Survival skills from the 1970s: how CEOs can respond to inflation
An energy crisis, inflation and industrial strife will all sound familiar to those business leaders who remember the decade which gave us the three-day week. What strategic lessons can we learn from history?
However fond you are of the Bee Gees – or indeed the Dagenham-built Ford Cortina mark 3 – the 1970s are not generally regarded as a vintage era for Britain and British business. Rather, what sticks in the mind is the lights going out during the three-day week of 1974, thanks primarily to the oil crisis of 1973.
That same crisis, of course, also stoked the soaring inflation which pushed the consumer price index to 25% in 1975 and sent interest rates to 15% in 1976 – all culminating with the so-called winter of discontent of 1979, when rubbish piled up in the streets amid a wave of industrial action.
It’s no surprise, then, that today’s economic woes – including an energy crisis, inflation and labour shortages, to name but a few of the present challenges – are being compared to the turmoil of the 1970s. There are, though, key differences.
According to Richard Portes, professor of economics at London Business School, one overlooked cause of inflation in the 1970s was the effect of the economically expansionist policies pursued by the then chancellor, Anthony Barber – the so-called Barber boom. Because the chancellor then had the power to set bank rates, “there was no restraining force” to counter the effects of the government’s tax and spending decisions. Now the Bank of England has its autonomy, things are different.
Focus on the balance sheet
There are other important differences between then and now too. The price of oil increased fourfold in the 1970s, whereas recent rises have been substantially lower. And it was the strength of the unions in the 1970s which turned the inflationary pressures of the boom and the oil crisis into a wage-price spiral. This shouldn’t happen today, Portes argues, given the relative weakness of unions – especially in the private sector, which is a significantly larger part of the overall economy than in the 1970s.
Any reasons to be cheerful are offset by the “expansionary effects of whatever policy the new prime minister will adopt”, which Portes fears “will push rates up much more than people expect now”.
Business leaders would be wise, then, to brace for what’s coming. Thankfully, looking back to the 1970s can provide some pointers.
“If I were running a firm right now, I would be doing everything to minimise the impact that rising rates will have on my balance sheet and my current revenues and costs,” Portes warns. “It’s not impossible that rates could go up very substantially.”
Adapt to permanent change
Meanwhile, businesses must also do their best to resist calls for higher wages, Portes suggests. And because of the recessionary conditions facing the UK, Europe and the US, they should “look to emerging market countries that are doing well” for exporting opportunities.
But Portes’s colleague at London Business School, Freek Vermeulen, professor of strategy and entrepreneurship, believes it might be difficult to stare down wage increases and to pivot overseas. Businesses will have little choice but to accept rising wage bills if they want to retain staff, he says – especially given the backdrop of labour shortages. “It’s almost inevitable that you’ll have to pay higher salaries and eventually start charging higher prices – there’s nothing you can do,” he says.
Vermeulen advises that CEOs should explore automation where possible but adds that there are “no quick fixes” here unless the right solution is already on the shelf. CEOs should also be wary of the “risky temptation” of making staff redundant and then trying to do the same with less. “Research shows that in the longer term those moves can do more harm than good,” Vermeulen warns. Instead, he lauds the example of Southwest Airlines’ founder and CEO Herb Kelleher, who built long-term, trusting relationships with unions from the late 1970s through to the mid-2000s, neutralising industrial issues in the process.
Another solution that business leaders of today could adopt would be something familiar to their forebears from the 1970s: diversification. “What we saw in the past,” says Vermeulen, “was that when circumstances changed, firms had multiple divisions and they could shift resources and shift emphasis. Companies have hugely focused over the past decade or two, so they have lost that flexibility.” He adds: “I could imagine diversification becoming less of a dirty word in five years.”
Finally, he advises business leaders to reconsider the very nature of uncertainty and what that means for their organisation. “We should stop thinking about change and transformation as periodic, as something we have to go through,” says Vermeulen. “We must look at the designs of organisations so that they’re geared up for permanent change. This time it’s labour shortages, energy prices and inflation, but five years from now maybe there will be something else.”
So, what does an organisation that’s geared up for change look like? “There’s not one perfect organisational form,” says Vermeulen. “Organisations that change and that build in these changes – maybe even proactively – develop a capability for change. It’s one of these ‘use it or lose it’ capabilities. You build it up by doing it.”
Henley Business School’s Dr Joe Lane agrees. “In the past, we would say when you’re faced with a period of crisis, ‘think efficiency’. Now we say that companies need to be doing that all the time, because we are constantly in that state of flux. Change is now continuous.”
Fortunately, digital technology – another big difference from the 1970s – gives business leaders several advantages over their predecessors; namely, there is a lot more data and information on hand to inform decision-making, whereas in the 1970s leaders were often relying on their own experience. What’s more, companies with digital infrastructures, products or services can change and adapt far more quickly than before.
Lane’s advice, then, for CEOs? “Hang on. It takes time, but things do rebound.”
But when they do, you might find things are rather different, says David Edgerton, professor of the history of science and technology at King’s College, London.
“Because we are heading towards a genuine social crisis – people won’t be able to heat their homes and children are going to go hungry – the state is going to have to intervene,” pronounces Edgerton. “Essentially, that’s what’s going to have to happen.”
Like the Thatcherite wave of privatisation and marketisation that followed the crises of the 1970s, state action in the years to come “will change the economic playing field”. Building on previous interventions – such as nationalising and bailing out the banks in the wake of the financial crisis of 2008, and the sweeping furlough scheme used during the pandemic – this crisis will force the state to intervene as never before. Well, not since the 1970s, when it nationalised Rolls-Royce.
“A lot of businesses would welcome state regulation of energy prices,” notes Edgerton. He adds that businesses should keep a close eye on this shifting political and economic landscape. “We have a profound political crisis, and the government is going to find it extremely difficult to act sensibly, but it will be forced to,” he warns.
“Don’t just look at politics, look at the realities on the ground. We need to think about the real economy in ways we haven’t done for a very long time. It’s not just about entrepreneurs and profits and stock markets; it’s about transport, food, energy – it’s about people’s needs, and that’s quite a big change.”