Better to Adapt than Change

When I was in college when I had the good fortune to meet a well respected Time magazine journalist who set me straight on the importance of language – using words with their proper meaning – I have been a stickler – read pain in the …. – ever since. This obliges me to actually listen to others. But, more importantly, I must hearwhat they are saying. So, the other night, for the umpteenth time, someone was talking about how they don’t like to change things in their life and hairs on my back started to rise.

Let’s face it, people only rarely change. On the other hand, people do adapt to changes they perceive in their lives!

Basically, as I learned in my high school physics class, like electrons, we all live at our lowest energy level until such a time when some outside stimulus makes us – or the electron – move to a higher energy state. It is the environment that changes and we adapt to that change. Or, as Darwin’s Theory of Evolution states the most adaptable of the species will survive.

This same frame of reference is pertinent to leading an organization. Way too often, the leaders I speak with want to throw the baby out with the bath water by changing almost everything in their company. This is simply way too destructive and almost never provides the results they seek. Change brings about a break from the company’s foundation, turning it into a Frankenstein monster.

Adaptation is a much more subtle approach for a business responding to a new environment. Regardless of the company’s stage of growth, adaptability means reducing – not eliminating – the influence of the past while placing more importance on some other aspect of the present.

In the ROKC™ Method, we explicitly recognize that the asset on which the business is built, the Key Component, will lose its ability to provide customers with the competitive advantage they seek. Consequently, if the business is to survive, it will to be enhance the value it creates by focusing on a new Key Component. If I think back on my college economics class, this is called the law of diminishing returns. Over time, the returns the first Key Component provides will diminish requiring the focus to change to a new Key Component that will provide higher returns. When the second Key Component wanes, focus will pass to a new one, then another and another and another, and so on into the future.

ROKC_CA_over_TimeLayer upon layer, the business adapts to changing conditions but strengthens itself around its each preceding Key Component.

If your business is challenged by changing market conditions don’t listen to anyone who tells you have to change. However, do listen and hear those who tell you your company needs to adapt.

rabbit

Like Rabbit Hunting, Snare Clients

Almost once a week, sometimes more, I have to admonish my clients for engaging in activities that are not efficient. I tell them they are “running after rabbits”. At some time or another, we are all culpable of this behavior but sometimes don’t see it until it is too late. As a leadership and strategy coach, it is my duty to point out this kind of behavior to clients. So, why do I use this odd expression?

As I explain in my book, ROKC: Leadership Built on the Return On Key Component, think of yourself as marooned on a desert island populated by rabbits. The first day, as a hungry castaway, your first concern will be to fill your grumbling belly. Probably, you will grab the first club you find and run after the first rabbit you spot. You might even come close to whacking one. However, rabbits are agile creatures, and you will probably not manage to catch it. After a bit you will collapse in frustration, your belly still empty.

Do you see the problem with this scenario?

In the worse case, you burned through a whole bunch of calories and have nothing to show for it. In the best case, you caught a rabbit but the calories the animal provides are FEWER than those you burned chasing after it. In either case, there is a good chance you will not survive very long.

So how did our ancestors survive?

Snares. For millennia, our ancestors captured small game using traps, because they learned – from experience – that making and setting a trap burns far fewer calories than running after the creatures. Thus, the number of calories the animal provides will be MORE than those burned in capturing it. In this way, survival is assured.

 

Unfortunately, experience and knowledge cannot be genetically passed down from generation to generation. Each generation has to learn this lesson for itself.

The same lesson is true for business: invest your time and energy in activities that produce more value.

When I talk to business leaders about the processes they use to get a return, I am often surprised to see them running after rabbits. So I tell them this story and they “get it”.

Are you or your team running after rabbits or building traps?

Aren’t sure which? Let’s talk.

ROKC’in Ideas

So many “wannapreneurs” approach us with ideas that we decided to dedicate a special article to them. If you have a business idea this article is for you!

First, let’s start by stating that ideas are not property and therefore do even enter into the ROKC™ Methodology. The law does not protect ideas; only property. No Non-disclosure Agreement will protect your idea so no sense asking for one. Ideas are a dime a dozen until they can actually generate value.

