B

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Blue Ocean
O
n Strate
egy
Instittute
INS
S260
Za
appos.com (B):
No
tC
op
yo
Strategy Powerred by
y Cultu
ure and
ople
Peo
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This case
c
was wrritten by Oh
h Young Koo, Institute Fellow of th
he INSEAD Blue
B
Ocean
n Strategy In
nstitute, und
der the
superrvision of W. Chan Kim and Rene Mauborgne
M
, Professors of Strategy at INSEAD. It is intende
ed to be use
ed as a
basis for class disscussion rath
her than to illlustrate eith
her effective or ineffectiv
ve handling of an admin
nistrative situ
uation.
Additional material about INSEAD case
c
studiess (e.g., vid
deos, spreadsheets, links)
l
can be accesssed at
cases.insead.edu
u.
Copyright 2013
3 INSEAD
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MADE WITHOUT PERMISSION
P
. NO PART OF THIS PUBLICATION
P
MA
AY BE COPIED,
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OR MEDIU
UM WHATSOEVER
R WITHOUT THE PERMISSION OF THE COPYRIGHT
T OWNER.
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STORED
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TRIBUTED
This document is authorized for use only by JOHNNY MAHECHA at EAN until March 2014. Copying or posting is an
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rP
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ue Ocean Strategy Institute
Deliv
vering Ex
xception
nal Custo
omer Serrvice
SSo do you remember

r
w
which
actresss was in thhis movie who
w had thesse boots? Iss it
onn YouTube?
? he asks the woman.. He types Cries in th
he dark innto the searrch
baar on YouT
Tube. I willl watch it. I will watch it with yo
ou. We are going to fiind
soomething ouut here.
op
yo
This is not
n a conveersation betw
ween friendds, but betw
ween a custoomer servicee representaative and
1
a custom
mer lookingg for shoes. The repreesentative iss patiently helping
h
the shopper finnd a pair
of bootts she saw in a Lifetiime televisiion movie. It is not a personal shopper seervice at
Bergdorrf Goodmann but a staandard custoomer servicce of the online
o
shoe store Zapppos.com.
Every tiime a custom
mer calls thhe companys toll-free number,
n
a customer
c
service repressentative
is comm
mitted to accommoda
a
ating any inquiry. If Zappos dooes not havve the exacct shoes
requiredd, they searrch their coompetitors websites annd recommend that thee customer buy the
shoes thhere. Does this harm the
t companyy? No, because custom
mers apprecciate and reemember
the top-notch service and frequuently returrn to Zapposs.com.
Zappos stands ouut for its dedicated service to customers. It was ranked
r
sevventh by
Businesssweeks Cuustomer Seervice Cham
mp in 20099 and toppped the besst customerr service
providers among online websiites in 20100. And its not
n only a good
g
companny for custoomers; it
is also rated a greeat place to work by itts employees. Zappos debuted att 23rdthee highest
rated neewcomeroon Fortunes 100 Bestt Companiees to Work For
F in 2009
9. Since theen, it has
th
th
moved uup to 15 (22010), then 6 (2011).
tC
Salariess of Zapposs employeees were on a par withh the indusstry standarrd. The majjority of
employeees at Zapp
pos were Keentucky warrehouse stafff, with salaaries startingg from US$$8.25 per
hour. Thhe salaries of
o the Custoomer Loyallty Team staarted from US$11
U
per hour,
h
althouugh their
dedicatiion and com
mmitment went
w
way beeyond the norm,
n
impressing customers with their
t
fast
deliveryy and courtteous custom
mer servicee. Employees were alsso happy att workthee annual
turnover of Zapposs CLT was 7%, compaared to an inndustry averrage of 150%.2
Do
No
Foundedd in 1999, Zappos grrew dramatiically, reacching US$1 billion in revenue within
w
10
years. S
Started in a single offi
fice in San Francisco, it has becoome one off the biggesst online
retailerss, with 12000 employeees at the Laas Vegas heeadquarters and the Keentucky Fullfillment
Center. During its rapid expaansion, the company was
w able to cultivate a unique cultture that
defied cconventionaal wisdom in the indusstry. In fact,, Zappos prrioritized cuulture over anything
a
else. Toony Hsieh, CEO of Zaappos, said,, If we gett the culture right, moost of the sttuff, like
buildingg a brand around
a
deliivering the very best customer service,
s
willl just take care of
3
itself. And this culture
c
was still nurturred, even after
a
Zapposs was acquired by Am
mazon in
2009.
1
2
3
Citeed from CBS, CBS News, Z

