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How to thrive in the time of turmoil: from soaring costs to supply chain bottlenecks and labor shortages
Executives can break the gloom and fortify their business against disruption by adopting these risk strategies.
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Business confidence is collapsing across major economies and companies are warning they face the toughest operating environment for a generation, after several weeks of labor shortages, surging prices for energy, raw materials and shipping along with supply chain ructions.
Executives must prepare for the inflation specterÂ
With oil reaching $80 a barrel, and other commodities at decade highs, global food prices surging and energy bills now rocketing, anxiety is rising that price pressures combined with supply bottlenecks and labor shortages could hold back growth for months to come.
Yet Karl Schmedders, Professor of Finance at IMD, says the present situation is different to the 1970s period that gave rise to the term âstagflationâ. Back then, inflation and interest rates were in the double digits and unemployment soared. âThe current economic situation is very different,â says Schmedders.
Still, executives are planning price rises as inflationary pressure builds in the global economy. Their confidence that they can pass on these costs to customers reflects the strength of the pandemic recovery and robust consumer spending. Other companies have looked to offset rising costs through productivity gains and efficiencies in production.
There have been hawkish signals from central bank officials that they could soon begin lifting interest rates to curb inflation. Yet Schmedders points out that some governments may actually welcome current inflationary pressures, as they reduce the value of public debts. Of course, he adds that savers and bond investors are suffering because inflation erodes the purchasing power of future returns.
The biggest problem for companies, in his view, is the worldwide supply chain disruption that has led to tighter resource constraints, leading to price increases. âIf climate change and the resulting economic damages lead to ongoing intermittent problems with supply chains, then they will remain a risk factor for the world economy,â he says.
The end of customer-centric supply chains?Â
International business leaders are warning that global supply chains are at risk of collapse, with current disruptions likely to worsen shortages of essential goods from electronics to food, fuel, and medical supplies in the run-up to the festive period.
The problems have been caused by border restrictions and other COVID measures as well as factory closures that have created congestion at ports, delivery delays and soaring shipping costs on routes between China, the US and Europe. The lack of transport workers has made matters worse; the UK government is deploying soldiers to deliver petrol after Brexit worsened a shortage of truck drivers.
In response, some companies have been âreshoringâ production back or near home to improve resilience. Carlos Cordon, IMD Professor of Strategy and Supply Chain Management, says this is necessary to correct a mismatch between supply and demand caused by heightened geopolitical tensions and COVID, even if it turns global trade from a deflationary to an inflationary force; cheap mostly Asian labor has kept production costs down hitherto.
Cordon also expects a shift away from customer-centric supply chains, citing the cancellation of next yearâs Geneva International Motor Show due to the semiconductor shortage and other pandemic-related issues. âWhy would car companies present new models that they canât make and deliver because of the lack of components?â he says.
Moving forward, âwe might design services and products around what we have available, like chefs who prepare dishes depending on the availability of the seasonâ.
Focus on talent retention and attraction will follow
The acute challenge for many companies is attracting talent. There are severe labor shortages in companies across richer nations, which are compounding supply chain disruptions, limiting growth and, as workers gain newfound bargaining clout, lifting wages, which could hurt profitability and cause inflation to spike higher.
This is a major departure from the start of the pandemic when the concern was over mass unemployment. Businesses are now grappling with staff shortages even as governments unwind generous benefit schemes. This is due to the mismatch of skills and vacancies, many people dropping out of the workforce during COVID, and poor training or slowing immigration and ageing populations.
Merete Wedell-Wedellsborg, Adjunct Professor in Leadership at IMD, says the bigger problem in her view is talent retention. âThe COVID crisis has been a moment of reckoning. It prompted us all to reconsider why we work, how we work and what we do,â she says. âMany people feel less connected to their workplaces and their colleagues. Those aspects ultimately matter more than the paycheck.â
She says the number one priority for leaders right now should be having conversations about rebooting their teams and resetting personal motivation. âThroughout these conversations leaders must chisel out the greater purpose of what the company does, address how the culture should evolve, and how the workplace can accommodate new ways of working.â
Wedell-Wedellsborg adds that, if you start out by answering why talent should stay, you stand a much better chance of communicating why fresh blood should join the business.
âThe COVID crisis has been a moment of reckoning. It prompted us all to reconsider why we work, how we work and what we do,â- Merete Wedell-Wedellsborg
Designing competitive tax systemsÂ
Corporations are likely to face higher taxes in the coming year as governments wind back pandemic stimulus and start moving to strengthen the public finances, just as companies emerge from lockdown, hitting their ability to invest and employ.
In the UK, business leaders have warned that plans for raising taxes for the corporate sector from 19% to 25% could have serious consequences for growth and investment and lower Britainâs economic competitiveness. There are calls instead for tax policies to encourage companies to invest and support access to skilled workers.
In the US, the Biden administration plans to raise corporation tax from 21% to 26.5% or higher. Business leaders have warned this would hit their ability to hire and conduct research and development innovation. The question is how to ensure companies pay their fair share of tax while encouraging them to make investments that ultimately boost productivity and real wages.
Corporate taxes are a double-edged sword, says Arturo Bris, Professor of Finance at IMD. While they are necessary to ensure public spending on healthcare, education, and infrastructure, they also deter companies from making value-increasing investments.
âThe balance is found when governments are efficient and transparent in the use of public funds, and when corporations pay a fair share,â he says. Bris points out that salaries are tax deductible for companies, along with other corporate investments, but to a much lesser extent.
He adds that governments must ensure tax codes are simple and remove uncertainties and room for manipulation. âTaxes are not a social responsibility, but an obligation,â says Bris.
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