In the first half of 2022, people were grappling with high inflation and starting to talk about the possibility of recession and stagflation. Things were getting tough. But when the going gets tough, the tough get going.
Business leaders need to learn about inflation’s insidious effects and take those lessons back to the businesses they run to get through this period in great shape.
In Leading Through Inflation: And Recession and Stagflation co-authors Ram Charan and Geri Willigan lay out the hazards of inflation and how to avoid them so your company will survive this difficult time.
It will help you build your confidence to act decisively despite the unknowns by showing how other leaders are stemming the damage and resetting their businesses for a brighter future.
It will help you see inflation’s impact through a wider lens and give you specific tools for dealing with it.
What You Need to Know About Inflation
It is your job as a leader to steer the company through inflation, whether or not you have practice at it. That means fully understanding how inflation touches every part of the business and enlisting the help of others in the company to combat it. Hunkering down until the Federal Reserve fixes things is not a viable plan.
You don’t need charts and graphs to know that costs have been rising. But there’s more to know about how inflation affects a business. You need to understand what inflation does to a company, an industry, and the economy as a whole
Rethink Pricing
Inflation provides an opportunity to revamp your pricing function and improve your pricing approach. To take advantage of this opportunity, accelerate your pace of price changes, but be cautious about how you implement them to avoid harming your sales force or customers.
Review and improve your pricing mode, method, model, and strategy, and consider making shifts that might work better in current times. Failing to keep up with price changes can cause you to miss out on cash and earnings.
Don’t rely solely on sales and marketing to make price changes, as they may hesitate due to fear of losing customers or push-back. Being first in line for a price increase can give you a competitive advantage.
Renew Your Business Model
The cumulative effects of inflation are leading to a world of lower consumption overall, one in which some consumer behavior will have changed permanently. There will not be a return to what we’ve known. Some segments–even some industries–will have shrunk, and some new ones may have appeared.
As you adjust your pricing, product offerings, costs, and cash flow along the way, at some point your business model might reach a breaking point. To thrive in the emerging world of lower consumption and slower growth, you will almost certainly need a new business model.
Combat inflation!
Get ready to combat inflation! As an employee in any business function, your actions can help your company mitigate the damage from inflation and prepare for the future.
- As a CEO, understand the basic choices in pricing, focus on the business model and strategy, and be a chief integrator of people and information.
- CFO and finance departments should watch for cash traps, take charge of working capital, and communicate with investors.
- Sales and marketing should work on segmentation and customer profitability, update pricing, and train for the new customer dynamic.
- Operations should revisit and recommend capital expenditures, use digital applications to improve, and be a conduit between employees and management.
- Procurement should secure supply, gather intelligence, and be decisive.
Pay Attention to Cash
Cash management is the number-one risk to your business and the key to managing it safely through inflationary times. You need to have a clear picture at all times of where cash is coming from and where it is going to, with a view of how those flows will change in the coming quarters.
You should be seeking ways to reduce costs and lower the break-even point, but the important shift is to focus on the balance sheet, not just the P&L. Orient yourself to think in terms of cash profits, not paper profits or percentages.
For example, if you have contracts to sell at fixed prices with no such assurances on the cost side, you are headed for trouble. If you have variable-rate loans or need to borrow money going forward but don’t have a plan to cover higher cash payments, you could likewise be in trouble.
Combat inflation! Part 2
- CIO and IT departments should learn new business priorities, find ways to help leaders, and use outside help for low cost and speed.
- Public and investor relations should know how the company fits in the macro environment, be clear about plans and actions, and be ready to explain pricing moves.
- Human resources should identify those who can’t adapt, keep KPIs up to date, and use training to build skills and reduce anxiety.
- The board should spur management to action, help break bottlenecks, use a framework for capital allocation, and revise the compensation plan.
Be ready to take action, adapt, and succeed despite inflation.
Change Your Pricing Approach–Fast
Pricing may have been a relatively low priority over the past decade, but under inflation it is central to survival. Whether you’re expecting more inflation, recession, stagnation, or a return to growth, you should fully understand how pricing affects your money making and relationships with customers.
It’s not just that you have to raise prices, which you almost certainly do, you may have to revise your whole approach to pricing.
Maybe you’ve ruled out surcharges, but now they make sense. The range of options on pricing is likely wider than you think, and the options you choose matter more than you think. Revisit your choices.
Find Cost Cuts that Build the Business
As you cope with inflation you’ll need to cut costs. You will run up against some costs that are impossible to control, whether it’s because the material is rare, the trading floor sets the price of a commodity, or front-line workers have a multitude of options.
Go beyond the obvious targets and consider all the direct and indirect costs strung across the company. How could they be reduced?
A step or jump in reducing costs might come from looking beyond the boundaries of your business and working with others in the value chain. When one link in the chain is affected, others are too. Or you might have to completely revise your geographic footprint, for people as well as sourcing.
The unknown effects of inflation
Inflation can have insidious effects on businesses, with cash getting trapped in inventories and accounts receivable, price increases disrupting the supply chain and causing demand drops, and well-planned investments becoming bad.
The cumulative effects of inflation can ravage businesses, and sacrificing customer trust to protect against higher costs can have long-term consequences. Inflation can reorder competition, making it crucial for leaders to have a broader response than just cost-cutting.
Micro-segmentation across the business and supply chain is essential, and leaders need to prepare for sustained periods of inflation, hyper-inflation, recession, or stagflation.
The War room
Companies that can detect early signals of inflation and coordinate a response are better positioned than others. A “war room” is necessary to gather information, strategize, and drive a plan. The war room should not just examine immediate threats but also look ahead and gather data to make predictions.
Early warning signals should be tracked on a dashboard and specific metrics critical to the business should be chosen. By brainstorming what the data is pointing to and considering how things could combine to create what’s next, companies can be preemptive and set themselves apart.
Expanding options to make a change
Creating a new business model may be as new to you as inflation. But don’t ignore the necessity. Remember that even if you are slow to recognize that the business model is breaking, investors won’t be.
Declining or persistently stagnant earnings with no sign of future building will begin to affect your market valuation. With that comes another insidious impact: you’ll have to use more cash for things like pension funding. When resources start to dwindle, you have fewer options to make a change.
