The impact of stagflation on businesses
How bad can it be?
Authors
Pedro Specter
21 March 2023
Stagflation is an economic phenomenon characterized by a stagnant economy with rising prices, which can have a severe impact on businesses. During times of stagflation, companies are forced to make difficult decisions to stay competitive, remain afloat and keep their competitive advantage from the competitors. Many companies, particularly those in the B2B sector, may experience a lack of capital, leading to insolvency and even bankruptcy if they are not solid in their target market with a very innovating marketing strategy.
The impact of stagflation on businesses can be significant, with rising prices eroding profit margins and making it difficult to remain competitive or even increase the positioning and leverage in the marketplace. Businesses may also struggle with reduced demand for their products or services as customers cut back on spending due to the economic climate and lack of differentiation between higher-end products and low-end products. Additionally, the high levels of inflation that accompany stagflation can make it difficult for businesses to plan for the future, as they struggle to predict future costs and revenues, and invest in special parts such as Customer experience and improving value proposition.
In this challenging economic environment, companies must find ways to adapt their business-model and business strategy, thrive despite the difficult conditions and increase their product-development to stay ahead of their closest competitor, while increasing their own branding. One approach is to use strategic business units (SBUs) to manage their portfolio of businesses effectively and gain Market-share by using different business tactics such as singled-out market-research. SBUs provide companies with the ability to adjust to market changes, focus on specific customer segments, innovate and create new products, and operate more efficiently by having their own business-models independent from the main business. By employing SBUs, companies can reduce their risk exposure, increase flexibility and innovations, and manage resources more effectively, ultimately helping them to weather the impact of stagflation and emerge stronger in the long term with a solid Corporate Strategy.
Strategic Business Units (SBUs)
what are they?
What are Strategic Business Units?
Strategic Business Units (SBUs) are self-contained business units within a larger organisation that operate as separate entities with their own set of objectives, resources, Niche, value-creation, segmentation, customer-value and management structure. The strategic management of SBUs is typically defined by a unique product or service offering or customer segment, allowing for greater flexibility and responsiveness to changing market conditions.
Why are Strategic Business Units important?
The importance of SBUs in managing a company's portfolio of businesses cannot be overstated. SBUs provide a clear view of a company's various businesses, allowing for better management of resources, capital allocation, value-chain and even competitive strategy. By managing each business unit separately, a company can optimise each business's profitability and reduce the risk of poor performance in one area or market segment dragging down the entire organisation by focusing on strategic-planning and new marketing plan.
What is the role of strategic business units under stagflation?
In 1985, Michael Porter introduced what he called the generic strategies, which included three main strategies: Cost Leadership (no frills), Differentiation (creating uniquely desirable products and services), and Focus (offering a specialized service in a niche market). Within the Focus strategy, Porter further subdivided it into two parts: Cost Focus and Differentiation Focus.
Michael Porter's generic strategies and strategic business units (SBUs) are related concepts in that they both provide a framework for businesses to manage their portfolio of businesses. While Porter's generic strategies focus on the overall strategy of a business, SBUs are a way for businesses to execute these strategies by creating separate business units with their own set of objectives, resources, and management structures.
For example, a business that is pursuing a Cost Leadership strategy may create an SBU that focuses on reducing costs and operating more efficiently. Similarly, a business pursuing a Differentiation strategy may create an SBU that focuses on creating new, innovative products that differentiate the company from its competitors. Within the Focus strategy, a business may create separate SBUs that focus on specific customer segments, tailoring their product offerings to the unique needs of those segments.
By creating separate SBUs, businesses can optimize each business's profitability and reduce the risk of poor performance in one area dragging down the entire organization. This approach also allows businesses to focus on specific markets or customer segments and tailor their offerings to meet the specific needs of those segments. Ultimately, the use of SBUs enables businesses to execute their overall strategy more effectively and manage their portfolio of businesses more efficiently.
read more about SBUs here.
In the context of stagflation, SBUs play a critical role in helping companies diminish the impact of the economic climate. SBUs provide businesses with the ability to adjust to market changes quickly, ensuring that they remain competitive in a rapidly evolving environment. Additionally, by focusing on specific customer segments, SBUs can tailor their product offerings to meet the needs of their customers better. This increased focus on customer needs can help businesses weather periods of reduced demand and insulate them from the broader economic challenges of stagflation.
SBUs' capacity to innovate and create new products is also critical during times of stagflation. By investing in research and development, SBUs can create new products that are more resilient to the impact of rising prices and reduced demand. These products can help to drive growth during a period of economic uncertainty and enable companies to emerge stronger in the long term. Finally, SBUs' ability to operate efficiently and reduce costs is essential during times of stagflation, where margins are tight and businesses are under pressure to remain profitable. By streamlining operations and reducing costs, SBUs can help businesses remain competitive and maintain profitability despite the challenges of the economic climate.
Strategic Business Units examples
Case studies in real life
Manufacturing
A metallurgic manufacturing company that had been struggling during a period of stagflation was able to turn its fortunes and Strengths around by creating a generic strategic driven strategic business unit focused on producing semi conductors for energy companies. This unit was able to invest in research and development, creating products that were more resilient to the impact of rising prices, bad economies and extreme competition. This allowed the company to offer through a low-cost and differentiated product formulation, to drive growth during a period of economic uncertainty and emerge stronger in the long term.
Retail
A retail company that had been hit hard by stagflation (and by its rivals) was able to survive by creating a strategic business unit focused on analyzing and motivating specific customer segments worried with sustainability goals. By tailoring its product offerings to the needs of these segment, the company was able to create a sustainable competitive advantage while increasing customer satisfaction and brand loyalty, as well increasing globally the brand awareness. This, in turn, led to increased sales, higher profit-margins and improved profitability, enabling the company to weather the economic challenges of stagflation while gaining competitive advantage from its competitors. It also managed to have a cost-reduction in its supply-chain due to its ESG-framework strategy in keeping the carbon footprint low.
Read more about ESG framework here
Recruitment
A B2B recruitment company that had been struggling during a period of stagflation was able to turn its fortunes around by creating a generic strategy focused on profiling anonymously candidates using AI and evaluating their competencies through their CV. This unit was able to streamline and create an alternative source of revenue by providing recruiters with insights over the market and pinpointing the job market candidates core competencies better.
Healthcare
A healthcare company that had been impacted by stagflation was able to survive and keep its sustained competitive advantage, by creating a strategic business unit focused on the development of new DBS (dry blood spotting) testing together with a key competitive cost-strategy. This unit was able to invest in research and development, creating new services that were more resilient to the impact of rising prices and reduced demand. By focusing on innovation, the company was able to drive growth during a period of economic uncertainty and emerge stronger in the long term.
In each of these cases, strategic business units played a critical role in helping businesses to diminish the impact of stagflation and increasing their own portfolio diversification. By changing their strategy formulation, and providing greater flexibility, responsiveness, and innovation, strategic business units helped these businesses to weather the economic challenges of stagflation and emerge stronger in the long term.
