18. Juni 2024

Stagflation - what’s next?

For some time now, the term stagflation has increasingly appeared in the media. But what does this mean and, more importantly, what consequences does stagflation have for companies? As you can easily guess, stagflation is a combination of the words inflation and stagnation. While inflation causes prices to rise, usually driven by the effect of high demand meeting low supply, stagflation means that the economy is in a phase of very low growth or even recession. If inflation is triggered by other factors, it can occur at the same time as stagnation. This phenomenon is difficult to combat in terms of economic policy. Companies are therefore well advised to prepare for the consequences in good time.

Avatar: Herbert Schönebeck
Written by Herbert Schönebeck, Principal

The challenge of stagflation

Inflation is galloping worldwide. This was triggered in particular by the war in Ukraine and its impact - primarily on energy prices. In terms of timing, this war immediately followed the pandemic crisis, which had already had a significant impact on many companies and therefore the economy as a whole. We are therefore currently in a similar situation to the 1970s, when OPEC's decision to produce less oil led to skyrocketing prices and an economic crisis. In stagflation, inflation meets economic stagnation.

As there is no economic policy prescription against this, central banks primarily fight inflation in order to fulfil their original task of ensuring price stability. Over the past year, the ECB has already raised interest rates ten times and the measures are having an effect. However, it remains to be seen whether this will also break the dreaded wage-price spiral. Even if this is successful, companies will have to prepare for a longer phase of weak growth, as the forecasts for the next two years are 1.x at best.

But where are the levers that can best be used to prepare for this?

The opportunity of the lean years

First things first: the looming "lean" years also present an enormous opportunity to get rid of the one or other love handle from the past fat years before corona. Business leaders are therefore well advised to proactively tackle the necessary changes. Measures with a watering can, such as across-the-board budget cuts, are not expedient and would almost certainly at best hamper growth, which will ultimately materialise again, or at worst prevent it in the long term. One example of this is the long-term shortage of skilled labour, which we reported on in the last Newsletter "Consequences of the shortage of skilled labour on project work ".

It is clear that companies need to make savings. But in the right places. But where are these right places? This is often not so easy to determine. And precisely because savings have to be made, companies are reluctant to seek external expertise in order to set the right focus when making savings.

The ideal approach would be a triad of steps that build on each other to find the future direction with the optimum resources:

  • Developing the competence strategy
  • Savings through operational excellence
  • Investment in innovation

Development of the competency strategy

This step is a supplement to the usual strategy work, but is often not carried out explicitly. When upper management is asked about the core competences of their company, they often give quick, sometimes very vague and unsubstantiated answers. A core competence can only be a core competence if it leads to a tangible competitive advantage. The ability to do something, be it certain production steps or product developments, are only core competences if they lead to market success.

It is not the ability or the resource, but the strength of realisation that brings advantages over the competition and ultimately generates returns that is a genuine (core) competence. Identifying these competences requires a great deal of effort. But it is worth it. Because, as mentioned above, it would be a fatal mistake to implement savings in a watering can approach. On the other hand, every manager can probably well understand that it makes sense to use the four areas of expertise (core, key, potential and basic expertise) to decide which savings or perhaps even investments should be made.

Savings through operational excellence

Effectiveness and efficiency are the drivers of operational excellence. If quality is not taken as a subset of these two factors, it could be added as a third dimension. However, as it rarely provides scope for targeted savings, we will not consider it as a separate factor in the following.

Operational excellence can be achieved by closely aligning the project portfolio with the corporate strategy in the first step. The competency strategy can be an important starting point for this. Using clearly defined key figures, both business and strategic, all projects are evaluated and ranked. The bold cut is then made, in which all projects below a defined score are cancelled. This frees up resources and also leads to a reduction in complexity.

In the second step, the potential from the processes is analysed. The aim is to make the processes lean and consistently align them with the value stream. It is amazing how quickly improvements can be identified and implemented if the processes and their resource requirements are analysed in a structured and methodical way. It is not a question of simply expecting more output from employees. Appropriate analyses show where non-value-adding work is being done or where work steps are being carried out that could be done more cost-effectively or more quickly elsewhere. In well-organised companies, there are usually no "big points" that immediately lead to major savings. But "many pennies make a dollar" - the many small improvements add up to considerable potential.

In the last step, the organisation is considered. Assuming that some projects are not pursued further and work content has been changed, it is possible that the organisation is no longer optimally aligned with the company's objectives. Whether agile working plays a role in this or not is ultimately irrelevant. Of course, Scrum & Co can improve both efficiency and effectiveness. But even without agility, flat hierarchies in conjunction with short decision-making paths are desirable characteristics of a structural and process organisation that promote operational excellence.

FIG 2 Stagflation
Figure: The programme to improve operational excellence has five modules

Investing in innovation

It may sound questionable, but in a phase of recession it is particularly important to drive innovation forward. The reasons are obvious. Lack of market growth always leads to high price pressure. A programme to improve operational excellence can of course improve the cost position, but because Germany in particular is suffering from stagflation, the global competitive pressure will be all the greater. Therefore, the only solution is to move forward - differentiation from the competition through innovation must be strengthened.

Abb. 3 Beitrag Stagflation
Figure: The funnel model of innovation management

Innovation management is a systematically structured process based on a funnel model. Many ideas and concepts must be generated at the beginning in order to ultimately incorporate a few specific projects into product development. Dedicated resources should be provided for the management of this process up to the handover to product development. An innovation board - made up of the heads of product development and product management, among others - decides in the various phases (comparable to the gates in the PDP) which ideas are to be pursued further. This strikes a balance between creativity in brainstorming and realism in product development.

The resources required to manage the process are covered by focussing on key and core competencies as well as improved operational excellence. Overall, consistent implementation of all programmes will result in significant savings potential.

Act now

Stagflation, or at least the consequences of it, will accompany the German economy in the coming years. Companies are well advised to prepare for this in good time and consistently. There are many adjustments that need to be made, but it is worth the effort. Contact us so that we can show you in a non-binding coversation how you can achieve good results quickly and in a targeted manner.

Your benefit

  • Stagflation and its consequences will concern all companies in the coming years
  • Timely preparation creates competitive advantages
  • The most important levers are a competence strategy, operational excellence and innovation