Editor’s Note: We’re having an ongoing conversation about how to lead through inflation with bestselling author and advisor to boards and CEOs Ram Charan, who has thought deeply about the subject for decades and who has agreed to teach a workshop for Chief Executive on the subject March 24. As we work on the full project, we wanted to share more of his thoughts, this time on how to prioritize—besides, of course, raising prices—during inflation.
“The most important thing is continued cash flow generation, forecast on a very conservative basis,” says Ram. “With that, make your cash outflow forecast on most likely risks.” Out of the net cash flow, he says, the company should prioritize efforts in the following way:
- Continuity of the business. What is required for the longevity of the business and winning against competition? It could mean advertising money, certain kinds of marketing expenditures, certain kinds of expenditures for reducing costs and breakeven points. Whatever capital expenditures or operating expenditures—CAPEX or OPEX—are necessary to preserve the future, that’s number one priority.
- Digitalization of the business. “This is existential. If you don’t digitize, you die. You must never lose focus here, no matter what happens. Your ability to react quickly depends critically on real-time data and analytics. Pre-Covid, people were slow to do this. During Covid, those who had done the work really prospered, and those who did not were hurt. In an inflationary period, connecting your enterprise digitally so you have real data on your customers and their spending is mandatory. You must increase your speed of reaction to change.”
- Fixing bottlenecks. “Eliminate friction and bottlenecks everywhere, especially in the supply chain. The drag on the business from slow cycle times and inventory in the pipeline will become more expensive as inflation grows.”
- Innovation—but more focused innovation. “Overall, you must not lose the innovation mindset in the company. Understand what the consumer is willing to pay more for and focus efforts there. It is okay to be incremental unless something big comes in your sector that you can’t ignore. The greatest mistake in innovation that companies made in the 1970s was to not increase the price but to shortchange the product—remember the shrinking candy bars—which damaged their brands long-term. Your products and services must remain fresh and new and show that they are of high value to justify a high price.”
- CAPEX for building capacity if you need it, and not ignoring maintenance. “Many people postpone maintenance. Don’t. It will come back to haunt you at the wrong time.” Also, when it comes to capital projects, think about how inflation will change not just your company but also your industry—and what opportunities may present themselves as a result. Work backwards from there: What will you need to fund to take advantage?
“A disciplined approach to people development and innovation will position the business to leap ahead once inflation subsides,” says Ram. “How would you become a better company with a better ranking in your industry? That’s an essential question to always keep in mind.” Learn more about the March 24 workshop >