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Editor’s Note: March 24 Ram Charan and other experts will share a new, multi-disciplinary approach—from communication to pricing to cost cutting—to help your management team fight inflation and win. Join us >
Almost 50 years ago, as a young professor, I was hired by General Electric to design and teach a unique course to their managers at their fabled Crotonville training center. The subject was one of the most painful, difficult challenges that any business leader can face: operating a profitable, growing concern in a time of strong inflation.
For GE, it was an urgent mission. In the rampant inflation of the early 1970s, the firm’s highly coveted AAA credit rating was in peril as the company bled cash. They were hardly alone. Inflation was crippling nearly every company in the world, while also stalling the ability of the middle-class to get ahead economically, let alone stand their ground. It was still nearly a decade before Fed Chair Paul Volcker’s crushing regime of interest rate hikes broke the inflationary fever in the early 1980s.
Now inflation is back. Every day, we hear of companies raising prices—from Starbucks and Coca-Cola to Procter & Gamble and Nestle. It isn’t just big consumer brands. A recent survey found 61 percent of small businesses in the U.S. had raised prices for their goods and services in January–the highest percentage since 1974.
Thanks to a unique confluence of events—including an extended period of near-zero interest rates flooding the world with cheap money, Covid-driven government spending boosting consumer demand and supply chains strained and broken by disruptions in production, transportation and talent shortages—the U.S., and much of the rest of the globe, finds itself in an economic situation not seen in a generation or more. Will central banks be able to get a handle on inflation before it gets out of control? Will supply chains unsnarl? Will people costs flatten?
It is too soon to tell, but my gut says no—at least not for a few years. That is why there is no more urgent need for business leaders right now than to get ahead of the inflation bogeyman. Corporate leaders of the past few decades have been spared the tremendous difficulties that come with trying to drive a business in an inflationary period. Few executives likely have any memory of how to do it at all. Now they will be on the front line. It’s one thing to talk about inflation at the macro level and another to keep your business healthy as the world as you know it comes unglued. The key challenge is to grasp the reality, change your organization’s psychology, and act and react quickly to the direct hits to you, your customers, ecosystem partners and the entire value chain. The dire effects of inflation happen quickly, and a recession—which could soon result from Fed action to rein in an overheating economy—compounds its effects.
Inflation consumes cash, eats margins and lulls managers into a false sense of security as inflated revenues rise. A company’s situation can erode very quickly, leading to takeover or bankruptcy. Those who are fast to react and flexible in their approach can not only survive but prosper in this challenging environment as they seize opportunities afforded by less nimble and smart competitors. Those who react slowly or choose the wrong strategy and tactics will be weakened and may even go bankrupt. The ultimate goal is to emerge from a period of inflation and recession stronger.
Preparing a company to battle this sudden rise of inflation is one of the most difficult tasks that will ever confront the CEO and management. Not only must the company be prepared structurally and financially, it must also change its dominant psychology. How management thinks about inflation and the company’s responses to it will determine if the company thrives and how it gets ahead of the competition.
Chief Executive asked me to revisit my work from 45 years ago and redesign it for the current moment when customers rule, the world is digitally interconnected and information is viral.
Whether you are a CEO, a member of the board of directors or the CFO or CHRO, this article is about what everyone must do to manage in an era of global inflation and slowing economic growth. It lays out a brief framework for how the entire company must shift its psychology, its strategies and tactics and its resources to minimize the effects of this corrosive economic environment while watching for the opportunities that will arise as competitors fail to meet the challenge.
Keep in mind that inflation can retreat as quickly as it pounces. Any aggressive action the Fed takes to tame it is likely to cause another sudden shift, this time to a radical slowdown in the economy. The mechanisms and agility you develop to adapt to high inflation will be equally useful to adjust to the next big shift. With either scenario, make no mistake: The time to act is now.