Is Economic Stability Possible in Uncertain Times?
“Mixed signals” are the two words that best describe today's economic outlook. Inflation, while historically high, has trended down in recent months. Yet, rising food, energy and housing costs are driving up the consumer price index (CPI).
Are we headed for a recession? Again, mixed signals. Some economists think we’re already in one (19%), while 72% believe we’ll be in one by mid next year.1 Nevertheless, 98% of CEOs who responded to a recent economic confidence survey are preparing for a recession in the next year or so, albeit a mild one.2
No matter which opinion is right, it’s wise to prepare for possible long-term uncertainty while striving for economic stability.
What are the current economic issues?
Experts say high inflation, the war in Ukraine, and supply chain disruption are contributing to the current economic woes. For businesses, inflation means higher interest rates and higher capital costs.
Given the last recession began more than 15 years ago, running a company during adverse financial conditions could prove challenging to executives who are new to leadership. Business consultants suggest executives consider three questions before deciding on a course of action:3
- How do inflationary cost pressures affect your industry and how will that impact your next moves?
Not all industries are affected by inflation in the same way. For example, healthcare is less tied to energy and food prices than it is the consumer goods manufacturing industry.
- Can your technology infrastructure capture and analyze data to improve your decision-making efficiency and agility?
Using the right technology to run “what if?" scenarios and analyze data can inform decision-making. Planning and performance tools can tackle pricing, sourcing and procurement, labor costs and compensation, supply chain disruptions, and consumer spending power, among other inputs.
- How will you resolve inflation-driven issues with stakeholders?
Whatever steps you take to address inflation should be discussed with stakeholders, not only to gain insight but also to avoid surprises. For example, talking with vendors may reveal opportunities to source alternative materials or services. Customers deserve updates on price adjustments, and employees need a heads-up about year-end bonuses, wage increases, and hiring freezes.
Once you've considered these foundational questions, you can then focus on concrete steps to manage inflation. Of course, there's only so much U.S.-based companies can do to stop global inflation. But there are short- and long-term ways to counter inflationary impact closer to home.
- Actively manage pricing
Up to 71% of CEOs and executives see price increases as a means to offset inflation and build value.4 That’s not a bad idea, as companies that actively managing pricing are usually more profitable.5 However, there are implications for raising prices. Impact to customers, costs, competitors, and cash (Oracle’s four “Cs”) should be carefully considered.6
The most common method is to implement a blanket rate increase for all goods and services. But this can be tricky if you sell a commoditized product, customers are price sensitive, or competition is stiff. You should ask yourself if you can afford to gain income but lose market share in the long term?
Short-term pricing strategies are worth considering. These might include product bundling, installment payment plans, or even dynamic pricing that automatically adjusts to either demand (think Uber or airline travel) or to core cost inputs as they fluctuate. In addition, consider adding pricing language to contracts that would cover inflation-related remedies.
What are your competitors doing? If they're increasing prices, you have an opportunity to either join them or target their customers with lower pricing. But you’ll need to understand how either decision will affect your cash flow.
- Prioritize products and services
Some companies rely on loss leader strategies to drive pricing higher on more desirable items. But this is an assumption that should be tested. The first step is to evaluate your profit margins on every product and service. Once that's accomplished, you can develop sales strategies that will move the most desirable products and services.
Stratus Cargo Canopies Owner J. Craig Jaschke said, “It requires keeping up with the myriad niches evolved in the last three years, while also being able to fulfill the customer’s wants. If the ‘go-to’ brand isn’t readily available, consumers will now keep looking for alternatives rather than wait. It could be an opportunity to gain new market share and value by delivering service that competitors can’t.”7
For example, if customers are eager for quick delivery, suggest a product with a higher profit margin that’s ready to ship. Refine your customer and prospect lists to focus on those who are interested in the higher-margin goods.
- Investigate technology options
Even business leaders with no prior experience managing during inflationary periods can succeed with the right tools. Technology is a critical enabler. Forecasting and scenario planning are vital as they provide valuable insights to inform decisions.
Consider these possibilities: What if the price of raw materials increases by 24% or labor costs by 15%? If you experience a supply chain delay of three weeks, how will that affect production? How would you respond if a competitor’s product is unavailable for several months?
Pricing, inventory, production, and operational analysis can help you develop and implement responses to any of the scenarios above.
Tim Dewald, supply chain director at Hercules Poly Inc. agrees that implementing the right technology is critical to business growth. “We purchased an enhanced enterprise resource planning and transportation management system and tied them into a customer relationship management system. Scaling in this way will enable our newest division to grow 70% over the next 12 months.”8
- Increase efficiencies
After the last three years, many businesses are much more proficient at managing through crises. Now is the time to keep up the effort – to look for more opportunities for cost savings and efficiencies.
In earlier inflationary periods, companies that made “judicious cost cuts" that didn't impact the company's profitability achieved higher shareholder returns. Eliminating redundant positions or processes, controlling payment timing, consolidating real estate, and cutting underperforming initiatives were among the most effective tactics. Now, improving supply chain resilience is also critical. If you are relying on too few vendors, are over- or under-inventoried, or experiencing ongoing delivery slowdowns, it may be time to reconfigure your supply chain.
- Focus on growth
Even during challenging times, growth should always be the goal. Eighty-three percent of business leaders responding to a recent survey on managing risks in the current financial environment say they will focus on growth in the next year.9
Achieving growth could require casting a wider net. Could an acquisition expand your market footprint? Is your research and development team exploring alternative products and services? These options may be worthy of discussion with your executive team and trusted advisors.
Progressive business leaders aren’t waiting for the economy to get better. Instead, they’re examining their circumstances with fresh eyes and identifying opportunities for advancement.
As a trusted advisor to successful businesses in a variety of industries, Synovus has the assets and insight you need to move confidently forward. Contact a Synovus Commercial Banker for more details.
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Important disclosure information
- Entrepreneur, “72% of Economists Predict a Recession Next Year – If We’re Not Already in One,” August 23, 2022 Back
- The Conference Board, “CEO Confidence Deteriorated Further Heading into Q4,” October 13, 2022 Back
- Accenture, “The War in Ukraine: How Businesses Can Survive and Thrive Through High Inflation,” July 27, 2022 Back
- PwC, “Pulse Survey 2022: Managing Business Risks,” August 2022 Back
- McKinsey & Company, “Pricing During Inflation: Active Management Can Preserve Sustainable Value,” August 19, 2022 Back
- Oracle NetSuite, “8 Strategies to Deal with Inflation in Business,” August 18, 2022 Back
- Synovus, “Real-world Strategies for Navigating Supply Chain Impact,” June 2022 Back
- ibid Back
- PwC, “Pulse Survey 2022: Managing Business Risks,” August 2022 Back