Most budgets for 2013 were made in 2012, when the prevailing economic outlook was grim. But here it is midyear and the signals are decidedly more positive. Don't let yesterday's mindset prevent you from seeing what is about to unfold. Those who fail to recognize that the economy is improving are likely to play defense for too long, leaving opportunities for top-line organic growth on the table.
There is ample evidence that things are better, trader-driven stock price gyrations notwithstanding. Housing prices have stabilized and are increasing in some regions. Personal debt has declined. Manufacturing is on the rise, exports are picking up, and the US continues to be the top target for FDI.
And there are plenty of reasons to be optimistic about the economic outlook for the next five years. The shifting energy equation, for example, sets the stage for growth. Shale gas will allow the US to be energy independent, create an export industry, and reduce energy costs. Lower costs are already making some industrial sectors more competitive.
Another compelling if intangible reason to believe that the economy has turned the corner is America's resilience. The societal factors that have made America strong in the past continue today: its diversity, thirst for innovation, entrepreneurship, and institutional support for risk taking. Banks are now adequately capitalized and are beginning to lend, and venture capitalists are as hungry as ever. Even gridlock in Washington has not stopped the economy from progressing.
Granted, it's not a perfect picture. Europe, excluding Germany, is still struggling, it's unclear whether Abenomics can pull Japan out of its slump, and the shrinking Yen could nick the US auto industry. The big drop in demand for major commodities like iron ore and copper has exposed excess capacity and caused painful plant closures, hitting Australia especially hard.
These and other countervailing forces will not, however, stop the US recovery and the synchronized recovery of economies around the globe. Even a small increase in US personal consumption is a huge absolute number — and that spending can spur exports from China, Brazil, Japan, Canada, Europe, South Korea, Mexico, and Singapore. The rating agencies reinforce this point of view. Just this month Fitch raised its rating on India's sovereign debt and Standard & Poor's raised its long-term outlook on the US. Ratings on other countries and companies are more likely to improve than deteriorate.
If your budget was created for economic headwinds, then now is the time to revisit your assumptions. Here are some steps you should take to build for 2014-2015:
1. Position yourself in market segments that will grow. The landscape has undergone major transformations since the global financial crisis. The recession eliminated some market segments and redefined others. This is the time to revisit the market spaces you occupy and position yourself to ride the uptick. You should be exploring new segments and experimenting with new ideas to expand your brand and occupy the space. For example, the wealth effect from rising equity and real estate prices might make premium product segments more attractive in the coming years. Get there ahead of the competition, and be sure your assignment of resources matches up with your growth prospects.
2. Increase your R&D spending. If you didn't cut the budget for innovation, technology, and product development over the past five years, good. If you did, then take action now. Be sure you are investing enough in innovation and focusing on the right R&D projects, so you have interesting products to meet the rising consumer demand.
3. Reset your goals and KPIs. You may have to make some upward revisions as the economic picture changes. Lack of ambition allows mediocre performance.
4. Set funds aside for growth. Even as you loosen the purse strings, keep some money on hand to invest in marketing or advertising as the market turns. You don't have to spend it ahead of time but be ready to pounce and outspend competitors segment by segment as consumption rebounds.
5. Rethink outsourcing. Market growth has shifted to the US, and change happens faster than ever requiring smooth coordination. It may be wise now to source domestically or to bring some functions back in-house. Being close to the market, you'll be able to move faster and also protect your intellectual property.
6. Upgrade skills. Letting talent become obsolete is a terrible thing. Some farsighted companies never cut back on training in the downturn, but many did. This is the time to revamp it for the new game. What new skills and capabilities will you need to succeed in the emerging landscape?
7. Keep the pressure on productivity. People often take their foot off the productivity accelerator in good times. Don't become lax on cost as you begin to sense rising demand. Keep a laser sharp focus on gross margin.
8. Prepare for inflation. While commodity prices and inflation are subdued, be on the alert for inflation's expected return. If you anticipate it over the next two years, as many experts do, develop a methodology to ensure that your pricing policies and purchasing contracts keep in step.
I'm not suggesting businesses should over-expand without appropriate controls, but remember that the marketplace doesn't run on a calendar year. If the context changes, you should adjust now, not on December 31st. Your leadership is crucial. What are you waiting for?