No company can totally avoid the impact of increasing costs. And most managers have learned to adjust to the effect inflation has on current operating costs. But few have factored it into their competitive strategies. And most managers, particularly those in capital-intensive industries, have not paid enough attention to the way increasing capital requirements affect their ability to compete in the long run. As a result of research and consulting work he has done with a number of capital-intensive companies, this author thinks that any organization can better its strategic position despite, and even because of, inflation. He recommends that managers do a strategic cost analysis to identify the severity of the impact of inflation on their companies’ competitive positions, as well as on the positions of rival companies. In this article, he takes the reader step by step through a diagnosis and analysis of changing cost patterns as well as through the formulation of a strategic solution. During years of chronic inflation, the managers of XYZ Corporation developed the habit of raising prices to cover rising costs and defend profit margins. (XYZ is a name I am using to designate a composite of several companies.) Observing that all its rivals were forced to do the same, XYZ felt secure in its strategy. A version of this article appeared in the January 1984 issue of Harvard Business Review.
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