Navigating Economic Uncertainty: How to Thrive in Times of Inflation and Disruption

The record-setting inflation, with its spiking commodity prices and deepening supply shortages, is just one of many disruptive factors causing uncertainty for corporate decision makers. With pressure mounting on central banks to raise interest rates, leading to a potential recession, companies are also facing challenges like geopolitical shifts, asset losses due to the Russia-Ukraine conflict, and continued supply chain disruptions.

In such turbulent times, companies are confronted with various risks. Rising costs combined with customers trading down threaten profit margins. Changing terms with suppliers and renegotiating deals create cash flow concerns. Furthermore, increased prices or stock-outs could negatively impact customer loyalty, while higher interest rates make capital more expensive and refinancing debt more difficult.

Despite these hurdles, the best companies are taking proactive steps to prepare for what lies ahead, focusing on inflation and disruption mitigation strategies. It is vital to act now. Historical data and our research spanning over 13 years and covering 3,900 companies globally show a sharp divergence between winners and losers during and after disruptions. The companies that thrive during times of uncertainty are those that take swift, decisive actions.

In times of disruption, the role of the Chief Financial Officer (CFO) becomes even more critical. CFOs must oversee spending closely and create visibility into the areas that will be most impacted, including the relationship between rising input costs and pricing decisions during inflation. Cash visibility and management are paramount, as companies are balancing tight liquidity with the need to invest in building resiliency for future disruptions.

Effective CFOs are taking the lead in driving scenario planning, where the focus is not on predicting the future but on envisioning various potential futures and outlining decisions needed to adapt to them. Developing a range of scenarios—such as the effects of de-globalization, import tariffs, and restricted supply chains—enables businesses to better prepare for what’s coming. Scenario planning also involves identifying triggers and signs that indicate when specific disruptions are likely to occur, with playbooks ready for fast response.

As part of these preparations, it’s crucial to enhance customer engagement. During disruptions, customers tend to become more price-sensitive and may look for alternatives. The companies that excel in this environment are those that have a deep understanding of their customer segments and can respond quickly to shifts in customer needs. Building customer loyalty becomes critical to reducing churn. For instance, Pure Insurance made a strategic decision to offer better rates to its loyal customers rather than new members. Additionally, using business intelligence to identify vulnerable customer segments allows companies to offer competitive alternatives to win over customers from competitors.

Pricing strategies must also evolve during inflationary periods. Rather than applying blanket price increases, companies should implement targeted price adjustments informed by customer value, historical performance, and the cost of service. Transparency in how prices are adjusted is key to maintaining customer trust. For example, companies can communicate temporary surcharges, as Uber did with a fuel surcharge, or swap pricing increases with added value through bundled services or guarantees.

Building resilient and growth-focused procurement and supply chain operations is also essential. In the near term, companies must scrutinize supplier price hikes and ensure they are in line with market conditions. However, long-term success requires a broader strategy. Companies should collaborate with suppliers on innovation, simplify requirements to account for shortages, and explore options to reduce total system costs, such as redesigning product specifications or reconfiguring distribution networks.

Another vital component in responding to disruption is zero-basing work and scaling automation. As wage inflation impacts higher-level roles, businesses should focus on automating tasks that do not require human input. Bank of America, for example, expanded its automation in cross-selling and upselling, resulting in nearly 50% of sales through digital channels. Similarly, companies should leverage automation for low-value tasks, freeing up workers for more strategic roles.

Finally, investing in a great workplace is critical. In today’s tight labor market, it’s more important than ever to attract and retain talent. Companies that excel in employee retention create workplaces that address workers’ needs and offer flexibility. Research shows that, during inflationary periods, employees value work flexibility more than compensation. Successful companies will focus on upskilling employees, especially those freed up by automation, and rethink talent strategies with a focus on individual potential.

The future business environment will undoubtedly remain unpredictable, but one truth is clear: Disruptions and shocks will continue long beyond the current inflationary period and any subsequent recessions. By taking swift and decisive action now, companies can position themselves for long-term success. The winners in this era will be those who use these strategies to navigate disruption effectively and build resiliency for the future.