1.What are Zappos core competencies and sources of competitive advantage? How sustainable are they?

  

1.What are Zappos core competencies and sources of competitive advantage? How sustainable are they? What role does corporate culture play in these questions?2.How important is next-day air shipment to the customer experience? Is it worth the cost? How might you change it in the cost-conscious environment facing the company in late 2008? 3.How would you expand the business? Would you add more products, more geographies, or by selling private labels? As you expand the business, how can the company become more profitable, particularly in light of the costs associated with the focus on service?4. How would you expect the environment of a more cost-conscious consumer to affect Zappos’ business? What can Zappos do in such an environment to maintain sales growth?APA Style
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CASE: GS-65
DATE: 02/13/09 (REVISED 01/03/11)
ZAPPOS.COM: DEVELOPING A SUPPLY CHAIN TO DELIVER
WOW!
Our decision was always to focus on service because we got instant feedback whenever we
upgraded delivery. Customers were wowed by the experience, and then they told a bunch of
people. And word of mouth works a lot faster on the Internet than it does person-to-person
because you can just e-mail out a bunch of your friends and say, ‘hey I just had this amazing
experience.’ That was one of the reasons that we wanted to keep upgrading shipping.
1
—Alfred Lin, Chairman, COO, and CFO of Zappos
In late 2008, less than 10 years after its founding, Zappos anticipated reaching annual gross sales
of $1 billion. When its founder first proposed the idea of selling shoes online, the concept was
greeted with intense skepticism. Despite the challenges, the company had achieved dramatic
success. It was the world’s largest online retailer of shoes, was profitable, growing rapidly, and
had an outstanding reputation for customer service. Its employees were passionately, engaged in
their work. While shoes still provided the vast majority of revenues, Zappos had expanded its
product offerings based on feedback from customers and the enthusiasm of employees. There
was still a huge untapped customer base—only 3 percent of the U.S. population were Zappos
customers—suggesting that the company was not close to saturating its opportunities in the U.S.,
let alone other international regions.
However, the collapse of the financial markets, and the prospect of a prolonged recession,
created new challenges. Zappos had never been lavishly funded—it had always been intensely
conscious of cash. Unlike most retailers, it was continuing to grow, but early signs were that the
rate of growth was slowing. As the company’s leadership looked forward, it considered ways
that Zappos could sustain the high quality experience that it was known for—to deliver “wow” to
its customers, suppliers, and other affiliates. The company’s supply chain management had
evolved as Zappos had grown, and was one of its sources of excellence. Yet, perhaps there were
opportunities for continued improvement.
1
Quotations are from interviews with the author, unless otherwise specified.
David Hoyt prepared this case under the supervision of Michael Marks, Lecturer in Operations, Information, and
Technology, and Professor Hau Lee as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or
write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University,
Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or
otherwise –– without the permission of the Stanford Graduate School of Business.
This document is authorized for use only by Wenyue Du in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019.
For the exclusive use of W. Du, 2019.
Zappos.com: Developing a Supply Chain to Deliver WOW!: GS-65
p. 2
ZAPPOS.COM
In 1999, Nick Swinmurn was frustrated in finding the right size, color, and style of shoe. After
trying several stores, he felt there must be a better way. Stores carried a relatively small
selection of styles, and usually did not have a full complement of colors and sizes even for the
styles they did stock. This was not surprising considering the physical constraints of shoe stores,
the limited number of shoes that an average store could stock, and the small local population
served by individual stores.
But this was 1999, and the Internet boom was in full swing. If Swinmurn, who was an ordinary
shoe customer (not a shoe fanatic), was frustrated, it seemed likely that many others must be
feeling the same way. What consumers needed was a way to access a huge selection of styles,
colors, and sizes. Since none existed, Swinmurn decided to create one, using the Internet to
address the selection problems faced by traditional shoe retailers—despite having no experience
in retail, let alone the shoe industry.
Raising Capital
Swinmurn raised $150,000 from family and friends and recruited Fred Mossler, a senior shoe
buyer at Nordstrom, to join him. Swinmurn tried to raise venture capital, but had difficulty
finding investors willing to put in large amounts of money.
