Zappos was established in 1999 to sell shoes online to customers. After years of rapid growth, by 2008 Zappos was profitable with net sales (after returns) of ca. $650 million. However, the company faces various issues in going forward. Zappos had established product lines in other products such as video games or camping gear. Would Zappos be able to replicate its success in other product lines? Was it possible to maintain the behavior of providing customers the "wow" effect even when scaling the company to tens of billions of revenue? Finally, after drastic changes in the economic landscape in late 2008, would Zappos need to make changes, and if so, what were those changes?
Michael Marks; Hau Lee; David W. Hoyt
Harvard Business Review (GS65-PDF-ENG)
February 13, 2009
Case questions answered:
- What are Zappos’ core competencies and sources of competitive advantage? How sustainable are they? What role does corporate culture play in these questions?
- How important is next day air shipment to the customer experience? Is it worth the cost?
- 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?
- Do you think Zappos is an interesting company for Amazon? Why?
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Zappos.com: Developing a Supply Chain to Deliver WOW! Case Answers
1. What are Zappos’ core competencies and sources of competitive advantage? How sustainable are they? What role does corporate culture play in these questions?
As Jay Barney (1991) defined in his work “Firm Resources and Sustained Competitive Advantage” for a resource or competency to serve as a source of competitive advantage it has to be valuable, rare, inimitable as well as non-substitutable (also known as VRIN model). In light of these prerequisites I identified the following three core competencies and sources of competitive advantage in Zappos’ business model:
- Supply chain management: Its supply chain management allows Zappos to provide outstanding service to its customers, primarily in the sense of fast delivery, while at the same time operating as efficiently as possible. With regard to serving customers and being efficient at the same time, Zappos realized early on the importance of a self-operated distribution network as part of its supply chain. Such a distribution network is important to enhance the business model’s reach which is limited by selling physical goods. The fact that Zappos struggles to internationalize its business because of the difficulty to rebuild a comparable distribution network abroad proves the importance of this distribution network for the company’s success. The Extranet which allows vendors to be directly involved in Zappos’ purchasing process is another example of how Zappos’ innovative supply chain management enhances its efficiency. In addition, through its program “Powered by Zappos”, the company pools the inventory of multiple online stores that are operated separately which also confirms the efficiency in Zappos’ supply chain, especially when compared to brick-and-mortar stores.
- Service orientation: The focus on “wowing” customers is expressed in the way Hsieh’s describes the company: “A service company that sells shoes”. Thus, he is convinced that the products Zappos is offering through its website are not a major differentiator from other online shoe retailers or brick-and-mortar shoe stores. In contrast, it is more about the way of selling those products to customers. This is for example confirmed by the fact that call center employees are not measured on metrics of efficiency, but on how long it takes for a call to be answered. To experience this service orientation at its core every new hire has to work at least two weeks in the call center and one week in the warehouse, the two key sources of delighting customers. The focus on service orientation also positively impacts word of mouth and customer loyalty thereby reducing the cost of customer acquisition.
- Corporate culture: Zappos’ most important source of competitive advantage is its unique corporate culture which includes and thereby enhances the other core competencies and competitive advantages. This culture is characterized by building relationships, operating as a team, having fun together and ultimately finding new ways to WOW everyone – not only the customer but also colleagues. As a consequence, Zappos’ service orientation, for example, is deeply enrooted in its corporate culture. Besides, the efficiency in the supply chain is also linked to the corporate culture through key values such as “do more with less” or “be humble”. Zappos’ corporate culture is thus what it finally all comes down to.
The question of sustainability of those core competencies and competitive advantages largely depends on how easily they can be imitated by competitors in the long term. While it might
be possible to replicate the company’s supply chain management or distribution network for companies that possess sufficient resources, it is more difficult to imitate Zappos’ service orientation which is embedded in the company’s values. Finally, it is the corporate culture that is the most crucial source of competitive advantage for Zappos, especially as it is driven by the employees themselves, and not enforced by the management. As a consequence, Zappos aims at hiring and retaining employees that are passionate about Zappos and its culture. To retain only those that feel this passion Hsieh for example filters out new hires without the right passion by offering them a bonus to quit after two weeks of training. In the end, this ensures sustainability not only of culture but also of the other core competencies and sources of competitive advantage which are an important part of the culture as explained above.
