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Harvard University’s Management Magazine has been published for a century and combines research and data-based articles. Its authors include the best international management and business experts in a variety of fields, including leadership, negotiation, strategy, marketing, finance and operations. Harvard Business Review articles are translated and published in Globes three times a week: Mondays, Wednesdays and Thursdays (G Magazine).
About the writers
Vijay Govinergan He is a lecturer at Dartmouth Tuck College Business School. Hassan Elias He is a doctoral student in finance at Johnson School of Management at Cornell University. Felipe B.G. Silva He is a junior lecturer at Trollska College of Business at the University of Missouri. Anop Srivestava He is an Associate Professor at Haskain School of Business, University of Calgary. Luminita Anache She is an associate professor at the same university
While consumers generally do not like inflation because it erodes the purchasing power of their income, businesses actually want a fixed level of inflation, as investments made at today’s prices yield higher profits and returns in the future. Governments also like low and stable inflation. With inflation, long-term government loans are repaid at lower real cost, and the country’s real income increases as long as employment levels are high and the improvement in employee productivity outweighs the improvement in their wages. Property prices like homes and stocks continue to rise and attract investors to the economy. The idea is that the economy continues to grow and everyone benefits. So why are consumers, businesses, governments and investors particularly worried about the latest inflation news?
First, while demand for goods and services reached pre-epidemic levels, supply did not close the gap: supply chain disruptions related to the epidemic continued and many goods remained stuck in ships or ports; Shipping, freight and insurance rates have skyrocketed; China’s ‘zero sticking’ policy means closing down the world’s major manufacturing and shipping hubs. Many factories remained closed or did not return to operation; Wages continue to rise, and companies are still struggling for talent; Extensive shortage of truck drivers is affecting production chains.
All of these factors are compounded by Russia’s attack on Ukraine and the subsequent sanctions imposed on it by Western countries for goods and goods.Russian Har. These developments have direct and indirect effects that fuel inflation. Russia is still an important supplier of oil, gas and coal to factories in Europe. Ukraine and Russia together are the world’s largest exporters of cereals, livestock food crops and crop fertilizers. Stopping or even significantly reducing the supply of these goods makes it difficult for the global supply chain system to function well. Even if the war ends tomorrow, the lifting of sanctions and embargoes on trade could take years, if not decades.
One of the likely consequences of these developments is that countries may become protectionist and thus retreat from decades of progress in the process of global trade and specialization. For example, in the last 40 years or so, much of the production has moved away from the US. Meanwhile, Silicon Valley has become the world leader in new digital business ideas, Taiwan has become the global supplier of semiconductors and the Shenzhen region in China has created an electronic system for electronic products. Of beef, China of steel, Canada of aluminum, Germany of cars and USA of radios, televisions and refined oil.
In other words, each region began to specialize in the production of goods in which it had a relative advantage or a size advantage. Goods crossed the world in various stages of production before reaching customers. These specialization and trade lowered the prices of goods and services and increased innovation.
There is now a real danger that at least some of this progress may be lost forever. States may return to a more protectionist policy and try to become independent of others. In addition, many countries will spend more on protection, which means less money for real development. All this will make the goods and services more expensive.
We do not think inflation will fall anytime soon, even though the US Federal Reserve plans to reduce its balance sheet this year by more than a trillion dollars (that is, to collect a trillion dollars back from the economy, in the hope that demand will be more in line with supply).
In light of developments in Russia and Ukraine, supply chain disruptions and inflation problems have become much deeper and more protracted than in the past. Here are seven strategies that will help companies deal with inflation over time.
1. Analyze your entire value chain and its level of exposure to shocks in the supply chain. Learn not only about your immediate supplier, but discover the supplier behind your supplier, and so on. Even a minor sub-component crosses the world at different stages of production. The risk of disruption should be assessed at each stage, alternative sources of supply should be developed and sufficient stock maintained.
2. Understand your capital structure: A mix of equity stocks, preference stocks, bank loans, short-term credit, vendor credit and convertible debt. Find out which ones should be repaid and when, which ones are affected by interest rate hikes and which ones might bring down the business if not repaid.
3. Pay special attention to developments cLobility: Changed alliances between countries and a change in the policies of international suppliers. These factors can no longer be taken for granted. You can not expect countries to act rationally in accordance with their long-term economic interests.
4. Be aware of the Fed’s policy announcements and protocols. They often include plans and policies that may surprise businesses when implemented. For example, any recent announcement of an interest rate hike surprised stock markets.
5. Maintain high morale among employees and prevent burnout. This is against the background of the departure of workers from the labor market. Loss of a key employee means months of loss of productivity and expenditure of additional resources to find and train a replacement. As a result, it is especially important to be in constant communication with employees and at least be aware of their job change plans. Were more flexible in addressing their personal needs, like working from home.
6. And bet on unprofitable ideas. It is time to rationalize activities, customers, businesses, brands, segments, suppliers, manufacturing sites and product lines, as short-term survival is a higher priority than long-term growth. The core areas should be identified and the focus should be on those that provide the best return. Keep the most promising ideas for the future.
7. Avoid cuts. A natural tendency in these times is to hoist a universal ax and order a horizontal cut in salaries, expenses and the number of workers. A clear result of such actions is low morale and further attrition of talented workers. It may also be tempting to start cutting back on future expenses, such as research and development, employee training and advertising. We recommend not to do such actions. Instead, re-rate activities and business lines in terms of conservation priorities. The ranking must take into account current organizational priorities while leaving room for future growth and profitability. For example, it must include:
■ Return on investment based on the current market values of the assets, rather than historical values.
■ The operating cycle of cash, that is, the time that elapses between investing cash in inventory and returning cash from the customer.
■ Risks and uncertainties, from delivery to logistics to customers’ ability to pay.
■ Growth, a combination of the total market that can be addressed and an achievable market share.
It is impossible to sweeten the fact that inflationary pressures and supply chain problems are here to stay. It is important to develop an in-depth understanding of these issues and create a plan that will address the rapidly evolving challenges.
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