One of the venture firms that he approached was Venture Frogs, founded by Tony Hsieh and
Alfred Lin. Hsieh was a young Harvard graduate, who had cofounded an Internet advertising
firm called Link Exchange with Sanjay Madan, a college roommate. They sold the company to
Microsoft for $265 million in 1998, when Hsieh was 24. Lin had been a friend of Hsieh’s at
Harvard (and a customer of Hsieh and Madan’s college pizza-making business), who left a PhD
program at Stanford University to join Hsieh at Link Exchange. Hsieh and Lin then founded
Venture Frogs, which funded Internet start-ups, including companies such as AskJeeves, Tellme
Networks, and Zappos.
In 1999, at the height of the Internet boom, Swinmurn left a voicemail with Venture Frogs,
explaining that he had started a company to sell shoes on the Internet. As Hsieh and Lin were
about to hit the delete button, thinking that this “sounded like the poster child for bad Internet
business ideas,”2 Swinmurn said that the shoe market in the United States was $40 billion, and
that 5 percent of this business was being done by mail order. Hsieh and Lin realized that if
people bought $2 billion of shoes from catalogs, the Internet—with its capacity to reach large
sections of the population and to provide detailed information vastly better than a catalog
could—was going to be a substantially larger market. They decided to invest, putting about $2
million into the company over the next few years. Hsieh also invested personally in Zappos
(whose name was an adaptation of the Spanish word for shoes, “zapatos”). Later, Sequoia
Capital, a premier Silicon Valley venture firm, also invested in the company.
While Hsieh, Venture Frogs, and Sequoia put money into the company, Zappos was never
funded on the lavish scale of Internet start-ups such as WebVan—the total investment in the
2
Hsieh quoted in Duff McDonald, “Sole Purpose,” CIO Insight, November 2006, p. 45.
This document is authorized for use only by Wenyue Du in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019.
For the exclusive use of W. Du, 2019.
Zappos.com: Developing a Supply Chain to Deliver WOW!: GS-65
p. 3
company was less than $10 million for the first five years of the company’s existence. Sequoia
Capital would later lead an investment round of $54 million, some of which was used to buy out
early investors. In the long run, the lack of substantial funding was a benefit—Zappos was
forced to focus on those factors which were essential to success, operate efficiently, and avoid
the excesses that led to failure for many other Internet start-ups. The difficult challenge of
creating a successful online shoe retailer, which inhibited access to large-scale investment, had
another advantage—lack of competition. As Lin said, “It was actually tempting to invest in a
company where everyone thought this couldn’t be done, because you knew that in the early
stages, you were not going to have a lot of competition.”
However, in the short run the relatively low funding raised by the company was painful—there
were times when employees worked for months without paychecks in order to help the company
survive.
Financial Success
After investing, Hsieh began to work closely with Swinmurn, and in 2000 they became coCEOs. Lin joined as CFO in 2005, later adding the roles of COO and chairman. Swinmurn left
Zappos in 2006, and Hsieh became the sole CEO. Zappos had strong growth from its first sales
through 2008, when it expected gross merchandise sales of $1 billion (Exhibit 1).
This strong growth was largely dependent on a happy, loyal customer base. As the company
developed, the percentage of repeat customers grew—from 40 percent in 20043 to 75 percent in
2008.4 Hsieh viewed this as essential for sustained success, saying, “You can get anyone to buy
from you once…. The hard part is getting people to buy from you again and again.”5
Zappos became profitable in 2006, but did not have an objective of maximizing profit, preferring
to invest in growing the company. That year, Zappos was able to achieve gross margins of 31
percent, even after shipping and returns (with more than one in four orders returned).6 Shipping,
both outbound and for returns, was a substantial part of the company’s cost structure, at about
$100 million,7 or almost 17 percent of the company’s gross sales of $597 million in 2006. This
percentage had remained relatively constant over time, despite increasing return levels and
decreasing delivery times.