2. How important is next day air shipment to the customer experience? Is it worth the cost?
In general, next day air shipment positively impacts the customer experience. It helps to WOW customers and therefore is an important component of Zappos’ service concept. Especially, considering Zappos’ real competition, brick-and-mortar stores, next day air shipment is of high importance. Shopping in real stores allows customers to just walk in, try out a variety of shoes and walk out with a new pair. In this regard, next day air shipment helps Zappos to “bring the store to [its customer’s] home” as Alfred Lin, one of Zappos’ first investors and later CFO, explained. In order to get as close as possible to the immediate shopping experience of brick and mortar stores next day air shipment, or at least fast delivery, can be therefore considered as an important part of the customer experience.
Nevertheless, the value of next day air shipment for the customer experience compared to other components such as the free return policy, the detailed online product information or the customer call center might be questioned. Especially, the adjustment of the company policy to guarantee next-day delivery for all orders during the holiday season 2006 has highlighted that it is much more about managing customers’ expectations by under-promising and then overdelivering than about actually being able to ship within one day. Considering that UPS can only reach 11% of Zappos’ customers within one day it is therefore not recommendable to promise next-day delivery. Furthermore, Zappos could realize significant cost savings by not shipping all orders overnight, for example using ground delivery for orders from customers within two-day delivery from the company’s warehouse.
I, therefore, think that next day air shipment is only partially worth the cost. While it generally is in line with Zappos ambition to always WOW the customer it is questionable if for example 2- day shipping would not be sufficient to delight customers when promising 5-day shipping.
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?
In light of the huge remaining potential of the US market as well as the significant challenges and costs required to expand Zappos’ business model internationally, I would, first of all, suggest not to focus on adding geographies. Especially considering the high geographic fragmentation in the European market as well as the lack of infrastructure in sufficiently large Asian markets such as China or India, Zappos would have a hard time living up to its high service standards as well as operating profitably in those markets. What Zappos could still do in regard to international expansion is improving service for international customers by for example opening up its website for international orders which so far can only be placed by phone.
In the short-term, I would definitely focus on adding more products to Zappos’ offering. The program “Powered by Zappos” clearly shows that with its capabilities in distribution and supply chain management, Zappos has an advantage not only in selling shoes online but generally in selling all kinds of products online. The company can thus easily and efficiently grow its business by establishing new online shops for the new products while sourcing the inventories from its centralized distribution center. This would most likely also come along with economies of scale as not only the distribution network but also the call center as well as other administrative and support functions could be shared. Existing fixed costs would be thus leveraged more effectively such that Zappos’ profitability would increase.
Zappos could also expand its business by establishing and selling private labels. This would, however, require Zappos to find a partner that would produce the private label products. In addition, Zappos would need to advertise its private-label such that costs would rise and profitability would be affected negatively, at least in the beginning. However, the case of Amazon with its Kindle shows that selling private labels can be an attractive option. In the long run, this could therefore also be an opportunity for Zappos.
4. Do you think Zappos is an interesting company for Amazon? Why?
Comparing the capabilities and experiences of Zappos and Amazon, Zappos definitely is an interesting company for Amazon. Zappos exhibits various characteristics and capabilities that make it fit very well to Amazon. In the following, I am presenting the three most important characteristics that make Zappos so interesting for Amazon:
- Business model: Amazon and Zappos are both active in the e-commerce business selling their products online to consumers. In general, both companies are thus running almost identical business models which are characterized by a traditional B2C relationship1.
- Supply chain management: One of Amazon’s core competencies and sources of competitive advantage is its supply chain management and its highly efficient distribution network. As outlined under question 1 this is also one of Zappos major “sources of excellence”. Both companies, therefore, fit very well together with their ambition to serve customers as fast as possible. In addition, a potential acquisition of Zappos would allow Amazon to realize significant economies of scale in light of redundancies within the supply chain that could be eliminated after such an acquisition.
- Product offering: While Amazon and Zappos initially started off by offering one type of product (shoes vs. books) over time Amazon has managed to successfully expand its product offering to include many other different product categories. However, so far Amazon had failed to successfully expand its product offering in the fashion segment of the e-commerce industry.
Those three factors might have played an important role in Amazon’s decision to finally acquire Zappos in 2009. Nevertheless, Amazon has decided not to integrate the customer interface of Zappos, i.e. the website, and let this part of Zappos continue to run independently2.
1 This primarily refers to Amazon’s traditional business model. Nowadays, Amazon has expanded its business model by for example also supplying companies with certain services.
2 Zappos’ distribution network and inventory were, however, integrated into Amazon’s network through the closure of Zappos’ Kentucky warehouse in 2012. This is also one example of how Amazon reduced redundancies and realized synergies.