How to lead through inflation
Ram Charan, Business Consultant, Author, CEO Advisor
Companies that look at the recession as a means to learn, look inward and improve, and uncover opportunities are poised to lead.
Ram Charan, Business Consultant, Author, CEO Advisor
Are businesses prepared for an economic slowdown? Concerns for the economy's health are rising as high costs, hiring slowdowns, and salary stagnation continues. The Russian invasion of Ukraine, supply chain issues, and other factors have also contributed to increased costs in the United States and abroad. Inflation is more than about rising prices. Its cumulative and pervasive influence squeezes margins, eats cash, threatens working capital, and throws all plans in an array.
In such a scenario, anxiety is common. Yet, there is reason to be optimistic. A period of economic discontinuity like this provides a massive opportunity for savvy business leaders. They can take some strategic steps to avoid inflation hazards and lead by positioning the company to thrive when the business cycle stabilizes. This blog discusses real-world examples and recommendations to help leaders navigate turbulent times.
Having lived through inflation as high as 21% in the 1980s and two severe recessions, I know we can overcome this adversity. With some simple yet strategic steps, you can prepare for the downturn and stagflation and feel your psychology shift from anxiety and fear to optimism and excitement.
HOW GLOBAL EVENTS ARE SHAPING THE ECONOMY
- Russia-Ukraine war - Ukraine-Russia has forced America to divert its resources. It has forced the EU governments to do the same and even build up their missile bases. In his New Year's Eve address to the nation, Russian President Vladimir Putin indicated that Russia would continue the war in Europe despite sanctions. The ongoing war and embargoes will have ripple effects and affect the world economy as they cause energy prices to skyrocket and supply chains to break.
- US-China relations - The ever-intensifying competition between the US and China will define global economic conditions in 2023. China's relationship with Russia may be a significant contributor to the future of its relationships with the US and EU, both of which have tightened ties as they united against Kremlin aggression. Much will also depend on how China bounces back after a year of weak economic growth and the abrupt end of "COVID-zero".
- Iran and Saudi Arabia driving the game - Iran supplying drones and missiles to Russia and the Crown Prince of Saudi Arabia keeping strict control over oil barrel prices are contributing to macro-economic conditions of 2023. An expanding US program, endorsed by many countries, aims to limit Iran's ability to manufacture drones by depriving them of the Western-made components needed for the process. The war inadvertently pushed Arab oil producers closer to Russia and China inviting the United States' wrath.
HOW TO PREPARE FOR THE RECESSION
Luck favors the prepared. There are three simple rules for companies to follow.
- Focus on the cash - build a cash reserve
Safeguarding the cash flow is important since expenses will continue amid rising costs. The average recommended supply of cash to reserve is between 6-12 months of operating expenses. A bit of careful balancing is needed to ensure accounts receivables are secure to make cash flow forecasting easier.
- Protect your talent - keep employees in the loop and manage well-being Most companies cut spending in times of recession and thus consider reducing headcount. Layoffs are demoralizing and leave a company bare in the aftermath of the downturn. A recession can damage employee morale and health, so employers must focus more on their well-being and support them in numerous ways. It is a good time for leaders to review their company's leadership and vision and revamp their culture to weather the trouble ahead. They should also go the extra mile to attract and retain candidates to stay ahead of the competition.
- Prioritize and be hyper-productive - ensure your operations are lean, streamlined, and agile Businesses should take stock and look for ways to maximize the efficiency of the team to drive through a recession and boost growth in the long term. Transforming business operations and increasing brand visibility and control by adopting automation can ease the pressure on your people and help you face upcoming challenges. They should use this time of economic uncertainty to become more productive, increase visibility and control, and ultimately be fit to scale and grow.
UNCOVERING OPPORTUNITIES DURING A RECESSION
For savvy leaders, economic changes during a downturn can have many benefits and are not necessarily devastating. They don't resort to broad cutbacks and mass layoffs but explore the hidden opportunities, adapt and create new revenue streams to keep profits up. The idea is to spend smart, not less. This way, they can grow their businesses and expand market share while others struggle to survive.
Companies that look at the recession as a means to learn, look inward and improve, and uncover opportunities are poised to lead. The new capabilities they acquire lay the foundation to build a better future.
Leaders who look for opportunities for growth and scale in a period of economic discontinuity come out stronger to lead in the face of inflation and a looming recession.
They are mindful of what matters to their employees. They invest in business operations that can minimize the need for layoffs and cutbacks. They can become more agile and resilient despite challenges by preparing thoughtfully for the downturn.
About Ram Charan
Ram Charan has guided hundreds of companies through many tough business challenges. In the early 1980s, he helped GE preserve its teetering credit rating in the face of double-digit inflation. In Leading Through Inflation, he brings the same common sense and wisdom that made his book Execution, coauthored with Larry Bossidy, a long-time New York Times bestseller.
Learn more about Ram: https://ram-charan.com/about-ram/
Ram's new book “Leading Through Inflation: And Recession and Stagflation” discusses how businesses can persevere through inflation and how technology can make companies truly resilient.