Question.1631 - Case Study 1Case Study 1 The Zappos ExperimentThere are many different ways in which firms can organize themselves: There are flatorganizations 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 ofcommand, or hierarchy.Do companies have to set up that way? Tony Hsieh doesn’t think so. Hsieh is the CEO of Zappos, theonline seller of shoes. Hsieh is a guy who thinks outside of the box. When he started Zappos in1999, no one was selling shoes online. It seemed like a crazy idea—you can’t try on shoes online tosee if they fit. But Zappos made the business work by offering good product, free shipping andreturns, and great customer service.Hsieh believes it’s not just the Zappos business model that has led to its success. Employees andtheir satisfaction are, too. To keep workers happy and passionate about their jobs, the companyoffers top-of-the-line and unusual perks: Good pay, free health care, and employees can bring theirdogs to work if they are well socialized. Quirky celebrations and parties are the norm at thecompany, which routinely makes Fortune’s “Best Places to Work” List.Happy Zapponians and a booming business weren’t enough for Hsieh though. He had noticed thatmost companies on the Fortune 500 list in 1955 were no longer on it today. In fact, many of themno longer existed.Hisieh figured it was because as firms grow, they become slow and lose touch with theircustomers. Executives at the top make the decisions, but they don’t really understand whatcustomers want, 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 rarelymake 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. There are nomanagers at Zappos anymore. Everyone is an equal, and no one can tell anyone else what to do.Employees at Zappos don’t have job titles. They have “roles” and their coworkers are their“partners.” They work together in “circles” (or teams) of their choosing. The members of a circlemeet regularly to talk about improvements and ideas. A “chit chat” is held at the beginning of eachmeeting. Everyone is required to speak, which ensures even the quietest employee is heard. Asoftware system then tracks the circle’s goals and who agreed to do what and when. “Really whatwe’re trying to do is turn each employee into a mini entrepreneur who has the ability to senseideas and do something about it,” says John Bunch, who oversees the Zappos self-governingsystem.There are also no performance appraisals at Zappos. If you’re doing a poor job, your coworkerswill let you know. Each employee gets 100 “people points” to distribute to the members in theircircles. If an employee doesn’t get enough points, the person may get booted from a circle—likecontestants get voted off of the island in Survivor. And if the person has no circle to work in, he orshe is out of job. Pay raises are based on new skills a person develops, 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 beanything but that for Zappos. First, there were all kinds of rules and meetings required to set upthe system: “Tactical” meetings focused on the workflows, and “governance” meetings focused onhashing out processes and eliminating roadblocks. Second, employees had trouble understandingthe new system and weren’t sure what they were supposed to be doing. Former managers feltdiminished. They no longer had any power or status, and they never would. So much for havingclimbed the corporate ladder. Writer/editor Roger Hodge referred to the new Zapposorganizational 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 newsystem a buyout, which amounted to about 5 months’ pay. Eighteen percent of the workforce, or1,600 employees, took it. Another 15 percent or so quit later. Morale fell, and Zappos dropped off ofFortune’s “Best Companies to Work for List” for the first time in its history.Does Hshieh have any regrets about implementing such a radical change at an already successfulcompany? No, although he admits he was surprised how hard it was for people to leave theirbureaucratic baggage behind. “In retrospect, I would have probably ripped off the Band-Aidsooner,” he says.Employees say Zappos is running more smoothly now and that things improved after theircoworkers who didn’t like the system left. The company also implemented a program to betterscreen and prepare new employees to manage themselves. And reportedly the firm’s profitmargins are holding up.Derek Noel, an employee with Zappos, says the new system has let his ideas be heard and allowedhim to take on a more substantive role in the company. “My worst day at Zappos is still better thanmy best day anywhere else,” he says. “I can’t imagine going back to traditional hierarchyanymore.”Discussion Questions1. 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? Ifso, what?

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