Leading Through Inflation

Leading Through Inflation Plot Summary

Introduction

Economic turbulence has become the new reality for business leaders worldwide. Inflation, once a distant memory for many executives, has returned with a vengeance, threatening cash flow, eroding margins, and disrupting established business models. Most leaders today have never navigated through high inflation, making this challenge particularly daunting. Yet within this disruption lies opportunity for those who recognize it and act decisively. The path forward requires a fundamental shift in mindset and approach. Rather than viewing inflation as merely a temporary obstacle to weather, forward-thinking leaders are using this moment to reset their businesses, strengthen their competitive positions, and emerge stronger on the other side. This requires understanding inflation's insidious effects across every aspect of the business, from pricing strategies and cash management to business models and organizational alignment. Success demands not just reactive measures but a proactive, comprehensive strategy that transforms challenge into advantage.

Chapter 1: Recognize the True Impact of Inflation

Inflation's effects extend far beyond simple cost increases. It fundamentally changes the dynamics of business in ways that aren't immediately obvious until significant damage has occurred. Understanding these universal truths about inflation is essential for developing an effective response strategy. The most insidious aspect of inflation is how it consumes cash. As costs rise, the same inventory and accounts receivable tie up more cash for the same unit volume. This cash trap becomes increasingly dangerous as inflation persists, with effects that compound over time. A 7% inflation rate might be manageable for one year, but that same rate compounded over several years could devastate a business's financial health. This is why many companies that appear profitable on paper can still face insolvency during inflationary periods. The psychological dimension of inflation further complicates matters. When people expect continual price increases, they may hoard goods, creating artificial demand that exacerbates supply-demand imbalances. This pattern can spiral into hyperinflation if left unchecked. Additionally, inflation distorts capital expenditure planning, potentially turning well-planned investments into bad decisions as the underlying assumptions become invalid. Despite these challenges, inflation creates opportunities for businesses that adapt quickly. Companies that move swiftly to adjust pricing, manage cash flow, and rethink their business models can strengthen their competitive positions. For example, Chanel raised prices on some luxury goods three times in 2021, staying ahead of rising costs while maintaining profitability. Other early movers have used inflation as a catalyst to sharpen their focus, improve productivity, and cultivate stronger customer relationships. The key to success lies in broadening your perspective beyond immediate cost-cutting measures. While preserving margins is important, the most successful companies are looking four years down the road, preparing for the post-inflation world. They recognize that inflation will reorder competition, creating opportunities for those who sustain themselves in the near term while strengthening their position for future growth. To navigate inflation effectively, leaders must enlist the entire organization in the fight. This isn't just a supply chain issue or a finance problem—it affects every aspect of the business. Sales and marketing must adjust pricing strategies, finance must vigilantly manage cash, and operations must find new efficiencies. By understanding inflation's far-reaching impact and mobilizing the whole organization to address it, companies can convert anxiety into action and uncertainty into opportunity.

