How Companies Can Survive and Thrive during Inflation
Geopolitical balances and the global economy in the first half of 2022 were largely driven by two factors: the reckoning of governments around the world with the effects of the COVID-19 pandemic, and Russia’s war on Ukraine which caused political tensions and economic instabilities around the globe. It was largely the combination of these two events which caused inflation to spike towards double-digits in western economies such as the US, the UK and the EU.
In April the inflation rate for the UK reached 9%, and continued rising throughout the second quarter. The Bank of England, along with most economists, agree that we have entered a period of high inflation and have urged businesses to take the appropriate measures to ensure they can survive and thrive for however long the current environment persists.
So what are the concrete steps that business leaders can take to steer their businesses through high inflation?
Firstly, in order to achieve an accurate assessment on inflation’s impact on your business’s operation and margins, it’s important to distinguish the three ways the current economic outlook is driving inflation up:
- The rising cost of natural resources such as gas and oil, as well as basic food supplies such as wheat that have been impacted by the war in Ukraine make it more expensive for many companies to operate. This varies based on each industry’s intensity of use of the resources that are now in shorter supply.
- Supply chain disruptions created both by natural resource shortages (i.e. transportation costs increasing due to high gas prices) and by geopolitical tensions (i.e. financial transaction with Russia being interrupted) drive up costs for a wider range of industries to different extents, based on their reliance on the disrupted segments of the supply chain.
- Cost-of-living squeeze created by rising inflation means that purchasing power is eroded, creating a dual pressure on businesses: on the one hand, employees demand higher wages to face higher living costs, on the other hand consumers must now be reallocated to cover the most essential goods, driving revenue down for many businesses even as they face of higher costs.
It’s easy to see how these three drivers impact companies in different way, based on their industry, their customers and their position throughout the supply chain.
Assessing Impact By Industry
It’s essential to gain a clear view of how much inflation is going to impact your business based on the how its drivers come together in your specific niche. Accenture developed an interesting framework that works by evaluating the cost pressures that act on a company based on its sector and supply chain position, along with its ability to pass these costs on to their customers.
For example, companies in the utilities sector face the greatest cost pressure from the rising energy prices, but are pretty much free to pass these costs onto their customers, within regulatory limitations, and are therefore not expected to see a loss in their profit margin.
Consumer goods manufacturers face increasing costs for their raw materials such as wheat, and also—in a smaller measure—increasing costs of manufacturing due to energy being more expensive, as well as a pressure to spend more on wages to help their employees meet their costs of living. It’s very hard for these companies to pass these costs onto the customers, as increasing retail price would mean losing market share to their competitors. Therefore, their margins are expected to shrink.
As a final example, software companies—which pay some of the highest wages as a percentage of their revenue—are mainly impacted by the effects of high inflation on their employees’ salaries. They can pass the cost of paying higher wages onto the customer, to some extent, but not enough to maintain their current margins.
Your Inflation To-Do List
So what are the actionable items that Founders can use to navigate their companies through high inflation? Most experts agree on one thing: technology must play a key role in your action plan.
Because the causes that led to this economic outlook have to do with the cost of energy and the delivery of supply-side goods that are essential for companies to operate, the way out has to involve an active effort in removing any possible friction and inefficiency from the start of the supply chain to the delivery of the product or service to the final consumer. Technology can do just that, in a way that creates long-term value for businesses even when inflation falls back to normal levels.
There are four ways technology can be used to survive and thrive during inflation:
- Data-driven decisions
Using a centralised data platform to record and analyse all the metrics of cost and revenue throughout the supply chain is essential to carry out an accurate assessment of which parts of the business are vulnerable to the current climate.
Investing in better data gathering, reporting and analysis will help you gain insights into the areas of inefficiency in your company where you can actively reduce the cost of doing business.
- Use data to improve productivity
Rising wages and higher production costs can slow down hiring and hinder your growth. Planning growth around technology allows you to scale rather than grow. This means delivering more of your product/service with the same workforce, at a marginally lower production cost. Some real-life example of what that looks like are:
- Digital automation of repetitive tasks freeing up your employee’s time;
- AI-powered models to solve optimisation problems around demand, transportation routes and more;
- Remote working, AR and metaverse solutions for training and collaboration, reducing overheads (i.e. office space) and potentially tapping into geographies with lower costs of labour.
- Reduce costs for the end user
Cost-of-living squeezes like the current one mean consumers have to make tough decisions about their spending. At the same time, most companies will eventually need to raise prices to face their own rising costs. If technology enables you to reduce production costs just enough to maintain your current prices leaving your margin broadly intact, it could be a great opportunity to gain market share, putting you in an advantageous position once we’re past the peak of inflation.
Finally, it’s important to remember that periods of high inflation tend to be temporary. ICAEW recently compared it to the post-war peak, where inflation reached comparable levels as now before reverting back to normal figures within a couple of years.
Regardless of how long high inflation is going to last, it’s essential to survive it as a business, but it’s even more important to do so while creating value for all your stakeholders, as that will result in a company that is stronger at its core and stays valuable through and beyond the current economic context.