It is Really All Quite Simple, ROKC Methodology

Since publishing “ROKC, Leadership built on the Return On Key Component”, we have encountered a significant number of business owners, executives and consultants who have been coached in the method. All of these cases have provided us with the opportunity to fine tune our message. We have made it even simpler to understand the ROKC method.

When you make an investment you are paying for the market value of the asset – stocks, bonds, precious metals; or, land, machinery, patents, copyrights, trademarks, and so on – in hope of a higher future value. Some assets provide the perception of little risk, like: bonds or money market accounts. While others have a high perceived risk, like: stocks, junk bonds, and such. The ROKC approach recognizes this reasoning by looking at the Key Component as just another asset class.

If you have been following our writings you will recall that a Key Component is an asset owned and/or controlled by the business that provides the customer with a competitive advantage in the market in which it operates. In this sense, competitive advantage is measured by the ability of the asset to reduce uncertainty in some process or other the customer is engaging in to enhance their own Return On Key Component, and this is very market specific. The business exists to make its Key Component available and usable to its clients. Thus, certain Key Components can be used by a company operating in one market and be licensed to another business operating in another market.

From this perspective, we can treat the Key Component just like any other asset we wish to get a return on. However, it is the business itself who will be creating this return by engaging in production and consumption processes that generate value, as measured by profit. Likewise, this profit must allow for mitigating the risks and paying for the cost of capital before it can provide a return to shareholders. Thus, the corporate bean-counters should track the return on the Key Component so as to monitor and track how well the Key component is standing up to changes in the business environment: competition, new management techniques, outsourcing, supply-chain options, and so on.

As any old bean-counter will tell you the best way to achieve this goal is to look at each process as an activity. Using Activity Based Costing the company can benchmark against market operators and see in an instant which processes and/or risks mitigating activities are improving and/or diminishing the ROKC. With such a high level of transparency strategic decision-making becomes much simpler and clearer for all stakeholders. This includes deciding to allow other economic actors to use the Key Component, see that a new Key Component has evolved within the business and spin it off, and most importantly when it is time to find a new Key Component.

Property & Power

Is it naivety or are most of us asleep in the wheelhouse? I don’t know for sure but I am concerned. What is so difficult about remembering that property is at the base of all power? It has been so since man started living in settlements and nothing has changed for around 10,000 years.

Sure, the needs of many are satisfied without property. Well, in many countries anyway. But does that mean we should fall asleep on our laurels?! Does that mean it is okay to aquiesse to anything those with power want?! No!

The basic premise of any business is ownership or control of assets that provide a competitive advantage. The ROKC method explicitly recognizes this historical fact and builds upon it. However, even belief systems recognize this fact. Most belief systems are road maps to help individuals understand how to be who they are. To be their specific and individual self. Why would we give that away?

This week, I have been reading Jaron Lanier’s Who Owns the Future with a certain amount of frustration. The primary source of my malaise is the degree to which he echoes my own thoughts and conclusions, some of which have been expressed on this website. The second source is Lanier’s inability to put a framework around all his observations which go all over the place. If Lanier stopped and focused on the relationship between property and power all would become much clearer to him and his readers.

Businesses exist to convert abundant and cheap resources into products valued by their clients. It makes no difference if the resource is land, a machine, an ore, or the individual expressions of millions of people using social media platforms or the computing power needed to analyze all that data. As long as their is a market someone will devise the means to use that resource. Even the converse is true. People will come up with a way to use the resource and then convince as many people as possible of its intrinsic value, some of whom will buy into it.

Just as we have done in the past, either legislation – or armed struggle – will be employed in order to control and mitigate the exercise of power that comes with the concentration of power that new technology brings. Any other solution does not exist. Or, to be more precise, is not part of man’s common experience.

So let’s stop the nonsense and kick our legislators collective butts to pass laws that protect our most basic and fundamental personal property, who we are.

