Zappos’s Case Case Study: Zappos’s HR Practices Unconventional Retailer The story of Zappos, an unconventional retailer, is somewhat unusual. Before t

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Case Study: Zappos’s HR Practices

Unconventional Retailer

The story of Zappos, an unconventional retailer, is somewhat unusual. Before the company
came to the scene, buying shoes online looked like a crazy business proposition. The
company had its origins in 1999. Nick Swinmurn founded Zappos in 1999 after a fruitless
day spent shopping for shoes in San Francisco. After looking online, Swinmurn decided to
quit his job and start a shoe website that offered the best selection and best service Originally
called ShoeSite.com, the company started as middleman, transferring orders between
customers and suppliers but not holding any inventory (a “drop ship” strategy) The website
was soon renamed Zappos, after the Spanish word for shoes (zapatos) In 2000, Tony stepped
making nearly investor and became its CEO subsequently. Zappos struggled for its first few
years, making sales but not generating a profit. The dot-com crash forced Zappos to lay off
half its staff, but the company recovered. By the end of 2002, Zappos had sales of $32 million
but was still not profitable. In 2003, the company decided that in order to offer the best
customer service, it had to control the whole value chain- from order to fulfillment to
delivery- and began holding its entire inventory. Zappos moved to Las Vegas in 2004 to take
advantage of a larger pool of experienced call center employees. The company generated its
first profit in 2007 after reaching $5840 million in annual sales Zappos also started to be
recognized for its unique work environment and approach to customer service. In 2010,
Amazon bought the company for $1.2 billion. Amazon agreed to let Zappos operate
indepently and to keep Hsich as CEO. After the merger, the company restructured into 10
separate companies organized under the Zappos Family.

Core Values & Business Model

Zappos has ten core values that guide every activity at the company and form the heart of the
company’s business model and culture: deliver WOW through service: embrace and drive
change, create fun and a little weirdness; be adventurous, creative and open minded; pursue
growth and learning, build open and honest relationships with communication: build a
positive team and family spirit; do more with less be passionate and determined and be
humble. Zappos core values differ from those of other companies in a couple of ways. In
addition to being untraditional, the core values create a framework for the company’s actions.
This is exemplified in the company’s commitment to their customers and employees’ well-
being and satisfaction. The Zappos business model is built around developing long-term
customer relationships. Zappos does not compete on price because it believes that customers
will want to buy from the store with the best service and selection. The company strives to
create a unique and addicting shopping experience, offering a wide selection of shoes,
apparel, accessories, and home products, free shipping to the customer, free shipping and full
refunds on returns, and great customer service.

Shopping and Shipping

Zappos strives to make the shopping experience enjoyable. The website is streamlined for an
easy shopping experience. Products are grouped in specialized segments, with some (like

outdoor products) on their own mini-sites. Customers can view each product from multiple
angles thanks to photographs taken at the company’s studio, and Zappos employees make
short videos highlighting the product’s features. Zappos analyzes how customers navigate the
site to improve features, adapt search results, and plan inventory The spirit of simplicity,
innovation, and great service extends to Zappos inventory and distribution systems an well.
Zappos has one of the few live inventory systems on the web. If the Zappos website displays
an item it is in stock. Once the company sells out of an item, the listing is removed from the
website. This helps in reduce customer frustration. Its inventory and shipping systems are
linked directly to the website via a central database, and all its information systems are
developed in house and customized to the a company’s needs. Their warehouses operate
around the clock, which allows them to get a product to the customer faster. Fast shipping
creates an instant gratification that is similar to shopping in a physical store Most companies
have a negative view toward returns, but Zappos mentality is the complete opposite turns the
ability to maintain customer relationships and to increase its profits Zappos offers a 100%
Satisfaction Guaranteed Return Policy. If a customer is not satisfied with a purchase, he or
she can return it within 365 days for a full refund. The customer can print a pre-paid shipping
label that allows all domestic customers to return the product for free. This return policy
encourages customers to order several styles or different sizes and return the items that do not
work out.

