In business, I usually prefer “learning at marching” (Czechoslovak saying which means learning by doing) because time is money. But this time, ROKC method is something I need to understand. First, because it’s just what I need to compensate my lack of business experience. And second, it helps my understanding what people like you will want from me when I approach them with my business.
Sorry, yesterday was a very busy day; I could not answer you.
Thanks for the email but it is a bit difficult to understand your point so I will do my best to summarize it: My arguments did not move you.
I think your response focuses too much on the community aspect as an ends and not enough on it being a means. This is undoubtedly a result of how I structured my argument to explain why I consider businesses reduce risk instead of satisfy needs. So let us go back to your Coke example to see what the difference can be.
Coke is a beverage and as such the human need it satisfies is to hydrate the body so we can live. This is a basic physiological need that can be satisfied by drinking a Coke or drinking water, coconut water or any other water containing beverage. From the satisfying a need point of view, Coke is competing with many substitute produces. However, if we look at Coke as reducing an uncertainty in a customer’s life a number of options open are presented: (1) hydration (risk of dehydration), (2) fun and excitement (it is fun and exciting to drink a bubbly beverage), (3) “sharing” which to my way of thinking is community (enjoy a fun and exciting moment with friends), (4) “refreshing” (you will feel refreshed and invigorated). All of these different risk reducing attributes have been communicated to consumers at one time or another over the years helping Coke expand its consumer base. In other words, these can be seen as the different markets in which Coke operates: customers seeking to reduce the risk of hydration, customers seeking to the risk of fund and excitement, customers seeking to reduce the risk of community, customers seeking to reduce the risk of feeling refreshed. Probably there are even more markets but these serve to illustrate how one key component can address the risk reduction requirements of multiple markets by using that key component in a product that is communicated and consumed by that target customer.
In adopting the ROKC Method you can conduct the same analysis for every product or service.
Does this help?
Good morning Peter,
You make a good point about doctors and craftsmen. However, just think about how you decide which doctor to see or craftsman to employ. Usually this decision is made by asking someone whose opinion you value with regard to health or workmanship. It is a referral process based on your network, otherwise known as your community.
A few years ago, a number of sites started to pop up online where users could review restaurants, stores, craftsmen, ….doctors. People who don’t have anyone in their community who can help them form a decision will go to these sites which act as referral systems. Do these work effectively? Not really because the people posting the review are not part of the seeker’s community. The trust element is missing. As a result, certain reviewers have tried to become influencers on those sites and to increase their reach beyond the site; they became experts and made a business out of it moving to the more traditional role of reviewer but using digital tools. They became trustworthy for a community.
But let’s move beyond the personal community one can have to a more business perspective. Let’s say you build an operating system like iOS or Android, if you don’t have a community of users who will build apps that run on the OS you don’t have anything of value. Do you? Consequently, both Apple and Google invest huge amounts of money sponsoring community events where programmers can come together and discuss/learn/question all they want. In this case, it is often referred to as an “ecosystem”, which is just another name for a community. That said, these communities form around these technologies because somehow the risk associated with using them is lower. The fact that there are so many smartphones and tablets in the world certainly factor into their success because it reduces the risk of getting users to try the new app and grow the market. If you develop an app for FirefoxOS or even Blackberry it may be more of a challenge. Similarly, iOS has its own programming language whereas Android uses Java making it much faster for programmers who already have experience with Java to build apps but also making riskier because it is easier to hack.
I hope I am making my point but if not please write back and I will try to improve on my explanation. Now, I have to close this email because I have some other things to attend to.
Yes, with our conversation you can sure make supplemental brochure to your book to explain certain topics further :) .
Ok, I understand your point. And from certain perspective it’s definitely right. But I need to study some more materials first to make my own opinion…
But even before that, I need to state one point: mostly you talk about being member of some community, not being a customer or consumer. Yes, communities such as guilds, trade unions, city states or state unions are here mostly to protect members from harm, uncertainty and reduce different risks.
But I never ask doctor “how many patients have you killed?” rather than “how many patients have you cured?” or craftsman “what can’t you do?” instead of “can you do this?” Risk reduction is for sure important factor, the question is what is the ratio between risk reduction and needs satisfaction?
Thanks for allowing me to share this thread with others.
To my way of thinking, people value only things that reduce the risks in their life.
If you look at history, when we were cavemen we already lived in small communities for protection. When we started to settle villages those groups became bigger also for protection but with the start of organized labor; people specialized in certain tasks. Many of the stories we still tell ourselves are based on the known limits of our environment, like don’t do into the forest or risk getting eaten, or there are monsters out there. Usually the monsters were simply people from a neighboring village who spoke differently and maybe dressed differently. Europe is full of stories like this. Religion is a great way to create communities of people with shared values. Even though people may dress and speak differently they can still connect through a common religion. As time marched on, cities evolved and with that the city-states of the renaissance. People developed an identity with the state and still do, while maintaining an identity with their neighborhoods. However, in the Renaissance you also guilds develop where some people belonged to the guild because it reduced the risk of not having a trade and not being paid a fair price. Guilds are the beginning of Trade Unions which serve the same purpose; collective bargaining. More recently, there are those who argued that people identified with a nation-state but today I can honestly say I do not believe that but that is for another discussion. However, the nation-state did a serve a purpose; it created a uniform jurisdiction within which commerce could be conducted throughout the nation in the same way; thus reducing the risks for businesses to expand. And even more recently, you have supranational organizations that try to even out the rules of commerce in a larger geographic area reducing the risk of business expansion a bit more. Think of the European Union and what its function is and you will see this action.
