Leading Through Inflation

Picture this: You're sitting in a boardroom watching your costs spiral upward while your margins shrink by the day. Raw materials that cost $100 last month now demand $150. Your workforce is demanding higher wages to keep pace with living costs. Meanwhile, your competitors seem paralyzed, afraid to raise prices and risk losing customers. Sound familiar? You're not alone in facing this challenge, but here's the exciting truth – you're also positioned at the threshold of unprecedented opportunity.

For the first time in decades, business leaders are confronting an economic reality that demands fresh thinking, bold action, and strategic reimagining. While inflation creates undeniable pressures, it also separates the visionary leaders from the followers. The companies that learn to navigate these waters won't just survive – they'll emerge stronger, more efficient, and better positioned for the growth that follows. This isn't about weathering a storm; it's about learning to dance in the rain and discovering capabilities you never knew you had.

Understanding inflation's impact begins with recognizing that it's not just about rising costs – it's about fundamentally reshaping how your business operates. Inflation consumes cash at an alarming rate, trapping resources in inventory and accounts receivable. Price increases ripple through value chains like freight trains, disrupting relationships and power balances. Most dangerously, inflation's effects compound over time, turning manageable 7% annual rates into devastating multi-year accumulations that can cripple unprepared businesses.

Consider how Catalent's CEO John Chiminski approached this challenge. As early as June 2021, while many dismissed inflation as transitory, Chiminski and his team recognized a different reality emerging. They observed acute worker shortages in their specialized biopharma space, particularly in key geographic hubs like Boston and San Diego. Their turnover rate jumped from a consistent 9% to 13% in early 2022, nearly doubling their employee-related costs. Rather than hoping the situation would resolve itself, Chiminski immediately established weekly leadership meetings and launched a company-wide Total Cost Excellence initiative. His team didn't wait for perfect information – they acted on clear signals while others remained in analysis mode.

The most effective approach involves creating your own "war room" – a frequent gathering mechanism that aggregates information, strategizes responses, and drives coordinated action across your organization. Start by establishing at least weekly meetings of your C-suite, focusing on both immediate threats and forward-looking scenarios. Create dashboards with metrics specific to your business, not just general economic indicators. Train your entire leadership team to become early warning sensors, sharing observations from customer interactions, supplier communications, and market intelligence. Speed becomes your competitive advantage when you can detect changes weeks or months before competitors recognize them.

Your war room transforms anxiety into actionable energy. By bringing diverse perspectives together regularly, you'll spot patterns others miss and coordinate responses that position your company ahead of the curve. Remember, in inflation's fast-moving environment, the companies that act first often set the terms that others must follow.

Cash management has suddenly become the difference between thriving and merely surviving. In inflationary periods, cash gets trapped in working capital at unprecedented rates – every unit of inventory ties up more money, and customers inevitably try extending payment terms from 60 to 90 days or longer. Growth that once generated profits now devours cash faster than most leaders anticipate. Meanwhile, debt service becomes more expensive just as your ability to generate cash profits diminishes, creating a dangerous squeeze that has historically driven many companies toward insolvency.

DuPont's leadership team, led by CEO Ed Breen and his experienced finance team, exemplified proactive cash management. They became obsessed with cash flow, monitoring it on weekly and even daily bases. Their approach included standardizing metrics for accounts receivable management across business units, showing leaders exactly how to improve past-due percentages and creating accountability through transparent performance comparisons. When one division achieved 0.9% past-due rates while another struggled with 15%, the company used these disparities to drive systematic improvements. They simultaneously tackled inventory challenges, recognizing that inflation creates a double trap – consuming precious cash while risking profitability hits when high-cost inventory must be sold in softer markets.

Effective cash management requires viewing your business through a cash-flow lens rather than traditional profit metrics. Start by analyzing which customers truly generate cash versus those that drain it through extended payment terms or high service costs. Implement rigorous accounts receivable management, potentially assigning high-caliber analysts directly to this function. Scrutinize inventory levels constantly, balancing customer needs against cash consumption. Most importantly, revisit all planned capital expenditures and investments using inflation-adjusted cash projections over multiple years. Projects that seemed profitable under previous assumptions may now threaten your liquidity.

Your framework should prioritize cash allocation: first for business continuity, then digitalization capabilities, followed by supply chain bottleneck resolution, focused innovation, and only then essential capacity building. This disciplined approach ensures you maintain the financial flexibility needed to capitalize on opportunities while competitors struggle with cash constraints.

