Few executives have faced the challenge of leading a company through an inflationary spike like today’s. Lessons from strong leaders and bold action can help top managers make the decisions that only they can make.
Setting a clear direction, aligning the organization, managing stakeholders, and serving as “motivator in chief.”
Where will customers see value in this new environment? How can we design products, services, and experiences to deliver this value?
How should I pursue repricing in an inflationary environment? How can I form a through-cycle and strategic mindset for my customer relationships?
Redesign product and service offerings for value and availability
- Promote near-substitutes. Consumer-packaged-goods companies identify product substitutes—often private-label equivalents that can be sold at lower costs than branded products. These substitutes maximize margins and increase the value to customers.
- Rapidly redesign products and services to adjust to new realities.
- Challenge specification orthodoxies.
Redesigns help to capture the longer-term opportunity to forge stronger relationships with customers.
At the same time, reduce the number of SKUs and diversifying the manufacturing base.
Make seamless end-to-end planning a priority
End-to-end planning involves several things. On the supply and demand side, companies must plan for longer lead times and earlier ordering. The financial implications of increased transportation, energy, and materials costs on working capital must be understood. The reorder points and stock of critical materials in inventory have to be reviewed. Production programs must be reprioritized in the event of foreseeable shortages.
Will suppliers accept cost sharing to lower the risk of disruption in demand for their products while balancing these costs by raising their own productivity?
Transform procurement to create value, not just cut costs
Over the last two years, critical supplies have been scarce or even unattainable at any cost within needed lead times. Prices for nearly all supplies have been rising in tandem globally, and labor market disruptions have affected nearly everyone.
- Basing contracts on the current reality. An industrial manufacturer faced across-the-board cost increases from suppliers. In response, it documented every such rise in fine-grained detail to better understand the exact cost drivers of each product or service, to improve internal cost models, and to build better contracts indexed to the right commodities and input costs.
A CEO can take a lead role in playing back the feedback the organization is hearing.
Adjust to the new talent game
Employee wages and benefits are one of business’s biggest costs. Wage increases put pressure on a company to maintain margins potentially by increasing prices. At the same time, wages and benefits are one of the most important levers employers have to attract and retain employees and help them ensure that they can provide for themselves and their families in a higher-inflation environment. The progression of wages and benefits are top of mind for executives.
“Forging new pricing relationships with customers will test CMOs in their role as the “ultimate integrator.”
Set prices to strengthen customer relationships
It’s a fundamental question in inflationary environments: What to do about pricing? As costs rise, repricing to sustain margins is nobody’s idea of a good time; it is typically unpleasant for companies and worse for customers. But CMOs have a chance to reframe customer relationships strategically by viewing repricing as an opportunity to forge deeper relationships with customers. The CMO can direct these conversations toward sharing common challenges and helping management to meet both their anti-inflation goals and those of their peers.
Ask a number of questions to help surface opportunities for strategic repricing:
How can we adjust discounting and promotions and maximize nonprice levers? Companies that consistently address total customer and product profitability are likely to weather inflationary cycles better than those that focus solely on cost changes. A manufacturing company facing a surge in demand for high-cost, low-volume products, for example, lengthened its lead times, especially for custom products with lower margins. Sales teams were trained to explain the new service levels and encourage customers to opt for more standardized alternatives. The result was an overall productivity increase that maintained margins without price increases.
Can analytics help us personalize more effectively? Best-in-class companies typically ground their price increase recommendations in analytics. These organizations examine their customers’ end-to-end profitability, willingness to pay relative to a comparable peer set, and the margin performance (at a product and service level) expected from price changes. Retailers have long used personalization tools to tailor promotions; B2B companies now have dynamic segmentation tools that allow them to do the same.
Can we communicate our value more effectively? Raising prices in response to inflation is seldom a one-and-done move; it is full of unintended and unexpected consequences. Companies that manage price increases well often have a council of cross-functional decision makers who can respond quickly to feedback from customers and markets.
Taking advantage of the opportunity to forge new pricing relationships with customers in a higher-inflation environment will test many managers in their role as the ultimate integrator of the enterprise. Keep inflation high on the company’s agenda with regular communication and role modeling, particularly with the leadership of sales and the frontline sales teams. Keep one eye on short-term margins and price fluctuations and the other on strengthening ties with customers and communicating value more effectively.
“Achieving a focus based more on strategic action and less on firefighting requires steps that only the CEO can take.”
Monthly business reviews or quarterly supplier workshops are not enough to handle fast-moving price changes, fluid negotiations with suppliers and customers, and the internal adjustments such pressures require.
“Keep moving to best capitalize on the current environment.”
Someone, somewhere, pays for every uptick in inflation. Customers pay at the end of the supply chain in higher prices. Suppliers pay when their customers de-risk production by seeking alternatives to their products. Shareholders pay higher costs as the ante for competing and maintaining a viable business. With the right playbook as a guide, the best managers will successfully manage the impact of the current higher-inflation environment and establish a new level of organizational resilience no matter where prices move next.