Second, we hate to see you go away empty handed because that’s just not our style and you may be a future client so we want you to have a good experience. Therefore, our recommendation to you is to apply the “3 Step Test”.

  1. Do you use the product or service you have in mind? How frequently? Depending on the product or service if you don’t use it every day why would anyone else do so.
  2. Would your family, friends, and acquaintances (first degree of separation) acquire the product or service? If so, how much; what conditions; to do what with it; and so on. Don’t just assume they will or won’t. Actually test it.
  3. Are those people who acquired the product or service so satisfied with it that they are telling their community? Are the members of that second degree of separation asking to acquire the product or service? Are you selling it to them? Really?!

This may sound like a harsh test but it works. The logic is very simple. You have to be your first client. Then, your community. And finally, your community’s community. If you can’t create this snowball effect the cost of acquiring clients past the second degree of separation will be very expensive. Too expensive. No third party investor will support such a business unless the top line growth is extraordinary. Consequently, neither should you.

John Locke

Locke & ROKC

One of the ROKC Method’s strengths is identifying the asset/property that underpins the business. Often, we find that business leaders have forgotten all about this oh so very important asset in favor of more the technical aspects of business. We don’t want to make the same mistake. On the contrary, we want to set the example by clearly identifying the philosophical underpinnings of the ROKC Method.

Whenever we look at a business, read the newspaper, watch a news program, or even analyze domestic and international policies, we see a very clear set of mechanisms at work around property. The only thing that changes is the degree to which property can be factored into the analysis, which varies from market to market and country to country. Nevertheless, it always reveals fascinating stories.

By why is this?

Property and the rights of ownership go back hundred, if not thousands, of years to antiquity. We can even trace property issues through Europe’s Dark Ages to the Renaissance. But our focus is on the period of Enlightenment with the influential writing of John Locke.

As a Wikipedia post on states, “John Locke (29 August 1632 – 28 October 1704), was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers and known as the “Father of Classical Liberalism”. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social contract theory. His work greatly affected the development of epistemology and political philosophy. His writings influenced Voltaire and Rousseau, many Scottish Enlightenment thinkers, as well as the American revolutionaries. His contributions to classical republicanism and liberal theory are reflected in the United States Declaration of Independence.”

With regard to the ‘Theory of value and property’, the Wikipedia entry goes on to state:

“Locke uses the word property in both broad and narrow senses. In a broad sense, it covers a wide range of human interests and aspirations; more narrowly, it refers to material goods. He argues that property is a natural right and it is derived from labour.

In Chapter V of his Second Treatise, Locke argues that the individual ownership of goods and property is justified by the labour exerted to produce those goods or utilise property to produce goods beneficial to human society.

Locke stated his belief, in his Second Treatise, that nature on its own provides little of value to society; he provides the implication that the labour expended in the creation of goods gives them their value. This is used as supporting evidence for the interpretation of Locke’s labour theory of property as a labour theory of value, in his implication that goods produced by nature are of little value, unless combined with labour in their production and that labour is what gives goods their value.

Locke believed that ownership of property is created by the application of labour. In addition, he believed property precedes government and government cannot “dispose of the estates of the subjects arbitrarily.” Karl Marx later critiqued Locke’s theory of property in his own social theory.”

Undoubtedly, Wikipedia is not the most authoritative source on Locke but we don’t pretend to be academics. All we want to point out is the influence John Locke’s thoughts about property had on the “Founding Fathers” and the U.S. Constitution which is the basis for all the laws that govern the country today. In fact, right from the beginning, only white men of property could vote in the United States. It would take around 100 years before women acquired the right to vote. Consequently, it was these land owners who shaped the laws of the land and exercised their influence to shape the way business is conducted.

According to a number of studies, the level of concentration of wealth and power in the hands of so few resulted in the Great Depression of 1929. A concentration not seen again until more recently because of the counter-weight of Communism during a the greater part of the 20th Century. Since the fall of the Berlin Wall, property and property rights have been integrated into the laws of most countries. At the start of the 21st Century by all former Communist countries: China and Cuba, in 2009.

