Quality Of Service At The Zappos Company

The proceeding paper investigates Zappos.com (Zappos), originally an e-tailing shoe company, which later adopted further merchandise lines. The company was founded in 1999 by Nick Swinmurn with its headquarters currently based in Henderson, Nevada, USA. With a revenue of $840 million in 2007 and a 1500+ employee staff Zappos.com has grown to the largest online shoe store in the world. In July 2009 Amazon.com acquired Zappos.com for the reported amount of $1.2 billion. Currently, the CEO is Tony Hsieh. The company is known for its customer centric business model and its unique corporate culture.

In this paper Zappos.com is analyzed via papers and published articles with which various problems addressed are answered. The intention of this paper is to analyze how Zappos.com has leveraged its HR practices to build strategic effectiveness in the past and how can it build its future competitive strength on it. First, Zappos.coms’ business model is analyzed, second the companies supportive HR practices, third the role of leadership on the development of HR practices, fourth the implications for HR practices caused by the takeover of Amazon.com are addressed and finally challenges and recommendations to support the future business functioning at Zappos.com are addressed. A framework is developed to which parts of the analysis can be linked in order to say to which extent findings influence committed HR practices, the corporate culture and the loyalty business model of Zappos.com. The purpose of this paper is just to analyze the company and to accumulate knowledge.

Zappos’ Business Model

A good initial business model starts off with an idea of a good customer value proposition. When in 1999, Nick Swinmurn, walked through a mall in San Francisco, looking for a pair of shoes in his size, his preferred color and style, his unsuccessful search proposed an opportunity to satisfy currently unmet customer needs. When starting to analyze what features have enabled Zappos to build its strong brand position as well as its impressive growth through the past few years (from 2003 to 2007 annual revenue increases 623.7 percent) its good customer value proposition is essentially only a small part in its effective business model.

A comprehensive study of Zappos’ business model will be composed of 4 integral parts (Figure 1). Following the (1) customer value proposition (CVP), the structure of Zappos’ business model, consisting of (2) the profit formula and the importance of (3) key processes and (4) key resources will be linked to Michael Porter’s (1985) value chain model in order to enable a detailed analysis on how the e-retailer has become so successful.

Figure 1 – Business Model

One evident potential customer value proposition of Zappos is the offering of an extensive online selection of mainly footwear and a few other extended product lines. Surprisingly this is not how the company defines itself. Calling itself a “service company that just happens to sell shoes, handbags and related items” (Morris, 2008) more value is placed on providing a “high-touch” customer service aimed at engendering a customer long-term relationship (O’Reiley, 2009).

Zappos has been a customer centric company since its startup in 1999. The retailer focuses on providing highest service quality, leading to customer satisfaction and consequent customer retention, what essentially can be described as a loyalty business model (http://bx.businessweek.com/zapposcom/). Repeat customers represent 75% of any day’s gross sales and word of mouth advertising has brought growth to Zappos in overwhelming numbers (Morris, 2008). Zappos’ first of the ten core values puts the CVP in clear terms: “Deliver [a] WOW [customer experience] through service” (Zappos.com).

How Zappos excels in delivering that CVP will be addressed in the subsequent analysis. Zappos’ CVP is supported by a profit formula, which establishes how the company wants to earn money. That formula is linked to the product’s value chain. The primary activities (key processes) have a direct impact on the formula while being supported by support activities (key resources), all driven by the customer value proposition with the objective to deliver value to the customer and be profitable.

Nurturing a successful value creation and delivery, Zappos’ profit model is directly influenced by: Inbound logistics with its link to the supply chain of Zappos’ offered merchandise (wholesale prices, distribution etc.); Operations which correspond to the cost structure of Zappos’ vertically integrated warehouse and inventory operations in Kentucky; and Outbound logistics including “free shipping both ways, surprise upgrades to overnight shipping” (Whitehorn, 2009).

Moving further through the primary activities of Zappos’ value chain, the subsequent function of marketing & sales is declared to be comparatively tenuous as current CEO Tony Hsieh explains: “…[we] put that money into the customer experience instead” (Whitehorn, 2009). Key processes also include a firm’s metrics and measurements, which Zappos sets based on customer satisfaction indicators, rather than number of order taken (Morris, 2008).

