By Shrinivas V Dempo
Inflation has become the new global pandemic. Energy and supply chains remain hostage to the economic war between the west and Russia and inflation’s brake on global growth is getting firmer. Indian economy is feeling the chill as uncertainty hangs over oil and gas prices in the approaching winter. Also, the western central banks are making a concerted effort to arrest the runaway inflation by aggressively reversing their easy money policy, even at the cost of a recession. Business leaders are back to the drawing board, as they must recalibrate their post-covid recovery and rebuilding plans.
The fear of inflationary expectations becoming entrenched and producing a price-wage spiral is bothering both policymakers and business leaders. Once everyone begins to believe that costs and prices will keep rising, inflation tends to eat into the growth. Also, inflation shocks tend to create political instability by triggering internal strife and external conflicts. Between growth and price stability, the world seems to be settling for the latter for now.
Managing in times of inflation uncertainty requires business leaders to strengthen the defences against cost shock and adjust the value propositions to fit the changing priorities and capacities of the customers.
Also read: India’s CPI inflation for September to top August levels; analysts say CPI rising yet steady
To fend off cost shocks emanating from inflation volatility, business leaders must acquire a high-resolution view of where the business spends and to what extent that translates into revenues and profits. Careful monitoring and streamlining of each input and process becomes a necessity, as blunt cost-cutting by business units tends to end up in self-harm.
Procurement has to be refined and reconfigured to lower costs through efficiency and not brute force. Some level of reversing of the supply chain resilience measures may be required, as a business has to balance costs with assurance. Procurement may shift back to large orders on a few suppliers in return for lower prices. Moreover, business leaders may need to reconsider the make-outsource balance. Also, centralization of procurement of common items needed by different units may be required to acquire buying power in the market. When inflation bites, buying better becomes the key to resilience.
However, since this inflation crisis is partly created by supply chain disruption, business leaders need to continue to rejig their inventory level and supplier distribution. The actual war in a strategic geographic area and the evolving prohibitions on trade links are affecting critical supplies and shipping. Add to that the continuing covid-related disruption of China-linked supply chains. Thus, inflation uncertainty comes with supply chain uncertainty and business leaders have to learn to tread the twin fires.
Also read: IndiGo marks 100th destination with Ras Al Khaimah
On the revenue side, business leaders need to work on pricing. The instinctive response to unavoidable cost increases is to pass on the inflation to the customer, even if it involves risking the loss of a few customers. Another standard response to cost inflation is to reduce the deliverables while holding on to the familiar price point. The less-for-same strategy tends to work better for low-value consumable items. However, the buyers of big ticket items do not forget or forgive brands for short-changing, even when they would not accept a price hike either. In such cases, business leaders need to get innovative on the payment terms to soften the blow of inflation. Offering discounts and loyalty bonuses to customers for moving to a subscription or pay-as-you-use model can help sales growth and also make revenues more predictable in the future.
Shrinivas V Dempo
The key to pricing during high inflation uncertainty is to divert attention away from the price to the value. Since price cuts are easy to imitate, and they are mutually destructive, it helps to focus on what a product or service can do more for a customer rather than just making it more affordable than the alternatives.
Moreover, price sensitivity is temporary, value is permanent. High inflation is an opportunity to reprice and reposition brands. When customers expect to pay more because of general inflation, many of them would appreciate the brand raising the deliverables even at a higher, but still accessible, price point.
So far, much of the demand reduction due to inflation is at the bottom end of the market. However, business leaders have to prepare for the possibility of inflation uncertainty becoming entrenched and affecting the market across the board. Even if the war suddenly ends tomorrow, the unwinding of economic hostility will take a long time. Managing in this environment demands strong nerves and constant creativity.
(The author is President AIMA & Chairman Dempo Group of Companies. Views are personal.)