could discuss the option of forging a strategic partnership with NGOs. Apple could also pursue other options. For instance, it could start to tie CSR outcomes more directly to how much it pays its suppliers by providing a substantial bonus for good behaviour. This option seems feasible given the profit margins Apple enjoyed in 2014. Apple could also consider implementing operational measures, such as permanently placing Apple employees inside supplier facilities. One key aspect here concerns Apple’s historical willingness to do so. Some students might argue that, for Apple, driving down cost levels was more important than improving CSR outcomes. 5. Is it reasonable for Apple to apply different ethical standards to different countries? Students may answer this question in a variety of ways. They may first discuss the issue of human rights and humane work practices from the perspectives of universality, relativity, or relative universality. Students can draw initially from the discussion of institutions (questions 1 and 2), and then be encouraged to provide an in-depth analysis of how institutional factors play out differently in different institutional settings. Those students who take the universality perspective may argue that Apple should hold the same ethical standards, and workers in developing and emerging economies should not be subjected to practices that are considered to be unethical in the United States. According to this perspective, Apple was therefore engaged in unethical practices. Students who take the relativity perspective are likely to argue that Apple suppliers applied standards that were acceptable in the host country. However, this suggestion is not correct. Pegatron also violated Chinese laws and norms, and its alleged practices may be considered to be unacceptable in China. Students who take a relative universality perspective would argue that firms such as Apple can adopt the concept of universal ethical standards but may be permitted variations across countries. A practice that is considered to be unethical in the United States may not necessarily be considered to be unethical in China. It is possible for one to accept the same ethical principles and standards in the United States and China and allow for variations in the practice because of differences in local circumstances. The instructor might suggest that students research the practices by other companies and other industries. For example, NIKE sets a minimum worker age in its codes of conducts, but suggests that its suppliers abide by their own national laws when the legal minimum age is higher. Drawing on the information provided in the case, students may then discuss the institutional peculiarities of the countries where Apple’s suppliers are located. At the end, students may discuss the efficacy of international standards applied by international firms such as Apple. 6. Should firms such as Apple maximize their profits, or should they sacrifice some profits to do