By Leo Popik, CEO and Founder of Leading Peers
More than 99% of current business owners and CEOs in the US have never steered a company during a period of inflation as high as it is today. Inflation is at its highest point since 1982. Over the past 12 months, ending in March 2022, inflation was 8.5%, 4X greater than the Fed’s target rate of 2%.
We live in highly challenging times for business owners. Funding your business is increasingly difficult because private lenders are raising interest rates. The government is no longer handing out low-cost and forgivable loans as it did in 2020 and 2021. Attracting and retaining employees is more challenging than ever before. On top of all that, there’s growing anxiety over international conflicts, a spike in cyberattacks, and ongoing supply chain disruptions.
The good news is that inflation is likely to start gradually coming down as the Fed continues to raise rates and slow down the economy. In the meantime, CEOs must rise to the occasion and preparation is essential. The roadmap outlined below will help you navigate high inflation and emerge stronger on the other side of this peak.
1. Adapt your strategy to attract and retain employees
The financial worries of Americans have risen considerably over the past year, as shown by the Gallup poll conducted in April 2022. We're now at similar levels of financial worry as in April 2020, when unemployment hit 14.5%, the highest peak since the Great Depression of the 1930s and over 4X greater than today's unemployment rate of 3.6%.
Today's record number of job openings means that the job market favors workers more than ever before. A high level of inflation creates a great deal of anxiety for employees, forcing many to quit. A recent report by McKinsey shows that employees are leaving because the stigma of changing jobs frequently has been removed, and they feel confident they can get a higher-paying job quickly. At a recent Leading Peers' event, Carolina Vargas from Insperity, a leading American HR firm and the event's sponsor, shared, "The biggest challenge our clients face today is attracting and retaining employees."
So, what can CEOs do? First, improve your ability to recruit and the processes your firm uses. Develop core recruitment competencies, including the art of redesigning your org chart, posting clear job descriptions, and creating competitive compensation packages. Second, speed up the selection process without undermining your standards. As Geoff Smart and Randy Street wrote in "Who: The A Method for Hiring," growing companies recognize that everyone on the team, beginning with the CEO, must always be recruiting. When you find your person, move fast to close the deal.
Besides improving recruitment skills and processes, seize the new and desired “flexibility” perk. The past two years have made remote work easy for practically everyone, and many Americans now prefer working from home — at least part of the time. The massive shift to remote and hybrid jobs gives employers more options to find the right talent within budget.
Many members of Leading Peers have hired employees overseas this year, part of a growing trend among American businesses to fill admin, tech, and back-office roles with knowledge workers based in countries with big talent pools and lower living costs. Sourcing talent from the Philippines, one of our members who leads a marketing firm doubled his team of digital experts. Another member expanded his data analytics firm by acquiring and merging with a company in Argentina to expand operational staff.
When hiring abroad is not an option, hiring remote employees in parts of the US with lower living costs may be the solution. A highly qualified virtual assistant based in Montana may charge $30 an hour, whereas someone in downtown Miami of similar qualifications may charge $60 an hour.
Another helpful solution is implementing modern HR time tracking software to log employee activity in 15-minute increments. Greater transparency in tracking hours also helps managers understand the workload involved in the tasks they delegate and generates more trust among team members. On average, companies that have adopted this solution have reduced HR costs by 8% by eliminating the rounding premiums they pay when employees don't use the right time-tracking tools.
For companies paying fixed salaries to employees based in the US, retaining employees will require wage increases of 5% to 12% this year. Private-sector wages in the US have increased at a 6.6% annualized rate since December 2019, more than twice the rate of the two years leading up to the pandemic. Bolstering a benefits program with additional funds or rolling out a new one can also be highly effective if it improves employees' living standards in the short term.
Finally, while all the tips above are essential to navigating inflationary times, CEOs must remember that cultural factors remain critical to retaining employees. Numerous studies have shown that employees are more likely to stay in jobs where they feel cared for by their managers, see opportunities for career advancement, and worker performance expectations are sustainable. Our February 2022 article, The Do's and Don'ts of Employee Engagement in a Competitive Labor Market, features a broader playbook for worker retention.