Without expressing a judgement for or against property it is fundamental to our understanding of how business, economics, law, politics and international relations work in today’s world. To ignore this reality is to play the ostrich and bury your head in the sand.

The ROKC Method explicitly recognizes that businesses exist to generate a return on a property. This can only be achieved if that property is of value to the customer.

 

ROKCing Brainstorming Sessions

This is our response to the article “Critique is Not the Enemy“, by Professor Alf Rehn, August 7, 2014, on the International Coach Federation blog.

In my experience, when something doesn’t make much sense it is only because we haven’t fully understood it. The same can be said for brainstorming.

Yes, it is touted as a technique for generating a free flow of ideas but as professor Rehn states the energy dissipates very quickly and any criticism is perceived as negative feedback killing off whatever involvement is left. Thus, brainstorming is not a very effective way of achieving the stated goal. Therefore, it must mean the goal is wrong.

Brainstorming is much more effective when simply seen for what it is: a technique for creating a greater sense of community cohesion. As any good performer knows, you have build a rapport with your audience, they need to feel involved in what is happening. There needs to be a connection. Professor Rehn implicitly recognizes this by starting his article with the example of a meeting already in progress that is interrupted to start a brainstorming session. The challenge is for the facilitator to generate audience involvement convincingly or risk losing his audience altogether. Using equal and evenhanded responses or plastic smiles will not cut it. However, just like a comedian will pick on certain members or groups in the audience in a playful way to create and keep engagement, the facilitator can do the same with their feedback, or criticism, to orient audience involvement.

The Means Of Your Ambitions

Recently, I was struck by a confluence of four events:

  1. The number of coaching clients who clearly saw the advantages of changing the direction of their business but couldn’t,
  2. A discussion with a client from a major Pharmaceutical company about aspirational goals,
  3. My own memories of working with executives that expressed the need for the company to change orientation but wouldn’t provide the resources to do so, and
  4. While building a new ROKC website to allow you to collaboratively develop your own strategies in a closed or open group, I reread the chapter on leadership.

All these events are important because as effective as any methodology can be it will only work if you have the means to act as a result of it. In other words, you have to have the means to achieve your ambitions.

In our view, leaders challenge us to see our world in a different way and to act according to this new paradigm. Through the ROKC method, we challenge leaders to see their world in a different way and to act accordingly. However, even after the leaders we work with develop those insights that allow them, and their businesses, to perform better they shirk away for an actual implementation.

A true, authentic, leader has the courage to follow through with the insights they acquire and act upon them not only for their own benefit but for the benefit of their community. The risk of not doing so is a loss of credibility in the eyes of that community followed by a fall from grace.

Are you really a leader?

ROKC your Financing

Over the last few weeks, we have been increasingly asked to express ourselves on financing. To be more precise, how can businesses raise the capital they need to grow. Consequently, we decided to post an article that tries to answer this very straight-forward yet often complex question.

From the ROKC point of view, the business requesting financing has to place themselves in the supplier’s shoes. In other words, how does the capital provider get their return on the capital invested.

To keep things simple let’s say there are only two forms of financing: debt and equity. The difference between the two is an equity financier takes possession of the business while a debt provider only makes their cash available to the business.

In the case of debt, a loan is made with a payment schedule and an interest rate so most of the unknowns are taken out of the relationship. If the lender is a financial institution usually some form of guarantee is required on the principal (the amount lent). This is achieved by taking a lien on another asset  owned by the business or its owners. Of course, there are other forms of debt financing but we want to keep things simple here. Well, we mention just one other. That is vendor financing; vendors extend credit to the business by selling it goods and services however asking for payment at some future time, like: 15 days, 30 days, 90 days, and in some countries 180 and even 360 days. Vendor financing is actually the least expensive form of financing for a business because there is no explicit interest rate to pay; it is built into the price so you don’t see it. Anyway, in this case, a business that is able to receive money from its clients faster than it pays out to its vendors will find itself in a cash positive position allowing it to use those resources elsewhere.

