The Consumer Price Index (CPI) was 7.9% higher in February than it was a year ago, the highest rate of inflation in 40 years. In a conversation with Ram Charan this past week, he told me this round of inflation is different. Companies will need to act differently. They should focus more granularly. They should manage cash to ensure continuity. They should nurture the 2% of people that create 98% of the impact.
According to Charan, past inflations were caused by excessive demand, especially in housing and auto, and relatively low interest rates. This inflation has been caused by excessive quantities of money in the system (which the government needed to inject to mitigate the economic impact of Covid,) supply chain disruptions, and talent shortages – not to mention the impact of the chain of events triggered by Russia’s invasion of Ukraine.
Charan thinks this inflation will not be temporary and will take a number of years to work through the system. He thinks there’s a possibility of it becoming “insidious” as people adopt a psychology of hoarding.
Strategically – Focus
Strategy is always about focus – choosing where to play and how to win. Charan is a master strategist. In this case, his overall guidance is for leaders to make more granular, specific choices. “Don’t look at the CPI.” He implores. It’s too general. Figure out the drivers of inflation in the different parts of your ecosystem.
And don’t be lazy. Don’t reduce the amount of product you put in your box to mask your price increase. Instead, keep investing in innovation to create more value for your customers – and charge for it.
- Inflation will vary by sector and sub-sector and the different players in organization’s supply chain ecosystem – hence the need to focus granularly.
- Focus on the right short-term goals.
- Be even more focused on innovation. Instead of delivering less with inflated costs at the same price to hold margin, invest in innovation to create new value and charge for it – keeping customers’ trust.
Operationally – Continuity
Job #1 is to survive. This different inflation will impact different parts of your business differently. Forget the norms. Manage for cash. Price to manage cash. Digitize to create cash. Work the supply chain to optimize cash. As the song goes, “Cash is the oxygen of commerce.”
- Manage for cash, “not GAP accounting.” Understand the impact of scenarios on cash/liquidity and competitive position – ensure continuity of business with an eye on working capital, pricing, maintenance, digitization, ESG, security. Deploy inflation-based accounting.
- Make pricing a strategic enterprise decision, not a tactical sales force decision. Don’t delay price increases. Take large pre-emptive price increases now, not in small bites. Have a full-time, cross-functional unit working on pricing, supply chain, and people. Speed matters.
- Fix bottlenecks and friction – especially in the supply chain. Invest CAPEX to increase capacity, not ignoring maintenance. Digitize. “If you don’t digitize, you die.”
Organizationally – 2%
When it comes to people, forget the 80/20 rule. One of Charan’s many great books is “The Leadership Pipeline.” When he says 2% of the people have 98% of the impact, he knows what he’s talking about.
Just as you need to focus on value creation instead of pure cost management strategically, and need to focus on cash operationally, focus all your love and attention on the most important 2% of your people. Support them. Recognize them. Pre-emptively reward them.
Over communicate with all, every step of the way. Treat everyone with the respect they deserve, especially when it’s time for them to go elsewhere.
- Focus on nurturing the 2% of the people who have 98% of the impact.
- Clarify goals and compensation. Revamp compensation to reflect the realities of inflation. Make pre-emptive counter offers to the 2%, even before others make their first offers.
- Communicate inside and outside extensively, hands-on, truthfully with unfiltered information. Educate about inflation. Deal with people with dignity and honesty (respect.)
Click here for a list of my Forbes articles (of which this is #756) and a summary of my book on executive onboarding: The New Leader’s 100-Day Action Plan.