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case study

Read the “Zappos: Stepping Forward in Stakeholder Satisfaction” case

Write a four to six (4-6) page paper in which you:

1. Analyze the manner in which Zappos’ leadership has fostered a culture of ethicalness in the company. Suggest two (2) actions that other companies can take in order to mimic this culture.

2. Determine the major impacts that Zappos’ leadership and ethical practices philosophy have had on its stakeholders.

3. Examine three (3) of the ethical challenges that Zappos faces. Recommend three (3) actions that Zappos’ leadership should take in order to address these ethical challenges.

4. Evaluate the effectiveness of the core values in relation to developing a culture of ethicalness. Determine the manner in which the core values support the stakeholder’s perspective.

5. Analyze the major ethical challenges that Zappos has faced. Determine whether or not you would have resolved these challenges differently than Zappos’ management. Provide a rationale for your response.

Need at least three (3) quality academic resources in this assignment. Note: Wikipedia and other similar Websites do not qualify as academic resources.

Zappos is famous for its relaxed and wacky atmosphere. Employee antics include nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters fea- ture an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “reply-all” hat when they accidentally send a company-wide email. This environment isn’t just fun; it’s also strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.” Hiring and Training The key to creating a zany work environment lies in hiring the right people. The job appli- cation features a crossword puzzle about Zappos and asks potential employees questions about which superhero they’d like to be and how lucky they are. They may also check how potential employees treat people like their shuttle driver. Zappos is looking for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure their character fits with a high-integrity company. However, even Hsieh admits finding great employees is tough. He believes pur- suing too much growth at once harms the company if the organization starts caring more about the quantity of new employees rather than the quality. All new employees attend a five-week training program that includes two weeks on the phones providing customer service and a week filling orders in a warehouse. To make sure new employees feel committed to a future with the company, Zappos offers $2,000 to leave the company after the training (called the “The Offer”). Amazon has adopted a similar practice. Even after the initial training is over, employees take 200 hours of classes with the company—covering everything from the basics of business to advanced Twitter use—and read at least nine business books a year.

Another aspect of Zappos that is unique is the benefits it provides to its employees. The company has an extensive health plan that pays 100 percent of employee medical benefits and on average 85 percent of medical expenses for employees’ dependents. The company provides employees with dental, vision, and life insurance. Other benefits include a flexible

Along with the extensive benefits package, Zappos developed a compensation model for its “Customer Loyalty Team” (call center representatives) that incentivizes employee development. At Zappos the goal is to answer 80 percent of customer inquiries within 20 seconds, although employees are encouraged to take the time needed to ensure quality ser- vice. Initially, employees were paid $11 per hour for the first 90 days. After 90 days, the employee moved to $13 per hour. To move beyond $13 an hour, employees had to demon- strate growth and learning by completing specific skill set courses that allow employees to specialize in certain areas of the call center. Employees were given freedom to choose the shifts they wanted based on seniority. Although the reasoning for Zappos’s compensation model is to motivate employees and promote personal growth, the base pay was less than the national hourly average of $15.92 earned by call center

representatives. Zappos determined that the pay structure and the process for employee shift sign- ups were inefficient for the company’s needs. With Hsieh’s encouragement the company adopted scheduling software called Open Market. Under this new system, call-center employees would be given 10 percent time flexibility to pursue their own projects. Employ- ees could decide when to work, but the compensation system was revamped to mimic the surge-time pricing of popular ride-sharing service Uber. With this compensation system, call-center employees working during periods of high demand would receive higher pay. In other words, Zappos’s hourly compensation for its call-center employees would be based on demand. Zappos hopes to expand this system to all departments eventually. For senior- ity-based jobs, this system holds risks. For instance, seniority-based incentives also take into account company loyalty, camaraderie with coworkers, and dedication that are also important to work productivity. However, Zappos believes the system works well for its call-center employees because many employees are employed for shorter perio

Work-Life Integration

One of Zappos’s core values is “Build a positive team and family spirit,” so the company expects employees to socialize with each other both in and out of the office. In fact, man- agers spend 10 to 20 percent of their time bonding with team members outside of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says this increases efficiency by improving communication, building trust, and creating friendships. Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees com- pile an annual “culture book” comprised of essays on the Zappos culture and reviews of the company. The culture book helps employees think about the meaning of their work and is available unedited to the public. This is based on the principle of transparency. As with its customers, the foundation of Zappos’s relationships with its employees is trust and transparency. The company wants its employees, like its customers, to actively discuss any issues or concerns that come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes “the best way to have an open- door policy is not to have a door in the first place.” Zappos’s management is open with employees by regularly discussing issues on the company blog. However, this positive work environment comes with the expectation employees will work hard. Employees are evaluated on how well they embody the core values and inspire others.