OK. Now my rant is over. I can go on to finish Mr. Lanier’s book.

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.

In business, 1+1 does not equal 2

When we are in elementary school, our teachers tell us 1+1=2 and that makes sense to us. We can count on our fingers and toes, counts beads, count friends, whatever we do we come up with the same result. It is a tangible and consistent result. In the same way, 2+2=4. No matter what we do we always come up with the same result. This is great because no matter who you are or where you come from we can all agree on this facts: 1+1=2.

However, from a business perspective this is not true. Business people don’t even want this to be true. For people in business 1+1 equals any number you want as long as it is at least 2.

I know, this sounds absurd. It isn’t. Just don’t tell my elementary school teach, or my accountant. Here is why.

Business is about creating value for your customers. Whatever activities the business engages in each one of them seeks to be greater than the sum of the parts. How much greater is question of perception.

How much does 1+1 make in your business?

Key Components Need to be Defendable

We recently began working with a not-for-profit to help them identify their key component and better structure their organization for future growth. Although it seemed clear to us education is the core business, when we started speaking with those involved in the business a competing idea came to light: community. Which one is the true key component? Why do some members consider community – not education – to be key component?

First and foremost, let’s remember that a key component is an asset the business owns or controls and that provides a competitive advantage in the market in which the business operates. Education can meet these criteria if the business owns or controls the educational content for that market and it provides a competitive advantage as compared with substitute educational content. Community, on the other hand, in and of itself is more difficult to consider a key component because no one can really own a community.

The second most important criteria is defendability. A key component once identified needs to be defended and protected from any diminishment in value. The law, through property laws, and insurance, through financial instruments, provide such protections. Educational content can be defended. Community cannot.

Based on this point of view, it should be clear education and not community is the key component of this organization. So why do some people think it is community? Quite simply because the education that is provided by this not-for-profit serves to foster a community.

Disruptive Company Mythology

Disruptive companies are a journalistic myth attributed to those businesses that devise a business model that extends an established market to a encompass a segment that could not be satisfied through the traditional model. I call it a myth because once the business scales up to compete with status quo economic actors the legislative and regulatory rules by which the latter operate are imposed drastically increasing the cost of doing doing business, thus making them uncompetitive.

AirBnB, Uber, Aereo,… Are all challenged by entrenched players who have built and who defend their companies based on legislative and regulatory norms. If these disruptive upstarts want to play in their market then they must play by the rules.

To date, there is no disruptive business that has truly influenced the cost of doing business at scale. Nor will they.

#1 Conceptual Business Challenge

What is the #1 conceptual business challenge in the world? Yes, in the world.

Based on over 20 years of experience and study, it is safe to say, the most significant – #1 – challenge encountered by businesses as small as start-ups and as large as Fortune/Global-size multinationals, across industries, is their almost uniform inability to conceive of their business as being based on an asset they own or control. We call this asset the “key component” but it is also known as the “means of production”, “working on your business and not in your business” and so on.

It really makes no difference what business you are in, you must have an asset, make an asset, control an asset, that is the bedrock of the business. For hundreds, if not thousands, of years, man has created a whole body of works all based on property. There are thousands upon thousands of pages generated by each countries legal system detailing what is property, and the rights and obligations that go along with it. There are scholarly works on the subject. Whole disciplines have evolved to understand, analyze, interpret, and recommend actions based on property. Wars have been waged over property. Governing bodies in distant lands toppled and/or imposed over it. People have been imprisoned because of it.

Why would any entrepreneur or business person develop a business that did not avail itself of the protections afforded by this rich heritage? No serious one would. And yet, so many, many, many decisions are made every day without keeping this very basic conceptual framework in sight! Millions upon millions of dollars, euros, rupees, what have you, are wasted every day by decision-makers who forget this.

It is very simple: Would you build your family’s home on someone else’s land? No! The land owner would put you and your family out and seize the nice home you built. So why do that in business? You shouldn’t. Stop it!

