Many individuals, employees, executives, CEOs, and business leaders have grown increasingly concerned about the current rate of inflation at 6.8% (USBLS, 2021). As executive coaches, what lessons and insights on managing inflation can we point our clients to? What can we learn from past business owner and CEO responses to inflation and how can we share this knowledge with our clients? This insight article takes a deep dive into what leaders of the past have done, and what leaders of today can do to combat inflation.
Not since 1982 has the US economy experienced inflation at the rates we are experiencing now. Bankers define inflation as a rise in the general price level. Put simply, this means, inflation is when the underlying price of a good or commodity rises faster than buyers’ income, such that inflated prices reduce buyers’ purchasing power. For example, if you make $15 per hour at your job, and the price of your food, rent, and fuel increases faster than your wages, then you have reduced purchasing power, and that’s called inflation. Inflation impacts businesses as well. When a company’s input prices (for costs of goods sold) rise, and the same business cannot raise prices commensurately on their customers, then inflation reduces company profitability and ongoing operations. In such times, companies do what they can to increase prices, and frequently implement cost-cutting measures inside the company to maintain profitability.
When inflation is at 2% YoY or lower, then inflation is almost not noticeable and easier to absorb. However when inflation rises more quickly, then problems, shortages, imbalances, and market volatility can persist. Hyper-inflation exists when the inflation rate is 50% or greater per month, and sadly this has occurred from time to time and wreaks economies. Happily, we are not there yet in the US, and there is still time for the Federal Reserve Bank and others to take action and tamp down on inflation before it gets out of hand.
“Let us learn from the past to profit by the present, and from the present, to live better in the future.” - William Wordsworth
Key insights from the 12/13/21 Arete Coach Podcast on inflation (episode 1052)
Inflation is higher than any time since 1982.
Inflation of goods and services is outpacing wage growth; meaning buyers (consumers and businesses have less purchasing power).
Central bankers typically seek to hold down inflation with five levers, all of which impact business operating conditions. The five levers include:
Monetary policy – increasing interest rates to cool off lending and slow the economy down
Control of money supply – pulling back cash in the system to reduce cash available to lend and spend
Supply side policies – implementing policies to increase competitiveness and efficiency of the economy, or to impact certain markets in a way bankers feel will help the economy
Fiscal Policy – recommending tax increases (to slow the economy) or tax reductions (to speed the economy up)
Price and Wage Controls – where the bank and governments seek to freeze prices, wages, or some combination of both. This has not been used since the 1970s however we have seen a willingness of the Fed Reserve Bank to do whatever it takes, and they have been quite creative in their application of their mandate. It embraced its role as “lender of last resort,” it provided liquidity to borrowers and investors in key markets, and it expanded its interest rate (market operations)
On the podcast, we also review insights from a 9/28/21 article published in the Harvard Business Review (HBR) titled, “6 Strategies to Help Your Company Weather Inflation” which offers key suggestions for business owners. The article authored by Jason Heinrich, Simon Henderson, Tom Holland, and Megan Portanova, examined 5,700 companies globally and what worked and did not work to navigate the waters of business during periods of high inflation. They found that the “businesses that cut costs to improve productivity the most during previous inflationary periods achieved higher total shareholder returns (TSR) than their industry peers that took less action.” Furthermore, “companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities. They need cost programs that allow them to grow top-line revenue and reduce their dependence on volatile labor markets while improving employee retention.” The authors suggest six strategies to prepare for inflation now:
Get [greater] spending visibility
Differentiate between strategic and nonstrategic spending
Unpack the drivers of spending; [get inside the numbers; they even suggest strengthening ties with your suppliers to get preferred supplier status for pricing and delivery]
Eliminate work [reduce SKUs, reduce what is sold to increase profitability of most important items, remember the 80:20 rule; fire some customers]
Our podcast concluded with 23 potential strategies for business owners to raise prices while seeking to keep their customers.
Additional lessons from the past
Although today’s inflation has relatively unique circumstances due to the COVID-19 pandemic, inflation itself is not a unique concept. According to Chair Cecilia Rouse, Jeffery Zhang, and Ernie Tedeschi of the White House, there have been 6 periods of inflation above 5% since World War II (2021). The most recent period of inflation they assess is the 2008 increase in gas prices (Rouse et al., 2021). Below we examine 4 major business responses to the 2008 financial crisis, as it is the most recent example of how businesses have combated inflation previously. Consider the strategies they used to ensure the wellbeing of their business despite the economic difficulties of 2008.
Adapting to market adjustments
During seasons of inflation, customers have less purchasing power. Meaning they are not able to purchase their usual amount of goods. However, people want to maintain their standard of living and are resistant to change. Because of this, they look to cut costs and save money on entertainment (Riserbato, 2021 & Wolverton, 2009). In response to the market adjustments brought by the 2008 recession, Netflix offered consumers new products at a better price than competitors. Netflix was offering customers a subscription-based service that allowed them to rent as many DVDs via mail one at a time per month or unlimited streaming online starting at $9 per month. Meanwhile, customers during that time expected to “pay $10 to $20 to buy a single DVD, or up to $5 to rent a DVD from Blockbuster” (Wolverton, 2009).
Inflation and recession changes consumer priorities and purchasing power. By adapting to the changing market and providing customers with a more cost-effective way to purchase entertainment, Netflix was able to survive and innovate during the 2008 recession. From this case study, it is apparent that adapting to changing market demands is key to financial success amidst seasons of inflation.
“During inflation, goodwill is the gift that keeps on giving.” - Warren Buffett
Look for addressable opportunities in other geographies
While customers in America sought to cut down on unnecessary spending during the 2008 recession, companies like Lego transitioned to the global market. While American consumers were managing the effects of the 2008 recession, Lego altered its focus to consumers in Europe and Asia (Riserbato, 2021). In doing this, their sales were able to reach “an all-time high” despite the recession (Thompson, 2009). Lego adapted to the financial challenges of America by investing in globalization. They saw an untapped market and innovated towards globalization to reap the necessary profits.