Don’t Let Inflation and Recession Ruin Your Data Strategy
How macroeconomics can help data leaders set a robust and visionary data strategy
Why on earth should you care about macroeconomics at all as a data leader?
Have you ever been in a meeting room with senior leaders discussing inflation or recession? And how you must set up a task force to address the issue? I have. And it made me uncomfortable. Everybody seemed to have an opinion, while I did not understand what they were talking about. I wondered how they got to learn about economics. It’s not something you learn at school, right? At least not in a way that is applicable to your job. It’s not something you encounter every day on the job either. You get exposed to it every other year when something extraordinary happens. So how is it possible that all those senior leaders seemed pretty at ease to make predictions and decisions? As a young manager, it sucks to see your inexperience exposed. Economics was one of those topics that used to make me self-conscious. When a recession hits, the senior leaders, more experienced and wise, always seem to know better what’s happening, what’s coming next, and what to do.
As a young manager, it sucks to see your inexperience exposed.
Elders in mountain villages can tell you whether it’s going to rain or snow by the shape of the clouds and the color of the sky. They know how to detect and prepare for an upcoming thunderstorm. Of course, they can’t prevent storms from happening and they can’t prevent all damages, but they are usually better prepared than the young.
To be old and wise you must first be young and stupid
However, I have good news: you don’t have to look stupid to your top management forever. If you can learn from the experience of others, you can get wiser, earlier in life. In business, like in the mountains, you can learn to recognize the early signs of an economic downturn or hyperinflation and the likely consequences to your business, so you can better lead your team through the storm.
What is macroeconomics?
According to Wikipedia:
Macroeconomics is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability.
In other words, macroeconomics is the study of the global context in which your business exists.
The reason macroeconomics is “invisible” most of the time.
Macroeconomics is everywhere around you when you do business. But because it’s always here and it usually moves slowly, you don’t even notice it. Macroeconomics for a manager is like water for a fish.
Let me illustrate my point with a story from David Foster Wallace:
There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What the hell is water?”
A young fish in a tank cannot understand what water is because it never has encountered anything else. It cannot even fathom that water exists.
In the same way, a young manager with five years of experience has never lived through a recession, or on the contrary, only knows recession.
Just because you don’t see it doesn’t mean it won’t change
The graph below illustrates that you could have 10 full years of work experience and still never have encountered inflation of energy prices such as the current one.
Another example is to look at the wider economy. In 1926, the economist Nikolai Kondratiev postulated the existence of 40 years cycles in capitalistic economic systems. During the 20-year ascending phase, companies invest a lot to fight competition, and prices increase. After the peak is reached, the economy slows down for 20 years, due to excess supply and a demand slowdown. This theory has been challenged and enriched since. But we remain sure that the economy is not a sea with constant level, but rather an ocean with a very slow tide cycle. This tide changes the conditions of business continuously. And at some point in the cycle, things start to accelerate, surprising those unprepared.
I am not saying that you should become paranoid and get paralyzed by everything that will inevitably go wrong. But knowing macroeconomics will give you an intuitive sense of how things could change tomorrow and challenge your assumptions.
What it could cost you not to understand economics
If you don’t understand macroeconomics, here are two examples of things that could go wrong during your tenure leading the data function:
- A major, unanticipated inflation wave might suddenly show up. Suddenly you discover that customer-centric pricing becomes the number one priority of the CEO. It takes you weeks to understand in which categories inflation is going to hit the hardest, and how to reorient your data science teams to tackle the issue. By the time your team is operational, your competitors have already repositioned their whole catalog pricing. They have moved faster and made bold announcements that they will protect the prices of flagship products. They won the race to the customer price perception while protecting their margin. In the few weeks it took you to react, you lost millions of EBITDA.
- A sudden pandemic provokes major supply shortages. Your supply chain, which used to be a well-oiled machine, starts to break down. You had just spent two years building a state-of-the-art demand forecast algorithm that improved accuracy by 2 percentage points, an applauded success. The problem is that your algorithm was fine-tuned to work in smooth cruising speed conditions. Now the sales curve is dropping fast, the algorithm forecasts a complete sales collapse and you have to unplug it before it messes up your whole supply chain.
Those apocalyptic scenarios would have made you laugh in disbelief in 2019. Now you know it actually happens. It’s easy to dismiss them as force majeure conditions that nobody could predict. Were they, really? Is there a way to bake more resilience into your data strategy so that you are prepared for the worst? Is there a way to react to crises faster and better than your competitors? I believe macroeconomics skills give you this kind of advantage and I will illustrate how.
Macroeconomics literacy gives you a helicopter view to see further
Understanding macroeconomics will help you see further in space and in time.
- In space, because you will understand that other regions of the world will have very contrasted economic conditions. Inflation might not be an issue in your European HQ, and at the same time be a recurring danger in emerging countries where the business operates.
- In time, because even if you are experiencing growth now, you could well lose your business if your core customer segment’s purchasing power is crushed by inflation tomorrow.
This enhanced vision will allow you to:
- be a strategic, cool-headed leader when the economic storm hits,
- look smarter in front of the board of directors, which always feels good, let’s be honest.