Now for equity financing, or those taking ownership in the business. More often than not business owners over-estimate the value of their business. Kind of natural since they are the ones who usually saw it through inception and growth. As a result of this experience and over-valuation, they never truly think about how a third-party investor will get their money out of the business. This works against them in almost all financing rounds beyond “friends, family, faithful and fools”. It is because of this erroneous mindset that we ask the business owners to think about equity financing not from the point of view of making an investment in the company but from that of an exit.

Let’s use a recent example we have from our mentoring activity to illustrate the point. A couple of entrepreneurs came to us with a business plan for a restaurant requiring a $350,000 investment. This is a significant investment so they wanted to raise the funds. However, when we asked them how their investors would get their money back they looked back at us with blank stares. To help them out a bit, we suggested two ways: (1) pay all investors back their initial investment out of the profits, (2) they could buy back the equity invested by the third-party investors effectively owning 100% of the business after a predetermined period of time, or (3) the business could buy the third-party investors leaving them once again with 100% ownership. The basic idea we were trying to get across to them was simply an investor can get their money back either from the business or by selling their ownership instruments to someone else.

Oh! We won’t even go into how the equity is valued because that is whole other subject. We want to keep this simple.

In another recent case, a consultancy asked us to review a financing white paper they had written to attract new customers. This paper was quite long because it tried to cover just about every form of financing that exists; and, there are quite a number of them. However, we did make a number of recommendations the most significant of which was to tailor it to the business life-cycle. The ways in which a startup is financed differs significantly from that of company in full expansion which is different still from a multinational. The business’s maturity is a very important consideration. Likewise, certain financing instruments depend upon the business’s legal form. A sole proprietorship can avail itself of equity financing by becoming a limited liability company or corporation. However, a corporation issuing more stock may dilute the value of the shares already issued thereby reducing the return of existing shareholders. Or, in the case of a “down round” the reduced value of existing shares is explicitly recognized making it challenging for existing shareholders to exit the company by selling their shares to another investor and make the return they expected.

As you can see, things can become complex very rapidly!

Another helpful way of looking at the subject of financing is to say those investors we are selling a share of our company to are buying in part what exists and in another part what will exist. In other words, part of the money reflects the value of what has already been achieved while the rest of the money will be used to grow the business. Therefore, the big question becomes, “Is the cost of the money used to grow the business equal to, less than or greater than the value that growth will generate?” This is a complex question, we know. Yet this question is the one all businesses are faced with at one time or another in their lifetime. And, this question will help the business owners to determine not only how much they are willing to pay for the outside financing but also, in many cases, this determine what kind of financing they will use, debt or equity.

In this article we are just scratching the surface of the issues surrounding financing since it can become very complex, rather quickly. However, if those asking for financing place themselves in the shoes of those offer the financial resources they will see how many risks first to the principal there are and then to the return on capital invested there can be.

Gratitude-based Marketing

Since the mid-1900s, most of the world has been involved in what is commonly referred to as “The Industrial Revolution”. Essentially, this is the ability to make goods and services at an increasingly lower cost of production and to penetrate an increasing number of markets. And that’s fine.

In the 1980s, companies started to move away from an emphasis on production getting involved with marketing; the customer is king. This, too, is fine. But up to a point. And that point is viewing marketing as an extension of production. To be clear, The Industrial Revolution has so marked our way of thinking that our view of marketing is conditioned by those same processes. For example, when looking at many web-based businesses we tend to ask “What is your cost of customer acquisition?”, or “What is the Return on Investment on that campaign?”. And we all take this approach as valid. But is it?

In previous articles, as with clients, in the ROKC method  we always split the business processes into two categories, productive and consumptive, with an emphasis on how each and every process provides a Return On Key Component, ROKC. We stand by this approach but it is important to add a nuance to the consumptive part. Although consumptive processes need to maximize the ROKC for the company, the transaction is not complete unless the company’s product or service helps the client maximize their own ROKC. This means that by design the client is part of the consumptive process.

