September 12, 2022 By Mimi Bulfin
Liz Davis
3 min read

As inflation dominates public discussion, many senior executives are preparing for an economic downturn with margin compression rates that have not been seen in over 40 years. Barron’s reports a falling profit margin in industrials, with CAT expected to fall to 13.4% from 15.3% and Deere & Co to decline to 20.9% from 22.2%. Year-on-year inflation in the OECD climbed to 10.3% in June 2022, the sharpest price increase since August 1988.

Source: OECD

Cost-cutting is not enough

Inflation supply chain disruptions, geopolitical uncertainty and unprecedented government spending all drive this projected downturn. Margin compressions will likely happen faster than any downturn in history as inflation merges with demand decline. Many executives are cutting costs to help preserve their margins in preparation for this scenario.

But in the 2008 recession, the most successful enterprises were those able to sustain (and even accelerate) growth during the recession. Businesses that emerged successfully from past recessions invested in growth and cost restructuring, while businesses that failed or merely survived lost sight of growth and only focused on cutting costs. When enterprises act intelligently and strategically, they can stimulate growth in tough economic times.

Technology accelerates growth under stagflation

In today’s digital environment, advanced technology, data and AI will play a much bigger role in driving growth. From 2008 to present, the share of ecommerce retail sales increased from 3% to 14% and the worldwide IT spend increased from $3.4T to $4.5T. Enterprises across all industries, including manufacturing, retail and financial services, increasingly identify more as tech companies than as companies in their own sector.

Even during a period of stagflation, enterprises can apply technology to drive rapid and sustainable business growth. This can be achieved by striking a careful balance between cost optimization and growth through methods like:

Pricing/bundling optimization:

By developing a more granular view of customer preferences, buying behaviors and segmentation, enterprises can tailor bundles and pricing to capture a greater share of wallet.

Cognitive care:

By leveraging AI and customer 360 analytics, enterprises can develop a real-time view of customer sentiment and adjust customer service to quickly meet the needs of the customer. This can lead to improved customer sentiment, lower churn rates and opportunities for upselling.

Digital channel expansion:

By expanding the channels where they sell their goods and services, enterprises can reach a broader audience. Enterprises should expand their social media presence and tailor it to specific population segments. They should also develop their presence in the growing metaverse.

Intelligent customer experience:

By leveraging technologies like IOT, sensors and real-time analytics, enterprises can optimize customer experiences and upsell services.

Ecosystem plays:

There is power in numbers. By developing or participating in an ecosystem of customer products and services (such as rewards programs), enterprises can expand their sources of revenue. This becomes particularly powerful when combined with other tech-enabled growth initiatives, such as intelligent customer experience.

Data monetization:

This largely untapped opportunity allows enterprises to package data and use it in ancillary services. This data may be gathered through the course of doing business, or it may be manufactured through the enterprise’s own products and services. For example, auto manufacturers can use telemetry data to create “lock-in” with intelligent fleet management solutions, services, diagnostics, prognostics and analytics, expanding the surface area of their sales force and driving greater market share.

IBM can guide your technological innovation

Executing these tech-enabled solutions can be challenging. It is often difficult for enterprises to understand where their opportunities lie, and technology implementation often requires time and a complex set of integrations to scale impact. Finding the talent needed to execute on these initiatives can be time-consuming, and legacy stakeholders often view these programs as temporary and don’t take ownership of initiatives. Additionally, the cost of technology programs can be high, particularly in the current environment with compressed margins.

IBM has technology and strategy expertise in 170+ countries, with successful implementation experience across many sectors. Our 12 research labs, 52 innovation centers and 57 studios worldwide, combined with our partnership with more than 100 ecosystem firms, provide the tools to help enterprises emerge stronger after a recession. Technology, data and analytics will enable sustainable growth in the coming years.

Read the value transformation report from IBM Consulting

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