President and CEO of Rev1 Ventures. Tom Walker is focused on helping entrepreneurs innovate and succeed.
Entrepreneurs build businesses in one of the most challenging economic environments of the 21st century. Inflation is at a 40 years highand while PitchBook’s Q2 quantitative outlook indicates that less than 20% chance recession in the next 18 months, the threat of shrinking markets is real. Low in the unique challenges of today’s talent wars and intractable supply chain problems, young companies face an unusually discouraging reality.
Much of the world most successful companies (from Microsoft to UPS, eTrade to IBM) started in tough economic times. Today’s entrepreneurs can overcome the headwinds of recessions and inflation by taking a fresh look at proven management principles and tools.
Scenario planning can improve quick response.
Think of the forced business lessons of the past two years. The lessons learned from managing the extraordinary circumstances created by the global pandemic could help companies navigate economic uncertainty now.
Responsive cultures cannot remain responsive without process and tools. Companies that use predictive models to manage business operations and achieve revenue and other goals have re-educated us just how much modern businesses rely on dashboards and data. That is why I believe that scenario-driven planning is indispensable.
Many companies, large and small, have developed rapid response teams with the freedom and responsibility to act quickly on multiple fronts. Defining security measures, approving new sources of raw materials, and restructuring how and where work was done infused many corporate cultures with an agile determination that stuck. While leaders weren’t sure what to do, they recognized they couldn’t risk standing still. They experimented and learned from their mistakes. Replace the word “pandemic” with “inflation” and imagine expanding those rapid response disciplines to address rising costs, talent shortages, and supply constraints.
When predictive data is scarce and people’s opinions are loud, scenario planning can help neutralize the noise and create a framework that can make the difference between failure, survival and growth. If ever there was an opportunity to break down functional silos, this is it.
Navigating the inflation scenario.
Inflation affects many aspects of an economy and affects every variable and decision in a company. While a business isn’t helpless, it can feel that way. But the answer is not to squat. Include one or two inflation scenarios in your scenario planning. This isn’t pessimistic, it’s being smart. Anticipate where the company can cut back when (not if) inflation hits, because sooner or later inflation will be a chapter in the life of any growing company. If there’s one positive aspect to inflation, it’s that company founders learn hands-on lessons that will stick with them for the rest of their careers. They don’t have to imagine what they would do if inflation hits – they can test options in real time and develop a playbook for future cycles.
Be stubborn and act fast. Of course, tackle variable costs, but also think strategically. Consider measuring business performance in broader terms. The value of young companies stems from the expected revenue and profit growth. New businesses in particular are vulnerable to the impact of inflation on the cost of everything. In my view, profitability can take a hit during inflation. Basing short-term decisions solely on profitability can cause a company to cut short and short-sightedness, which can be fatal to future growth. Invest in technology.
Instead, rethink every aspect of how the company delivers value to customers. According to McKinsey & Company, companies that invest in innovation outperform peers through a crisis during the crisis and recovery – by 10% during the crisis and by more than 30% in the post-crisis years. Investigate supply chains. Who does the company buy from and how are those relationships established and managed? Can the company redesign parts or workflow? Can the company change its billing model? Look for other CEOs who are thinking about how to keep going. To have conversations. Be clear about what the company wants to achieve and connect that vision to the impact of the individual employee.
Wages and benefits more important than ever in times of inflation. In December 2020, nominal wages and salaries increased by 4.5%, the fastest increase since 1983. I see many employees now believing that it is easy to find another employer, that there are better managers in other companies, and that people’s lives are about more than just work. The greater a leader’s responsibility in the company, the more important it is for them to understand at this particular moment why employees stay or leave. Look for ways to remove the boring aspects of people’s jobs. Nothing is more important to an employee’s career compensation than experience. Use those quick response teams to move people.
Recessions are relationship opportunities.
Scenario planning for recession produces action cards that are very similar to the cards for inflation scenarios. This means that rather than becoming an expert at forecasting, companies need to build a framework and mindset to define the critical levers and associated initiatives that apply in both recession and inflation scenarios. Then take what has been learned about rapid response during the pandemic and trade.
Build your new mindset.
• Do not allow assumptions to become statements.
• Focus on the whole of the customer relationship.
• Accept that customer priorities will change.
• Find ways to invest in technology that reduces risk.
• Break down silos. If there’s ever been an opportunity for multiple jobs, it’s recessions.
• Look for leadership in the ranks.
• Show a bias for action and a tolerance for error.
Setbacks cause people to think differently. New thinking breaks through indolence and changes beliefs. This creates an open invitation to innovation, where entrepreneurship can shine, regardless of the economic headwind.