Zappos’s New Structure

In 2015 Tony Hsieh made a controversial decision to completely change the structure of the organization. For the past year the company had been transitioning toward an orga- nizational structure that abandons the top-down managerial hierarchy in favor of a redis- tribution of power. Called a Holacracy, this organizational structure places empowerment at the core of the organization. Employees become their own leaders with their own roles. To be effective, a Holacracy requires periodic governance meetings where each employee understands his or her roles and responsibilities. Teams hold tactical meetings to discuss key issues. While governance meetings focus on clarity and role structure, tactical meet- ings are used to “sync and triage next actions.” It is believed that this distributed authority increases clarity and transparency and decreases cognitive dissonance by recognizing ten- sions before they become a problem. As Zappos continues to grow, there is a risk its expansion will make it harder to man- age employees and control productivity. Hsieh cites statistics that demonstrate how growth often causes innovation and productivity per employee to go down. However, he also claims that when cities double in size, productivity and innovation per resident increases by 15 percent. Hsieh believes the key to sustainable growth at Zappos is to operate more like a city than a business. This is why he decided to restructure the organization. He feels the best way to handle growth is to become a Teal organization, starting out by using the Holacracy structure and evolving from there. In his book Reinventing Organizations, Fré- déric Laloux uses a color scheme to describe the development of human organizations, with Teal being the highest. The concept of a Teal organization is based on three premises: self-management developed through peer relationships, involving the whole person in the work, and allowing the organization to grow and adapt instead of being driven. A Teal organization is structured under the premise that all units will work “together to support the whole.” For Zappos this involves adopting a new structure promoting self-organization and self-management. The transformation of Zappos’s organizational structure started off slowly. However, Hsieh believed this slow transition hindered the company’s transformation toward self- organization and self-management. He therefore sent an email to all 1,500 employees to inform them the organization was going to take immediate action to transform Zappos into a Teal organization. This involved eliminating bosses and the traditional functions of finance, technology, marketing, and merchandising to create task-oriented circles struc- tured around specific businesses. Managers became employees and no longer engaged in traditional management functions, although their salaries stayed the same throughout 2015. Hsieh handled the email carefully, making sure to praise traditional managers for their past contributions but stating they are no longer required for a Teal organization. He real- ized there would likely be much resistance from managers and other employees who did not agree with the new system. To address these concerns, Hsieh extended “The Offer.” Zappos agreed to provide employees who wanted to leave severance pay for three months. Approximately 14 percent of employees chose to take the package,

Philanthropy

Zappos is involved in a variety of philanthropic efforts. Programs include donating shoes and gifts as well as giving gift cards to elementary school students. Zappos donates money to organizations such as the Shade Tree, a nonprofit that provides shelter to women and children, and the Nevada Childhood Cancer Foundation. The company even partnered with Britney Spears to hold an event at the zoo to raise money for the foundation. Zappos also has a donation request application available on its website.

Sustainability

Zappos started a campaign to improve the company’s impact on the environment. A group of employees created the initiative, known as Zappos Leading Environmental Awareness for the Future (L.E.A.F.). The campaign focuses on several environmental efforts, includ- ing a new recycling program, community gardens, and getting LEED certification for the company. For instance, Zappos created an annual children’s art contest that awards prizes for the best drawing involving a recycling-based theme. The winner was awarded a $50 Zappos.com Gift Card. Like the rest of the company, L.E.A.F. is open, with its progress posted on its Twitter account and blog. Another area on the company’s blog is a section on “Eco-friendly Products.” Here, the company highlights new products that are organic or manufactured using environ- mentally friendly procedures. The postings also list ways customers can live more sustain- able lifestyles, including tips on how to throw an eco-friendly party and green product recommendations.

