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Business executives must constantly adjust to shifting economic conditions. However, they have seen low inflation and a generally rising economy for more than ten years. Long forgotten is the “stagflation” of the late 20th century. However, economists have long memories. Some believe that stagflation, a prolonged period of economic stagnation or recession during which unemployment and inflation soar, may return.
Rising expenses and dwindling client demand are two significant challenges that businesses in stagflationary periods must contend with. Managers should look for ways to increase productivity during stagflation, frequently by utilizing technology. Additionally, they can review pricing strategies, enhance supply chains, lower debt, and consider acquisitions. Those who are able to cope with stagflation may find themselves in a better position for the ensuing economic boom.
Stagflation: What Is It?
When an economy is expanding, there is often inflation as a result of rising prices brought on by a combination of restricted supplies and increasing demand. When unemployment is increasing and there is high inflation in a stagnant or decreasing economy, this is known as stagflation. Stagflation occurs when demand is weak, whereas inflation is brought on by a sudden rise in commodity prices that is frequently caused by a disruption in supply.
For instance, stagflation developed in the 1970s as a result of an oil embargo implemented by the Organization of Petroleum Exporting Countries (OPEC), which decreased the supply of oil to the United States from October 1973 to March 1974. Oil prices skyrocketed, driving up prices across the economy. Lower consumer spending on other items as a result of higher oil prices affected businesses’ earnings and the expansion of the economy. Additionally, because of inflation, consumer salaries were no longer as valuable as they once were. The purchasing power of consumers was declining. In response, employees demanded pay raises. Many contracts at the period contained automatic wage adjustments for inflation because unions were powerful at the time. Companies increased the cost of their goods and services and laid off employees in response to rising energy prices, input expenses, and wages. The end effect was a terrible wage-price spiral.
The outcome? a recession that lasted in the United States from November 1973 to March 1975, peaking at 9% unemployment and 12.2% inflation, as measured by the Consumer Price Index (CPI), for the year ending December 1974.
Stagflation presents a challenge to central banks around the world, including the U.S. Federal Reserve. Interest rates are typically lowered by the Fed to increase economic growth and lower unemployment. However, doing so in a time of stagflation might possibly increase inflation. By rapidly hiking interest rates from 1979 through 1983, the Fed was able to finally control the inflation of the 1970s, but their measures also caused the economy to enter a new recession.
Once stagflation sets in, that dilemma makes it persist, posing the dual difficulties that constrain both large and small businesses: poor or negative economic growth, which results in declining consumer demand, while costs rise due to inflation.
Stagflation is a state of high inflation, flat or declining growth, and rising unemployment in an economy.
Stagflation makes it difficult for businesses to operate since expenses are growing and consumers are becoming less willing to pay higher prices.
Raising pricing, boosting output, cutting costs, reducing debt, and making acquisitions are some strategies organizations can use to counteract stagflation.
8 Strategies for Preventing Stagflation in 2022 and Beyond
Stagflation creates a challenging climate for corporate operations. On the one hand, inflation raises costs by frequently causing a rapid increase in the cost of raw materials and wages. However, the economy isn’t expanding swiftly, if at all, and the rate of unemployment is increasing. It is challenging to pass on greater prices to clients due to the challenging economy. As consumers cut back on their spending, revenues could decline. An economy plagued by stagflation sees a large number of small enterprises fail.
But here are seven strategies managers may use to support their company and get through challenging stagflationary times.
Increasing your business’ production is the best strategy for avoiding stagflation. Consider making an investment in equipment or software that can automate tasks and lower the number of workers required to produce the same quantity of goods or services. New equipment or software may be able to create goods more quickly, with fewer flaws, and with less waste.
The technology available today to enhance business operations across an organization represents perhaps the biggest shift between the 1970s and today. All employees in a company are becoming more productive thanks to software, while changes in artificial intelligence and robot intelligence are speeding up these developments.