By not viewing the client as outside the company, the ROKC method stimulates leaders to move away from the old “zero-sum-game” mentality wherein both sides “take” from one another to a more inclusive form of reflection in which one party “give” and the other “receives”. To be precise, it is initially the company who gives and the customer who receives but in a second step it is the reverse, the customer gives and the company receives. This approach helps us move away from the production-centric frame of mind most commonly used to one focusing on the relationship the transaction creates between the parties.

Of course it is difficult – if not impossible – to control the way a customer receives your goods or services but it is possible to develop a marketing program in which the company focuses on instilling a sense of gratitude in their customers. For example, when building an app or website the user interface is built with the objective of insuring an excellent user experience. Many do this quite successfully and the user expects this. However, is this enough to create engagement? The answer is usually “No”. By building a user interface which leaves a customer feeling grateful for the experience many customers will seek to engage with the company. The customer will move from only providing feedback when things go wrong to doing so when things go right. The relationship become a virtuous cycle that can go far beyond that initial customer contact to their whole community bringing in more business.

Through gratitude marketing the ROI on your marketing operations are no longer calculated in terms of the number of sales transactions you have with a customer, it includes the new customers they bring in; their feedback on the product or service; faster product or service development; faster time to market; lower risk of failure; fewer customer service calls; fewer returns to process; and so on. Go on, give it try. It can’t hurt.

Competitive Advantage

The term “competitive advantage” gets bandied about quite a bit in business literature, meetings as well as among any number of business-minded people. Regrettably, everyone gives it their own respective meaning and no one agrees on any of them.

I often feel the hairs on the back of my neck rise up when someone uses this term because they don’t use it the same way I do, and  I use it  quite often. In particular with regards to the Return On Key Component method and my particular definition of the key component:

“A key component is a company owned and/or controlled asset that provides a competitive advantage in the markets in which the company operates.”

Initially, this sentence expressed exactly what I wanted to say: it is an asset owned/controlled by the company, it provides a competitive advantage, and that competitive advantage can only be measured on the basis of the market in which the company operates. It was “perfect”. Or, so I thought.

In defining the key component I was actually falling into the same trap as everyone else. The term “competitive advantage” in this context was clear in my mind but was it clear in anyone else’s? The answer is “no”.

There are essentially two uses for this term. The first is inward-looking. For example, a business may develop a process that they say gives them a competitive advantage. If this were the case, the shareholders should fire management right away. Any process that gives the business a competitive advantage will interest a large number of customers. By spinning-off this new key component into a separate company management is fulfilling its fiduciary responsibility to shareholders by maximizing their return on investment. Therefore, a competitive advantage must be market defined. Conversely, if the competitive advantage can only be defined with reference to the internal processes of a company then it is an efficiency.

Thus, the second definition of competitive advantage is market-oriented. It is this definition which is at the basis of the ROKC methodology. A competitive advantage means that the company owns an asset that does not help it do a better job but that helps the customer do a better job. In other words, the competitive advantage the key component provides satisfies the needs of the client, it helps the client obtain a certain outcome. The business only exists to make the benefits of its key component available to its customers. The company uses its internal processes and manages the risks in an effort to make benefits of its key component available to its clients in the form of a product or service.

If we return to the definition of the key component it may be better to state:

“A key component is a company owned and/or controlled asset that facilitates and improves the way clients in a given market achieve a specific outcome.”

Well, this statement is good as a first stab but I’m sure it can be improved. Any suggestions? Please send them to me or write them in the comments below.

In any case, the next time you use the term “competitive advantage”, please be sure that you are using it with respect to a market – not an internal process.

Process vs Product

Traditionally, when we talk business we look at a product. The product can be anything from a mousetrap to a toaster to a hotel room to a financial instrument to a company. We look at the whole. This is quite normal because a whole product is very tangible.

On the other hand, when we look a business although we want to do the same thing – look at the whole – we cannot. We have to look the process. As we have argued before, the impressive productivity gains in the US are the result of companies shedding those processes that were inefficient for them and then buying them back on a fractional basis when needed from companies serving multiple clients.

Therefore, when launching a new business do not look at the while product but look at where your business can insinuate itself into your client’s processes.

Defining your business in this way means not providing the final answer but the expertise required to work collaboratively with others to find the answer.

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