Tariffs are the pressing topic for directors, but the changing on/off nature is making strategic discussions and subsequent decisions difficult.
Why do tariffs matter, and how can we prepare for them without over- (or under-) reacting as we maintain our roles stewarding value creation?
The Cost of Tariffs
Tariffs are a tax, and taxes have costs.
- Cost. Public organizations are signposting price increases in earnings reports, and we will see more moves. While some companies will stomach the cost to enact a share play, most will pass it onto the industry value chain, which will eventually impact the end-user.
- Complexity. Even assuming you have full transparency into your end-to-end supply chain (few private organizations do), almost all have a country of origin ramping up against tariffs. Attempting to decode and then move to a less affected country, if at all possible, will lead to a web of complications of where to source, how to source, what this means for delays and other related implications. Even if you want to commit to re-sourcing, this is a multiyear process and few boards are making big-bet decisions given the current, uncertain environment. As strategic decisions are interrelated, this will increase complexity, and that complexity is a cost organizations must bear.
- Consumer Price Index (CPI). Tariffs are inflationary. It is hard to build an economic model where tariffs don't increase inflation, especially given their nearer-term impact on consumer goods that make up the bulk of CPI. Central banks can counter this with movement to an extent but, so far, the Federal Reserve, led by Jerome Powell, has given indications they want to reassert the criticality of independence, so it's unlikely they will do much in the immediate future. Cutting into the cycle is unlikely, especially if unemployment remains around current levels.
- Commitments. Be prepared for a return to post-2020 inconsistent commitments on timelines, sourcing schedules and shipment arrivals. While few anticipate the same level of chaos we had in global supply chains then, given the criticality of fast turnaround that exists in many industries, slowness in the system — which tariffs will create — will impact go-to market and make all commitments questionable.
What Not to Do
Before what to do, let's start with what not to do.
- Nothing. For all the talk of taking Trump seriously but not literally, tariffs are in play and will be used at minimum as a negotiating tactic, and more likely as a midterm strategy to reset trading negotiations and attempt to bring manufacturing and production back to the U.S. (though arguably, few of these jobs will materialize in the near-term).
- Holding pattern. It's tempting to pause and wait “until we get more information,” but such decision-making paralysis, where you punt decisions for weeks or months, places your company in a constant holding pattern. Indecision has a cost just as poor ones do.
- Prediction time. The key to performing through uncertainty is to acknowledge we cannot predict the future, but instead focus on making great decisions, even though we cannot make great predictions. Predictions are tempting but, in reality, are a trap. Reallocate resources on over-predicting and over-planning to preparing.
What to Do
The key is shifting from planning to preparing, which involves a few strategic shifts and building some new decision-making capabilities.
Articulate your beliefs. Essential to any strategic decision is separating the trend (what we are seeing and hearing) from your belief (your stance on how it will play out) from the implication (what you should do). Most organizations fall into the trap of jumping from trend to implication: we are seeing X, so we must do Y. That is, we are seeing a threat of 25% tariffs, therefore we must stockpile inventory. Knee-jerk responses are not great at any time, but given the current administration's tendency to make bold announcements and scattered action, this response is especially problematic.
Identify your kickers and killers. When developing strategy under uncertainty, leaders should shift the conversation from “what could happen” to “what could make us” or “what could break us.” These are your kickers and killers. Identify the potential big upsides and the business model killers (for example, 90% of a critical and price-sensitive supply is in China). When you have killers, you need to start making moves, even when beliefs remain untested.
Isolate your no-regret moves. When making decisions look for “no regret” moves. These are moves that, even if you got your beliefs wrong, you would not regret making. Investing in your own manufacturing facility is a regret move — if tariffs don't materialize, you would regret that massive capital outlay. Vetting additional suppliers, however, is a no-regret move.
Use multiple strategic stances. We are programed to act and most leaders pride themselves on a bias to action, but sometimes it's OK to wait if it's purposeful. You can actively wait while you watch and learn. And when you act, you can also make moves to shape the environment in your favor through advocacy, lobbying or related activities. Critically, you can also act to learn more. Lean in and learn faster than any other. Map out supply chain, talk to key customers and work with partners.
These moves signify a critical strategic shift from planning to preparing, a differentiated approach needed under extreme uncertainty.
Address the Killers
If you identify a strategic “killer”, then you need to start moving.
- Customer communication. Start communicating with your customers that you may need to adjust price or timing. Give them a view on how you're approaching the issue, when you'll update them and who the key contact is.
- Leverage your learning partners. Make an ecosystem and identify your most significant “learning partners” throughout the next cycle. These are more than transactional vehicles, but strategic partners who also want to grow. Pursue proactive and early conversations with your customers. Vet your shared beliefs and see where you are aligned and where you are not.
- Substitute inputs. Review your vendor/suppliers in affected countries (e.g. Canada, Mexico, China) and review which input materials can be substituted for a lower cost — domestic or inbound — from a non-affected country origin.
- Ecosystem management. Work across your local ecosystem to investigate back-ups to all critical components that may be affected and find a dual or tertiary source where applicable. Begin the process of vetting new suppliers now, performing due diligence and beginning supplier onboarding for critical materials.
- Local sourcing. Investigate local sourcing or manufacturing now. Perform the cost analysis so fast decisions can be made if tariffs (that stick) go into place. Run the scenarios for different levels so modeling can be clearer.
Value Creation Does Not Change
Most critically, remind your board colleagues of a critical point: the definition of strategy and value creation has not changed. Your role remains guiding the organization as it creates and captures value, and then your governance mandates you protect this over the longer term, however value creation is defined (family, investors, community, etc.).
It is easy to get distracted from the main purpose but keep the focus where it should be: value creation insights and opportunities. Tariffs, and similar macro events, are what I call fair disadvantages: they are in the market for all. Your role is to turn these fair disadvantages into unfair advantages and continue to create value through this uncertainty.