The rosette is a decorative circle around the sound hole. You could make a guitar without a rosette if you were going for a very minimalistic approach, and indeed some makers do this. But most luthiers enjoy using the rosette to make a little artistic statement on the front of the guitar. The rosette doesn't really provide any structural support because on the underside of the top, there will additional sound hole reinforcement.
Some basic rosettes are just small strips inserted into grooves cut in the top of the guitar, while other rosettes are made separately and then mounted into the top. I tend to follow the latter approach.
I make my rosettes by using a dremel tool with a fine cut bit mounted to a radius tool anchored on a pin centered in the middle of the guitar top or the piece of wood that's going to be used for the rosette. In the example below, I added an inlay of paua abalone and little black and white strips (called perfling) to the edges.
I then used the circle cutting tool to make a place in the guitar top for this rosette to sit.
The new rosette is glued into place and clamped over night. I then scrap and sand it so it sits flush with the guitar top.
Once the rosette is glued in place, I use the dremel to cut the sound hole.
Bracing the top and back.