Service is a primary value chain activity that deserves some detailed inspection at this point. Being a significant contributor to the cost structure with items like 365-day return policy or a call center staff working 24/7, Service represents the most intense link between Zappos’ CVP and its profit model and most significantly enables the implementation of its loyalty business model. Service represents how Zappos creates value for its customers (CVP) and most importantly it “defines how the company creates value for itself” (profit formula); (Johnson, Christensen & Kagermann, 2008).

Identifying Service as the primary source of value and profit suggests the examination of how the support activities (key resources) are allocated to contribute to Zappos’ competitive strength. Not only the primary activities, but also Zappos’ support activities underpin “deliver[ing] the Zappos experience to [its] customers” (O’Reiley, 2009). Key resources like procurement channels, technology, equipment and people are illustrated in the value chain as support activities. While careful procurement activities ensure a certain standard of product quality to the customer, its technology, equipment and firm infrastructure are also aligned with Zappos’ delivery of “great customer service” (e.g. in-house developed information technology, fast storing and shipping system) (Masha, 2009).

Nevertheless, the most essential and valuable key resource of Zappos’ customer service is its Human Resource Management (HRM). Strategic Human Resource Management, which is the HRM’s role is supporting a certain business model and strategy (Wright et all., 2001) plays a crucial role in Zappos’ effectiveness in the past. How HRM as a key resource and support activity is employed by Zappos to foster its loyalty business model is the next level of analysis.

Zappos’ Supportive HRM Practices

Zappos’ customer centricity leads the company since its startup in 1999. This is embedded in its company culture. Zappos’ employees live, breathe and operate through ten core values. These particular values create a positive environment in which employees excel to the maximum of their abilities and still have the freedom to express and implement their own initiatives.The company culture creates an environment in which customers receive more than they expect. Nurturing this environment is done through committed human resource practices (article on ccomm hr practices.

Zappos’ Human Resource Management plays a vital role in fostering the initial driver of the thriving environment: company culture. Committed HRM practices reach from recruiting the right employees to rewarding and helping to create an environment that allows for the company culture to continue and strive. HRM is strategically placed in Zappos (SHRM) and people related elements create the core competency of the firm (Wright et al.: Human resources and the resource based view of the firm (2001).) The people management practices are created around the core values and in this way make the most of the human, social and organizational capital. The environment in the company allows for easy creation, integration and transfer of ideas. All employees are constantly in a changing environment due to the type of products they sell and therefore they too become dynamic which leads to their core competency of providing excellent service (Wright et al.: Human resources and the resource based view of the firm (2001).)

As a starting point the company only hires people who are both technically and culturally fit (A perfect organizational fit, Samantha Whitehorne.) This is such an important point that Zappos.com fires employees who although technically fit do not fit into their culture. A lot of time and money is invested in the recruitment process, the reason being that employees have a vital role in the success of the loyalty business model.

Furthermore, every new employee, regardless of their position in the firm will go through a four week training period in which they learn about the company and how it functions. Normally this involves being part of the call centre to really understand what customers want and need. The underlining message throughout all human resource processes is that the company lives and breathes customer service and everyone is put into this way of thinking.

Rewards too play a dominant role in establishing the company culture. They create a positive environment in which employees are encouraged to share ideas on all levels of the company; in addition employees are not afraid to take risks because they are encouraged to take these through the rewards. Rewards can be companywide, departmental and individually driven. A lot of time and money is put into the rewards, which vary from being very simple to big and elaborate. This however is seen as an investment because it improves employee satisfaction and motivation and increases the overall profits of the company.

The different forms of ‘celebrations’ create a positive and constructive environment without putting the employees in a stressful, competitive environment. Many of the rewards are created by the departments and individuals themselves. However Human Resources is still involved in the bigger picture. Ensuring that company goals and progress are shared amongst all employees, creating financing and merchandising rewards appropriate to the customer orientated business model and to ensure that employees feel free to try out new, innovative means of doing business and therefore being rewarded for results and not punished for mistakes.

Both the resource based view and the transaction cost theory can be seen in how Zappos functions and remains competitive by heavily supporting there loyalty business model with human resource practices(Masters, JK. & Miles, G.: Predicting the Use of External Labour Arrangements: A Test of the Transaction Cost Perspective (2002).) For example call centres are kept inhouse; it is a valuable asset which is frequently used by consumers and requires attentive and dedicated employees.

There is continual development of the employee as the company is aware of dynamic capabilities. Every single individual is held accountable for the company culture, it is not only restricted to human resources or top management. Initiatives can be brought forward from any position in the company.