But let’s go down to street level. How do you feed yourself? You no longer grow your own food. You go to the market. The market reduces your risk of starving. There is trust relationship between you and the market that they will always have enough food on hand of the kind you like so you can feed yourself. You also count on the market to buy good quality food with all the nutrients necessary for you to survive and free of pesticides that will kill you. The organic food movement is a response to people’s insecurities about the quality of the foods they eat; in other words, organic food reduces the risk of eating poor quality food. The same can be said about every other product or service you acquire.
- A doctor reduces the risk you are unhealthy.
- An airline reduces the risks associated with traveling large distances.
- A car reduces the risk of traveling a short distance.
- Lipstick reduces the risk of not being attractive.
- A branded handbag reduces the risk of other people not seeing you as successful.
- Education reduces the risk you don’t learn (maybe).
- Google reduces the risk of finding pertinent information on one side while reducing the risk of your ad reaching your target audience on the other.
- A glucose tester reduces the risk of not knowing what your glucose level is and falling ill.
- A wallet reduces the risk of losing your cards and cash.
- The iPod reduces the risk you can’t consume cultural content.
And, so the list goes on and on. But don’t believe me try the opposite test: would you acquire something that increases a risk?
- Would you go see a doctor who isn’t very good and does cure you?
- Would you use a browser that serves up nonsensical search results?
- Would you use a vehicle that always breaks down?
- Would you belong to a church where you weren’t part of the community?
- Would you live with people who wanted to kill you?
I don’t think you can answer yes to any of the questions above.
Leaving the issue of money aside, you should also understand that one of government’s roles is to make sure you are protected from people who would go into certain businesses and harm you. In other words, government knows there are certain risks and will legislate and regulate to protect you. This is why a doctor has to pass a state exam and receives a license to conduct business in a jurisdiction. This is why food is inspected. This is why airlines are regulated. This is even why measures are adopted to limit what a company can do with your personal information. And, these laws and regulations are increase the cost of doing business thus reducing the returns for the business.
So yes, Peter, it is all about reducing risk for the customer. Whether that customer is a person or a business they will only acquire a product or service that reduces a perceived risk. This is why I reason based on risk reduction.
Hope this helps your understanding of the ROKC Method.
Ok, my bad. It was the secret formula, not product or process itself.
I think I also understand your perception of intangible assets in the process of ROKC and display of Market Specifics, I recall your examples of iPod and flat companies, but after reading through this again and again I still don’t understand why such term as “customer risk”? Why are we talking about Risk instead of Value? And Reducing instead of Increasing?
Thank you anyway. I can’t even properly thank you for your time you are making for me. I sure understand how much this would cost me if I am your paying customer. By all means, post anything you want.
From an accounting view, a business has many asset. Some assets are even off the books, like the value of a brand. I think you would agree if I said a trademark registration costs $600 (in the US it does) which you mould find classified as an intangible asset on the balance sheet. However, the value of the brand may be much, much more than that yet that value is not on the balance sheet. Even if I were to buy a company that owns the brand, in consolidation I would only record the $600 trademark and put the rest of the brand value in Goodwill.
Still using your Coke company example, the key component was the secret formula. It wasn’t written down on any balance sheet and was a trade secret. To my knowledge no patent was ever filed for the Coke formula. And yet, without the formula you wouldn’t have Coke.
So accounting does not help us to understand what we mean by a key component. You understand this I am sure.
This why when I wrote the book last year I described the key component as an asset the company owns and/or controls with which nothing else is possible. Without the coke formula you have no need for any of the other assets, any or the processes, any trademark, and so on. This formula was the basis for everything that came afterwards. Just like in the book, I explain that the optical pickup is the key component for the CD player because without it you cannot read the disc making the whole device, the whole system even, useless. However, the markets for optical pickups is not limited to CD player but extends into other products: DVD players, BlueRay players, and so on (optical medium).
This is where markets become an important factor in the equation. An iPod player uses completely different technology making the optical pickup obsolete in that audio and video market. In other words, the optical pickup does not reduce the risk of reading the content stored in an iPod because it just doesn’t work there. That said, there are still plenty of markets that use CDs, DVDs, and BlueRay discs. In the rich western countries almost all the optical medium market is gone even though some still exists but in emerging markets and poorer markets it is a stable or growing market. Unless many consumers have smartphones in which to store their audio and video content in which case the market is surly migrating there. Back in the day, Apple prematurely launched the iPhone as a way of protecting its iPod market for this same reason.
