Tony Hsieh CEO for Zappos Culture and Support Systems Discussion Paper Think about what the CEO of Zappos, Tony Hsieh, was trying to do. Use the questions

Tony Hsieh CEO for Zappos Culture and Support Systems Discussion Paper Think about what the CEO of Zappos, Tony Hsieh, was trying to do. Use the questions below as a guide to explore this case:What was at the center of what Hsieh sought to achieve, and why did he feel this would benefit the company?If you were the CEO of Zappos, what leadership style would you use and why?How would this leadership style complement the culture you want to create?How important are structural support systems in making sure that change initiatives are sustainable over time? IN1249
Tony Hsieh at Zappos:
Structure, Culture and Change
Winner
“Human Resources Management / Organisational Behaviour” category
The Case Centre Awards 2018
03/2018-6181
This case was written by Noah Askin, Assistant Professor of Organisational Behaviour, and Gianpiero Petriglieri,
Associate Professor of Organisational Behaviour, both at INSEAD, with the assistance of Joanna Lockard. It is intended
to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation. It has benefited from the advice and insights of INSEAD Professors Frédéric Godart and Mark
Mortensen.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.
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March 24th, 2015 began like a typical morning at Zappos. Employees streamed into the online
retailer’s headquarters in Las Vegas, shuffling by the popcorn stand in the lobby, the makeshift
bowling alley between desks, and colleagues dressed as pirates. Once in their personalized
workspaces, they answered the daily “identify a fellow Zapponian” quiz required to log in to
their computers. And then they found a memo from CEO Tony Hsieh in their inboxes. 1 “This
is a long email,” the first line of the company-wide message read. “Please take 30 minutes to
read [it] in its entirety.”
Zappos had been moving towards Holacracy—a philosophy and form of organizing based upon
self-management—for a year now. But Tony felt that the transition was not going fast enough,
and had not been supported with the widespread conviction necessary for such an overhaul.
Therefore, he had decided “to take a ‘rip the Band-Aid’ approach to accelerate progress.” That
approach involved a limited-time offer, as he wrote:
Self-management and self-organization is not for everyone … Therefore, there will
be a special version of “the offer”2 on a company-wide scale, in which each
employee will be offered at least 3 months’ severance (and up to 3 months of
COBRA reimbursement for benefits) if he/she feels that self-management, selforganization, and our Best Customers Strategy and strategy statements as
published in Glass Frog are not the right fit. 3
In order to qualify for the offer, employees had to read the book “Reinventing Organizations”
and watch a talk by its author online. 4 If, after absorbing its message, they remained steadfast
in the intent to leave, they had to give notice by April 30.
One week after the deadline passed, the press was reporting that 14% of Zappos’ 1,443
employees had taken up Tony’s offer. 5
The 210 employees who left included 20% of the tech department. At the time, Zappos was
undertaking a complex migration of its web site, which powered a billion-a-year business, to
the Amazon platform. The project, labelled “Supercloud” and mandated by Amazon, was
arguably “the single largest e-commerce re-platforming in history”. The timely completion of
the transition, scheduled for December 2015, was now at stake. 6
Zappos, which Tony ran and had saved multiple times with his own money before it was
acquired by Amazon in 2009, was regarded as a shining example of a dynamic organizational
culture, lauded as one of Fortune’s “Best Places to Work,” and labelled a potential savior of
downtown Las Vegas. Each of these achievements was now called into question with the
substantial scrutiny and potential disruption generated by Tony’s move.
Tony Hsieh’s Background
Born to what he described as “typical Asian American parents,” 7 Tony Hsieh was expected in
his youth to master four musical instruments, achieve perfect grades, and earn admission to a
top American college. While he met his parents’ demands, Tony’s aspirations differed
considerably. He began to show an interest in entrepreneurship at age 9. His first venture was
breeding and selling earthworms. Garage sales, delivering newspapers, and selling his own
newsletters followed. Most of his business ideas were short lived and failed to generate the
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Copyright © INSEAD
1
returns he hoped for, though he was never dissuaded from pursuing new ventures. While he
was attentive to their financial success, he saw money as a means to an end. As he recalled,
Money meant that later on in life I would have the freedom to do whatever I wanted.
