Praise for leading through inflation
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A CEO has two broad mandates: as leader of the business and leader of its people. Of course they are intertwined, but under inflation, recession, or stagflation, neglecting either one of these responsibilities is high risk. If you’re not a CEO but lead a business unit or division, many of these lessons will also apply to you.
Inflation has turned the CFO’s world upside down. The pressure on cash touches every part of the business, so CFOs must be actively involved with virtually every business function. They have to be the visible hand pushing for changes in pricing, contract terms, and inventory levels, while revisiting assumptions embedded in formal allocation processes and rules of thumb. And above all, they must be sure management has a clear picture of the company’s cash situation on a daily basis.
Sales and marketing should reread the chapter on pricing and take it to heart. Missing the timing and magnitude of price changes is a risk to cash and can set the company far behind others financially, eventually crippling its ability to compete. Because pricing is so critical, the sales force cannot be left to its own devices in setting prices. It must use the analytics finance can provide by sector and by individual customer to know the true profitability of each account, and grasp the urgency management conveys. That could be the difference between the company staying above water or not.
In manufacturing companies, operations has taken center stage in fighting inflation, but usually with a mandate that is narrower than it should be. As senior leaders see raw-material and energy costs zooming, they seek to maintain margins by squeezing every bit of savings from the production process itself.
In ordinary times, procurement, or purchasing, is considered a narrow job and not as important as many other business functions. It’s expected to buy the right amount of the right product at a price that is discounted by at least as much as the company’s biggest competitors get. Now rising costs and shortages of critical resources give purchasing executives a bigger role.
However deeply mired you may be in multiyear digitization projects and keeping the existing systems up and running, you now have to lift your horizon and refocus. The business will need digital capability to fight inflation on multiple fronts, squeeze out costs across the value chain, boost efficiency in production, analyze customer data, apply dynamic pricing, and keep key moneymaking metrics front and center. The company’s ability to react quickly depends critically on the real-time data and analytics only digitization can provide.
R&D cannot be walled off from the pressures of inflation. A fresh look at the allocation of total R&D resources going forward three to five years is the first step in adjusting to the new environment.
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All the questions about the timing and severity of inflation and recession have created anxiety internally as well as externally. The communications staff should reach out to national and local media to demonstrate that the company is solid, methodical, and has a realistic view of the environment. The comms people should be prepared to demystify the company’s situation and plans for reporters and editors.
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Now that we’ve broken from the longstanding pattern of economic stability, HR should help reassess whether the people in leadership roles are up to the challenge. Leaders must fully understand the nature of the environment we are in and be willing to make the necessary shifts in psychology and habits. Can they take the offensive? Adopt flexible strategies and tactics? And sacrifice resources and preapproved plans for the sake of the company’s overall situation?
In good times directors tend to give the CEO a lot of leeway within the outline of an overall strategy the board has approved. Most try not to overstep into micromanaging the business. But in this period, the board has to step up to make sure that management is moving quickly and radically enough to fend off serious damage from inflation and/or recession.
Ram discusses how inflation will affect CFOs