The company’s culture was established from day one but the human resources department along with all recruited employees is responsible to keep the inspiring, highly motivated, free spirited environment running with its main goal to provide the customer value proposition of exceptional service. With the emphasis of all individuals sustaining Zappos’ unique environment, an interesting question concerns the role of leadership and managerial influence at the e-retailer, which triggers the following discussion.

Role of Leadership on Zappos’ HRM

Zappos.com is one of the leading companies in its industry and since its startup it has seen an enormous amount of growth. From February 2010 on, Zappos.com is expected to grow 30% in the next 12 months. A challenge for Zappos.com is to be able to fulfill new positions that are the result of the growth of the company with skilled and suitable managers. This implicates that especially in this time of growth individual leaders have to be acquired which fit and understand Zappos.com unusual culture. The basis of this culture is founded by the initial owners and persons who joined the company from its early start. The characteristics and vision of the CEO and the manner he positions himself towards the employees still influences the committed HR practices and the corporate culture. Besides defining leadership as the guidance of individual managers and the characteristics of the CEO it can also be seen as the leading role of Zappos.com in its industry. Zappos.com has accounted on all these three levels of leadership throughout the company in the development of its HR practices.

First, to attract individual leaders and to have a long-term relationship with them, different measurements are integrated into HR practices. Already in the recruitment phase the hiring is rather unconventional. Possible future employees are invited to events outside the office, for instance team building events and happy hours in order to hire them based on different events rather than one job interview. After acquiring an employee, regardless their position, an extensive 4 week customer training follows which contains various courses coordinated by the training, leadership and development department. Zappos.com recognizes leadership potential in every one of its employees, regardless their position. Employees are encouraged and taught to represent the companies’ culture in everything what they do and say and to be accountable for themselves, actually this one of the key fundamentals. To make sure a long term relationship is also expected from the employees’ side and that they are committed to the company and their work, 3000 dollar walk away money is offered to them after the training program. When looking at the framework (exhibit) acquiring individual leaders mostly influence committed HR practices, since recruitment has to make sure people are hired that fit into the culture.

Second, the vision at the manner of working of Zappos.coms’ initial founders has a major influence on both the committed HR practices and the corporate culture. Today’s CEO Tony Hsieh has agreed on an annual base salary of $36.000 in 2009 with which he signals a culture of motivation instead of extrinsic rewards. This stimulates employees to work from intrinsic motivation and HR practices concerning rewards might not be the most important asset for employees. How CEO Tony Hsieh influences the corporate culture of Zappos.com for instance is the way he wrote an open and honest letter to all the employees ensuring their perks would remain the same after Amazons takeover. The positioning of the companies leader towards the employees inspire the corporate culture because by showing honesty and transparency, an open corporate environment is stimulated. When looking at the framework one can say that the CEO’s vision on the corporate culture influences HR practices committed.

Third, to maintain the leading position of Zappos.com in a fast changing market due to technological and fashion market changes, more HR practices have been developed. Especially the core values are a tool to develop a culture and a mindset to maintain this position. Zappos.coms’ fourth core value is to be adventurous, creative and open-minded, which means risk taking does not have to be avoided. Herewith Zappos.com creates a mindset throughout the entire company. Zappos.com also recognizes the importance of creating a culture of continuous learning via their fifth core value pursue growth and learning in which is stated every employee should constantly challenge and stretch themselves.

Due to the focus of Zappos.com on leadership on different levels and integrating this into different HR practices Zappos.com is able to acquire and keep appropriate employees which goal is to grow and learn every day. Also due to these acknowledgements and integrating them into the development of HR practices, Hay Group ranked Zappos.com number 16 at the ‘Top 20 Best Companies For Leadership’ in 2009.

Acquisition by Amazon.com – Clash of Cultures?

Amazon bought Zappos.com for 850 million dollars. Zappos.com is remaining a seperate entity within the company and has assured employees and the general public that their culture and workplace environment will not change (week in news). Although the companies are both customer centric, the approaches used towards satisfying customers differs significantly. Amazon strives for customer convenience, low prices and large vareity of goods for the customer to choose from. On the otherhand Zappos.com aims for customer loyalty by providing a unique experience with personal contact opportunities between customer and employee (A new lace on life, Tim O´Reiley.) In addition Zappos.com was a privately owned company and Amazon a public limited company. The ownership structure creates differences in the way that the companies operate and more specifically how human resource practices are placed within each company.

It is necessary to analyse the differences and identify to what extent these may lead to potential sources of conflict between the human resource practices.