The idea of one day running my own company also meant that I could be creative
and eventually live life on my own terms. 8
In his college years at Harvard, Tony avoided hours of exam prep by crowdsourcing study notes
and selling each collection for $20. He also ran the Quincy House Grille, an eating area in his
college dorm, buying frozen McDonald’s burgers for $1, and then cooking and selling them to
fellow students for $3. Switching to selling pizzas, which required less travel and generated
higher profit than burgers, Tony met Alfred Lin. One of his best and most entrepreneurial
customers, Alfred would buy whole pizzas from Tony and resell them at a profit by the slice in
his own dorm. The two eventually became business partners.
LinkExchange
After graduation, Tony took a job at Oracle, but quickly realized that his generous salary did
not compensate for the lack of challenge. His desire to run a business was stronger than the
appeal of easy money. After a short-lived website design venture, Tony and another friend from
college, Sanjay Madan, created LinkExchange, a network of banner ads on websites. Sequoia
Capital, one of Silicon Valley’s prestigious Venture Capital firms, provided seed funding and
the company took off immediately. Microsoft bought it for $265 million in 1998, only three
years after its launch. Sequoia made $50 million on their $3 million investment. 9
As a 24-year-old millionaire, Tony had time to consider what he had learned from the trajectory
of LinkExchange. In the beginning, Tony and Sanjay had hired friends and friends-of-friends
who wanted to be a part of something special. As the company grew past 100 employees,
however, they had switched to hiring smart people who seemed to be more motivated by money.
Shortly after, Tony recalled, he began dreading going to work.
I was the co-founder of LinkExchange, and yet the company was no longer a place
I wanted to be at. …How did we go from an “all-for-one, one-for-all” team
environment to one that was now all about politics, positioning and rumours? 10
Venture Frogs
In 1999, Tony and Alfred Lin, who had been LinkExchange’s CFO, decided to start an
investment fund called Venture Frogs, the name a product of a friend’s dare. They raised $27
million and begun investing in early stage companies.
Meanwhile, Tony bought a brand new loft above a movie theatre. Here, together with exLinkExchange friends, he hosted a tight community that he referred to as a tribe. In addition to
incubator space for Venture Frogs, Tony later purchased the building’s 325 square meter (3500
square foot) penthouse solely to facilitate frequent and large gatherings of close friends.
The connectedness we felt was making all of us happier, and we realized that it was
something that we had all missed from our college days…. I made a note to myself
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2
to make sure I never lost sight of the value of a tribe where people truly felt
connected and cared about the well-being of one another. 11
Tony’s understanding of the nature of connectedness had started at a rave where, he recalled,
The entire room felt like one massive, united tribe of thousands of people, and the
DJ was the tribal leader of the group. People weren’t dancing to the music so much
as the music seemed like it was simply moving through everyone…It was as if the
existence of individual consciousness had disappeared and been replaced by a
single unifying group consciousness…everyone in the warehouse had a shared
purpose. 12
Ten years later, combining personal insights with the study of scientific research, Tony would
assert his conviction that “the combination of physical synchrony with other human beings and
being part of something bigger than oneself leads to a greater sense of happiness.” 13
Zappos: The Early Years
Following a frustrating shoe shopping experience in the late 1990s, Nick Swinmurn was struck
by the idea of an online marketplace where people could find and purchase any shoe they could
possibly want. Swinmurn pitched his idea to Venture Frogs in 1999, explaining that footwear
was a $40 billion industry in the US. Mail-order catalogues accounted for 5% of the market,
but no serious player had yet emerged online that offered a large selection, or an experience
that was superior to visiting a brick-and-mortar store.
Venture Frogs invested $500,000—enough to try to grow the business to a size that might catch
the attention of a large venture capital firm. Fred Mossler, a Nordstrom sales associate, joined
the company to handle the commercial side, and the online store was dubbed Zappos, an
adaptation of the Spanish word for shoes, zapatos.