Zappos Deliveers Happinesss, June 6, 201
10,
http://www.cbsneews.com/videoo/watch/?id=6
6554219n
R
J. Ely, Laura Winig, Zappos.com
m 2009: Clothiing, Customerr Service and Company
Frannces X. Frei, Robin
Cultture, Harvardd Business Schhool, Rev: Jan
nuary 23, 2010, p.7
Tonny Hsieh, Thee New York Times,
T
intervieew by Adam Bryant, On a Scale of 1 to 10, How Weird
W
Are
Youu?, January 9,
9 2010,
http://www.nytim
mes.com/2010//01/10/business/10corner.httml?pagewantted=all&_mocc.semityn.ww
ww
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The Z
Zappos Culture
C
Tony H
Hsieh joined Zappos in 1999 by invvesting US$$500,000 frrom Venturee Frogs, thee venture
capital ffirm he co-owned withh Alfred Lin
n. He was a young milllionaire enttrepreneur who
w had
sold hiss co-foundeed internet advertising
a
company, LinkExchannge, to Miccrosoft for US$265
million in 1998. Like many dotcom
d
succcess stories,, Tony and his schoolm
mate Sanjayy Madan
t
San Frrancisco flaat in 1996. It
I grew expponentially, opening
had starrted LinkExxchange in their
offices in Chicago and New Y
York and hiring
h
a largge numbers of people. Despite thiis stellar
nd that he no longer enjoyed w
working forr LinkExchange. As thhe scale
growth, Tony foun
increaseed, it becam
me just anothher Silicon Valley
V
firm
m where smaart people worked
w
hardd for four
years, m
made million
ns, and thenn retired.
op
yo
A
As we grew
w beyond 255 people, wee made the mistake off hiring peopple who weere
jooining the company
c
for other rea
asons. The good
g
news was that the
t people we
w
hiired were smart
s
and motivated. The bad news
n
was that
t
many of
o them weere
motivated byy the prosppect of eithher making a lot of money
m
or building
b
theeir
r
caareers and rsums.
Tonyy Hsieh, Deelivering Haappiness, p.47
tC
Withoutt noticing, the culture of the com

mpany he started outt by hiring friends andd people
who waanted to be part
p of buildding somethhing fun andd exciting4 was deterriorating. Diispirited,
he begaan to dread going
g
to woork. Out of the US$265 million accquisition deal
d with Microsoft,
M
Tony coould expectt a US$40 million
m
pay out if he stayed at LinnkExchangee for one moore year,
and 80%
% of that if he
h walked away.
a
Notw
withstandingg the financiial incentivee, he left to look for
a new vventure.
Core V
Values
No
Zappos had no corre values in the beginnning. Six yeears later, when
w
the com
mpany movved from
L Vegas, hiring manny new peopple along thhe way, it sought
s
not to
t repeat
San Fraancisco to Las
the LinkkExchange mistake. T
Tony neededd to set guidelines thatt identified Zappos cuulture for
the empployees, parrtners, and customers,
c
but
b he felt that
t
mission
n statementss and core values
v
of
corporaations were ritualistic
r
annd difficult to associatee with their everyday operations.
o
Do
Zappos engaged evvery employyee in identtifying and building thee companys culture innstead of
wn. Tony seent e-mails to all emplloyees, askiing them to come up with
w core
dictatingg it top-dow
values tto which alll Zappos peeople were willing to commit.
c
E--mails weree sent severaal times,
and it toook over a year
y to gathher suggestions, filter thhem, and list them in a common language
l
that peoople could act upon them. In 2006,
2
Tonyy finally seent the ten core valuees to all
employeees, describ
bing each inn detail. (Seee Exhibit 1))
These ccore values were neitheer ideal nor abstract; thhey were acctionable. Zappos used them as
the basiis for hiringg and firing people. In the
t hiring process,
p
Zapppos ran a cultural
c
inteerview to
test wheether the applicant fit thhe Zappos culture.
c
(See Exhibit 2)) Though thhe general innterview
assessedd the appliccants relevvant experieence and teechnical cappability, thee cultural innterview
Tonny Hsieh, Delivering Happinness (New Yoork, NY: Businness Plus, 201
10), p. 47.
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screenedd the appliccants creattivity and in
ndividualityy. Cultural fit also acccounted for 50% of
existingg employeess performannce evaluations.
During their inducttion, all canndidates weent through the same four-week
f
trraining proggramme,
regardleess of job tiitle. They spent at leasst a week onn the phonee with custoomers so thhat every
new em
mployee undderstood thee importancce of personnal emotionnal connecttions. At thee end of
the trainning, Zappoos enticed sooon-to-be em
mployees too quit withh a US$3,0000 bribe. Acccording
to Zapppos, only 23% of peoople took thhe offer, annd the otheer 97% chose the job over the
cash.5 T
This was thee final hurdlle to filter out
o culturallly incompattible peoplee and to givee them a
clear diirection in the
t companny. During the graduation ceremoony, new employees
e
r
read
and
signed a pledge to respect
r
the core valuess.
Emplo
oyees
op
yo
Every yyear, a Zapppos Culturre Book was