Chapter 2: Create Your Economic War Room

Inflation intensified in late 2021, followed by Russia's invasion of Ukraine and China's COVID-19 lockdowns, which dramatically accelerated shortages and price increases. Companies that established mechanisms to detect such changes and coordinate responses quickly gained significant advantages over competitors caught flat-footed by these developments. Catalent, a contract development and manufacturing organization serving the biopharma industry, exemplifies this proactive approach. As early as June 2021, CEO John Chiminski and his team recognized that the wage inflation they were experiencing wasn't transitory, despite many economists claiming otherwise. They observed turnover rates jumping from 9% to 13%, nearly doubling their employee turnover. With talent at the core of their business model (the very name Catalent combines "Catalyst" and "Talent"), they couldn't afford to fall behind market wages. Rather than simply reacting to these pressures, Chiminski established what effectively functioned as a war room—a mechanism to focus attention on the inflation threat and enlist help in executing solutions. The top team began meeting at least weekly and launched a companywide "Total Cost Excellence" initiative. Chiminski framed the challenge bluntly: "We can't stop wages and costs from increasing, and we have to be competitive in the markets where we participate. That means we have to take significant costs out of our business. In addition to that, we need to rebuild the muscle of price increases." DuPont took a similar approach when inflation began accelerating. CEO Ed Breen had already established a one-hour weekly meeting of the company's top leaders. When shortages and price increases began to accelerate in fall 2021, the chief procurement officer started joining these meetings to brief the leadership team directly. He provided data and expert perspectives on rising freight costs, raw material issues, and potential supply disruptions. When Russia attacked Ukraine in February 2022, this forum allowed the team to immediately assess energy supply and price implications. The value of these war room structures extends beyond information sharing—they create a social mechanism that converts anxiety and fear into energy and action. By bringing together cross-functional leaders regularly, companies can aggregate information, strategize collectively, and drive coordinated responses. This alignment becomes crucial when inflation requires fundamental shifts in pricing, cash management, and business models. To establish your own economic war room, start with a meeting of the entire C-suite to learn from outside experts about inflation's historical impacts. Then establish a regular cadence of meetings—at least weekly, but potentially more frequently depending on your industry's volatility. Some manufacturing companies have implemented daily meetings with the CEO, COO, and heads of manufacturing and purchasing to stay ahead of rapidly changing conditions.

Chapter 3: Prioritize Cash Management

Cash management represents the number-one risk to your business during inflationary times and the key to navigating safely through this period. You need a clear, real-time picture of where cash is coming from and where it's going, with visibility into how those flows will change in coming quarters. While reducing costs and lowering break-even points remains important, the essential shift is focusing on the balance sheet, not just the P&L. Indorama Ventures, a global chemical company based in Thailand, demonstrates the value of early action on cash management. CEO and CFO DK Agarwal says they detected inflation warnings in late 2020 and began taking action in 2021, well before most companies recognized the threat. "We thought the stimulus packages and other factors would put unnecessary pressure on interest rates," he explained. "When we saw concrete early warning signals that there was too much money in the system, we knew inflation was going to come and that we had to fix the interest rate on our debt." In 2021, Indorama Ventures locked in about 68% of its debt on a fixed basis, with some maturities as long as seven years. They also secured additional lines of credit, creating $300-400 million more liquidity. "Liquidity is very important to us," Agarwal notes, "because you never know when oil will go to $200 a barrel." This preemptive action protected the company from the interest rate increases that followed. The most insidious aspect of inflation is how it affects working capital. For a generation of leaders accustomed to near-zero interest rates, the relationship between revenue growth and working capital consumption has rarely been a concern. But in high inflation, any attempt to grow or even sustain your business will consume more cash in accounts receivable and inventory. This additional cash must come from somewhere, and in high inflation, the options narrow as cash profits become harder to generate and borrowing costs increase. DuPont exemplifies disciplined cash management under inflation. CEO Ed Breen, together with CFO Lori Koch and Chief Strategy Officer Raj Ratnakar, implemented an aggressive plan to reduce cash consumption across the company. "We are obsessed about cash. We watch it on a weekly and even daily basis," Ratnakar explains. This focus included vigilantly managing accounts receivable to prevent customers from extending payment terms, which becomes increasingly tempting for them during inflation. To help leaders across the organization manage accounts receivable effectively, DuPont standardized metrics and provided concrete tools. "When you tell a business leader they have to improve accounts receivable, they're not sure how to go about it," Ratnakar says. "So we translated broad targets into tangible operational improvements we could measure—for example, the past-due percentage by customer segments." This approach allowed the company to identify which salespeople, branches, or regions were performing better than others and share those best practices.

