Surviving the Energy Crisis
Rising energy prices are threatening the viability of many businesses, but this isn’t the first crisis, and it won’t be the last. Companies must focus on adaptability and resilience.
“Crisis” can be an overused word, but very few people would deny – or seek to underplay – the very real and potentially terminal challenges that businesses are currently experiencing in the face of rapidly rising costs.
Energy costs are at the centre of today’s perfect storm. Oil and gas prices began to rise on international markets as the world emerged from Covid lockdowns and restrictions and demand began to outstrip supply. That might have been seen as a temporary blip, but the sanctions imposed following the invasion of Ukraine meant that exports of oil and gas from Russia into the European market fell sharply. That in turn led to a scramble to buy shipments from elsewhere in the world, putting further pressure on prices.
The impact on businesses has been far reaching. On the demand side of the equation, consumer-facing companies expect their customers to cut back on spending. And there is clear evidence that consumers are, indeed, beginning to struggle. Figures released in 2022 by Britain’s Office for National Statistics suggested that as far back as twelve months ago, 66% of households were feeling the impact of rising prices, with 79% of that group citing energy inflation as the cause. That was in response to the regulator allowing a 12% increase in energy prices in October 2021. In April 2022 a further 54% was announced and in October 2022, prices rose again, although the full impact was mitigated by a range of government interventions. Consumer spending dipped marginally in the second quarter of 2022, but a sharper dip is expected.
Wider Challenges
But of course, the challenges do not end there. The cost of energy has itself been crippling in some sectors, but worldwide price rises have also forced up the cost of raw materials, components and imported goods at a time when customers are reluctant to pay more. Added to that, inflation has fuelled pay claims. When polled in July 2022, around 70% of SMEs said energy price inflation would curb their growth.
It’s a similar picture elsewhere in the world. In France, industrial activity has dropped and in Germany the Institute for Economic Research is predicting the domestic economy will shrink by 0.3% in 2023. Worryingly, German businesses are cutting back on investment and concentrating instead on reducing energy consumption and the introduction – in some cases – of short time working.
In other words, wherever you look, the prognosis is gloomy and for the moment at least, there are few signs of a turnaround.
The Importance of Resilience
Perhaps the one positive factor is that businesses of all sizes have already learned the importance of resilience. The Covid pandemic triggered lockdowns and protracted restrictions in just about every major economy, forcing organisations to find new ways of doing business. Home and hybrid working was introduced, and digital transformation projects were accelerated as companies sought to protect revenues and margins in the face of a global crisis.
Now businesses face a different kind of crisis, but the same principles apply. Companies that are adaptable and focused on building resilience are the most likely to thrive. According to research carried out by McKinsey covering 2020 and 2021, businesses that displayed good organisational behaviours – with resilience being an important part of that equation – had a much greater chance of avoiding bankruptcy during difficult times.
Immediate Action
One thing that businesses can do immediately is review their energy consumption policies.
That could, for example, involve seeking out new suppliers. The UK energy market is evolving rapidly and in terms of electricity supply, renewables are becoming an increasingly important part of the mix. This trend will continue as the country transitions to net zero. Crucially, the cost of generating power from wind and solar has fallen markedly. This in turn, provides an opportunity for businesses to strike deals with green energy suppliers as a means of bringing down cost in the medium and long-term.
In tandem companies can invest in tools to audit their energy consumption and take steps to reduce usage.
But there is a bigger picture. Businesses will always face crises and it is important to look at resilience and adaptability in a broader context. For instance, McKinsey recommends that businesses build-in resilience by creating agile organisations founded on making data-driven decisions. The consultancy also recommends the establishment of self-sufficient and accountable teams. In addition, businesses should invest in talent and culture while hiring demonstrably adaptable leaders to ensure they have the skill and corporate mindset to deal with present and future shocks.
And the truth is that the creation of truly adaptable and resilient organisations, embeds an ability to deal with all kinds of crises, whether it be a global financial crash, a pandemic, disrupted supply chains, the effects of climate change or the economic impact of a European war. There will always be problems. Organisations that can deal with those problems have a competitive advantage.