w publisheed in whicch all emplloyees sharred their
feelingss about wo
orking at Zaappos. By taking partt in establiishing the companys culture,
employeees took ow
wnership annd committted to the company.
c
T book was
The
w availabble to all
employeees, Zapposs partners (iincluding veendors), andd the generaal public. (S
See Exhibit 3)
tC
Zappos customer service reppresentativees were keyy to conneccting with Zappos

Z
cuustomers.
While the positioon of custoomer service represenntative wass often seeen as a loow-paid,
unpleasant job thatt required no
n intelligennce, Zapposs cherished the intellecctual worth of CLT
staff meembers, giving them fuull authorityy to make deecisions using their besst judgmentt without
asking a supervisoor or manaager. For in
nstance, CL
LT staff co
ould send a birthday card or
opriate. Theere was no script to paarrot or limiited time
condoleences to cusstomers if juudged appro
for a coonversation
n. What Zapppos focuseed on was letting them
m do their best to shaare their
knowleddge and cappabilities with customeers online. They
T
were encouraged
e
d to build a personal
and em
motional connnection, offten going above and beyond to gratify cusstomers, spread the
Zappos experiencee, and get thhose custom
mers to returrn.
No
Zappos nurtured a fun and cloose-knit fam

mily atmospphere and faacilitated oppen communnication.
d
in each deppartment, such as a
Workstaations weree in an openn office, witth themed decorations
rainforeest or cheerrleaders. Evven the CE
EO did not have a corrner office, working alongside
a
other em
mployees onn an open flloor. All em
mployees at the Las Veegas headqu
uarters wentt through
the maiin reception
n area, interracting withh others. The
T free lun
nch and snaack bar enccouraged
people to hang arround and share ideaas rather thhan simply feeding employees ffor free.
m memberss outside
Manageers were enccouraged too spend 1020% of theeir time witth their team
the officce.
Do
In 20088, during thhe econom

mic downturrn, Zappos made a decision
d
to lay off 8%
% of its
employeees to reducce costs. Thhe announceement was upfront andd straightforrward, sent through
e-mail, blogs and Twitter.
T
Insttead of spin
nning terms like strateggic restructuuring, it ussed plain
pening up trust
t
and
languagge to explaiin the lay-ooffs, the prrocess, and compensattion. By op
Niloosha Sharma, Online Footw

wear Seller Zaappos.com, Amity
A
Researcch Center, 20009, p.8
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communnication am
mong emplooyees, they were not aafraid of reeaching acrooss job titlees.6 (See
Exhibit 4)
Partne
ers
op
yo
Traditioonally, buyeers used theeir position

ns of powerr to treat veendors like the enemyy: it was
typical to ignore thheir phone calls, makee them waitt for schedu
uled appoinntments, maake them
buy the meals.7 In contrast,
c
Zaappos built open
o
and coollaborativee relationshiips with its vendors.
v
w
vendoors could seee how manny shoes
It had a managemeent networkk called the Extranet where
were soold on Zapppos.com baased on sty
yle, size, and
a colour. Normally, sales infoormation,
includinng pricing and
a marginss, is kept coonfidential to leverage the
t retailers bargaininng power
against suppliers. Zappos
Z
unvveiled such informationn to engagee suppliers at a differeent level.
Instead of receivinng merchanddise orders from Zapppos buyers, as they would with traaditional
retailerss, Zappos vendors
v
logged into thee Extranet and
a checkedd their saless data and innventory
level. T
They could then move quickly to maintain innventory orr mark dow
wn productss. In this
way, veendors becaame Zapposs most knowledgeablle merchand
diser of thee brand at no cost.
They allso voluntarrily particippated in maarketing theeir productss sold on th
he Zappos website.
From deesigning a brand
b
boutiique on the website to planning ann on/offlinee campaign,, Zappos
invited vendors to collaborate, recognizin
ng their abillity to run the
t businesss. In appreciation of
a
Venndor Apprecciation Partyy, and invitted more
their coontribution, Zappos orgganized an annual
than 1,0000 vendorss. By treatinng vendors like familyy and respeccting their capabilities,
c
, Zappos
believedd they woulld spend moore hours heelping Zapppos than the typical acccount.8 For instance,
i
vendorss helped proocure invenntory for hot-selling iteems and proovided uniqque items thhat could
only be found on Zappos.
Z
tC
Questtions forr Interac