Recognition

In addition to being the number one online shoe retailer, Zappos has been recognized for its innovative business practices. The company appeared on several prestigious lists includ- ing Fortune’s “Best Companies to Work For,” Fast Company’s “50 Most Innovative Compa- nies,” BusinessWeek’s “Top 25 Customer Service Champs,” and Ethisphere’s “World’s Most Ethical Companies.” The company continues to get recognized for its efforts in creating an environment and business model that encourages transparency and strong relationships among all stakeholders

Zappos is known for its commitment to its employees, but the company faced hard eco- nomic times that demanded tough decisions. In October 2008, Sequoia Capital, a ven- ture capital firm that was a controlling investor in Zappos, met to discuss the problems presented by the economic downturn and its effect on their portfolio companies. Sequoia Capital instructed Zappos to cut expenses and make the cash flow positive. As a result, Hsieh made the difficult decision to lay off 8 percent of employees. This was not a desired event, but was required by Sequoia Capital. Zappos strived to handle the layoffs in a respectful and kind manner. Hsieh sent an email notifying employees of the layoff and was honest and upfront about the reasons behind the decisions, even discussing the move on Twitter. Employees who were laid off received generous severance packages, including six months of paid COBRA health insurance coverage. Because of the company’s honesty and transparency, employees and customers were more understanding of the tough decision Hsieh and Zappos had to make.

Acquisition by Amazon

In 2009 Zappos was acquired by e-commerce giant Amazon.com. Many Zappos custom ers were confused by the unexpected move and expressed concerns about the future of the company’s culture and customer service. Most CEOs would not feel any obligation to address customer concerns over the acquisition, but Tony Hsieh values the support of Zap- pos’s employees and customers. Shortly after the acquisition, Hsieh issued a statement about why he sold Zappos to Amazon. In the statement, Hsieh discussed the disagreement between Zappos and Sequoia Capital over management styles and company focus. Specifically, Hsieh said, “The board’s attitude was that my ‘social experiments’ might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.” Hsieh and Alfred Lin, Zappos’s CFO and COO, were the only two members on the board committed to preserving the company’s culture. The board could fire Hsieh and hire a new CEO who focused more on profits. Hsieh decided the best way to resolve these issues was to buy out the board,

To bring awareness to the fact Zappos sells more than just shoes, Zappos created a market- ing campaign in 2011 designed to catch people’s attention. The company released several advertisements that featured people who appeared to be naked doing daily activities such as running, hailing a cab, and driving a scooter. The creative advertisements had certain parts of models’ bodies blocked off with a box that said “more than shoes.” The campaign received criticism from several groups because of their “sexual nature.” However, the catch with these ads was that the subjects of the ads were not actually nude; they wore bathing suits or small shorts that were later covered by the box. Because of the negative attention, Zappos pulled the ads and released an apology that explained the pro- duction process. Technical Difficulties Also in 2011 Zappos experienced some technical difficulties that resulted in delays and problems in customers’ orders and shipments. Zappos upgraded one of its processing sys- tems, and in the process many orders were deleted or delayed. Some orders had the incor- rect shipping information, and products were shipped to the wrong location. Although this upset several customers, Zappos handled the problems and reassured customers that it would get them their merchandise as soon as possible. The company also offered different perks, depending on the circumstances of each customer experience. Another problem Zappos encountered was that every item from 6pm.com, one of its websites, was priced at $49.95 for six hours in 2010. The company shut down the website for a few hours to solve the problem. Zappos honored all the orders from the pricing mis- take, which resulted in a $1.6 million loss.

Theft of Customer Info

in 2012 hackers broke into Zappos’s computer system, and the company had to respond to the theft of 24 million customers’ critical personal information. The stolen data included custom- ers’ names, email addresses, shipping and billing addresses, phone numbers, and the last four digits of their credit cards. Zappos immediately addressed the situation by sending an email to customers notifying them of the security breach. Zappos assured customers the servers con- taining their full credit card information were not hacked. Its next move was to disconnect its call center, reasoning that the expected amount of calls would overload the system. While Zappos has a reputation for delivering customer service that is unmatched by any competitor, some customers were unhappy with how Zappos handled the hack- ing. Many customers were upset by their information being hacked, but the situation was made worse by the company’s action of disconnecting its call center. Although this situa- tion caused problems for Zappos and blemished its customer service record, the company has worked to restore its reputation.

THE FUTURE OF ZAPPOS

Zappos remains committed to serving its customers and employees. So far, the company has retained its unique culture and continues to expand into new product categories. In one interview, Hsieh talked about the growth of Zappos and how he believes expanding