As we enter a phase of hyperinflation, no one has the muscles or experience to navigate this new business climate, which means CEOs and their leadership teams need to figure out a new way to lead and win. The hyperinflationary toolkit is drastically different from the one that has been applied for the past 30 years, with steady 1% to 3% inflation combined with a cost of capital that has been almost free.
The ‘Stimuli’ for Inflation
Inflation is everywhere and, though it may vacillate, it continues to show signs of increasing velocity. During the past two-plus years, governments around the world have flooded markets and consumers with dollars to spend. If money printing was the only stimulus for inflation, it would be hard enough, but there is another layer of complexity to account for. We have amplifying effects from a globally gnarled supply chain that is causing additional pressures on pricing, Russia’s invasion of Ukraine, and commodity and energy markets going through the roof without an easy way to relieve the rising prices. On top of all these factors, we have arguably the tightest labor market in our lifetimes.
We have triangulated with CEOs around the world, and each one is deeply concerned about inflation. No one is talking about it being transitory any longer, only that it is moving from inflationary to hyperinflation. And while hyperinflation will subside somewhat as demand comes off, we believe it will lead to a period of stagflation where we have falling demand and continuing persistent inflation.
Leaders and leadership teams are entering a new era of “tone at the top” in the leadership and management of their companies. This is going to require a total rethink of the company’s blueprint on how strategy is defined, how future investment is determined, and how business models continue to prove viable.
Tightening Up Management of Cash and the P&L
We suggest that the CFO of the company undertake a full review of the business model with each business leader to identify where the P&L has inflation risk and model out various scenarios to uncover the sensitivities within the company and across the industry. Part of this undertaking needs to be to develop the inflation dashboard and metrics that provide the CFO and business leaders real time data of how inflation is affecting the company’s ability to generate cash and operating profit. Inflation has a time component to it, so it is critical that these dashboards are dynamic and operate in real time.
Now we are in a world where each leader will have to touch, feel and manage cash or working capital again. Hyperinflation eats away at cash, destroying margins and instilling a halo effect on managers and leaders as they see inflated revenues and think, “Everything is actually pretty good.”
In reality, it is not good at all, and leaders need the muscle and mindset to recognize this. When these forces combine without a corporate playbook, the likelihood of missing a few cycles and coming in late is extremely high. When leaders start playing catch-up in a hyperinflationary environment, they often struggle to make up lost ground, which leads to massive underperformance and even total failure for the companies they lead.
The cost of capital is increasing rapidly, and most executives have been operating in a low interest rate environment where investors have been willing to reward long-term growth. As hyperinflation settles in, investors will discount future growth and start to turn their attention to how companies are managing the balance sheet. This is a huge mindset shift from the past decade.
CEOs Must Develop the Muscle to Push Pricing
The old-fashioned approach of “raise prices 1% to 2% per year or 3% every other year” or “grow the bottom line through operational improvements and efficiency gains” will not work in a period of 8% to 10% annual inflation. If leaders don’t move quickly, the compounding effect of being off on price (200–300 basis points) every year is vast and extremely hard to make up quickly. Developing the muscle to push price will be key for CEOs and senior leaders to win in the future. They will need to:
- Understand the true increase in costs of the business, so that price increases can be targeted correctly and quickly.
- Create a regular product/service improvement cycle so increased prices can be justified on a regular basis (innovation means more now than ever).
- Collect quick feedback on competitors’ responses and customers’ reaction to price changes to understand increased costs’ impact on demand and volume.
Moving to the ‘Networked Organization’
The modern company has moved from being highly vertical and top-down, where managers operate in their individual silos, to the matrix organization. This introduced a lot of additional processes that slowed the pace of change. As we move into the next blueprint for the modern corporation, we are heading to what we call “the networked organization.” The network is about a more distributed model of leadership and efficiently organizing around the work that needs to be completed. The notion here is that before leaders drive any content, they map it across the company (the network) and engage with key stakeholders. The network brings to life a company that can be both “hyperlocal” and “hyperglobal.” These distinctions are more critical than ever before, as inflation will force organizations to consider new options like re-shoring, deep vertical integration and multiple source purchasing. Driving work in the network starts with executives asking themselves:
- Is this just me in my area?
- Is this me with a few peers across the organization?
- Or is this an enterprise activity with many key stakeholders?
Effectively leading in a hyperinflationary environment requires the leadership team to be highly connected and thinking about each other in each facet of their roles versus focusing on their individual areas.
By way of example, CFOs need to be working closely with global supply chain and procurement. More broadly, leadership teams need to ensure they are all working together to unlock supply chains at speed. Procurement must delve into every contract and understand the inflationary implications of those contracts, potentially closing or renegotiating them for an inflationary world. If pricing is with the sales and marketing team, it might need to be moved into the CFO and CEO office as sales and marketing executives are not wired for a hyperinflationary world of pricing and will balk at raising prices repeatedly.
Having the Culture and Talent to Deal with Setbacks
If central banks aggressively start moving interest rates upward, it is likely to send different types of shock waves into the global economy and we may quickly see the world head into a downturn and recession. Nobody has a crystal ball, and all we can do is prepare and respond, which requires a culture that is dynamic and flexible instead of slow and fixed. Each company and its culture need to be resilient, turning negatives into positives that spur the company into action, instead of allowing setbacks to derail them.
CEOs also need to build talent strategies that don’t rely on a large, available pipeline of viable candidates. CEOs and CHROs must recognize that the time to fill positions is no longer 60 or 90 days, but instead will be more like six, nine or 12 months going forward. Compensation increases aren’t 2% to 3% per year, but 5% to 7%. Questions will begin to emerge, like: How do leaders effectively balance resource allocation (talent and costs) across multiple initiatives? Will organizations have to leverage partnerships to “borrow” capabilities? Can the “gig economy” help more organizations going forward?
Similarly, CHROs need to rethink how executives are being measured and rewarded to develop a new model of compensation that shifts how success is measured. The CHRO and head of talent should embark on evaluations for leaders in critical roles, ensuring they are fit for purpose in a hyperinflationary world — and some will probably need to be changed out.
Every CEO Needs to Shake their Company out of the COVID-19 Haze
Companies not directly impacted by COVID-19 policy whose business model has not been producing super normal profits have a very big problem. We have been lulled into a false sense of competitiveness and virtual effectiveness. What nobody seems to be talking about is the hit to innovation and creativity that comes only from being in-person. We have prioritized efficiency as opposed to individual and collective effectiveness. Leaders need to mobilize their teams back into the office as we focus on more new threats to their business model.
The next few years are going to be a lot harder than the past few years, which many didn’t think was even possible. We will be doing a lot of new things, and we need each company to be at its creative and innovative best. This is going to require — you guessed it — being in the office.
Stephen Miles is the founder and CEO of The Miles Group (Twitter) LinkedIn). Previously, he was a vice chairman at Heidrick & Struggles and ran Leadership Advisory Services. With more than 20 years of experience in assessment, executive coaching, top-level succession planning, organizational effectiveness and strategy consulting, Miles specializes in CEO succession and has partnered with numerous boards of global Fortune 500 companies to ensure that a successful leadership selection and transition occurs. He shares insights on TMG’s C-Suite Intelligence podcast.