The Return On Key Component methodology helps you develop and use this bedrock conception of business so you make the right the decisions about your business. The ROKC approach is based on the historical record and empirical facts that cut across industries and business size. Buy the book today. Download the presentation or cheat sheet. Contact us. We are here to help you be successful.

Bored of Directors?

Do you look forward to your Board meetings? Are they insightful, productive, and inspiring? Or are they more of a distractive obligation?

Your Board should be your greatest asset. If not, you need to take responsibility for it, and then act to transform it. By following these recommendations, you will create and unleash an asset that will better serve your shareholders, executive team, company, and career.

First of all, the composition of your Board needs to reflect the company that you want to become, and not the company that you are or once were. As just one example, if you are striving to transform your company into a multinational, your Board should be comprised of a mix of people that collectively possess the needed range and depth of perspective, experience, and professional contacts to do so.

Secondly, Board membership needs be viewed as analogous to a relay race, but too often it is viewed more like academic tenure. Different skill sets are required to take your company from zero to $1 million, from $1 million to $10 million, from $10 million to $100 million, and so on. Or from a distribution to a product company. Or, once again, from a domestic to a multinational company. Welcome all growing pains and adjust accordingly. Your Board needs to view its expected handing off of the baton as a great milestone achievement for them, and a confirmation of a relay race stage well run.

Thirdly, your Board needs to be one that works and is held accountable. Too often Board meetings are an exercise in “pop in” governance in which management tries to prove to the Directors that it is executing as well as is possible, while in turn the Directors try to prove to management and each other that they actually add value to the discussion. Although governance is an important function, it is also only a small fraction of what your Board is capable of contributing.

Instead your Board needs to be actively engaged in true corporate development. While you are focused on effectively executing the agreed upon strategy and delivering the expected operating results, who is thinking about the best outcome for your investors, such as a liquidity event? Who is actively developing the pipeline of potential acquirers? Who is thinking about how to achieve and maintain a readiness for a strong valuation? Or is thinking about how to avoid any operational decisions that will complicate a future due diligence process? Or is ensuring that you will have timely access to the necessary flow of capital? Or is opening up executive level doors for your company as you pursue business development opportunities? (You are not trying to do all of this yourself, are you?)

Having a working Board means that your Directors are actively contributing value between meetings and in areas that you the most need help with. And it means that during a Board meeting your Directors are also reporting on their achievement of their corporate development commitments. In other words, all parties are contributing to shareholder value and are accountable to each other for doing so.

Fourthly, if you want to attract the best of the best to your working Board, compensate them accordingly. I am not referring to insiders or investor representatives who are already compensated elsewhere, but to independent Directors that you need to attract in order to build the company that you envision.

Highly successful people think about opportunity cost. If you want to secure the services of highly engaged, experienced, skilled, and connected Directors, do not approach them as if you neither understand nor respect the value of what you are asking them for, as if you are somehow entitled to their pro bono support. Instead appreciate that you are competing against alternative uses for their valuable time and effort, and act accordingly.

In business, most people do not properly value what they do not properly pay for. As a rule, include a material cash component in any Independent Director package because “cash is king” and reflects the priority and value that you place on having a truly productive, working Board. If you do not, then what caliber of independent Director do you expect to attract?

And lastly, properly manage your Board! Think of your working Board as a new sports car that requires skill and attention to extract the performance it is capable of delivering. Fully exploit the opportunity presented to you by this collection of talent, experience, and connections. A thoughtfully composed and managed Board is an opportunity for you to listen, learn, lead, enjoy, and thrive. If you are willing to invest the necessary time, effort, and resources to create and maintain a truly productive, contributory Board, you will improve your odds of a successful outcome for your investors, company, and career.

And isn’t that what you really want?

Reposted with the permission of David Guinther. Originally posted on December 11, 2013 on Threadian.com.

Scroll Up