ctive Cla
ass Discu
ussion:
1. How
w did Zapp
pos create trust, com
mmitment aand voluntary cooperration deepp in the
orgaanization?
Do
No
2. How
w easy is it to
t imitate thhe Zappos strategy givven its cultuure and peop
ple practices?
7
8
Twiitchell Jeremy
y, Workplacce fun is thee shoe that fits
f
at Zappoos, Las Veggas Sun, Jan.26, 2009,
http://www.lasveg
gassun.com/nnews/2009/jan/26/zapposcom
m/
p 185.
Hsieeh, Deliveringg Happiness, p.
Tonny Hsieh, A Lessons
L
from
m Zappos: Folllow the Goldeen Rule, Jun
ne 4, 2010, poost on blog H
HBR Blog
Netw
work, http://bblogs.hbr.org//cs/2010/06/a__lesson_from__zappos_follo
ow_th.html
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Exhibit 1
C
Core
Value
es
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os
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Blu
As we grrow as a com
mpany, it hass become moore and moree important too explicitly define
d
the coore values
from whhich we deveelop our cultture, our bra
and, and ourr business strategies. Th
hese are the ten core
values thhat we live byy:
Deliver WOW
D
W Through Service
E
Embrace
andd Drive Channge
C
Create
Fun and
a A Little Weirdness
W
B Adventurrous, Creativve, and Openn-Minded
Be
P
Pursue
Grow
wth and Learnning
s with Comm
B
Build
Open and
a Honest Relationship
R
munication
B
Build
a Posittive Team annd Family Sppirit
D More Wiith Less
Do
B Passionatte and Determ
Be
mined
B Humble
Be
op
yo
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Exhibit 2
Sample In
nterview Q
Questions9
plicant is willling to think

k and act ou
utside the boox.
The app
G
Give me an example
e
from
m your previious job(s) where
w
you hadd to think annd act outsidee the box.
W
What was thhe best mistakke you madee on the job? Why was it the best?
T
Tell me abo
out a time yoou recognizeed a problem
m/area to im
mprove that was
w outside your job
dduties and soolved withouut being asked to. What was
w it, how did you do it??
tC
The app
plicant is mo
ore creative than the average person.
W
Would you say you are more or less creative thhan the averaage person? Can you givve me an
eexample?
No
IIf it was you

ur first day onn the job at Zappos
Z
and your
y
task wass to make thee interview/rrecruiting
pprocess moree fun, what would
w
you doo for those eiight hours?
The app
plicant is willling to takee risks in tryying to solve a problem.
W
Whats an exxample of a risk
r you took
k in a previouus job? Whaat was the outtcome?
W
When
was th
he last time you
y broke thee rules/policyy to get the job done?
Do

p 172
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Exhibit 3
Zappo
os Culture Book10
Exhibit 4
Lay
y-off e-ma
ail11
Date: Noovember 6, 2008

2
From: Tony Hsieh
Zappos Employees
To: All Z
Subject: Update
oyees:
To all Zaappos emplo
tC
Today has been a touugh, emotionnal day for ev

veryone at Zappos.
Z
We made
m
the hardd choice of laying
l
off
% of our em
mployees. Thhe layoffs will
w affect allmost every single deparrtment at Zaappos. In
about 8%
addition, we are also looking att closing som
me of our brick
b
and moortar outlet stores
s
in Nevvada and
Kentuckky.
This is oone of the hardest decisioons weve haad to make ovver the past 9.5
9 years, buut we believee that it is
the rightt decision forr the long terrm health of the
t companyy. The rest off this email will
w explain why
w
No
We feell fortunate thhat we havee Sequoia Capital

