[MUSIC] Let's wrap up Module 5. In doing so, I want to take a few minutes to do some important things. Number one, I want to say a few words about the difference between markets and industries, which lies at the heart of many of the flash sales' failures, I believe. Number two, I want to examine the circumstances under which I think a Zara like scarcity model could work for you. I want to suggest some optional reading as always, and I want to give you an assignment to help you identify a scarcity business that might work in India and perhaps by analogy in the place where you are. So let's get started. In my first book, The New Business Road Test way back in 2003, I developed a framework. A framework for effectively assessing entrepreneurial opportunities in a disciplined and thoughtful manner so you don't miss things that could kill you. After all, you might as well invest your entrepreneurial time and talent in a business with a good chance for success. Rather than in a no hoper. Now, there are couple of lessons therein that I think shed some light on this flash sales fiasco that we've seen. The first of those lessons is this. Markets and industries are different things. Markets consist of customers, people you hope will buy your stuff. Industries consist of competitors, those who are going to sell other things like you're going to sell. But entrepreneurs and often investors as well get these two things confused. And they get mesmerized by the large and fast growing markets they think about serving. And they forget to ask whether the industry is attractive, it's an important point. So here's the framework. As you can see, to assess an opportunity you want to know some things, you want to know where are the market is attractive both from the 30,000 foot level, the Macro Level as I call it. And in terms of the particular market segment you've identified kind of one costumer at a time, are those costumers likely to buy your stuff and if there's some evidence they will do so. Back in 2008, when all the VC money began flooding into the flash sales industry, the market was large and growing very fast. So you tick the upper left box. And recession battered consumers were thrilled to find fashion apparel online at fantastic pricing. So you tick the bottom box too on the left-hand side. Thanks to the scarcity models, it gave them the customer's cash up front and paid the vendors later. The VCs loved and continued to love these flash sale businesses because in the long run they'd be very capital efficient. And that's something most VCs would like to find more of. You heard that from Bruce Golden earlier in this MOOC. So there was lots to like here on the market sign, but what about the industry? At the macro level, industries are attractive. That is most companies in them make good money when the following tests hold. There attractive when their high barriers to entry to keep competitors out. But in flash sales in apparel anybody could enter if they had a cousin in the apparel business and could build a website. Big problem there. They're attractive when there's a low threat of substitutes. But of course for apparel there are many other ways to buy apparel. Not so good here either. They're attractive when suppliers have little power to squeeze you. The supply of close-outs in the apparel industry is scarce in better times, so that's not good either. They are also attractive when buyers have little power to squeeze you. Now, this one's probably neutral, but, of course, competitors online are only a quick trip to the shopping mall or a click on the Internet away. And then, number 5, they're attractive when rivalry is low. That is, all the players in the industry aren't trying to kill each other. And here, flash sales merchants competed vigorously to get the insufficient supply of close-outs. The result is this has been a very tough industry in which to compete. And everybody missed it. Now at the micro level, industries are attractive when a company can build some kind of sustainable competitive advantage and a viable business model so they don't run out of cash. The first of those things means having patents, or unique capabilities, or brands and things like that. So here, there was a good business model. Because the customers were paying up front. But, otherwise difficult. Nothing proprietary really, to keep anybody out. There are also, as you can see, some issues related to the entrepreneurial team in the framework. But they're not the real problem here, for at least some of the players. Especially, Vont Prede had great management teams. They had been dealing with close outs in Paris for many years. So what have we learned here? Well, the first lesson learned is that markets and industries are different things. An important take home. The second thing, is that life is going to be difficult in an attractive market that attracts a lot of venture capital, especially, where it's a brutally unforgiving industry. Made even more difficult by all the capital flowing in. So it shouldn't come as a surprise that there had been virtually no exits in the flash sales category. Zululilly is about the only one I could find, and these companies, some of them vastly overvalued are among what some VCs are now calling dead unicorns. High notional values, but really they're dead. Sadly, I find this to be a common error, falling in love with a market and forgetting to ask whether the industry is one in which you'd like to play, a critical issue. The other common error I find is examining only the macro level of issues, the stuff in the top left of the chart. Lots of information about trends, market size, industry analysis, all that and forgetting to ask the critical question whether the customer will buy your stuff. Really? Is there evidence here? Is there a real problem here? And on the right-hand side, whether there's any source of sustainable competitive advantage. Otherwise, all you're doing is asking some company to come eat your lunch after you prove the model. Now, I'm going to provide Chapter One of The New Business Road Test for you at no cost to the end of this module in case you'd like to learn more about this approach to assessing the opportunity that you may have in mind. Now, with this assessment under our belts, are there any circumstances in which Zara likes scarcely remodels might be able to work for you? Well, here's my guess. Maybe in brick and mortar retailing or e-commerce. Maybe in low labor cost markets where you can control your supply chain and go from design to store quickly and produce locally. That's what Zara does. Maybe in categories where there's rapid fashion change or trendiness. Apparel, accessories, maybe some health and beauty categories. And maybe where suppliers are fragmented, not concentrated. And where the local distribution channels in the category are fragmented as well. So maybe places like Turkey or India or China or Africa, maybe those are places where this kind of stuff will work. Scarcity is endemic there as we know. So we'll see. And if one of you figures out how to do this in one of those markets, please let me know. So what about optional reading in the scarcity arena? My suggestion is that you read New Business Road Test chapter one, which I'll give you free to download here. That's going to give you some fundamentals you need. Now, let's get ready for one more assignment. Here's what I would like you to do. I'd like you to download the app of a company in India called Myntra.com. That's spelled M-Y-N-T-R-A, Myntra.com. It's an Indian provider of lifestyle products. I'd like you to explore the site so you can see what they sell. You can log on there. And then, I'd like you to log on to a PWC report that was done recently on e-commerce in India. It's a great story of how e-commerce is evolving in India. And using the market and industry portions of the seven domains framework to structure your analysis, I'd like you to write a two page report, no longer please, on whether you believe a scarcity apparel retailer like Zara. Or a flash sales apparel retail like Vont Prede is or is not an attracted opportunity is start in India today. And then, of course, submit it in the usual way. If you’re not doing this course for credit, I suggest you do that work as well. So we're now done with Module 5 on Scarcity Models. We're going to turn to Module 6 where we'll tackle Service to Product Models. And we're going to meet the person who I think is the poster child for this entire MOOC and the entire customer funded phenomenon. He started a business called GoViral in Copenhagen in 2003 with no investment and sold it nearly 10 years later for nearly a $100 million without raising any VC a long the way. It Is quite a story, you're going to love it. You'll find a short version of it in the Customer Funded Business chapter seven which those of you who are reading along, might want to read next. In a couple of seconds, you're going to find a closing slide to help you reflect on what we've done in this module. After that, I look forward to seeing you for module six. For those of you in service businesses, this next module may well be the spark that transforms your business. I'll see you there. [MUSIC]
