By HPA Senior Advisor Alex Nesbitt
This isn’t exactly a newsflash: Inflation has forced the Federal Reserve to raise interest rates (like, really raise them), and the increasing the cost of money tends to crush consumer demand. Things like it being harder to buy new houses and credit being out of reach for many are expected to become more commonplace for the next while.
And consumers aren’t alone in reeling from the impact of inflation and higher rates. Investors are rapidly de-risking their portfolios. They are fleeing away from speculative growth assets and searching for ways to preserve their capital. Businesses are also bracing for a shake-up. Premier venture capital firms are advising startups and high-flying unicorns to preserve their cash and concentrate their investments on generating near-term value.
The impact is not limited to start-ups; the cost of capital has increased for every business. Many projects that focused on long-term growth are now much less attractive than they were just six months ago. This is why we’re currently seeing a lot of businesses, especially in Tech, doing a round of hefty pruning: cutting off their speculative branch/es–while also letting go of a lot of employees–so they can focus their capital on less risky projects.
But inflation and higher interest rates don’t have to be a death knell. Customers, talent, and investors will move towards companies that produce greater value now and not in some distant, speculative future. Leadership teams that act swiftly to adopt a back-to-value agenda have an opportunity to gain advantage over those that move at a slower pace.
A Back-to-Value Agenda: The 7 Ps
Rethinking strategy to reprioritize near-term value creation over longer-term speculative growth is the new imperative. If this is something your business is undertaking or considering it, here are seven areas in your business to take a close look at:
1. Product: Concentrate on immediate value-to-customer
What 10-20% of your product matters the most to your customers in today’s environment? By looking at the most valuable features and benefits of your product, you can then take a pass at stripping away the less important components of the value proposition. Get rid of the bells and whistles that no one cares about and focus on producing immediate value to your customers.
2. Pricing: Stop the leaks
Set up a cross-functional team (marketing, sales, finance, etc.) to review and reevaluate the pricing waterfall between gross and net. This process will help you find hidden costs and revenue leakages, and in doing so, can help your business identify ways to improve yields, keep costs under control, and identify new pricing opportunities.
3. Promotion: Adapt to a new customer reality
Customers are feeling the strain of inflation and high interest rates, too. However, the impact is not symmetrical. Some customers will be much more affected than others. Some will stop buying, while others will look for less expensive alternatives. Others still will look for more durable quality.
Customer profitability models need to be reassessed under these new conditions: Which customers are most valuable to you? How does this change your customer segmentation? How does this impact your marketing priorities? What new opportunities can you pursue? How can you help your customers navigate this period of financial uncertainty until the economy stabilizes again? All important questions to consider.
4. Production: Focus on value produced by the constraint
Aligning production with demand in a way that maximizes value is always challenging. During periods of rapidly changing demand, it becomes even more important and more valuable for those that master the challenge.
The focal point for production needs to be the strategic constraint. How well you prioritize the use of that constraint ultimately determines how much value you can produce. Smart companies will ask themselves how they can maximize the throughput value produced by the constraint. The benefits of increased contribution margin will be well worth the effort.
5. Purchasing: Reorient purchasing from cost savings to value generation
Purchasing has traditionally been focused on cost, not value. That needs to change. Low-cost suppliers who fail to supply when needed destroy value. The key question for purchasing needs to shift from what’s the best price to how this contract protects and produces value.
Making this shift will require changing objectives and incentives for purchasing. A great place to start is incorporating purchasing staff into value stream analysis so that they fully understand the overall objective and not just their local contribution.
6. Projects: Recalibrate and reprioritize for value
The assumptions used to justify projects have likely changed significantly over the past six months. The cost of capital is higher, expected customer demand has shifted, and the availability of talent has shifted as well.
If this is the case for your business, your project portfolio needs to be recalibrated to incorporate updated assumptions, and ultimately needs to be reprioritized. Remember that sunk costs are never a good justification for investment. The things that matter are future costs and revenues. So, act accordingly. Don’t hesitate to put marginal or no longer attractive projects on hold–or kill them outright.
7. People: Redeploy for value
As you re-evaluate your project portfolio, rethink your people deployment in parallel. Do you have your best people working on your recalibrated list of most important things? If not, make the necessary changes to align your talent with value.
The other people factor to keep in mind is that talent will also be recalibrating for value. The collapsing value of speculative stock options will likely cause many talented people to reassess their choice of employment creating a rare talent acquisition opportunity for companies that offer attractive cash-based compensation.
If you haven’t yet begun your back-to-value agenda, it’s time to get moving before you are left behind. The shift to value will provide strong cash-generating businesses with a once-in-a-decade opportunity to acquire customers, talent, and companies.
The above-mentioned seven areas will be the source of quick wins for many companies pursuing a back-to-value agenda. But don’t stop there. Reevaluate and refocus every part of your value chain on value creation and capture.
About the Author
ALEX NESBITT is an HPA Senior Advisor with 30+ years of management consulting experience and a strong track record of partnering with CEOs to tackle issues related to strategy, organizational and operational effectiveness, and performance improvement. Alex is a former BCG Managing Director who led the firm’s West Coast Industrial Practice. After leaving BCG, Alex founded a third-party logistics firm, which he later sold to Ryder Logistics.