Director: ReVive Advisory & Turnaround
In today’s turbulent economic climate, businesses face a growing challenge: stagflation, a rare but damaging combination of sluggish economic growth, rising inflation, and high unemployment. Unlike typical inflationary periods, stagflation disrupts investment, squeezes profit margins, and erodes consumer purchasing power, creating uncertainty across industries.
For businesses, navigating stagflation requires strategic adaptation. As costs escalate and demand weakens, companies must reassess their pricing strategies, optimise operational efficiency, and maintain financial stability. Supply chain disruptions and interest rate fluctuations add further complexity, making it crucial for businesses to stay agile and proactive in mitigating risks. Despite the challenges, opportunities exist for companies that innovate, diversify revenue streams, and strengthen resilience. Understanding the impact of stagflation and implementing innovative economic strategies will be key to survival and long-term growth in an unpredictable market.
How can businesses turn adversity into opportunity?
What is stagflation?
Stagflation, the simultaneous occurrence of high inflation, stagnant economic growth, and rising unemployment, is one of the most disruptive economic conditions a country can face. Unlike typical inflationary periods, stagflation strains businesses, erodes consumer purchasing power, and undermines long-term investment. But what causes it, and how can businesses prepare?
One of the leading causes is supply shocks, which occur when major economic disruptions, such as the 1970s oil crisis or sudden tariff increases, push costs up while reducing productivity, resulting in higher prices and job losses. Additionally, policy missteps, such as conflicting fiscal and monetary actions, can fuel stagflation. The mismatch between government spending, taxation, and interest rate policies creates inflationary spirals that destabilise business confidence.
Another key driver is de-anchored inflation expectations, where consumers and businesses anticipate ongoing inflation, leading to price hikes and wage demands that reinforce the cycle. Historically, high inflation expectations have prolonged stagflation, making recovery difficult even with rising unemployment.
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Signs of stagflation include disrupted supply chains, rising input costs, declining productivity, erratic policy direction, and slowing economic growth despite persistent inflation. Businesses must stay vigilant, refine cost management strategies, and navigate economic uncertainties with resilience and adaptability.
Last week, I spoke about companies in four dimensions and how they influence the decision to move towards business rescue or not. Let’s focus on two key dimensions in particular and how companies in these sectors can address stagflation.
Dimension Three: Strong Leadership, Weak Sector
In a stagflation environment, businesses with strong leadership in weak sectors cannot afford to be complacent. Strong leadership must take decisive action to counter inflationary pressures and declining demand by optimising capital allocation to areas of their business that provide the best returns. This can include divesting from lower-performing businesses, minimising risk, and seizing niche opportunities. This portfolio review needs to be vigorous and take into account the stagnant growth and rising input costs. What may seem healthy now may change suddenly and without warning.
The key to outperformance lies in agile restructuring, cost reduction, and operational efficiency improvement. Are all components of your business measured in terms of their profitability and cash flow? Take a hard look at the outlook for your branch networks and retail stores. Consolidation is painful, but as Westpak evidenced, it would rather have a smaller footprint than lose the whole business.
Identifying high-value initiatives that can sustain profitability. Encourage innovation in how you deliver your products and services. This includes your online offerings. Is your fleet optimal and cost-effective, or have you overinvested in trucks rather than small delivery vehicles?
What is your warehousing costing you? Can you rationalise product offerings and pack sizes? Fewer larger orders at a discount for your key customers? Cost-effective productivity will conserve your resources and help address a declining margin.
Companies must strengthen supply chains. Stagflation kills demand and squeezes margins. How will your suppliers remain in business? Have a look at BMW or Volvo. Their business is under real price pressure, and the dealer network is shrinking. How will they maintain after-sales services if unit sales continue to decline? If a partner is already under stress, you must determine how that will impact you and reduce your risk and exposure. This is a complex assessment that could provide opportunities for downstream integration and the formation of new partnerships.
Invest in strategic workforce adjustments; this is not a simple discussion about resizing. It must include skills and development. Can your staff acquire new skills for you to remain competitive, or do you need new skills that come from new people? This is especially true when you assess the impact of new and emerging technologies on your business.
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The value of decisive leadership
For companies that are thriving despite sector-wide downturns, decisive leadership is critical. The choice is clear: double down on market dominance or pivot toward a stronger industry. Productivity and efficiency are not negotiable; this must be measured and driven hard. In classical language: In stagflation environments, sweating assets is the only route to survival for many companies. It must become the new DNA, or you will not be in business for any upturn.
Expanding alternative revenue streams, embracing digital transformation, and reinforcing investor confidence through transparent financial management are essential strategies for long-term success; these must be maintained despite cost pressures.
In a stagflation landscape, resilience, innovation, and adaptability are non-negotiable; only companies willing to evolve will emerge stronger and more profitable. It is a challenging environment and could persist for a few years. The only saving grace is our current low level of inflation. In the stagflation scenario, interest rate relief is not likely to be a policy choice.
With supply chain disruptions, shrinking margins, and unpredictable demand, a proactive turnaround strategy can mean the difference between survival and insolvency. Businesses that leverage these partnerships gain access to restructuring strategies, industry best practices, and financial recalibration tools, ensuring they remain competitive even in the most challenging economic conditions. Rather than waiting for distress, forward-thinking companies engage these specialists before financial pressures become insurmountable, securing their position as leaders rather than casualties of stagflation.
Seasoned executives, diverse industry resources, and a unique turnaround perspective.
