In Les Echos, Michel Rességuier explains how the inflation context impacts companies and their transformation.
Companies are caught between the rise in the cost of their purchases and the forthcoming tougher wage negotiations on the one hand, and the acceptability of the rise in their own selling prices on the other. This dual challenge forces them to make strategic choices whose consequences will have a lasting impact on their competitiveness, and in some cases, their survival.
Between the pandemic and the return of war to Europe, the succession of crises over the last two years has not stopped creating ruptures. For companies, there is one that has been keeping teams particularly busy for the past few months: the return of inflation, whose latest news suggests that it will probably be more lasting than we anticipated a short while ago. Indeed, the concomitance between the obstruction of supply chains and the tensions on the supply of raw materials suddenly increases production costs and poses the question of how to pass on these pressures to sales prices. Solving this equation is far from simple. Worse, the increase in inflationary pressures could well accelerate sectoral recompositions, creating winners and losers.
Why such an upheaval?
Let’s start by analysing how inflation will impact on companies. The first consequence is higher purchasing costs. Although it primarily impacts the upstream part of the value chain, sooner or later it will be passed on to the downstream part and thus to the final consumer. As they are also often employees, they will seek to compensate for the decline in their purchasing power in the context of wage negotiations, a subject which the trade unions have quite logically taken up.
A first challenge for companies lies in the response to this demand. Employees’ expectations are legitimate within the limits of what does not ultimately destroy their jobs. Economic theory teaches us that a wage must be at least equal to the marginal productivity of labour, otherwise it becomes a net cost for the company. However, the multiple transformations that companies have had to face in recent years and decades have shifted, sometimes radically, the sources of productivity of companies, sometimes making current wage scales economically inappropriate. Rather than granting generalised increases which are the result of a certain managerial laziness, companies have every interest in increasing salaries in a differentiated manner, in the light of the real evolution of productivity differences and the economic reality of the moment. Their long-term competitiveness depends on it.
Another issue, which is just as strategic for companies, consists in passing on these inflationary pressures to their own sales prices, unless they accept an erosion of their margins. The question arises as to whether customers will accept these increases. This question is all the more pressing as the ongoing changes in value chains are gradually transforming certain products or services into quasi-commodities, while multiple innovations are generating a strong risk of substitution. The result is a deterioration in the price elasticity of a large number of market segments.
A necessary transformation of the value proposition of companies
In this context, there is a great danger that customers will take advantage of the price increases imposed by their suppliers to re-evaluate their procurement policies or, in a more retail environment, their consumption choices. As a result, the current inflationary context increases the risk of many companies dropping out of the market and encourages them to accelerate the transformation of their value proposition. The objective? To respond as best they can to the changes in demand addressed to them, in order to acquire “pricing power” and therefore the enviable ability to impose price increases on their customers without impacting sales volumes.
Companies face their future
This ridge between cost increases and the acceptability of sales price rises means that companies are faced with choices that will shape their future. These decisions will determine the conditions of their future competitiveness and the strength of their position in their market, and even, in some cases, their survival. It is therefore as much a risk as an opportunity.
Yet too few teams know the true value of what they provide to their customers. The vast majority of SMEs and SMIs focus their internal requirements on the permanent improvement of an established business model, which is already a permanent challenge in a world of free competition. But few of them dare to analyse factually and methodically the evolution of their societal usefulness, the factors of which are multiple, in order to question their raison d’être and significantly adjust their strategic choices. “Daring’ is the right word, because this questioning, which is nonetheless vital, upsets skills, which is legitimately disturbing for people at all levels of the hierarchy. This courage is nonetheless necessary to ensure the sustainability of activities and jobs, the ultimate responsibility of the manager under the law.
