In this excerpt from his new book, Leading Through Inflation, world-renowned business consultant Ram Charan explains how leaders can respond to inflation, recession threats or any other crisis with a "war room" strategy to aggregate information and plan a response. As in a military situation, a war room is an excellent way to convert anxiety and fear into energy and action.
Inflation intensified in late 2021, then came Russia's invasion of Ukraine followed by sanctions, and China's lockdown of entire cities due to COVID-19, which kicked shortages and prices into overdrive. Some cost increases may have been predictable, but the sudden constriction of Russian oil and Ukrainian agricultural products was a shock.
Companies that have a mechanism to detect such changes and coordinate a response sooner are better positioned than others.
It's how Catalent, a contract development and manufacturing organization to the biopharma industry, has been able to adjust to rising wage costs and prepare for a host of potential disruptions to its value chain. As CEO John Chiminski puts it, "It's a situation where you need to at least be riding the curve and not be behind the curve."
As early as June 2021, Chiminski and his team were convinced that the wage inflation Catalent was experiencing would not go away.
"There was a lot coming out in the news around that time saying that the inflation numbers were transitory," said Chiminski. "But as we saw things unfolding, we came to a different conclusion. There was a shortage of workers in general, and in our very specific high-demand biopharma space, it was even more acute. In specific geographic areas, the hubs of biopharma in the United States, you had almost hyper wage growth combined with a significant increase in turnover. As a company, our turnover rate had consistently been around 9 percent through the pandemic. It jumped to 11 percent in 2021, and then in the first part of 2022 to 13 percent."
Keeping up with market wages was non-negotiable. How could Catalent sustain the business while paying what was necessary to attract talent? Chiminski and his team commenced those discussions immediately, and their urgency only increased as raw-material costs began to rise steeply as well.
Strategy, Not Just Fighting Fires
This is what war rooms are for. Whether or not you use the term, every company needs a mechanism to get people's attention focused on the urgent threat from high inflation and to enlist their help in executing a solution. Some companies have simply changed the content of existing meeting formats. Others have created something new.
Best practice is not just to examine the immediate threats to the business but to look ahead and make judgments about what might be coming next—an exercise of gathering data and reasoning out the possibilities.
An ideal war room is not just for firefighting; it is also strategic. Early warning signals will tell you not just where the problems are emerging but also their pace. They allow you to be predictive, prescriptive and preemptive.
If the CEO doesn't take the initiative to create a war room, the board should propose it. Maybe do an off-site with the top team. Conversely, the CEO may want to call a special meeting of the board solely to discuss how inflation and recession will affect the company.
Converting Anxiety Into Action
A war room is a frequent gathering of people—face to face or not—who will aggregate information, strategize and drive the plan. It has an important social purpose in aligning and intensifying people's focus. Much as in a military situation, it is an excellent way to convert anxiety and fear into energy and action.
By now, inflation is not new to you. But the anxiety and fear it has stirred have likely taken root. When otherwise confident business leaders are unsure how to deal with it, reactions slow. Delays can mean shrinking margins and dwindling cash; and once you fall behind in pricing, it is hard to catch up.
One way to get people's attention is with a meeting of the entire C-suite to learn from outsiders how inflation affected businesses in the past and how they responded, especially in the 1970s in the U.S. and in the 1980s and 1990s in Brazil. At one point, Brazilians were rushing to buy food in the morning because supermarkets increased prices during the day.
Move quickly to focus on your business by establishing a cadence of meetings at least once a week, but probably more often. Some manufacturing companies have daily meetings of the CEO, COO and heads of manufacturing and purchasing.
In late 2021, the top team at Catalent started meeting at least weekly, in addition to launching a companywide Total Cost Excellence initiative. Chiminski laid out the dilemma in blunt terms: "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. And in addition to that, we need to rebuild the muscle of price increases." As the meetings continued, discussion of what was happening quickly evolved into specific steps and assignments.
Case Study: DuPont
Soon after Ed Breen took the helm as CEO of DuPont in 2020, just prior to COVID setting in, he established a one-hour weekly meeting of the company's top 10 or so leaders. Throughout COVID they joined by video conference every Monday morning, typically to focus on operational issues.
It was an effective tool for running the company in ordinary times, and it became even more useful when the unexpected arose.
When the COVID-19 pandemic broke out, Breen, an experienced CEO who had managed through several crises, brought out his playbook. He nominated a member of his leadership team as the "COVID czar" and had that person report to the group on what was happening, how COVID-19 was impacting the workforce and how it was being managed.
In fall of 2021, as shortages and price increases began to accelerate, DuPont's chief procurement officer began to join in to directly brief the corporate leadership team. He brought data and perspectives from experts on things like how much air and ocean freight was rising, or what was happening with key raw materials, or where a force majeure was threatening to disrupt the business.
Then when Russia attacked Ukraine in February 2022, attention was riveted on energy supply and price levels. "The CPO suddenly became a rock star who everybody wanted to talk to," said Raj Ratnakar, DuPont's senior vice president and chief strategy officer. "He and his team were running around gathering metrics and picking up the latest trends and presenting them to us every other week, and we are all there taking it in and asking questions."
"That information trickles down through the organization, so everybody is on top of it," said Ratnakar. "When we were shown that the cost of natural gas was going up, we immediately tied it back to implications on our raw material and logistics costs. We were able to stay ahead of the curve. We knew we had to raise prices on products that were impacted, like next week! If not, there would be imminent impact on our financial performance."
Energizing people to spring to action based on information others share is valuable, but there's another benefit: It sensitizes everyone to early warning signals they may be exposed to in the normal course of their workday.