Traditional cost-cutting approaches – slashing budgets across departments – miss the transformational opportunity that inflation presents. Smart leaders look beyond their company's four walls to optimize entire value chains, finding ways to strengthen both suppliers and customers while building competitive advantages. This broader perspective often reveals cost reductions that simultaneously add value, creating sustainable improvements rather than temporary fixes that weaken long-term capabilities.

A medium-sized footwear company exemplified this approach when facing severe margin pressure. Rather than implementing typical cost cuts that might damage customer relationships or supplier partnerships, the CEO challenged his team to strengthen the entire end-to-end value chain. They reduced organizational layers from nine to six, accelerating decision-making and improving customer responsiveness. More innovatively, they helped manufacturing contractors optimize capacity utilization, reducing cutting-and-making costs that represented 50% of total manufacturing expenses. They assisted suppliers in stretching their assets more effectively, creating favorable pricing while maintaining quality relationships.

The company's geographic reimagining proved equally transformative. Instead of accepting traditional sourcing locations as fixed, they explored opportunities in Mexico and Caribbean countries, achieving faster delivery times to US customers while reducing costs. They relocated key account managers from expensive Asian cities to lower-cost production locations, solving the persistent problem of order-takers who lacked production understanding. These relocated managers became profit-center heads responsible for optimizing resource allocation across customer demands, eliminating friction between sales promises and production realities.

Your cost transformation strategy should examine every aspect of your business ecosystem. Map your value chain completely, identifying where improvements in one area can benefit multiple stakeholders. Consider relocating operations or personnel to optimize both costs and capabilities. Most importantly, resist the temptation to make cuts that weaken your competitive position or damage crucial relationships. Instead, find changes that reduce costs while adding value – these improvements will compound over time, positioning you ahead of competitors who chose short-term fixes over strategic transformation.

Inflation's cumulative effects are creating a permanently different economic landscape characterized by lower overall consumption, changed consumer behaviors, and shifted industry dynamics. Some market segments will shrink permanently while others emerge unexpectedly. Your current business model – the combination of revenue sources, customer mix, product portfolio, geographic footprint, and profit generation mechanisms – may be approaching a breaking point. Rather than waiting for definitive proof of this shift, forward-thinking leaders are reimagining their business models now, while they still have resources and options.

TVS Motors' transformation illustrates this proactive approach. When Managing Director Sudarshan Venu recognized that mass markets were shrinking while multiple competitors fought for share, he shifted focus toward customers who valued premium features and could pay appropriately for them. The company accelerated innovation cycles, launching products faster to reduce the lag between development costs and revenue generation. Simultaneously, they transformed their dealer network from a credit-extended model to cash-and-carry operations, improving velocity while strengthening the entire value chain's financial health. These changes created a smaller but more profitable business with higher margins and enhanced brand positioning.

Business model redesign requires examining every element systematically. Customer segmentation must reflect new economic realities – which segments remain viable and which offer growth potential? Product mix rationalization becomes crucial as complexity often destroys value in resource-constrained environments. Your ecosystem relationships need evaluation for financial stability and mutual benefit opportunities. Geographic footprint decisions should incorporate geopolitical considerations, exchange rate implications, and regional economic stability variations.

Innovation remains essential but requires more disciplined resource allocation. Focus on projects that can generate cash quickly while preserving selected long-term capabilities that will matter in post-inflation markets. Digitalization becomes non-negotiable – not as a massive multi-year project but through targeted applications that can deliver results in months rather than years. The law of increasing returns means digital products and services offer exponentially higher margins as volume grows, creating the cash-generation capabilities you'll need for continued investment and growth.

Leading through inflation isn't about surviving until conditions improve – it's about using this period of disruption to build a fundamentally stronger business. As one CEO reflected, "We see the positive side of inflation. We are using it to demonstrate our differentiation." This mindset shift from defensive reaction to offensive opportunity creation separates leaders who emerge stronger from those who merely endure.

The companies thriving through inflation share common characteristics: they act quickly on early warning signals, obsess over cash flow while reimagining pricing approaches, view cost management as value chain optimization, and treat business model evolution as ongoing strategic work rather than crisis response. These leaders understand that inflation's challenges are temporary, but the capabilities built during this period create lasting competitive advantages. They're positioning themselves not just to weather current storms but to dominate markets when stability returns.

Start today by establishing your war room mechanism and conducting a brutally honest assessment of your cash position. The actions you take in the next 90 days will largely determine whether you emerge from this period stronger or weaker. Remember, every delayed price increase, every cash trap ignored, and every strategic decision postponed compounds the challenge while diminishing your options. Your moment to lead is now.