| This week, how businesses can best respond to inflationary pressures. Plus, the future of digital innovation in China, and Chris Bradley, a senior partner based in Sydney, on why leaders need optionality. | | | | | Volatility ahead. Inflation, that destructive beast feared by corporations and central banks alike, has reared its head of late. Prices have ticked higher in Europe, and inflation hit a three-decade high in the US in October 2021, adding to the worries of corporate leaders who are already dealing with labor shortages. In the latest McKinsey Global Survey, uncertainty about the COVID-19 crisis was no longer executives’ biggest economic concern (though the survey was conducted before the Omicron variant emerged). Instead, respondents cited mounting supply-chain woes and inflation as the top risks to growth. | | Balance sheets. As input prices rise, minimizing exposure and protecting margins has vaulted to the top of many C-suite agendas. One way to act is to release cash from balance sheets, including by analyzing receivables and payables. By closing the gaps caused by slow invoicing, weak collection policies, early payments to vendors, inefficient payment processes, and out-of-market terms, a company can typically reduce its cash-conversion cycle, freeing up cash to make investments, reduce debt, pay dividends, and fund M&A. Here are six strategies that companies can follow to unlock more cash. | | Margins. For industrial companies, the price increases required to offset inflation and maintain constant gross margin could greatly exceed the 2 to 3 percent hikes many make at a year’s end. In an environment in which prices of raw materials can swing by double digits, capturing pricing upside is more challenging than ever, especially if pricing and procurement organizations are not working hand in hand. To handle a volatile environment, companies can create a strategy centered on three actions to make consistent price improvements: setting the right price, optimizing discounts and rebates, and managing margin leakage. | | A focus on procurement. A digital nerve center can help procurement teams capture value by collaborating better and acting faster during turbulence. This structure brings together specialists across the value chain—from supply, planning, finance, operations, and engineering—to triage supply-availability problems for raw materials, components, and related inputs. In a centralized, strategically informed way, a nerve-center team accelerates a company’s response to uncertainty. When facing inflationary pressures, a nerve center collaborates to capture cost savings, find and approve alternative commodities and their sources, and develop deeper partnerships with key suppliers to generate additional sources of value. | | A strategic pricing response. While input-cost increases and volatility are challenging, they present an opportunity to improve pricing and institutionalize best practices—but margins will likely suffer if these are not executed in a strategic way. Here is a four-step approach to put your organization on a path to pricing excellence, allowing you to recover cost increases and minimize negative impacts to financial performance in a responsible, transparent, and customer-centric manner. | | |  | | OFF THE CHARTS | | T is for turbulence and transformation | | Global payment revenues in 2020 declined 5 percent from the prior year, to $1.9 trillion, though the payments industry overall proved remarkably resilient, even as many economies spent significant portions of the year in lockdown. Looking forward, the 2021 McKinsey global payments report projects continued cash displacement and a return to global economic growth to accelerate upward trends in the share and number of electronic transactions. On the other hand, interest margins will likely remain muted. The report reveals expectations that global payment revenues will recoup 2020's declines in 2021 and reach roughly $2.5 trillion by 2025. | | | | | | | | | | PODCAST | | Ageism at work is alive and well | | In this episode of The McKinsey Podcast, Mona Mourshed, global founder and CEO of Generation, discusses the findings from Generation’s recent survey on the state of midcareer workers. The report reveals a consistent pattern of bias against workers aged 45 and older across geographies and suggests actions that business leaders can take to hire, retain, and retrain this cohort of employees. “There has been this tremendous pressure on this population,” Mourshed said. “There’s a level of desperation that, frankly, is even higher in some cases than what we see with our youth population.” | | | | | | MORE ON MCKINSEY.COM | | The future of digital innovation in China | A report on one of the world’s fastest-evolving digital ecosystems looks at the six megatrends that are shaping the future of digital innovation in China—and what they mean for other digital and traditional players. | | Getting personalization right | The Next in Personalization 2021 Report reveals that companies that excel at building customer intimacy generate faster rates of revenue growth than their peers. And the closer organizations get to the consumer, the bigger the gains. | | Where and how to capture value with the Internet of Things | New research shows that the IoT offers significant economic-value potential, particularly in standardized production settings. But companies must achieve scale to capture it. | | | | | | | There’s one piece of research we did that just keeps ringing in my mind. When we looked at who came out of the 2008 crisis—who won and who didn’t—the startling thing was that the outperformance endured: the winners kept winning for about seven to ten more years, and the losers kept struggling in that time span. | | What separated the winners from the losers? The winners hit the gas harder early on. They got organic growth back, and they started spending money again. They went harder and more fundamental in their costs. They churned their deal portfolios more. And they got their balance sheets in order much more quickly. | | That’s a strong call to arms because it shows that the exit path you take out of the COVID-19 pandemic is going to define you for potentially a decade. Yet the current environment is one of disequilibrium and uncertainty. So the challenge for leaders is to get on with it in a way that demonstrates unusual boldness and humility. You need optionality in your strategy like never before. You’ve got to think hard about how you’re going to be flexible. | | The cheapest and most obvious line of optionality—and often the most underused—is plan B. If you don’t know how difficult your environment’s going to be, for example, you have to be ready to pull your labor cost a bit harder, or you may need to be ready to build up inventory quickly because of order behavior. You are going to need a plan B, C, or D on the shelf—even if you never have to use them. | | For a generation of managers growing up in the “good times,” who were always evaluated on their ability to deliver a plan, this will be confusing and different. Managers love scenario planning at planning time but not so much at evaluation time. And now you’re going to have to get used to making plans that you won’t deliver on—including scenarios that might feel ugly or scary. | | Finally, there’s speed. In a high-uncertainty environment, decision making gets pushed down, and the time horizon for reevaluating decisions gets pushed back. That means it’s going to be tougher than ever to have a one-year budget. You might consider a rolling budget that’s updated every quarter or contingency budgets that are triggered by certain events. | | The speed of decision making and the speed of resource allocation are going to challenge many managers, particularly those used to playing the annual corporate-budget game. High-level advice like “be fast” and “be agile” won’t help you much. Instead, focus on your financial systems: Can you make your resource allocation and budgeting—and the decision making around them—more nimble? Can you build in optionality and scenarios? Time, once again, will tell. | | — Edited by by Barbara Tierney | | | | | BACKTALK | | Have feedback or other ideas? We’d love to hear from you. | | | | | Did you enjoy this newsletter? Forward it to colleagues and friends so they can subscribe too.
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