Reference no: EM133377602

Case Study 1. The Zappos Experiment

There are many different ways in which firms can organize themselves. There are flat organizations and there are tall organizations. There are organizations structured by products, divisions, and geography. But one thing nearly all structures have in common is a chain of command, or hierarchy.

But do companies have to be set up that way? As founder and CEO of Zappos, Tony Hsieh didn't think so. Hsieh was a guy who thought outside the box. When he started Zappos in 1999, no one was selling shoes online. It seemed like a crazy idea-you couldn't try on shoes online to see if they fit. But Zappos made the business work by offering good products, free shipping and returns, and great customer service.

Hsieh believed it was not just the Zappos business model that led to its success. Employees and their satisfaction were essential, too. To keep workers happy and passionate about their jobs, the company offered top-of-the-line and unusual perks: good pay, free health care, and employees could bring their dogs to work if they were well socialized. Quirky celebrations and parties were the norm at the company, which routinely made it a candidate for Fortune's "Best Places to Work" list.

Happy Zapponians and a booming business weren't enough for Hsieh, though. He had noticed that most companies on the Fortune 500 list in 1955 were no longer on the list by the end of the millennium. In fact, many of them no longer existed.

Hsieh figured it was because as firms grow, they become slow and lose touch with their customers. Executives at the top make the decisions, but they don't really understand what customers want, know how products can be improved, or have a lot ideas for transforming the business. Lower-level employees -the people closest to the work-often do, but their suggestions rarely make it up the food chain. He didn't want that to happen at Zappos.

So what did Hsieh do? In 2014, he instituted a new type of self-management system. Managers were eliminated at Zappos. Everyone became an equal, and no one could tell anyone else what to do.

Job titles were also eliminated at the company. Instead, employees had "roles" and their coworkers were "partners." They worked together in "circles" (or teams) of their choosing. The members of a circle could meet regularly to talk about improvements and ideas. Each meeting began with a "chit chat," where everyone was required to speak. The idea was to ensure that even the quietest employee was heard. A software system was installed to track the circle's goals and who agreed to do what and when. The goal was to turn each employee into a "mini-entrepreneur" with the ability to sense ideas and do something about it.

Performance appraisals were also eliminated at Zappos. Instead, the new system had coworkers distribute 100 "people points" to the members in their circles. Those employees who didn't get enough points might get booted from a circle-much as contestants get voted off of the island in Survivor. Ultimately, if the person had no circle to work in, they lost their job. Pay raises were based on new skills a person developed, a system called "badging." For example, a person might earn a badge for Java coding or merchandising.

If ditching the old corporate structure for something new sounds simple, it turned out to be anything but that for Zappos. First, all kinds of rules and meetings were required to set up the system: "tactical" meetings focused on the workflows, and "governance" meetings focused on hashing out processes and eliminating roadblocks. Second, employees had trouble understanding the new system and weren't sure what they were supposed to be doing. Former managers felt diminished. They no longer had any power or status, and they never would; so much for having climbed the corporate ladder. Writer/editor Roger Hodge referred to Zappos' new organizational structure as "a radical experiment . . . to end the office workplace as we know it."

Hsieh knew the transition wouldn't be easy, so he offered employees who didn't like the new system a buyout, which amounted to about 5 months' pay. Eighteen percent of the workforce, or 1,600 employees, took the company up on its offer. Another 15 percent or so quit later. Morale fell, and Zappos dropped off of Fortune's "Best Companies to Work for" list for the first time in its history.

Hsieh admitted that he was surprised how hard it was for people to leave their bureaucratic baggage behind. "In retrospect, I would have probably ripped off the Band-Aid sooner," he said. Even so, things improved after coworkers who didn't like the system left. Not surprisingly, the company also implemented a program to better screen and prepare new employees to manage themselves. Reportedly, the firm's profit margins held up during the change.

Derek Noel, an employee with Zappos, put it this way. "My worst day at Zappos is still better than my best day anywhere else," he says. "I can't imagine going back to traditional hierarchy anymore." The new system helped ensure his ideas would be heard and allowed him to take on a more substantive role in the company.

Following Hsieh's retirement and premature death in 2020, some say that Zappos quietly began returning to a more traditional approach.

Discussion Questions

1. Is a self-managing organization a good idea? Why or why not?

2. Could Zappos have done anything to make the transition to the new system smoother? If so, what?