In October 1999, Zappos began “drop ship” relationships with manufacturers. It forwarded
customers’ online orders to each brand, which would in turn ship the shoes directly to the
customer. Zappos did not generate much profit at first, but made progress fast enough that Tony
decided to introduce the founder to Sequoia. In spite of the positive indicators and Tony’s
endorsement, however, Sequoia decided not to invest.
Swinmurn pitched to other VC firms to no avail, and eventually found himself with five days
left before Zappos would run out of cash. As employees packed their desks, he received a call
from Tony: he and Alfred had decided to make an exception to Venture Frogs’ strategy of
making only one angel investment per company. They would give Zappos another $1.1 million
to help it keep trying to secure more funding. Tony regarded the founders as
passionate and determined, and they don’t seem like they’re doing this just to get
rich quick. They’re actually interested in trying to build something for the long
term. 14
The Zappos team moved into the Venture Frogs incubator, and Tony joined the company as coCEO in May 2001. By the end of 2001, the business had grown to $8.6 million in gross
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3
merchandise sales. In 2003, as the company reported $70 million in sales, Tony became sole
CEO and Swinmurn took the role of chairman.
In the process, Tony cultivated Zappos’ “fun and a little weird” culture. He kept things casual—
wearing jeans, sneakers, and a Zappos T-shirt or hoodie each day. He preferred to greet others
with a hug rather than a formal handshake. 15 He communicated in a casual format, writing
emails with bullet points and ignoring capital letters and punctuation.
While he continued hosting frequent parties and gatherings with his “tribe” that now included
fellow Zapponians, Tony spoke quietly and with little inflection. In a group, he attracted little
attention to himself and often sat on the sidelines, enjoying the company of people who were
more outgoing than he was. He lived alone, but he regularly filled his five guest rooms with
friends, business associates, and people he met travelling. 16
In contrast to his reserved physical presence, Tony was one of the first CEOs to embrace Twitter
and develop a large following on it. He believed the micro-blogging platform provided an
opportunity to make users happier because of its transparency, and allowed him to build closer
connections to Zappos’ customers and employees. As he put it,
What I found was that people really appreciated the openness and honesty, and that
led people to feel more of a personal connection with Zappos and me compared to
other corporations and business people that were on Twitter.17
Growing Pains
As sales continued to grow, the company set up a warehouse in Kentucky to carry its own
inventory. Fred generated new business with dozens of brands, establishing Zappos as “the
Amazon of shoes”. Delighted customers received their order within a couple of days. However,
profits remained very low and the company continued to struggle for cash.
To keep the momentum going, Tony and Alfred invested the remaining Venture Frogs fund in
Zappos, and Tony cut his salary to $24 a year. He housed employees in his loft without charging
rent, and sold his real estate to put the proceeds into Zappos. Eventually, he sold the loft too, at
a loss, to keep the company going. “In my heart,” he recalled, “I knew it was the right thing to
do. I believed in Zappos, and I believed in Fred.” 18
To help make the company profitable faster, Tony cut most marketing expenses and focused on
increasing repeat purchases with existing customers, hoping that word of mouth would sustain
the company’s growth. This strategy relied heavily on its call centre customer service
representatives, the principal point of contact for all customers. Finding people committed to
these positions in San Francisco, however, proved to be a challenge. Tony briefly considered
outsourcing the function, but ruled it out on the basis of a lesson he had learned dealing with
warehousing problems: never outsource a core competency.
Tony decided instead to move Zappos near Las Vegas, a city where he hoped to find a larger
pool of customer service-oriented talent for its growing 24-hour call centre. The majority of
Zappos’ San Francisco-based employees chose to move with the company and found
themselves, like Tony, with few friends in Las Vegas outside the Zappos “family”.
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4
Once the company settled in its new location, Tony focused on improving the customer
experience, strengthening Zappos’ culture, and investing in employees’ hiring and
development. Sales continued to grow, driven primarily by repeat customers. When they
reached $184 million, in late 2004, Sequoia finally invested $20 million in Zappos.