Chapter 4: Implement Strategic Pricing Approaches

Pricing has moved from a relatively low priority over the past decade to a central survival issue under inflation. It's not just about raising prices, which you almost certainly need to do—you may need to revise your entire approach to pricing to maintain profitability and customer relationships. The contrast between two lumber distribution businesses owned by the same private equity firm illustrates how pricing approaches can determine success during inflation. Both faced skyrocketing lumber costs and supply fluctuations in 2021, but their outcomes differed dramatically. Distributor A used an index-based pricing approach with a fixed margin percentage automatically added. When lumber costs increased, prices adjusted immediately with no lag time. Because the percentage markup remained fixed, higher costs led to higher prices and more cash. As pricing consultant Adam Echter explains, "Because 40% of $100 is $40 but 40% of $200 is $80 and so on, the more costs went up, the more cash came in." Distributor B, however, relied on individual customer negotiations to set prices, making it difficult to keep pace with rapidly rising costs. While Distributor A emerged from the volatile period with resources to acquire weaker players, Distributor B was significantly weakened. This example demonstrates how your pricing approach—not just your price levels—can determine whether inflation becomes an opportunity or a threat. Inflation provides an opportunity to evolve your pricing function and build new capabilities. Consider expanding beyond your current pricing mode (transactional, subscription, or contractual), method (dynamic, index, or negotiated), model (factory-filling, margin-based, or value-based), and strategy (market penetration, customer retention, or value extraction). A crane manufacturer demonstrated this flexibility after the 2008-2009 financial crisis when shipping demand collapsed. Rather than selling cranes outright to ports that couldn't afford the capital expenditure, they placed cranes at ports and charged per container moved. This preserved income during the downturn and positioned them for substantial profits when shipping volumes recovered. The urgency of price increases cannot be overstated. DuPont chose to be among the first in its industries to raise prices, despite concerns about losing market share. Raj Ratnakar explains their approach: "We have a long tradition of having the trust and respect of customers. Everything starts with open and honest communications. We want customers to know price increases are happening for very specific reasons and that the pricing policies are therefore fair." This transparency helped customers understand that all players faced the same challenges, and switching suppliers for slightly lower prices would sacrifice quality and reliability. Developing a cadence of more frequent, smaller price changes typically works better than infrequent large increases. Even if you have contracts that fix prices for a period, don't assume you're stuck. When senior executives reach out to customers with honest discussions about their dilemma, many customers accept the new reality and allow renegotiation. Catalent's head of Commercial Operations, Karen Flynn, notes: "Nothing precludes going to customers out of cycle and negotiating with them. We did that, saying that, 'yes, we have annual mechanisms, but these are extraordinary times.'"

Chapter 5: Cut Costs While Building Value

When Catalent faced rising wage costs in a tight labor market, CEO John Chiminski launched a company-wide search for cost reductions in other areas, dubbed "Total Cost Excellence." Rather than implementing across-the-board cuts, he created multiple teams to explore a full range of options: one team focused on professional services, another on lab spending, others on manufacturing materials, equipment maintenance, IT, and travel expenses. This comprehensive approach recognizes that while some costs are impossible to control during inflation, companies can find savings in many direct and indirect costs across the organization. However, the most successful companies go beyond incremental savings to consider more radical changes that reduce costs and cash consumption while strengthening the business for the future. A medium-sized footwear supply chain company exemplifies this forward-thinking approach. When inflation hit, the CEO knew that raising prices to pass along cost increases wasn't realistic, as his customers were still recovering from pandemic disruptions. He asked his team to find cost savings wherever possible, with one critical caveat: he would not support cuts that weakened the business—either their own or those of their customers or subcontractors. This constraint forced more creative thinking. The search for savings led to internal changes that not only reduced costs but made the company operate more efficiently. One such change was reducing organizational layers from nine to six. The CEO began by cutting two layers at the top, and once the company had adapted to that change, eliminated a middle layer as well. The lower layers were preserved to maintain direct customer relationships. These changes resulted in faster decisions and approvals, making the company more responsive to customer requests—a change customers explicitly appreciated. The CEO pushed his team to expand their vision beyond the company's own operations. "I saw an opportunity for us by taking a broader view. I wanted us to think about suppliers and customers as well as our own company," he said. "Competitors are 100% focused on reducing cost and generating cash internally just to survive. But if we strengthen the whole end-to-end value chain, we can win the game for the future." This value chain perspective led the team to help their customers prepare for rising costs by encouraging more disciplined forecasting for seasonal purchases and earlier commitments. This approach reduced inventory and conserved cash across the supply chain while preventing cost increases and supply disruptions. Similarly, they helped their manufacturing contractors optimize production capacity, which reduced costs and strengthened the entire chain. The company's quest to improve the business also led them to reconsider their geographic footprint. They explored new sourcing options in Mexico and Caribbean countries, which would allow faster delivery to U.S. customers and reduce markdowns from missed seasons or trends. They also relocated key account managers from high-cost Asian cities to lower-cost production locations, giving them broader responsibilities and better insight into both customer needs and production constraints.