Customer Service

What really makes the Zappos business model unique is the company’s focus on customer
service. The company f established a method of serving customers and handling their names
that is distinctive from the rest of the industry. Zappos believes great customer service is an
opportunity to make the customer happy. Customers are encouraged to call Zappos with any
questions. The number is displayed on every page of the website. Hsich says, At Zappos, we
want people call a We believe that forming personal, emotional connections with our
customers is the best way to provide great to service Customer service representatives also
actively use social media sites such as Facebook and Twitter to respond to customer issues.
Another key aspect of Zappos customer service model is that nothing is scripted. Employees
have free reign in their decision-making and are expected to spend as much time as they need
to “wow” customers. They help customers shop, even on their competitors’ websites,
encourage them to buy multiple sizes or colors to try (since return shipping is free and do
anything it takes to make the shopping experience memorable Zappos customer service
representatives try to develop relationships with their customers and make them happy
Stories about great customer service include customer support calls that last for hours,
sending flowers to customers on their birthdays, and surprise upgrades to faster shipping
Some extreme cases have included Zappos hand-delivering shoes to customers who have lost
luggage and pa groom who forget the shoes for his wedding Zappos has even sent pizzas to
the homes of customers who have tweeted to the company about being hungry Zappos
believes that great customer experiences encourage customers to use the store again. In
addition, Zappos long-term strategy is based on the idea that great customer service will help
them expand into other categories. While around 80 per cent of Zappos orders come from

shoes, the markets for housewares and apparel are much larger. The company says it will
expand into any area that it is passionate about and that meet their customers’ needs.

Transparency

Transparency is also a critical part of the Zappos model. Employees receive detailed
information about the company’s performance and are encouraged to share information about
the company. Zappos believes that employees should develop open and honest relationships
with all stakeholders with the hope that this will assist in maintaining the company’s
reputation Hsieh uses Facebook and Twitter to share information with employees and
customers (he has 2.2 million followers). When Zappos laid off 124 employees in 2008,
Hsich announced the decision via Twitter and later blogged about it. Although some
companies may hesitate to open themselves to public criticism, Zappos feels it has nothing to
hide. In fact, most of the public posts on Zappos social media sites are praise from customers.

Work Environment

Zappos is famous for its relaxed and wacky atmosphere. Employee antics include nerf hall
wars, office parades ugly sweater days, and donut-eating contests. The headquarters features
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
application features a crossword puzzle about Zappos and asks 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 lking 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 they will fit with the company. However, even Hsieh
admits that finding great employees is tough. “One of the biggest enemies to culture is hyper-
growth. You’re trying to fill seats with warm bodies, and you end up making compromises”,
says Hsieh All new employees then attend a five-week training program, which includes two
weeks on the phones providing customer service and a week fulfilling orders in a warehouse.
To make sure that new employees feel committed to a future with the company, Zappos
offers $2,000 to leave the company after the training (less than 1 per cent of new employees
take the deal. 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. Another aspect of Zappos that is unique is the benefits that it provides to its
employees. The company has an extensive health plan, where it pays 100 per cent of
employee’s medical benefits and on average 85 per cent of medical expenses for employees’
dependents. The company also provides employees with dental, vision, and life insurance.

Other benefit include a flexible spending account, pre-paid legal services, a 40 per cent
employee discount, free lunches and snacks, pand volunteer time, life coaching, and a car
pool program.

Work-life Integration

One of Zappos 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, managers
spend 10 to 20 per cent of their time bonding with team members outside of work Zappos
outings include hiking trips, going to the movies, and hanging out at bars. Hoch says that 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 employce a $50 reward for great work Zappos employees compile
an annual “culture book” comprised of essays on the Zappos culture and reviews of the
company. The culture book helps employees to think about the meaning of their work and is
available unedited to the public. As with its customers, the foundation of Zappos
relationships with its employees is trust and transparency. The company wants its employees,
like its customers, to actively discuss any issues or concerns that may come up. Hsich does
not have an office, he sits in an open cubicle among the rest of the employees. He believes
that the best way to have an open-door policy is not to have a door in the first place.” Zappos
management is very open with employees by regularly discussing issues on the company
blog. However, this positive work environment comes with the expectation that employees
will work hard Employees are evaluated on how well they embody the core values and
inspire others; Zappos will fire people who are doing great work if they don’t fit with the
culture of the company. Hsich says. “We definitely don’t want anyone to feel that they’re
entitled to employment for life. It’s more about us creating an environment and growth
opportunities for our employees such that they want to be employees for life.”

