Every few classes, I look at one of my presentation slides and notice that something is off. I think, “Wait. That doesn’t look right. I need to fix it.” Sometimes it is a spelling or grammar mistake. Other times I notice that a particular example no longer works. And then there are the moments when I realize the entire concept is wrong.
I had that experience recently in my Marketing Strategy class. I was talking about the challenge of building an established business, and how in this environment growth is so hard to come by. For many firms, the focus is finding tiny cost savings, optimizing overhead spending, and making smart cuts to marketing budgets.
And then I realized: that just isn’t the case right now. We are living in a new world.
For more than a decade, revenue growth was hard to find for many companies. In most instances, the core problem was flat overall demand combined with an inability to increase prices.
In a mature industry, you need to build profits every year to keep your investors happy. If you can’t raise prices, you have a big challenge. Where will the incremental revenue and profit come from? Growing share is a tough battle, so the focus quickly shifts to reducing costs, overhead and marketing spending.
AB InBev’s idea of “Zero Based Budgeting” is a perfect example of this type of thinking. First step, cut everything. Second step, start adding back programs that are essential. Third step, stop adding as soon as you get past the critical activities. This works for a while but quickly gives out. You can only cut so much.
It is becoming very clear that we are in a new world for business leaders. The dynamics are shifting in dramatic and important ways. There are new challenges and opportunities.
The first striking shift is the supply problems rocketing across the distribution system. Boats are lining up in LA and China, waiting for a berth to unload. There is no place to put all the containers even if you could find dock space. These supply issues are forcing companies to focus on simply meeting demand. Inventory levels are going up, efficiency is going down.
Second, it is hard to find employees, so companies are scrambling to hire, and offering more money in the process. Apparently, people saved so much during the pandemic that there isn’t the usual urgency to get a job.
Third, inflation is building, with year-on-year rates up roughly +5%, a simply astonishing number.
These factors will likely begin to spiral. When a company can’t trust the supply-chain, there is an incentive to expand buffer stocks and order more. This only makes the supply-chain trouble worse. When workers see lots of companies hiring, they are more likely to quit. This creates more job openings, encouraging more people to quit.
In this new world, the challenge isn’t finding profit in a slow-grow world. No, the challenge is now figuring out how to increase prices and meet demand. Balancing higher prices vs higher costs is critical to driving profit growth.
Think about this: many of the people running brands and companies today have never worked in an inflationary environment. All the skills and strategies are new. The question: how quickly can we change our mindset and adapt our skills to make the most of this new world?
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