In late 2008, Zappos had about 9 million customers—a large number, but just 3 percent of the
U.S. population, leaving plenty of room for continued growth. It had about 1,500 employees,
half in its Nevada headquarters and call center, and half in its Kentucky fulfillment center. The
company was still private, with no immediate plans for an IPO.
3
Richard Waters, “Trial and Error Shows the Path to Success,” The Financial Times, March 9, 2005, p. 9. Zappos
defined repeat customers as any customer that had previously purchased from the company.
4
Jeff Morris, “Service a ‘Shoe-In’ for Zappos.com,” Multichannel Merchant, April 2008, p. 7.
5
Arthur Zaczkiewicz, “Zappos Sells Service,” Women’s Wear Daily, November 15, 2006, p. 24.
6
Waters, loc. cit.
7
Sidra Durst, “Shoe In,” Business 2.0, December 2006, p. 54.
This document is authorized for use only by Wenyue Du in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019.
For the exclusive use of W. Du, 2019.
Zappos.com: Developing a Supply Chain to Deliver WOW!: GS-65
p. 4
Corporate Culture and Values
Zappos had a strong company culture, which was developed and nurtured by management. This
culture, together with company values, was a strong influence on all aspects of the business,
including the supply chain. Hsieh and Lin recalled that the strong culture that existed in the early
days of their first start-up, Link Exchange, had disappeared as the company grew. As Lin
explained, “At the end of the day, one of the reasons we sold the company was because it was no
longer a fun place to work.” They were determined that this would not happen at Zappos.
As a result, when Zappos leadership considered what it needed in order to meet the next year’s
business objectives, the question “How are we going to grow the culture?” was as important as
issues such as “How many people do we need to hire, how many more servers, or how much
more office space do we need?”
Hsieh described what the culture meant to him in 2008:
To me, the Zappos culture embodies many different elements. It’s about always
looking for new ways to WOW everyone we come in contact with. It’s about
building relationships where we treat each other like family. It’s about teamwork
and having fun and not taking ourselves too seriously. It’s about growth, both
personal and professional. It’s about achieving the impossible with fewer people.
It’s about openness, taking risks, and not being afraid to make mistakes. But most
of all, it’s about having faith that if we do the right thing, then in the long run we
will succeed and build something great.8
Hiring and training were particularly important in maintaining and growing the culture and the
company’s values. Hsieh said, “We want people who are passionate about what Zappos is
about—service. I don’t care if they’re passionate about shoes.”9 (Zappos’ culture and values are
discussed in detail in the Appendix.)
THE ZAPPOS SHOPPING EXPERIENCE
From the beginning, Zappos set out to provide an exceptional shopping experience for its
customers. It wanted customers, after any interaction with the company, to say “Wow!” To
illustrate the priority placed on serving its customers, Hsieh referred to Zappos as “a service
company that sells shoes,” which he later amended to include the wide range of other products
sold by the company. Hsieh elaborated on the importance of customer service: “It’s not really a
secret…. People have known for a long time that companies that provide good service do really
well. Yet no one does it.”10 Hsieh saw customer service as an investment rather than an
expense.
8
“2008 Culture Book,” Zappos.com, p. 12.
Christopher Gergen and Gregg Vanourek, “Zappos Culture Sows Spirit,” The Washington Times, July 16, 2008, p.
B2.
10
Waters, loc. cit.
9
This document is authorized for use only by Wenyue Du in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019.
For the exclusive use of W. Du, 2019.
Zappos.com: Developing a Supply Chain to Deliver WOW!: GS-65
p. 5
The drive to provide a “wow experience” informed every aspect of the company. The Zappos
website loaded faster than any other retail website. While most orders were made online,
telephone support was essential for maximizing the customer experience. Unlike other popular
retail sites, he company’s toll-free phone number was prominently displayed on all its web
pages, the average phone call was answered in less than 20 seconds, and call center operators had
the authority to resolve virtually any issue.
Zappos knew that its primary competition in the shoe business was brick-and-mortar stores, and
that in order to be successful, customers needed to be comfortable buying shoes online. The
company addressed this challenge in a number of ways, including free returns, providing
extensive online product information, maintaining a call center, and free overnight shipping.
