Want to be very profitable? Then what’s your problem?

Very, very profitable businesses are those that work out how to solve a major problem pertaining to their industry. These are the businesses that tackle the problem head on and make it go away rather than do what everyone else does, which is usually to manage around the problem.

One of my favourite examples is the fast-fashion giant Zara.

A big problem for the fashion industry is that we consumers (especially us ladies) are fickle. We change our minds and don’t buy what we are expected to. The impact: retailers have to heavily discount inventory to sell it resulting in low gross margins and shocking bottom lines.

In the fashion world designers are creating our ‘look’ up to a year in advance, the factories in China are making our ‘look’ at least six months ahead of season and retailers are ordering their merchandise for our summer ‘look’ in the middle of winter.

It’s not surprising then that retailers often get it wrong. The predicted ‘hot’ item turns out to be not that hot at all and the retailer is left holding a bunch of stock that nobody wants. Roughly 25% to 50% of all fashion clothes are sold at a massive mark down.

So low gross margins are a big problem for the fashion industry.

But not for Zara.

Zara do what is called “fast-fashion”. Zara designers select items from the catwalk and looks from the street, and create ‘Zara versions’, Zara get them made up in European (yes European!) factories and have them distributed to their stores within two weeks. So everything that is on display in Zara is current fashion. And guess what, it sells!

Zara has higher direct costs than its industry counterparts (manufacturing in Europe isn’t cheap) but has such low write-downs that overall Zara margins are way superior.

Zara solved the unsolvable problem.

So how do you work on solving the problem for your industry?

First of all you need to determine what the problem in your industry is. While this just sounds like commonsense, the truth is that we largely accept the problems – the big costs to our businesses – and put our efforts into tactics to manage around them.

Armed with the problem, you then need to think, think, think about the issue.

Do you need to be a genius to solve these types of problems? I like to think not. In fact, I believe we can take a tip from Albert Einstein, who said, “It’s not that I’m so smart, it’s just that I stay with problems longer”.

And I think that’s the issue. Even when we are clear about the problem we simply don’t spend that long thinking about it. Instead we rather assume that it is unsolvable.

So if we articulate the problem and make sure that everyone in the business understands it, if we put it on the agenda for every meeting and make it the subject of lots of conversations, then maybe we can be the Einstein or Zara of our industry.

So today’s question is: What is the problem that you are going to think about solving and critically, how are you going to keep it top of mind?

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business”  and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).