Inflation, Recession Or Both
Originally posted on Forbes.
Inflation, Recession Or Both: How To Build And Grow A Business That Withstands Any Market
Entrepreneurs are building companies in one of the most challenging economic environments of the 21st Century. Inflation is at a 40-year high, and while PitchBook’s Quantitative Perspectives for Q2 indicate a less than 20% chance of a recession in the next 18 months, the threat of markets contracting is real. Layer in the unique challenges of today’s talent wars and the persistent supply chain issues, young companies are dealing with an unusually daunting reality.
However, many of the world’s most successful companies (from Microsoft to UPS, eTrade to IBM) began in troubled economic times. Today’s entrepreneurs can overcome the headwinds of recessions and inflation by taking a fresh approach to proven management principles and tools.
Scenario planning can enhance rapid response.
Consider the forced business lessons of the last two years. The lessons learned from managing through the extraordinary conditions brought on by the worldwide pandemic can help companies work through economic uncertainty now.
Responsive cultures cannot stay responsive without process and tools. Companies that deploy predictive models to manage business operations and achieve revenue and other goals have retaught us just how much modern businesses depend on dashboards and data. For this reason, I find that scenario-based planning is indispensable.
Many firms, large and small, developed rapid response teams with the freedom and responsibility to act quickly on multiple fronts. Defining safety measures, approving new sources for raw materials and restructuring how and where work was performed enhanced many corporate cultures with a nimble decisiveness that stuck. Even though leaders weren’t sure what to do, they recognized that they couldn’t risk standing still. They experimented and learned from their mistakes. Replace the word “pandemic” with “inflation” and imagine extending those rapid response disciplines to tackle rising costs, talent shortages and supply constraints.
When predictive data is thin, and people’s opinions are loud, scenario planning can help neutralize the noise and create a framework that can make the difference between failure, survival and growth. If ever there was an opportunity to break down functional silos, I believe this is it.
Navigating the inflation scenario.
Inflation affects many aspects of an economy and impacts every variable and decision in a business. While a company isn’t helpless, it can feel that way. But the answer is not to hunker down. Include one or two inflation scenarios in your scenario planning. This isn’t being pessimistic—it is being smart. Anticipate where the company can cut back when (not if) inflation hits because sooner or later, inflation will be a chapter in every growing business’s life. If there is a positive aspect to inflation, it is that company founders are learning real-world lessons that will stick for the rest of their careers. They won’t have to imagine what they would do when inflation hits—they can test options in real time and develop a playbook for future cycles.
Be tough-minded and move quickly. Tackle variable costs, of course, but also think strategically. Consider measuring company performance in broader terms. The value of young companies comes from expected revenue and earnings growth. New businesses are especially vulnerable to the impact of inflation on the cost of everything. In my opinion, during inflation, profitability may take a hit. Basing near-term decisions on profitability alone might cause a company to make short-term and short-sighted cutbacks that can be fatal to future growth. Invest in technology.
Instead, rethink every aspect of how the business delivers value to customers. According to McKinsey & Company, companies that invest in innovation through a crisis outperform peers during the crisis and the recovery—by 10% during the crisis and by more than 30% in post-crisis years. Scrutinize supply chains. Who is the company buying from, and how are those relationships set and managed? Can the company redesign parts or workflow? Can the business change its billing model? Look for other CEOs who are thinking about how to manage through. Have conversations. Be clear about what the company is working to accomplish and connect that vision to the individual employee’s impact.
Wages and benefits become more important than ever in times of inflation. In December 2020, nominal wages and salaries rose by 4.5%, the fastest increase since 1983. I see many employees now believing that it is easy to find another employer, that there are better managers in other companies and that people’s lives are about more than work. The larger a leader’s responsibility is in the business, the more important it is for them to understand at this particular moment in time why employees stay or leave. Look for ways to remove the boring aspects of people’s jobs. There is nothing more important to an employee’s career compensation than experience. Use those rapid response teams to move people around.
Recessions are relationship opportunities.
Scenario planning for recession produces action maps that look a lot like the mapping for inflation scenarios. This means that instead of becoming an expert at predictions, businesses need to build a framework and mindset to define the critical levers and corresponding initiatives that apply in both recession and inflation scenarios. Then take what was learned about rapid response during the pandemic and act.
Build your new mindset.
• Don’t allow assumptions to become assertions.
• Focus on the totality of the customer relationship.
• Accept that customer priorities will change.
• Find ways to invest in technology that reduces risk.
• Break down silos. If ever there was a cross-function opportunity, recessions are it.
• Look for leadership down in the ranks.
• Show a bias for action and a tolerance for mistakes.
Adversity causes people to think differently. New thinking fractures inertia and changes beliefs. This creates an open invitation to innovation, and that’s where entrepreneurship can shine, regardless of economic headwinds.