Fit, and the Return Policy
A key aspect of making customers willing to buy shoes online was dealing with the issue of fit—
customers needed to feel comfortable that they would receive products that fit, and that they
could return those that did not. Zappos quickly realized that this could be best addressed by
providing free returns, initially for 60 days, later extended to 365 days (although most returns
came back within 60 days). Customers could thus purchase several pairs of shoes, of different
styles and fits, keeping those they wanted while returning those that did not fit.
Zappos closely monitored customer behavior. It found that the most profitable customers were
not those that returned the fewest products. Customers who made use of the free return policy
tended to experiment with different brands and styles—while they had a higher return rate, they
also made more net purchases. Overall, returns were about 35 percent of gross sales.
Online Product Information
It was also essential to provide as much information as possible to customers as they made their
purchasing decisions. This was done in several ways. Retail websites typically had small
photographs of products, with swatches of the available colors. The pictures were generally
from only a few angles, and often did not show important details. Zappos provided substantially
better information to customers. When new models (or models with new colors) arrived at the
Zappos warehouse, a photography team took pictures from several angles (by 2008, eight photos
were taken of each style and color). Customers interested in a particular item could easily see
large pictures, in the desired color, from multiple perspectives.
The site also included detailed descriptions of the shoes, as well as information that would
ordinarily be provided by experts at a brick-and-mortar shoe company. For instance, a person’s
gait (the way that they ran or walked) was important in finding the proper running shoe. The
Zappos site had a detailed discussion of gait, and how customers could determine which type of
shoe was appropriate for them.
The site also provided customer feedback. Customers could write comments on the shoes they
purchased, which Zappos did not edit (except to remove profanity). The most recent customer
comments were displayed for each type of shoe.
This document is authorized for use only by Wenyue Du in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019.
For the exclusive use of W. Du, 2019.
Zappos.com: Developing a Supply Chain to Deliver WOW!: GS-65
p. 6
The Zappos Call Center (“Customer Loyalty”)
Most customer interactions were through the website, which handled about 95 percent of orders.
The rest of the orders, plus questions about products, returns, or other issues, were handled by
the call center. In 2008, this was staffed 24/7 by about 400 people in the Las Vegas
headquarters.
As described in the Appendix on company culture and values, all Las Vegas employees went
through the same 4-week new-hire training course. At the end of the course, regardless of the
job that they were hired for, they spent at least two weeks in the call center working with
customers.
Zappos measured most every aspect of its business, including the call center (or “customer
loyalty” in Zappos terms). It measured how long it took from the time a customer called to the
time the call was answered by a call center operator—in 2008 this number was astonishingly
low, consistently averaging less than 20 seconds. It did not, however, measure call center
operators on metrics of efficiency, such as how many calls they took. The objective was to
provide the customer with the best possible experience. If that meant having an extensive
conversation with a customer about his interest in running, the call center operator was
encouraged to have the conversation. If the customer was looking for a specific shoe that was
not available at Zappos, the call center operator was trained to look on at least three other
Internet websites to find what the customer wanted, and then talk the customer through finding
the product on the competitive website. Zappos would lose that order, but the customer would
likely return to Zappos in the future. Hsieh commented, “We score [call center operators] based
on whether or not they went above and beyond for the customer…. We don’t care if they made
the sale or how ‘efficient’ they were…. For us, every interaction is a branding opportunity.”11
One widely cited example of a call center operator going above and beyond customer
expectations took place in July 2007. A call center operator was following up on shoes that
should have been returned, and e-mailed the customer. The customer replied that she was very
sorry—she had bought the shoes for her sick mother, who had since passed away, and had not
gotten around to returning the shoes. The call center operator arranged for UPS to go to the
customer’s house to pick up the shoes, then sent a flower arrangement and condolence card to
the customer. Needless to say, the customer was overwhelmed by this concern on the part of a
company, and posted comments about her experience on a blog, which were widely circulated.12
Call center operators were trained to handle most any situation by themselves. They were given
the authority to do so using their best judgment without needing to escalate the matter to a
supervisor or manager. For quality control purpo …
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