The COVID-19 pandemic's repercussions on governments around the world and Russia's war on Ukraine, which sparked political unrest and economic instability worldwide, were the two main drivers of geopolitical balances and the global economy in the first half of 2022. In western economies including the US, the UK, and the EU, inflation spiked near double digits mostly as a result of the confluence of these two events.
The UK's inflation rate peaked in April at 9% and increased steadily during the course of the second quarter. We have entered a period of high inflation, according to the Bank of England and the majority of economists, and it has urged companies to take the necessary steps to make sure they can survive and prosper for however long the current climate lasts.
What specific actions should business executives take to guide their companies through high inflation, then?
This week we are going to take a look at the specific actions that entrepreneurs can take to guide their companies through an era of high inflation.
Drivers of Inflation
First, it's crucial to recognise the three ways that the current economic forecast is raising inflation in order to make an informed assessment of its effects on the operation and margins of your business:
1. Many businesses are finding it more expensive to run due to the growing costs of natural resources like gas and oil as well as staple foods like wheat that have been impacted by the conflict in Ukraine. This changes depending on how much each industry uses the resources that are currently scarce.
2. A wider range of industries experience varying degrees of cost increases as a result of supply chain disruptions brought on by both natural resource shortages (e.g., rising transportation costs due to high gas prices) and geopolitical tensions (e.g., suspension of financial transactions with Russia). This is because different industries depend to different degrees on the supply chain segments that are disrupted.
3. Consumer spending must now be reallocated to cover the most essential goods, which reduces revenue for many businesses even as they face higher costs. This cost-of-living squeeze brought on by rising inflation means that purchasing power is eroded, putting pressure on businesses from two directions. On the one hand, employees demand higher wages to deal with higher living costs.
Based on their industry, target market, and position in the supply chain, it is clear how these three forces affect businesses in various ways.
Impact Evaluation by Industry
It's critical to develop a clear understanding of how much inflation will affect your firm depending on how its factors coalesce in your industry. Accenture created an intriguing framework that measures a firm's capacity to pass on costs to customers as well as the cost constraints that the company faces due to its sector and supply chain location.
Companies in the utilities sector, for instance, are under the most cost pressure from rising energy prices, but they are mostly free to pass these costs onto their consumers, as long as they comply with regulatory requirements, so it is not anticipated that their profit margin would decline.
Manufacturers of consumer goods are under pressure to raise pay to help their workers cover their living expenses, as well as rising costs for their raw materials like wheat and—in a lesser degree—the cost of production due to the cost of energy. These businesses find it extremely difficult to pass these expenses forward to the consumer because doing so would result in them losing market share to rival enterprises. As a result, their margins are anticipated to decrease.
The consequences of rising inflation on employee salaries are especially felt by software companies, which offer some of the highest wages relative to their sales. To a certain extent, they can shift the cost of paying greater salaries onto the client, but not sufficient to keep their existing margins.
Your Inflation To-Do List
So what practical steps can you take, I’ve outlined some below.
There are four ways that technology can be used to prosper in an inflationary environment:
1. Data-driven judgments
To make a precise determination of which areas of the company are vulnerable to the current economic climate, a centralised data platform must be used to capture and analyse all cost and revenue metrics across the supply chain.
You can acquire insights into the inefficient parts of your business where you can actively cut costs by investing in improved data collection, reporting, and analysis.
2. Use data to measure and increase productivity
Hiring may be slowed down and your expansion may be hampered by rising wages and higher production costs. Technology-driven growth planning enables scaling as opposed to growing. This entails producing more of your good or service with a smaller staff and a somewhat cheaper cost of production. Real-world examples of that include: digital automation of repetitive tasks freeing up your employees' time; AI-powered models to solve optimisation issues related to demand, transportation routes, and more; remote working, augmented reality, and metaverse solutions for training and collaboration, reducing overheads (i.e. office space), and potentially tapping into regions with lower labour costs.
3. Lower expenses for the consumer
Consumers must make difficult judgments about their spending during cost of living squeezes like the one we are currently experiencing. The majority of businesses will eventually have to boost their pricing to cover their own mounting expenses. It might be a terrific opportunity to gain market share, positioning you in a favourable position once we've passed the inflation peak, if technology allows you to lower manufacturing costs just enough to keep your existing prices while maintaining your margin substantially intact.
Finally, it's crucial to keep in mind that times of high inflation are frequently brief. The ICAEW recently compared it to the post-war peak, when inflation peaked at levels similar to those experienced now before returning to normal levels after a few years.
No matter how long there will be high inflation, it is imperative for businesses to survive it. However, it is even more crucial to do so while adding value for all of your stakeholders because doing so will result in a company that is stronger at its core and retains value both during and after the current economic context.
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