Zappos and Lululemon
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Chapter 11: Zappos: Taking Steps toward Maximizing Stakeholder Satisfaction: 11-8d Zappos’s New Structure Book Title: Business Ethics: Ethical Decision Making and Cases Printed By: Toure Williams (taaw_15@yahoo.com) © 2019 Cengage Learning, Cengage Learning
11-8d 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 organizational structure that abandons the top-down managerial hierarchy in favor of a redistribution 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 run by a facilitator to discuss key issues. While governance meetings focus on clarity and role structure, tactical meetings 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 tensions before they become a problem.
As Zappos continues to grow, there is a risk its expansion will make it harder to manage 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, Frederic 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 approximately 500 task-oriented circles structured around specific businesses. Managers became employees and no longer engaged in traditional management functions, although their salaries stayed the same throughout 2015.
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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 realized 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 18 percent of employees chose to take the package.
This has had strong implications for Zappos in the short term, and the transition has been difficult for the organization. For instance, one glitch in the software Zappos uses to help manage its Holacracy structure accidentally removed Hsieh from the CEO position. The bylaws of a Holacracy structure require that when CEOs are removed, the job is automatically opened and the firm must accept cover letters from applicants for the position. Zappos practiced transparency with consumers and informed them about the glitch, as well as the fact that the firm would be accepting cover letters for the position of CEO for a two- week period. Tony Hsieh continued to be the CEO of the firm.
In 2016 Zappos fell off the Fortune magazine’s list of 100 Best Companies to Work For, the first time in eight years. Employee surveys showed that scores had gone down on 48 out of 58 questions. However, Hsieh believes employees must be committed to the changes and that it will pay off in the long term. It is clear that this new organizational approach has divided up the company, but Hsieh believes this approach is necessary to handle the company’s growth and maintain the same quality service and zany culture that has made it so successful. He has expressed regret only that the structure change was not implemented sooner.
Chapter 11: Zappos: Taking Steps toward Maximizing Stakeholder Satisfaction: 11-8d Zappos’s New Structure Book Title: Business Ethics: Ethical Decision Making and Cases Printed By: Toure Williams (taaw_15@yahoo.com) © 2019 Cengage Learning, Cengage Learning
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