Recognition

In addition to being the number one online shoe retailer, Zappos has been recognized for its
innovative business practices. The company has appeared on several prestigious lists
including Fortune’s “Best Companies to Work For.” Fast Company’s “50 Most Innovative
Companies,” Business Week’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.

2008 Layoffs

Zappos is known for its commitment to its employees, but the company has also faced hard
economic times that demanded tough decisions. In October 2008, Sequoia Capital, a venture
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 then
told Zappos to “cut expenses as much as possible and get to profitability and cash flow
positive as soon as possible.” As a result, Hsieh had to make a difficult decision and lay off 8

per cent of Zappos’ employees. 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.

Merger with Amazon

In 2009 Zappos was acquired by e-commerce giant Amazon.com: Many Zappos customers
were confused by the unexpected move and expressed concerns about the future of the
company’s culture and customer service. Most CEOs would not have felt any obligation to
address customer concerns over the merger, but Tony Hsieh valued the support of Zappos
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 manage to good 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,
were in worrying about employee happiness and more time selling shoes.” Hsieh and Alfred
Lin, Zappos CFO and COO, we the only two members on the board committed to preserving
Zappos culture. The board could fire Hsieh and hire a new CEO who would focus more on
profits Hsich decided that the best way to resolve these issues was to buy out the board, but
he could not do this on his own. After meeting with Amazon CEO Jeff Bezos, Hsieh
committed to a full acquisition, as long as Zappos could operate independently and continue
to focus on building its culture and customer service. Many customers were concerned that
Amazon was not a good fit for Zappos, but Hsieh addressed those concerns, saying, “Amazon
wants to do what is best for its customers- even, it seemed to me, at the expense of short-term
financial performance. Zappos has the same goal. We just have a different philosophy about
how to do it.” Although, consumers were not pleased with the acquisition, they at least
understood why it occurred. Moreover, Hsieh’s commitment to his beliefs and management
style resonated with consumers.

Technical Difficulties

In October 2011, Zappos experienced some technical difficulties that resulted in delays and
problem in customers’ orders and shipments. Zappos up graded one of its processing systems,
and in the process many orders were deleted or delayed. Some orders had the incorrect
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
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 had to shut down the website for a few hours to solve the problem.
Zappos honored all the orders from the pricing mistake, which resulted in a $1.6 million loss.

Theft of Customer information

In January 2012 hackers broke into Zappos computer system, and the company had to
respond to the theft of 24 million customers’ critical personal information. The stolen data
included customers’ 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 containing their full credit card information were not hacked. Zappos’
next move was to disconnect its call center, reasoning that the expected amount calls would
overload their 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
hacking Many customers were upset by their information being hacked, but the situation was
made worse by Zappos’ action of disconnecting its call center. Although this situation caused
problems for Zappos and blemished its customer service record, the company believes that it
can restore its reputation. 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 a recent interview, Hsieh talked about the growth of Zappos and how he
believes that expanding into the clothing and merchandise market will help the company to
grow. Hsieh says that “the sky is the limit” for Zappos, and that growing and expanding into
many different types of businesses is Zappos future. During his interview, Hsieh states,
“Although Zappos is a long ways from becoming a company that is similar to Virgin, it does
consider Virgin a role model in how Zappos wants to shape itself” (Virgin Group Limited is a
successful U.K conglomerate.) As Zappos expands, it will have to work harder to hire the
right people, avoid ethical issues, and maintain its quirky culture Leadership is a key factor in
the success of any company, and for Zappos having Tony Hsieh as a leader is a strong
indicator for future success. Hsieh has expressed that he will do whatever it takes to make his
employees, customers, and vendors happy. The future for any company looks bright when its
leadership is committed to such strong values. However, Zappos needs to make sure that it
continues to focus on its stakeholders and its long-term vision with or without Hsieh.
Ultimately, Zappos intends to continue to deliver happiness to its stakeholders Hsieh says,
“At Zappos, our higher purpose is delivering happiness. Whether it’s the happiness our
customers receive when they get a new pair of shoes or the perfect piece of clothing, or the
happiness they get when dealing with a friendly customer rep over the phone, or the
happiness our employees feel about being a part of a culture that celebrates the individuality,
these are all ways we bring happiness to people’s lives.”

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