Ultimately, I believe macroeconomics literacy can make or break a Chief Data Officer. The average CDO tenure is only two and a half years according to an HBR article: “Why Do Chief Data Officers Have Such Short Tenures?” [1]. This means you only get one shot at it. If your initial strategy reveals irrelevant after only a year because the economic context changes, it will seriously reduce your chances to succeed.
The average CDO tenure is only two and a half years. This means you only get one shot at it.
Examples where economic conditions dictate your data strategy
In the following sections, I will give you concrete examples of how you could consider macroeconomic factors such as inflation and GDP in your data strategy. I will illustrate how it could affect:
- your use cases prioritization.
- your data team's organization.
Impact of inflation
Inflation is a generalized rise in price levels. Most developed economies have stable inflation rates below 2%. It allows for minimal unemployment and adverse effects of inflation. However, emerging economies are more often subject to hyperinflation, with sometimes disastrous consequences. In the worst crisis, people get their wages paid many times per day because a 100 bill of the national currency earned in the morning could be worth 20% less by the evening of the same day. People start doing grocery shopping during lunch breaks because it will become more expensive if they wait until 5 pm. Even in developed economies, inflation could get out of control like in 2022 though, and become a top-of-mind concern for CEOs.
Use case prioritization
In inflation periods, your costs could increase dramatically and squeeze your margin down to zero in a matter of months. It means cost control use cases become a priority, as well as pricing use cases.
- In the cost control use case category, energy prices are usually those soaring the fastest. If you are able to do energy efficiency analytics, you know where to act to realize savings.
- On the pricing use case category, if you can leverage advanced analytics, you can target your price increase strategically. You will freeze the price increase on the products with the highest price elasticity of demand. This way you will beat your competition in the race to low price perception. You will increase prices the most on less sensitive products where you are cheaper than the competition to win on profitability.
Data teams organization
If you work for a multinational company, inflation might be a very abstract concept for your data scientist at the London HQ, while it might be completely business as usual for your data scientist at the Istanbul office. The Turkish business unit might not have the resources to develop an end-to-end price elasticity algorithm, and it is better to have it developed at HQ for the whole group. However, you could have your Turkish data scientist fine-tune the algorithm for inflationary economies.
Impact of GDP and growth
Use case prioritization
When a recession hits, each customer segment is affected differently. For example, the more modest households lose more purchasing power. This creates a distortion of your customer segmentation. This requires you to work closely with marketing to quantify those tectonic shifts in demand and to define actionable levers.
Then, your company becomes risk-averse and tries to control costs to survive a turnover collapse. You will have to work with finance on cost-efficiency use cases.
Data teams organization
Your data budget will probably shrink when a recession shows up, or at least grow more slowly. You will have to justify your value to your CFO more than ever before. Measuring value creation requires bureaucracy and capabilities that take months to set up. So even if it is easy today to get a budget, it is probably worthwhile to start tracking value creation so that you are ready when the bad days come.
How to get started
- Ask economic questions: Instead of relying only on the corporate strategy slide deck, you could make your strategy more robust and visionary by studying the sensitivity to underlying economic assumptions. For example, ask your marketing department: “What could go wrong?”, “When recession hits, what will happen with our customer demand”? Or ask your finance department: “How quick and how deeply could the cost structure evolve in case of hyperinflation?”.
- Learn the basics: understand supply, demand, inflation, and GDP. Studying the history of economists is in my opinion the most compelling approach if you can’t take a full course. The early economists started with very simple models, that where challenged, augmented or replaced over decades of research. Observing their thought process is fascinating and enlightening.
If you have no idea where to start, here are a few resources I recommend. I did not deep dive into all of them but the content seems adapted and presented in an actionable way (I have no affiliation in any way):
- A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know, a book by David A. Moss. While I did not read it, it’s rated 4.6 stars on Amazon, which is remarkable for an economics book. It seems designed to be actionable by managers. A good concise option, cheaper than the bigger textbooks.
- Macroeconomics for Business Management MOOC on Coursera. Reviews are stellar with a 4.9 stars rating. It seems to provide solid theoretical foundations together with an application to business planning and investment decisions. For the most motivated only because it represents 14h of study.
- Economics, textbook by David Begg, Gianluigi Vernasca, Rudiger Dornbusch, Stanley Fischer. This is the book I studied for my macroeconomics class. It is comprehensive, with both theoretical deep-dive, loads of charts, and historical illustrations which make it compelling to read. It is very rich and detailed so it will require a certain effort, but you can skim through it. It also covers microeconomics.
Conclusion
Macroeconomics is not the number one skill that you need as a data leader. However basic literacy in macroeconomics will help you see further in both space and time. This is essential to effective leadership. Understanding inflation and GDP growth will allow you to build more optimized and robust data strategies. Instead of being overwhelmed by the economic crisis, you will lead, cool-headed.
Don’t wait to be old to be wise. History repeats itself.
Special thanks to my editor Ben Huberman, for making this article more relatable and actionable for the community.
[1] Davenport, Bean and King, Why Do Chief Data Officers Have Such Short Tenures? (2021), HBR
