As summer is now upon us (unofficially, at least), there are several noteworthy economic developments taking shape that will impact business strategies across most, if not all, industries. The post-COVID economic picture has become clearer in the first half of 2024, and the picture is somewhat surprising to many. The recession that was forecast by most economists a year ago is now viewed as a less likely scenario, with the “soft landing” outcome now perceived to be a more likely result following the Fed’s unprecedented swiftness in rate hikes from early 2022 through mid-2023. This shift in economic forecasting and sentiment is driven more by what hasn’t changed than what has changed. What hasn’t materially changed within our economy during the past 12-18 months is consumer demand and unemployment. Consumer demand was expected to slow in a higher interest rate environment, driving down real GDP growth and triggering a rise in unemployment. Very sound economic theory, but the economic models behind the recession forecasts underestimated the insatiable appetite for Americans to consume. Apparently, you don’t fight the Fed or the American consumer. Of course, hindsight is 20/20, and a recession is not off the table, but it is now fair and reasonable (if not necessary) for executives to consider their current strategic options and initiatives with a healthy economy as a backdrop.
With a strong US economy providing a tailwind for corporate strategies, how should companies proceed with their work of maximizing shareholder value in this environment? Let’s briefly consider each of the 3 basic value creation levers available to executive teams – revenue growth, cost containment and capital structuring. With respect to expenses and cost management, a word of caution is warranted. Organizational focus on expenses is often countercyclical to economic conditions (particularly within the financial services industry). Expense reduction occurs during economic downturns and becomes a tertiary priority, if not an afterthought, in stronger economic environments. This is not a recommended approach for creating long-term shareholder value, particularly in a world where technology tools and advancements are offering organizations unprecedented opportunities to increase efficiency and productivity. As such, the boring and often “unfun” work of managing expenses and driving greater productivity from existing resources should continue, irrespective of the economic climate going forward. Beyond the staffing rationalization, office space downsizing and inflation cost containment work that has taken place in the past 2-3 years, expense management initiatives that should remain on CFO and COO “to-do lists” include:
Outsourcing or smart-sourcing of business functions / sub-functions
Rationalization of products/services/business locations that do not meet performance targets
Implementation of technology tools with defined productivity and P&L impact
Assessing and optimizing post-COVID supply chain and purchasing arrangements
Before we touch upon revenue growth, let’s briefly address the other relatively mundane topic of financing and capital structure. During periods of economic uncertainly, equity issuance, share buybacks and debt restructuring/refinancing are less palatable (if not financially imprudent), as companies would prefer macroeconomic signals that support the value-enhancing potential of these activities. In the early stages of an economic growth cycle (coupled with a stubbornly inverted yield curve), these capital structuring/restructuring options become more worthy of consideration. Additionally, the increasing availability and competitiveness of private credit must be evaluated by CFOs as a part of their due diligence to maintain an optimal capital structure for their organizations.
And last but certainly not least are the value creation opportunities from revenue growth. A robust economy brings with it a seemingly endless list of potential top-line growth initiatives, including:
Business line extensions
International expansion
New product/service launches
New/expanded distribution channels
Marketing/branding programs to capture greater market share and deepen client relationships
Joint venture and M&A opportunities
In a weak economy, executives must make difficult decisions on what to do to sustain revenue and stabilize earnings. In a strong economy, the better question to address is what not to do to grow revenues. With a favorable economic outlook lengthening the list of positive ROI projects and initiatives, it is imperative for executive teams to maintain strategic focus on market opportunities that align with the competitive advantages of their firm and contribute to the long-term vision of the organization.
The unfolding “Goldilocks economy” is certainly a welcome scenario, and with it comes an expanded set of value-enhancing business activities to consider. Given this circumstance, executive teams should:
Collaboratively define their most impactful cost containment, capital structuring and revenue growth initiatives;
Determine the leadership and staffing resources required to successfully implement each priority initiative;
Monitor and adapt to changing economic data and industry/competitive developments (as it’s worth remembering that Goldilocks didn’t stick around for too long after enjoying her porridge).
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