A Customer-Centric Strategy and a “Weird” Culture
Having led it out of the doldrums, Tony kept Zappos focused on its strategy of “WOWing”
customers and treating vendors with respect. Zappos’ employees were fanatical about service,
constantly seeking to surprise, amuse, and engage customers. Four million pairs of shoes were
stored in the Kentucky warehouse, which was next to a UPS hub. The set-up enabled Zappos’
free-delivery policy; orders were guaranteed to arrive within 4 or 5 business days. Customer
service representatives often chose to offer repeat customers free next-day delivery. Zappos
also instituted a 365-day free returns policy, and returns were more than a third of gross
revenue. 19 The “please at any cost” attitude ran through every interaction. As Tony recalled,
Some customers order as late as midnight and get free delivery by 8 o’clock the
next morning. People ask me if it is expensive to do that. It is very expensive. But
we are willing to invest to create a ‘wow’ experience that generates customer
loyalty. Our whole philosophy is to take most of the money we would spend on
marketing, put it into the customer experience, and let word of mouth be our true
form of marketing. Repeat customers buy more and become our best advocates.”20
Tony believed that a customer who called the company was worth five to six times as much
over the course of his or her lifetime as one who ordered online. 21 Unlike the majority of online
retailers, Zappos encouraged its customers to communicate with it by telephone, placing its tollfree number at the top of every page on the web site, and stressing the company’s desire to have
personal interactions with anyone interested.
Zappos did not adhere to common call centre performance management norms. There were no
incentives to get customers off the phone quickly, no scripts provided, and no upselling
encouraged. Tony emphasized developing “personal emotional connections” with each caller.
He wanted call centre representatives to be authentic on the phone and to build a genuine
relationship with each customer. Reps, for example, were trained to visit competitors’ websites
if a customer asked for a Zappos product that was currently out of stock.
Similarly, Zappos’ vendor management strategy diverged from industry norms. Vendors’ calls
were answered the same day, their emails within hours. Zappos employees would meet vendors
at the airport when they flew in to visit, and invited them to play golf the last Friday of every
month. 22 The company also created an “extranet” to give them complete visibility into sales
and merchandising metrics. Alfred Lin explained,
They can write suggested orders for our buyers to approve. They can communicate
with our creative team and make changes to their brand boutiques on the site. Why
do we do this? The average buyer at Zappos has a portfolio of 50 brands, but
because of transparency, there’s an additional 50 pairs of eyes helping run the
business too…. No one buyer knows a brand better than the brand’s own
representative. So why not leverage their knowledge to help us run better business?
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5
As a result, when they feel empowered to manage their own business using the tools
and accessibility we provide, they’ll spend more hours helping us than their typical
account. 23
Zappos’ culture became even more important to Tony after the move to Las Vegas, and he put
increasing emphasis on hiring and rewarding people who were motivated to be more than just
Zappos’ employees, but people who enjoyed hanging out with other Zapponians. He favoured
the term “work-life integration” above “work-life balance,” 24 reflecting the belief that the two
could be enjoyably inseparable given the right conditions and the right people.
Zappos was as an intense workplace where an employee could suddenly break into dance on
the table during a meeting. 25 Employees, referred to as “members”, were encouraged to be
themselves at work. They decorated their workplace with streamers and quirky memorabilia,
and the style was casual at all levels. 26 One described the scene as follows:
Everybody here was so happy. They were so invested in this company. You could
see it, and you could feel it. I was floored. I was sceptical, but I knew there had to
be something special here for people to behave that way…. You can wear pajamas
or bunny ears to a meeting and be taken seriously—actually, they’re more
responsive to you. 27
To reinforce the Zappos culture, members were asked to define what it meant to them. New
hires received a book of the collected responses. The book gradually grew to include those of
customers, partners, and vendors and eventually became publicly available. Tony said,
We believe that your company’s culture and your company’s brand are really just
two sides of the same coin. The brand may lag the culture at first, but eventually it
will catch up. 28
Zappos took pride in being transparent and opened its doors to anyone: the public, …
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