Chapter 6: Reinvent Your Business Model

The cumulative effects of inflation are creating a world of lower consumption, permanently changed consumer behavior, and restructured industries. As you adjust pricing, product offerings, costs, and cash flow, your business model may eventually reach a breaking point. To thrive in this emerging environment of lower consumption and slower growth, you'll likely need a fundamentally new business model—and you should focus on developing it now. The mental challenge is conceptualizing how the key elements of your business—revenue sources, customer mix, product mix, geographic footprint, cost structure, and moneymaking model—could work together differently. If you prioritize moneymaking above all else, you'll shortchange customers and your future. During the 1970s inflation, some beverage and food companies kept prices the same but reduced the size of their products, damaging customer trust and brand value for years. Conversely, if you maintain the same offerings at the same prices despite rising costs, your profitability will erode, eventually leading to quality decline and a downward spiral. TVS Motors, based in Bengaluru, India, demonstrates how to adapt a business model successfully during inflation. The company had a thriving business selling two- and three-wheel motorbikes, deriving about 40% of revenue from overseas. When costs started rising and demand in certain markets began sliding, Managing Director Sudarshan Venu recognized they needed more than just cost reduction. Venu began by looking at the market more granularly to identify where TVS Motors had pricing power and which customers remained profitable to serve. He observed that the mass market was shrinking, with multiple competitors fighting for share, while excess capacity would further weaken pricing power. Instead of competing in this deteriorating segment, Venu focused on a smaller, more profitable customer segment that still had resources and willingness to pay for products with exciting features. "Even when we were doing cost reduction, we did not cut innovation," Venu explains, "because innovation is a core part of our culture. We could channel it to launch more premium products and charge appropriately for them." This focus on innovation for a more profitable segment promised to boost margins, which would fund more premium variants. The company also accelerated product development to reduce the lag between innovation and cash generation. Venu also reconsidered the dealer network. Two years earlier, the company had stopped extending credit to dealers and switched to cash-and-carry. "We used to give credit to dealers, but we found that supply chain lending was not the best use of our capital," Venu explains. "With a variety of banks so flush with liquidity, they were able to outcompete us in some segments." This change exposed weaknesses in the supply chain but ultimately strengthened it by encouraging dealers to manage their finances more effectively. These combined changes in customer mix, product mix, product development, value chain, and moneymaking formula worked together to help TVS Motors weather inflation while competitors struggled. "Now we have accelerated our innovation process and are launching some new products that are in good demand," Venu explains. "Because the dealer network is more efficient, we can get those products to the consumer faster. Hence, our market share has been growing steadily." The result is a healthier company with higher margins and greater financial strength, albeit with a smaller share of the mass market. This positions TVS Motors for profitable growth when inflation subsides, having reduced waste, become more focused, accelerated product development, and enhanced its brand. The company will also emerge with new capabilities—positive cash flow to fund algorithms and data analytics that will further improve customer segmentation and innovation.