At Zappos.com human resource management can be classified as a strategic partner (chapter 2.) The use of committed human resource practices creates the companies core comptency. As previously mentioned it defines, maintains and help grow the corporate culture. The ten core values create an environment in which employees work to the best of their abilities to satisfy customers. Shortly said the business model is dependent on HR practices. At Amazon HRM is not as dominant, it can be seen as a business partner (Amazon, HR Spectrum eNews.) It is necessary in the sense that it provides the company with strong human capital and it provides assistance to other departments, however it does not define how the company runs the business.

We can seperate the two further by looking at the different levels of integration that exist between HR practices and the strategy process of a comapny. Zappos.com has an integrative linkage , there is constant interaction throughout all phases of the strategy process. Communication flows freely from all levels of the business.Every employee has the ability to initiate actions or improve certain aspects of the business. Consistent with the business partner role, Amazon has a two-way linkage. It considers human resources issues during strategy formulation such as ensuring the recruitment of highly skilled employees that fit yith their company strategy. However it is a less dominant role than what HR plays in Zappos.com. (chapter 2 from the book.)

From these differences it is apparent that their could be a clash between the two practices. They have different levels of authority, in Zappos.com employees are given the freedom to take risks which affect the entire company. Amazon appear to be more constrained in this.Amazon focuses on efficiency whearas Zappos puts alot of emphasis on giving employees the space to express their creativity in a productive environment.

Although Tony Hsieh has promised no change in the company´s structure it will definitly have to consider the differences and how Amazon could impact the HR practices.

Zappos’ Future Challenges

Although the strategic approach of managing human resources has been distinguished as a driving force of Zappos’ severe competitive position, the planned acquisition by e-retailer giant, Amazon, put forward some potential challenges. The reviewed threat of HRM clash, is only one of the possible challenges in the future business functioning of Zappos.

Directional Strategies are “strategic typologies for classifying the ways different organizations seek to compete within an industry” (Noa, 2008, p.86). With the approved acquisition by Amazon, Zappos continues to strive for growth and decides to pursue an external growth strategy, strengthen its market position through entering new businesses (other merchandise) (Noa, 2008, p.87). While growing, Zappos need to sustain its valuable corporate culture by managing the trade-off between changing human resource knowledge, skills and behavior needs and the upkeep of its successful organizational environment. Zappos will need to constantly educate and motivate its employees to engage in”self-directed learning” to cope with the new challenges when growing with the company (Noa, 2008, p.295).

Growth it not the only challenge encountered in Zappos’ future business functioning. There is a necessity of appropriate recruitment, training, development and promotion to meet the changing HRM needs in an increasingly dynamic environment. What can be defined as “challenge of sustainability” describes the current economic changes, changes in demographics and expectations of the workforce, the growing importance of corporate citizenship and legal and ethical issues, has a key influence on the management of HR. Special regard has to be given to manage HR changing needs in companies as Zappos, in which it represents the main source of competitive advantage.

Other challenges include the “global and technological challenge”, which include the HR impact from expanding into international markets and the importance of sophisticated technology in the workplace. Zappos growth strategy has already reaches out into another North American country: Canada (zappos.com). Simply reconstructing similar values and HR practices will not easily reproduce the same valuable organizational environment that exists in the retailer’s home-country operations. Understanding cultural differences, diverse backgrounds and attitudes is needed to establish a HRM that truly enables international success. Technological challenges emerge when employing technological innovation to leverage knowledge creation and sharing through the firm, which Zappos need to support by adequate and committed HR recruitment, training and motivational rewards.

Conclusion

The examination of Zappos’ past effectiveness and successful implementation of the loyality business model has been linked to an ambitious customer value proposition of best service, a strong profit formula and a strategic alignment of key processes as well as key resources. Most emphasis has been given to one specific key resource, namely the committed human resource practices, which serve as a support activity and a strategic element in Zappos loyalty business model and yield final competitive strength. While defining Zappos’ people, environment and culture as a primary source of competitive advantage, the significant role of leadership in the development of HR practices has been indicated.

Concluding on how Zappos has build up a successful business model based on excellent customer service, loyalty and retention and how it continuous to operate effectively, the prior analysis has comprehensively identified one major contribution: strategic human resource management. The aligning of human resources practices and activities to the strategic objectives of high customer service quality, demand a development of committed HR practices, which generate a unique corporate culture and environment and ultimately enable Zappos’ remarkable competitive strength.