C
as ann investor who
w had the foresight too see the
hat lie aheadd for all of us.
u On Octobber 7, Sequooia held a
ramificaations of the tough econoomic times th
meeting for all of thheir portfolioo companies (including Zappos),
Z
wh
hich one very
y clear messsage: Cut
expensess as much as possible andd get to profiitability and cash flow poositive as soo
on as possiblle.
Jason Caalacanis alsoo has a welll-written em
mail that talkss about avoiiding the ddeath spiral, which I
highly reecommend reeading.
Fortunattely for Zapppos, were in a much better position than many
y other com
mpanies. Unliike many
other com
mpanies, we are still grow
wing and alrready profitabble and cashh flow positiv
ve.
Do
And we are also forrtunate that we

w have a revolving
r
linne of credit from
f
wells Fargo,
F
US Bank,
B
and
KeyBankk. This line of credit haas given us a lot of finaancial flexibiility. Howevver, given thhe current
economiic uncertaintyy, we believee its prudent to reduce oour reliance on
o debt finan
ncing.
10
11
Thee image was taken from Sybil

S
F. Sterrshic, Zappoos Culture Boook: Best Evver Business Reading,
Deccember 08, 200
09, post on blog Quality Service
S
Markeeting,
http://qualityserviicemarketing.blogs.com/quuality_service__marketing/20
009/12/zapposs-culture-bookk-besteverr-business-reaading.html
p 191 p.1944.
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Weve ddecided the right
r
thing too do for thee company iss to be proactive insteadd of reactivee. We are
proactiveely cutting back
b
some of our expeenses today so that we can take caare of our em
mployees
properlyy, instead of being
b
reactivve and waitinng until we arre forced to cut
c expensess.
Because we are stilll growing annd are alreaddy profitable, we do not have to take as drastic a step as
most othher companiees of our sizee. Last year, we did $8400mm in grosss merchandisse sales, andd this year
we are fforecasting to
t do about $1 billion in gross merrchandise salles. Howeveer, when we first put
together our 2008 pllan at the endd of 2007, we
w were expeecting our grross merchanndise sales too be even
higher thhan $1 billionn.
Because of all this, we are reduucing our staaff by 8%, buut because we
w are beingg proactive innstead of
reactive about it, wee are able to take care off our employyees and offeer them moree than the staandard 2week sevverance (or no
n severancee) that most other
o
compannies are givin
ng.
op
yo
We are offering to pay each laiid-off emplooyee throughh the end off the year (aabout 2 monnths), and
offering an additionaal amount forr employees that have beeen with us fo
or 3 or more years.
mployees
In additiion, because our regular health beneffits cover 1000% medical, dental, and vision for em
and 50%
% for spousess and dependdents, we deccided to offeer to reimburrse laid-off employees
e
foor up to 6
months of
o COBRA payments.
p
In doingg all of this to take caree of laid-off employees, we expect that
t
it will actually
a
incrrease, not
decreasee, our costs for
fo 2008, but we feel this is the right thing
t
to do foor our emplooyees. It will put us in
the posittion of havinng a lot moree financial flexibility
fl
in being able to
o respond too potential chhanges in
the econnomy in 2009
9.
e-commeerce growth has slowed compared
c
to its growth rate
r a year aggo, but the goood news is that even
in this toough econom
mic environm
ment, e-comm
merce overalll is still grow
wing.
tC
Within tthe footwearr category, we

w are the onnline markett leader. Whhen times aree tough, the strongest
player inn any markett have an oppportunity to gain even more
m
market share,
s
even if
i overall groowth may
be sloweer. Historicaally, we havee actually grrown faster than
t
the oveerall e-comm
merce markett, and we
anticipatte for that to continue in 2009.
2
For the rest
r of 2008 as well as foor 2009, we anticipate coontinuing to grow year over
o
year. Ouur current
forecastss are that wee will continuue to be proffitable and caash flow possitive, as long as we are proactive
p
instead of
o reactive inn managing our
o business and financiaals.
No
I know tthat many teaars were sheed today, both

h by laid-offf and non-laiid-off employyees alike. Given
G
our
family cuulture, our laayoffs are muuch tougher emotionally than they woould be at many other coompanies.
Ive beenn asked by some
s
employyees whetherr its okay too Twitter abo
out whats going
g
on. Ouur Twitter
policy reemains the saame as its allways been: just
j be real, and use yourr best judgem
ment.
These arre tough timees for everyoone, and Im sure there will
w be many follow-up quuestions to thhis email.
If you have
h
any qu
uestions abouut your speccific job or department,, please talkk to your deepartment
managerr. For all otheer questions,, comments, or thoughts, please feel free
f to email me.
Do
Tony Hsieh, CEO
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