Getting back to the Coke example. The machines are part of the processes that allow the company to make its key component available to customers. In the same way, marketing is a process to make the key component available to customers. So yes, there are plenty of assets on the books and most of them are simply process related. So if as a business owner I am forced to acquire all this machinery that is process related just to get a return on my key component I need a lot of money to invest. Why not use someone else’s assets for whom my process assets are their key component? Thus, coke developed the bottling plant system where they went around the world searching for companies who were bottling beverages for other companies and sold them a license to bottle Coke. For these bottlers the demand for Coke was so high that they maximized the return on their key component. Understand?
More recently, we read about flat companies. What exactly does that mean? Simply, each company is specialized with their own key component selling access to it to their customers. All the participants in the value chain are then held together through an IT system that uses a common protocol known as the Internet Protocol.
This form or economic organization greatly increases productivity as we see in the US statistics but not in the European ones. Why is this you may ask? Many have argued that US productivity gains came from the computer but almost everyone in the world has a computer nowadays and they don’t have such gains because the US has advantageous laws, easy access to capital and an appetite for risk you don’t find elsewhere. Consequently, there are certain products and services you will find a ready market for in the US but not elsewhere. In other words, because the product or service is not useful in that market it cannot be considered a key component.
I hope this is clearer for you, Peter.
Ok. I am trying to understand where my assumptions are faulty:
I understand why Key Component is Trade Mark and not Brand. Without mark “Coca Cola” it would be hard to penetrate market with Dasani water. Also its not Marketing as I said but Marketing creates Brand and therefore Trademark.
Second, it’s asset is Trademark. But manufacturing machinery as well? Maybe distribution chain etc… every beginning accountant would say that and this must correspond with ROCK method right?
I could say that there are many processes in Coca Cola Company such as brand management or manufacturing of drinks that turns assets into product (can customer’s brand identification be considered for product???
But we focus on Key Component and that is Trademark.
The second issue and somewhat fishy I would say:
“In other words, people who drink coke feel that their risk of not being American, patriotic,… is reduced by drinking Coke.”
Why are we talking about “reducing customer’s risk”? Why not “satisfying customer needs?” or maybe “providing customer value” or perhaps “delivery customer solution”? Your term resembles negative emotions like fear, anxiety, doubt… Do you go to market because you feel for buying something nice for you or because you are afraid of starve to death if you don’t do your grocery today? Or you drink Coca Cola because you might not feel American enough??? I also have strong sense for feel to be European but I have no problem to prefer nice shot of Tequila to Absolut Vodka ( I think it’s from Sweden owned by French).
I utterly fail to understand purpose of such terminology.
I don’t recall describing “market specifics” term according to ROCK in your book any further. Probably it’s there but is there is something “special” I should understand about this term? Given an example: people demand on regular basis, prefer cheaper product but demand quality/exclusivity (brand), drink with favorite junk food etc. Simply “what are the characteristics of the market or how does the market behave”?
Or am I mixing up tomatoes with potatoes again?
My confidence is starting to decline….
Nope, you don’t have it right.
The “key component” is the trademark: Coca Cola. Its value is a result of the competitive advantage it provides the customer: Americana, Patriotism, Happiness, Freedom,… In other words, people who drink coke feel that that their risk of not being American, patriotic,… is reduced by drinking Coke.
Although originally, the process by which the company achieved this was the production and distribution (as you describe below) of the Coke products it has since shifted in emphasis to brand management. As a brand they extended their product portfolio to include other products that can convey and support the same values Americana, patriotism,…
Each shift in key component requires a shift in processes even though that doesn’t mean completely abandoning the processes that existed before. As you suggest, a company might have managed their own physical distribution but then – under a new key component paradigm – realized it could be more efficiently done by a third party without harming the company elsewhere. Ideally, the company is maximizing its profits on the physical goods side and reinvesting those profits in the brand identity side since that is where its new key component can be found.
“To use your Coke example, you are focusing on yet failing to see that the key component is the brand. Almost every aspect of the product you mention have to do with branding and not the beverage in the can. Do you see that? I hope it is clear now.”
I got it now! Even though my example wasn’t best for this sort of question your definition speaks clearly: “The key component is the asset a business owns or controls that gives it a competitive advantage in the market in which it operates.”
And in case of Coca Cola is Key Component for sure it’s brand!
So to sum it up, if I understand it correctly, in case of Coca Cola company:
1) the business own a)water and ingredients, manufacturing machinery to turn water and ingredients to fizzy drink and bottle it and of course supply chain to deliver product to stores. (or maybe not, maybe they outsource logistics, it that case it’s not their asset but logistic’s company)
2) It’s their marketing and tradition that provides competitive advantage: Coca Cola is a symbol of US and most recognized fizzy drink in the word. This competitive advantage, this brand recognition we call Key Component. Furthermore since it’s so strongly associated with national identity, brand recognition is likely to endure for a long time even though product itself changes. US is superpower with over 300 000 population and Americans are unlikely to accept product that is not their or power of Coca Cola Company simply ensures the strongest market position.
3) “Competitive advantage is market specific” -> Western consumers demand drink that goes well with hamburgers and other junk food. Alternatively, it is refreshing and gives a lot of (unnecessary) energy. These are all traits that Coca Cola drink provides and therefore ensures market needs.
Am I right?