2. Adjust your supply chain
One of the leading causes of the current inflationary spike is that shipping costs have skyrocketed 540% by ship and 65% by land in the past two years. The pandemic significantly strained global shipping by sea and land. To fight the pandemic, national governments adopted mostly unilateral solutions, and international cooperation reached its lowest point since the end of the Cold War in 1991.
Geopolitical tensions among the superpowers have grown over the past two years. As explained in our April 2022 article Leading Your Company Through the Cyber Security Pandemic, a global cyberwar has reached new proportions. Relations between the US and China have deteriorated because of the devastating consequences of China's lack of transparency over the pandemic and the aggressive rhetoric from former US President Donald Trump in signaling Beijing's responsibility for what he dubbed "the China Virus."
Meanwhile, the Russian invasion of Ukraine has caused most US companies operating in Russia to leave the country, while other Western businesses have stopped sourcing goods and services from Russia. It has become extremely challenging for Western companies to buy Ukrainian products due to the damage inflicted by Russia on its neighbor's production and infrastructure.
While I'm not advocating for ending all US-China commerce, American companies have learned during the pandemic that they cannot rely on China's goodwill to supply health, food, and technological goods during times of crisis. So, if you're sourcing from China, Russia, or Ukraine, you need to take steps to mitigate supply chain issues impacting your company.
First, shift your supply chains domestically and to nearby Western markets like Canada and Latin America. CEOs must accept that mitigating risks in redesigning supply chains is worthwhile, even if it raises costs.
Second, CEOs need to nurture relationships with their vendors to help guarantee continued sourcing at reasonable prices and terms. Diversifying the supply chain can help reduce risks for businesses that rely on a stable influx of certain supplies. Just be careful not to over diversify, leading to operational inefficiency and higher procurement costs.
Finally, CEOs must modernize procurement by introducing digital technology to make their supply chains increasingly visible. Understanding each layer of the supply chain offers CEOs and their teams the chance to assess opportunities to redesign and renegotiate their supply chains to increase transparency, reliability, and agility.
3. Shift your product offering
The most creative CEOs will realize that these inflationary times require significant changes. The area of greatest opportunity for some companies will be in redesigning their product offering. This strategy is highly effective by moving away from products experiencing significant cost increases and dwindling margins and embracing new products where margins are sturdy while prices remain competitive.
What can CEOs do? Focus on identifying new products and solutions that deliver on customer needs while maintaining a healthy margin. First, you can reassess product offerings to understand which ones are experiencing the biggest hit on their margin as the cost of goods sold rises. Then, brainstorm new solutions for your clients, seizing opportunities in areas where you are not experiencing rising costs. You can also introduce entirely new products based on new technologies.
By changing your product offering, you protect your margins and keep your prices competitive while building a reputation as an innovative company attentive to its customers. One example is a Leading Peers CEO of a men's shoe company who pivoted his business last year. Until 2021, his company exclusively sold high-end dress shoes made in Italy. In 2022, this CEO led his company through the launch of a new line of casual dress shoes made in Brazil at a fraction of the cost of the shoes produced in Italy. The new shoe line offers the business a higher margin while lowering prices and satisfying the consumer need for more casual shoes to work from home.
Finally, another strategy is to know the margins of each product and advertise the right products, when raising your prices may not be necessary to sustain a healthy margin. By adopting this approach you bring solutions that your customers need, while maintaining the prices they can afford, without hurting your company's finances.
4. Tackle repricing with a focus on customer relationships
Repricing is almost inevitable for companies:
with labor costs that account for more than half of the cost of goods sold,
that cannot hire a substantial portion of their work abroad, or
that sell products greatly affected by rising costs, such as transportation companies.
When repricing, a focus on customer relationships is key to success. Inflation is a known phenomenon impacting everyone, and the causes of supply chain disruptions have often appeared in news coverage of the pandemic, the crisis in Ukraine, and rising inflation. Get out in front of your main customers and the media to explain why you have raised prices. Explain what your company is doing to minimize the impact of rising costs on your customers. If you handle repricing by focusing on your customers, they will likely remain loyal.
Conclusion
Navigating inflation is a challenge that CEOs must tackle head-on. The solution mix that's right for you will depend on your business. Whichever solution you choose to focus on first, you will need to revisit the problem weekly or monthly to gauge which other solutions to apply. Raising prices should not be your sole solution. A more sophisticated approach that involves constant monitoring, strategizing, and action focused on stakeholder interests will yield better results.