Tag Archive: VUCA

  1. Questions for 2022 Pt. 2: Price Increases

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    Two weeks ago, we wrote about four questions for 2022 based on factors that we can all agree will influence our business this year. We went further and addressed the first question: Is your organization data literate enough?

    We’ve received some interesting comments related to the need for greater data literacy in organizations. This would enable better examination of weak links in the supply chain, operations process improvement in areas susceptible to disruption, and generally increase organizational flexibility and dexterity across all functions in response to this new “VUCA” world.

    This week, let’s dive into the second question we raised: Should you be considering price increases?

    What we already know:

    Once again, let’s take what we know about 2022, and then apply it to the question:

    • It’s generally accepted that inflation in the United States is currently running around 7%.
    • Unprecedented supply chain challenges and labor disturbances brought on by the pandemic have throttled output. At the same time, the pandemic has increased various costs (such as increased expenditure on PPE, safety protocols, etc.) leading to both increased business expenses and decreased productivity.
    • Conversely, unprecedented fiscal and monetary stimulus has turned demand in the opposite direction to supply.
    • Unemployment rates are at historical lows, creating additional worker shortages and upward pressure on labor costs (meaning additional incremental business expenses).

    Great, but so what?

    No one knows whether current inflation rates will be a short-term aberration or a long-term reality.

    Equally, while supply and demand-side economics may eventually achieve equilibrium, it is highly likely that post-pandemic business expenses will be higher than pre-pandemic ones, affecting profit margins.

    In order to maintain profit margins, businesses can do three things:

    • Decrease expenses
    • Increase prices (to increase like-for-like revenue)
    • Increase volume (to decrease relative costs, increase relative margin through economies of scale, and boost revenue)

    An oft-quoted McKinsey study succinctly lays out the comparative effectiveness of these three strategies:

    “A price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits – an impact nearly 50 percent greater than that of a 1 percent fall in variable costs such as materials and direct labor, and more than three times greater than the impact of a 1 percent increase in volume.”

    Put simply, like-for-like, price increases are far more effective than the alternate strategies.

    In the context of 2022, one could also contend the following: While effectively implementing price increases is difficult, it will be even more difficult (nigh impossible) to cut your way to margin maintenance or to increase volumes significantly enough, bearing in mind the expense pressures we are all facing.

    But there’s the rub: effective implementation of price increases.

    The stigma of price increases

    We’ve been involved in multiple price increase projects, and we can tell you the following:

    • Most organizations don’t like asking for price increases (and are bad at implementing them when they do)
    • Most customers don’t like price increases either
    • More than 50% of the time, the net impact of price increases (after concessions to big customers) is either break-even, or negative
    • Done badly, price increases can (negatively) affect customer relationships.

    However, can your business afford not to raise prices right now? If you cannot, what should you do?

    Build your business case for the price increase

    Data disarms. It’s hard to argue with evidence of increased expenses outside of your control, and customers with professional procurement functions will appreciate a fact-based approach.

    Communicate clearly

    In addition to a clear business case, customers respect vendors who communicate clearly. Your message should reinforce shared values, mutual respect, and commitment to an ongoing and mutually beneficial business relationship.

    Plan, Plan, Plan

    Achieving effective price increases is an important muscle in your business. If you are out of practice, the best way to overcome this is to invest the right amount of time, resources, and executive oversight into planning and managing your price increase activities.

    Conclusions

    Based on the extreme levels of expense increases your business is experiencing, you may have no choice but to consider increasing prices. This does not mean that expense reductions are impossible or inadvisable (see the third post in this series), or that increased labor costs cannot be mitigated longer term (see the fourth post in this series), but increasing prices effectively is going to take some time and effort, and you may not have all the resources, experience, and expertise to do this on your own. If this is the case, Core Catalysts may be able to help!

    Thanks once again for reading. Please share any thoughts or comments you have, and we’ll see you again in two weeks for the next question in the series: Have we adequately reviewed business cost structures and all major business expenses in light of how business has changed?

    Mark Jacobs, Client Service & Delivery

  2. This VUCA World: What Can You Do About It?

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    VUCA is an acronym coined at the US Army College in the 1990’s to sum up what the world would be like after the Soviet Union’s collapse: Volatile, Uncertain, Complex, and Ambiguous.

    However, I think you will all agree that VUCA has never been more relevant for both the military and business than it is right now.

    From a business perspective, current societal, cultural, political, economic, and technological upheaval is making it increasingly difficult to lead and grow a company. The harder it is to comprehend both what is actually happening and likely to happen, the harder it is to articulate a clear vision, objectives, strategies, and tactics.

    So, what can you do to survive and thrive in a more VUCA world? Here are a few recommendations that we think will help:

    Expend your energy where it will have the highest payoff, and on things you can influence or control

    You are only human, with a finite amount of intellectual and emotional energy. How much of your day is spent “firefighting,” or on things that will not have an impact on either the short-term or long-term health and success of your business?

    In an increasingly VUCA environment, make sure you are focusing most of your time and energy on things that will “drive the needle,” and minimize time spent on things that you cannot influence or control. Also remember that “good enough” is better than nothing!

    Make sure everyone understands what you are trying to achieve

    One critical priority all business leaders have is to develop and maintain a clearly articulated vision to drive your team’s actions. This must be communicated consistently and often across all levels and functions in your organization.

    The clearer that you can be about what you hope to accomplish, the easier it will be for your team to take initiative and execute in the volatility, uncertainty, complexity, and ambiguity of today’s business environment.

    Simplify, Simplify, Simplify

    Remember the adage of K.I.S.S. (keep it simple stupid!) and the 80/20 rule.

    Simplification minimizes the chances of making big mistakes. Focusing on refinement and execution of the basics and fundamentals that form the majority of the day-to-day operations will keep your business humming. This also creates more time and space for you to tackle VUCA issues.

    Develop a forensic understanding of success and failure

    Use experience, from both success and failure, to learn and improve. Make sure your hard-won lessons are well understood not just by you, but by your team.

    Also mentor your direct reports in “pattern recognition” so that they are better able to spot opportunities to apply this knowledge and know-how. Be open if they come to you with ideas about learning from the past.

    Remember that Culture is King

    There is a saying: “Culture eats strategy for breakfast.”

    In an increasingly VUCA world, “failing fast” and achieving even small but incremental improvements on a continual basis needs to be celebrated and encouraged. It is up to you to do everything you can to build a productive culture and a positive mindset within your team and organization.

    At Core Catalysts we frequently help our clients navigate volatility, uncertainty, complexity, and ambiguity. We have multiple success stories we can share, including where we have worked with clients to:

    • Identify their highest payoff opportunities
    • Create and communicate simple and compelling visions to activate their organizations
    • Develop actionable insights of past successes and failures that can be applied to current and future issues
    • Grow and maintain positive organizational cultures and mindsets

    If you think we might be able to help you too, or would like more information, please get in touch!

    Mark Jacobs, Client Service & Delivery