Chapter 7: Mobilize Your Entire Organization

Inflation affects every part of your business, requiring all functions to adapt their approaches and work together cohesively. Each role has specific responsibilities in navigating through economic turbulence and positioning the company for future success. For CEOs, the dual mandate of leading the business and its people becomes especially critical. As trustee of the business, the CEO must focus on four key areas: cash management, pricing implementation, business model evolution, and operational oversight. Beyond these technical aspects, the CEO must serve as the chief integrator of people and information, helping others face reality and adapt their behavior. This requires a psychological shift from aggressive growth pursuit to judicious capital allocation and cash preservation. Through open, honest, and frequent communication, CEOs can convert anxiety into action and instill confidence that the company will emerge stronger. CFOs face a transformed landscape where cash pressure touches every business function. They must actively engage with all departments to push for changes in pricing, contract terms, and inventory levels. The finance team should support leaders in updating financial assumptions and reevaluating budgets and capital expenditures. Communication with the investment community becomes crucial, providing realistic guidance about the company's prospects amid uncertainty. As one CFO put it, "We are obsessed about cash. We watch it on a weekly and even daily basis." Sales and marketing teams must overcome psychological aversion to raising prices, recognizing that missing the timing and magnitude of price changes risks the company's financial health. They should work with finance to understand true customer profitability and segment the market accordingly. DuPont's experience shows that transparent communication with customers about price increases can preserve relationships while protecting margins. When they explained that price increases were happening for specific reasons and policies were fair, customers understood that all players faced the same challenges. Operations teams must look beyond immediate cost-cutting to find opportunities that improve the business. Balram Mehta, COO at ReNew Power, explains how his operations group helps: "If borrowing costs skyrocket, they can judge where it makes sense to turn Capex into Opex. Or they might see that converting to more efficient machinery is the better route to generating cash." Digital technology applications can significantly improve operational efficiency at relatively low cost with short payback periods. Human Resources plays a crucial role in assessing whether leaders can adapt to the new environment and helping those who struggle. Roberto Bettini, former group head of HR for Indorama Ventures, conducted training sessions tailored to various business functions to prepare them for inflation's challenges. HR must also update key performance indicators and compensation plans to reflect the new priorities, particularly the increased importance of cash management. Boards of directors must ensure management is moving quickly and radically enough to prevent serious damage. They should encourage robust analysis of inflation's effects across the entire value chain and help the CEO make difficult trade-offs in resource allocation. The compensation committee faces the complex task of revising executive compensation plans to reflect slower growth and changing dollar values. Directors should also leverage their networks to enhance the company's ability to detect early warning signals across different sectors and geographies. By mobilizing every function with specific responsibilities and coordinated action, companies can not only survive inflation but emerge stronger when economic conditions improve. The organizations that thrive will be those that recognize inflation as not merely a temporary obstacle but an opportunity to reset their business for future success.

Summary

Throughout this exploration of leading through economic turbulence, we've seen how inflation creates both significant challenges and strategic opportunities for businesses willing to adapt. The leaders who succeed don't merely react to rising costs—they transform their entire approach to business, from cash management and pricing to cost structures and business models. As Ram Charan wisely notes, "Take the hand you are dealt. Use it to create new value for the customer, shareholders, and the other constituencies you serve. That's how you and your company will come out ahead and be ready to ride high when stability and growth return—as we know they will." Your journey through inflation begins with recognizing its true impact across your organization and establishing mechanisms to detect early warning signals. Take immediate action to prioritize cash management, implement strategic pricing approaches, and find cost reductions that strengthen rather than weaken your business. Most importantly, use this moment to reinvent your business model and mobilize your entire organization toward a common purpose. Start today by creating your economic war room—gather your leadership team, assess your cash position, and develop specific action plans for each function. The companies that act decisively now will not only weather this storm but emerge as leaders in the post-inflation economy.

About Author

Loading...

Ram Charan

Ram Charan is an Indian-American business consultant, speaker, and writer resident in Dallas, Texas.

Read more

Related Books by Ram Charan

Loading...

The Attacker’s Advantage

Ram Charan

Turning Uncertainty into Breakthrough Opportunities

★★★½☆3.8

Loading...

Talent Wins

Ram Charan

The New Playbook for Putting People First

★★★½☆3.8