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Inflation, the time to think about it is before it gets here

by Mark P. McDonald  |  February 10, 2011  |  1 Comment

Remember the global economy right before the global financial crisis? Oil prices were hitting nominal records, food prices were climbing and other commodities were driving resource-based economies forward. Inflation was nowhere to be seen, but it was suspected around the corner. Then the global financial crisis took away demand and seemed to drive us to the opposite fear — deflation.

However, there are signs that it may be coming back!

Inflation fears are on the rise as governments watch prices and demand rise as a natural part of a recovering economy. That should be good news, after all a little inflation is not a bad thing as its a sign of increased demand as well as having palliative effects on paying off debts on a personal and national level. You know paying off future debt with ‘cheaper’ money.

The time to deal with inflation is before it happens, as that is when your resources have the greatest value. That means understanding what inflation does to the business, your budget and priorities. These form the considerations for a plan and determining the trigger that puts that plan in place.

Some thoughts on what to do going into a potential inflationary environment does to your business. The principles are simple; in the future, your dollars are worth less. Dollars including the ones you will earn in sales as well as the cash you hold on your balance sheet

  • Pricing power becomes important in an inflationary environment as you the power to pass on pricing increases become critical to maintaining profitability. For CIOs and IT, this becomes a critical target for deploying new technology as your company has pricing power where customers feel that you know them well and have what they need, when they need it. All three things rely on technology to achieve.
  • The value of immediate SG&A cost cuts and controls increases to preserve profits in the face of uncontrollable input costs. CFOs will go through another round of ‘operational’ tightening ahead of the inflation spike, as savings matter the most at the start when the dollars saved have higher value.
  • Debt becomes relatively cheaper, which can lead to increased leverage buyout activity either in the form of consolidation or perhaps increased privatization of public firms. Companies are sitting on record amounts of cash and they will face increased pressure to put it work as its value erodes with inflation. Look for some to leverage up to buy others. However, given the increasing scrutiny of public firms I would not be surprised to see more companies go private via leveraged debt as banks and hedge funds need to put their cash to work as well.
  • Suppliers shift their focus and service away from their long-term contracted prices to spot market requests. Consider what you did over the past few years in terms of squeezing your suppliers and get ready for them to squeeze you back. Their criticality to your operation determines supplier-pricing power.
  • Wage pressures will increase as people are squeezed, particularly after years of low to no salary increases. Pay will be come immediate and good people who are behind the pay curve will become vulnerable to leaving. Consider increasing the frequency of bonus payments, as people will value money more today than in the future.
  • Increased focus on energy and commodity costs and waste. These two categories are the most volatile in inflationary times. Refocus efforts to replace energy and commodity needs with information. That requires a dual focus on Just-in-Time operations as well as reducing waste in operations and processes.

There is no way to know the future, however it is always good to be prepared for the likelihood of inflation in the future. There are simply too many forces behind inflationary pressures to rule them out entirely. A suggestion is to pull your leadership team together and just go through the scenario of 7 – 10% inflation and no ability to pass on the costs. What would you do, what actions would you take. That is the start of the plan.

Category: 2011  economy  leadership  lean-thinking  strategy  

Tags: 2011-planning  business-strategy  cfo  economy  finance  

Mark P. McDonald
8 years at Gartner
24 years IT industry

Mark McDonald, Ph.D., is a former group vice president and head of research in Gartner Executive Programs. He is the co-author of The Social Organization with Anthony Bradley. Read Full Bio

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