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.