Strategy

CEOs Can’t Fight The Fed, But You Can Do These Things To Weather The Coming Storm

Editor’s Note: The following ran originally in our CEO Briefing eNewsletter for Friday, Sept. 23. Not getting the CEO Briefing, our 3x weekly strategy pep talk exclusively built for C-Suite leaders and business owners? You can sign up here. It’s useful and it’s free.

Federal Reserve Chairman Jerome Powell’s read-my-lips, we’re-not-fooling press conference should confirm for everyone that they’ll do what it takes—including engineer a recession—to bring inflation down. As the man said: “We won’t stop until the job is done.”

That hardly means doomsday is neigh. Every business has the chance to endure a very different version of Powell’s March. The key is focusing on essentials. A handful of our CEO100 Network members sat down this week with Ram Charan, the bestselling author and advisor to CEOs and boards. (His new must-read book Leading Through Inflation, based on work he did in partnership with Chief Executive Group earlier this year, will be out in October.)

It was an extraordinary session. Ram answered a ton of questions and engaged for nearly two hours. (FWIW, CEO100 is our peer network exclusively for CEOs who run complex organizations with more than $100 million in revenues—learn more about membership; it’s excellent). Here’s a quick download (tip of the hat to CEG Chairman Wayne Cooper for his note taking):

 

Overall

Inflation varies by sector, sub-sector, geographic market and other factors. Get specific, don’t use averages, and understand that inflation isn’t a one-year phenomena—think about the cumulative impact of your costs three years out and then work backwards.

  • Be honest—hope won’t do you any good.
  • Think about input costs and those you can control vs. those you can’t (e.g., energy costs)
  • If your costs are likely to increase by 20% or more over the next three years, have a multi-pronged approach and take bold actions.
  • With inflation, same volume levels consume more cash. Stress test a simplified P&L and balance sheet for your company under different volume changes (include interest, taxes and capex—not just EBITDA).
  • Watch out for “cash traps” like accounts receivable and inventories.

 

Leading Through

As CEO, your job isn’t to commiserate; it’s to lead. Make the best of the hand you’ve been dealt. The billionaires Ram knows haven’t panicked. They remain realistic while optimistic that they will find a solution—or someone with a solution. Just make sure you can survive.

  • Cash is king. Conserve cash and reduce waste, but don’t sacrifice your future.
  • Lower your breakeven point (e.g., John Deere is reducing its fixed costs and using outsourcing, etc. to make more costs variable).
  • Draw down your credit lines to have extra cash “just in case.”
  • Focus on increasing productivity, increasing innovation and price increases.
  • Don’t give up the innovation mindset. Continue to innovate to improve productivity—focus on product and process improvements to increase revenues with your given team.

 

Prices and Process

You need to increase your prices to reflect higher costs, but be smart about it—segment, segment, segment. Understand your costs, profitability and price sensitivity by product, customer, etc. and raise prices appropriately/surgically vs. across-the-board uniform increases.

  • Make sure your salesforce doesn’t block price increases or reduces price discounts. Align and incentivize them to increase their realized prices.
  • Work with customers to help them pass the cost increases on to their customers.
  • Apply many of the lessons of Amazon and the Amazon Management System to improve your company.
  • Put algorithms in place in a key function, get return on that one area and then expand to other areas.
  • Use tech to improve efficiency, reduce waste and inventory requirements and increase customer centricity.
  • Be patient. Machine learning and algorithms won’t start out perfect but improve over time.

His comments are a great reminder of two things: First, it’s worth getting your team to spend time with Charan’s excellent guides to Leading Through Inflation (published earlier this year) and How Amazon Does It (a book and the most-read article in Chief Executive’s history). Second, no matter what’s happening in the world, there’s always opportunity. Read the full Inflation Playbook >


Dan Bigman

Dan Bigman is Editor and Chief Content Officer of Chief Executive Group, publishers of Chief Executive, Corporate Board Member, ChiefExecutive.net, Boardmember.com and StrategicCFO360. Previously he was Managing Editor at Forbes and the founding business editor of NYTimes.com.

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