7 Ways to Differentiate Your Company in 2022

The new year typically represents a fresh start, a time of clarity and optimism. For many business owners as we enter 2022 amid yet another COVID variant wave, this new year offers the opposite. Many have been on the defense from the onset of the pandemic, and as no one expected it to last this long, this frantic way of business, moving from one fire to the next, has become the unfortunate new normal. As investors and board members across 10 lower middle-market companies, our firm has seen the unique challenges businesses are facing and the myriad ways to address these. We’ve distilled this into actionable advice that companies can use to cut through the noise in 2022 and get back on track, on their own terms.

#1 Current-state analysis

Stop focusing on COVID as a temporary event – it’s not likely to go away. Focus on the future. We’re in a period of robust demand across many industries. Navigating today’s challenges is an opportunity to differentiate your company relative to competitors that are still playing 2020-type defense. It’s a gift. Don’t waste it. Take a clean sheet of paper and list the most essential reasons your company has been successful: Why do customers buy from you? What do the best people on your team like about working at the company? If you don’t know the answers, find them. Schedule customer calls. Schedule transparent one-on-one discussions with a wide cross-section of people on your team. If the list of answers is long, shorten it. Distill it down to the most essential factors. Don’t lose sight of these things. You need these. Everything else is non-essential and should be viewed as subject to change as you re-imagine the company’s next 10 years.

#2 Liquidity

The last two years have only highlighted the importance of liquidity in surviving – and thriving – in an economic crisis. Build a monthly budget model covering the next 12 months. Be sure to link the income statement, balance sheet, and cash flow statement. Take into account new positions, capital expenditures, debt service, R&D expenses and other investments in growth initiatives. Next, extrapolate the model on an annual basis to cover the next three years. Finally, set a sufficient minimum cash balance. Ensure that as reality may deviate from your model over the next three years, you won’t be distracted managing liquidity and can keep your attention focused on executing your plan. If necessary, capitalize the company today to accomplish these goals. That could mean new equity from you, partnering with a private equity firm, or could simply consist of establishing a working capital revolver or senior term loan to ensure the company has ample liquidity to execute the plan.

#3 Retention

Whether your company is developing software, providing healthcare services, or manufacturing a physical product, the people on your team drive its success. Today’s labor market is red hot. Market compensation is an obvious must. However, great people care about more than just comp. Culture is important. Whether you’ve intentionally cultivated a specific culture or not, your company has one. Be conscious of what it is. Discuss with people across your organization what they like most (and dislike most) about the company. Build upon the positive attributes. Correct the negative ones. Caution: Don’t assume you know what they are. Find out directly from the people on your team. They know.

#4 Recruiting

In today’s tight labor market, attractive compensation is necessary but not sufficient. Make your company a great place to work. Find out from your current team what makes it so. Combine this with clear career path opportunities and you’ll begin to develop a differentiated value proposition that high performers demand.

#5 Inventory

Many companies have been navigating supply chain disruptions for most of the past two years. One way to differentiate relative to your competition is having sufficient inventory to deliver on your commitments without stretching lead times. Be reliable. Be fast. This requires being a great partner to your suppliers. Pay reliably. Pay fast. Provide forecasts. Communicate often. Be transparent. Build additional safety stock into your inventory and invest in capacity to deliver better lead times relative to competitors. Yes, this consumes cash. However, today’s challenging environment is an opportunity for you to enhance your company’s reputation for reliability in your customers’ eyes. Be reliable when others aren’t. Be there for your customers. Then, you’ll be positioned to also be there for your competitors’ customers. Not everyone will be able to do this. Get this right and you’ll create lasting brand equity.

#6 Pricing

Many economists are arguing over whether the inflation of the past year is transitory or sustained. The boards of the companies in which we’re investors aren’t betting on transitory. Companies across many industries have absorbed substantial material cost and labor cost increases over the past year. Consumers have also been absorbing price increases. While the rate of increase may very likely slow, we’re not seeing signs of near-term reversal. If you haven’t evaluated whether your pricing is sustainable over the past year, you’re behind and should devote attention to this. Important caveat: Be fair. Do not take advantage of the current environment to push through price increases for the sake of padding your margins. Those who pursue this path will likely get burned as their customers see this and lose trust in the relationship. Set pricing to ensure that you can deliver value for your customers. No more, no less.

#7 Automation

This final topic is longer term in nature but no less important. Adjusting pricing to offset rising material costs and labor costs is a short-term solution. A company that relies on this alone will lose over the long-term. While politicians and the media often cite globalization as the root cause of labor force displacement, research shows that nine out of 10 lost jobs are lost to technological advancements (i.e., automation) while only one in 10 is lost to offshoring. This blog offers no opinion on whether this is good or bad for society, only that investments in automation are necessary to your company’s long-term success. Ten years from now, will your order fulfillment process still work the same way? If you’re a manufacturer, how will you compete in 10 years if your unit labor costs remain at today’s levels while competitors and new entrants have automated processes? Start today by creating a value stream map of your fulfillment process. It’s a simple thing to do. Find one step in your process that could be automated (for example, by software or more modern equipment) or eliminated altogether. Refine your process. Then, do this again. This isn’t something that’s ever finished. It’s ongoing. It’s important. Your customers expect this of you. Otherwise, over time they’ll find a more efficient alternative. Get this right and you’ll inevitably displace competitors and expand your presence in your industry.

The start of 2022 may feel like watching Groundhog Day. However, it’s doesn’t have to. Turn the movie off and chart a new course. As the saying goes, the best way to predict the future is to create it. Get started!