Look for strategies to reduce spending to counteract rising costs for labor and commodities. Can commercial activities consume less energy? Exist any strategies to streamline the supply chain and lower
delivery costs? Can the company save money by placing bulk orders or by being flexible with delivery dates? Finding methods to reduce expenses and counteract inflationary pressures is crucial.
Stagflation is a chance to review pricing strategies. Check to see if other businesses, especially those in your field, are raising their rates. If so, take into account raising pricing as well to balance out rising expenses.
Think about bundling goods or services or altering packaging to raise the cost per unit sold. By doing this, you might be able to balance off rising expenses and maintain your profitability without offending clients with an apparent price hike. Snack manufacturers have been known to reduce the quantity of chips in a bag while maintaining the bag’s size and price. The firm can cut one area of expense while maintaining the same level of sales by reducing the bag’s contents.
Offering a new range of products that are more expensive or more accessible may be another option. So that clients won’t notice, lower quality. If you must raise pricing, consider ways to boost quality without incurring as much additional expense so that clients feel like they are receiving value for the higher price.
Finally, take into account a new pricing strategy, such as offering your product as a service. Software companies used to sell their products once and then upgrade them after a year or two in an effort to upsell users. Today, the majority of software companies sell their products as a monthly service that includes automatic software updates.
If a business is going to charge customers more for a product, it needs to ensure that the quality is at least as good as it was prior to the price rise. An increase in research expenditures may be necessary to enhance the product. Companies that make consumer goods frequently have the ability to increase pricing on newly enhanced products. A new laundry detergent that is more effective at removing stains will probably sell for more money than older detergent alternatives. When compared to similar products from competitors with slower processors and older technologies, new computers and telephones that process information more quickly either have higher price points or reduced expenses.
Fortify the balance sheet
strengthening the balance sheet Revenue may stagnate while costs continue to rise under stagflation. Create a cushion to protect yourself in difficult circumstances. Keeping debt to a minimum is necessary. Consider replacing any debt with fluctuating interest rates with debt with fixed interest payments if interest rates are rising. Interest on floating-rate debt frequently resets every month, quarter, or year at a spread above a predetermined benchmark, such as the two-year Treasury note.
Interest costs on floating-rate debt can increase quickly in a rising interest rate environment. For instance, a floating-rate bond might have an interest rate that is set at 1% more than the two-year Treasury note every three months. The interest rate on the debt will be 2.95% in January if the yield on the two-year Treasury note is 1.95%. If the yield on the two-year note has increased to 5.95% by the time the interest rate resets in March, the debt’s interest rate will increase to 6.95%. A fixed-rate note, however, has a fixed payment throughout its term. The interest payment on a 3.95% fixed-rate note is the same on day one as it is on day thirty-five.
tighten up the payable and receiving accounts. Reduce late accounts receivables (AR) and request the longest payment terms from your own vendors in an effort to increase cash flow. With the aid of software like NetSuite Enterprise Resource Planning, management may more easily and effectively keep track of inventories, accounts payables (AP), and receivables.
Turn into a landlord
Rents may rise during stagflation, but your company’s revenue may not. If you have excess money, you might want to think about purchasing the building where your company is located.
Be opportunistic when making purchases
Sad to say, but stagflation-era hardships will cause a lot of small and medium-sized enterprises to fail. Consider shopping for deals if your business is one of the survivors and has the financial resources. Property and equipment may be sold at fire sale prices by businesses that are closing their doors or who need to raise money. Think of acquiring real estate, machinery, assets, brand names, or qualified personnel. Likewise, think about combining with or buying out a rival if doing so enables both businesses to cut costs, penetrate new markets, or provide a wider range of goods or services.
Stagflation creates a challenging climate for corporate operations. Both earnings and costs are rising. In the meantime, slow or declining economic development and significant unemployment may cause sales to stagnate or decline. Stagflation presents management with a chance to examine their company carefully and make adjustments to strengthen it. Businesses can use time and money-saving technology to increase productivity. They might alter their pricing strategies, think about acquiring or merging with rival businesses, and strengthen their balance sheet. When the economy improves, companies that take such measures to survive stagflation may find themselves in a strong position for growth.
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