As teams become increasingly important, particularly in organizations requiring complex problem solving, knowing how to manage teams has taken on a significant role for organizational leaders. Ethical leaders can increase the effectiveness of teams by supporting the team’s ability to make decisions, initiating the structure of the team, and assigning tasks if needed. Team members should be trained in effective team building skills to help them arrive at more ethical decisions while avoiding common pitfalls such as groupthink.

Leadership styles influence many aspects of organizational behavior, including employees’ acceptance of and adherence to organizational values. The most effective ethical leaders possess the ability to manage themselves and their relationships with others effectively, a skill known as emotional intelligence. Resonant leaders are emotionally intelligent leaders who demonstrate mindfulness of themselves and their own emotions, a belief that goals can be met, and a caring attitude toward others within the organization. Transactional leaders attempt to create employee satisfaction through negotiating, or “bartering,” for desired behaviors or levels of performance. Transformational leaders strive to raise employees’ level of commitment and to foster trust and motivation. Another leadership style gaining attention is authentic leadership. Authentic leaders are passionate about the company, live out corporate values daily in their behavior in the workplace, and form long-term relationships with employees.

The RADAR model stands for Recognize, Avoid, Discover, Answer, and Recover. An ethical leader can use this model to identify ethical risk areas, respond to ethical issues, and, if necessary, help the organization recover from ethical mishaps. First, an ethical leader must be able to identify or recognize issues having an ethical component. Next, the leader should seek to avoid having the ethical risk areas turn into ethical disasters by putting systems and controls in place to limit the opportunity for misconduct. Discovery involves proactively uncovering ethical risk areas that could lead to misconduct. Ethical audits are a good discovery tool. When an ethical issue or a misconduct disaster occurs, answering involves responding to the discovery of an ethical dilemma through communication both internally and externally. Finally, recovery involves fixing any weaknesses in the ethics program and developing improved ways of detecting misconduct.

Chapter Review

11-11cResolving Ethical Business Challenges

David Hannigan had come far since he started working at a subsidiary of Emper Corp., a manufacturer of automobile parts. He began as a line manager after graduating from UCLA four years ago. His skills at maintaining efficiency, his leadership, and his repartee with the factory workers soon gained the attention of management. Even the lowest factory workers seemed to respect David for his caring attitude and his ability to empathize with employees. While he made it clear he expected hard work, David had the ability to make every member of the factory floor feel like their contributions mattered. He shot up through the ranks and was recently promoted to Director of Personnel of this subsidiary when the previous director retired. In the entire history of the firm, nobody had moved through the ranks so quickly. David even received a letter of congratulations from the CEO of Emper Corp. after his promotion was announced. David was confident that within a few more years, he would be able to secure a high-level job at the corporate headquarters in Chicago.

A few months into his new position, David had lunch with a few key personnel from the company. One of them included Vice President Stanley Martin. Stan began the lunch meeting by praising all of them for their success. Later into his talk, he said, “You all know Emper Corp. wants to increase revenues and give big bonuses to as many employees as possible, but we need to become more efficient. That said, corporate decided the amount of automation in some of our factories, namely this one, needs to be increased.”

Jane Newton from the accounting department replied, “But the cost and accounting analyses we sent to headquarters showed it wouldn’t be profitable to make changes like that in this particular plant. Why did they pick this one?”

“Apparently,” replied Stan, “Top management wants to test robots and all the high-tech gadgets at one factory to see if they increase product quality and pay for themselves. They think that in the long run, stockholders will benefit from automation. Anyway, the decision has been made, and it’s our job to make it work. We’re going to have to sell the work force and the community on the decision.”

David knew what this meant. He replied, “That won’t be easy. Hundreds of people are going to lose their jobs, and we are the largest source of employment for this town.”

Stan’s reply was pleasant, yet forceful. “Some of the factory people will be able to stay on if they get additional training. We can convince the workers and the people in town that the decision was necessary, if we can show them accounting and cost information to justify the decision. If they see good, sound reasoning for the action, they’ll be less likely to resist and cause trouble. We all need to maintain productivity and efficiency until the new equipment is here. I want the accountants to work on a cost summary we can release to the employees and the town newspaper that shows why automation is a good idea.”

Jane spoke up once more. “But Stan, I already told you. The net present value and other analyses I did earlier show this plant would benefit from staying the way it is.”

Stan countered, “Jane, when you were working on the analyses, you said yourself that the benefits of automation are hard to identify and assign numbers to. You had to make several assumptions in order to do those analyses. If you change some of your assumptions, you can make the numbers look better. Try a longer useful life for the new equipment, or change some of the projected cost information. As soon as you have the new numbers, bring them to me to look at.”

He stood up and addressed each member at the table and said, “Remember, if you can pull this off, your yearly bonuses will triple your annual salaries.” Stan walked out of the room.

David felt uncomfortable about the situation. He could not understand why one of the company’s top leaders would advocate for such a massive change when the numbers clearly stated that automating the factory would cause more harm than good. He remembered hearing a rumor that Stan was under serious consideration as a candidate for a prestigious position at corporate headquarters. He wondered if Stan was trying to gain favor with those at corporate. Then again, this was mere speculation on his part. What David really worried about was what he was going to tell the employees.

Case 11: Zappos: Taking Steps towards Maximizing Stakeholder Satisfaction

11-1Introduction

Can a company focused on happiness be successful? Zappos, an online retailer, is proving it can. Tony Hsieh, CEO of Zappos says, “It’s a brand about happiness, whether to customers or employees or even vendors.” Its zany corporate culture and focus on customer satisfaction has made Zappos both successful and a model for other companies. Zappos has built a culture of integrity in all of its activities. The company provides an incredible example of managing ethics and social responsibility by addressing challenges and responding to stakeholder issues.

This case examines how the company’s focus on stakeholder happiness contributed to its success. First, we examine the history of Zappos, its core values, and unique business model. Next, we analyze its corporate culture and how it influences its relationships with employees, customers, the environment, and communities. We then look at some of the challenges the company faced and how it plans to move into the future.

11-2History

In 2000 entrepreneur Tony Hsieh became the company’s CEO. Hsieh, 26 at the time, was an early investor in Zappos, having made $265 million selling his startup company to Microsoft in 1998. Hsieh was not initially sold on the idea of an Internet shoe store, but he could not help but become involved. After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $24.

In 2009 Amazon bought the company for $1.2 billion. Although Hsieh rejected an offer from Amazon in 2005, he believed this buyout would be better for the company than management from the current board of directors or an outside investor. Amazon agreed to let Zappos operate independently and keep Hsieh as CEO (at his current $36,000 annual salary). Hsieh made $214 million from the acquisition, and Amazon set aside $40 million for distribution to Zappos employees. After the acquisition, the company restructured into 10 separate companies organized under the Zappos Family. Zappos was able to keep its unique culture and core values.

11-3Core Values

Zappos has 10 core values that guide every activity at the company and form the heart of the company’s business model and culture.

· Deliver WOW through service.

· Embrace and drive change.

· Create fun and a little weirdness.

· Be adventurous, creative, and open-minded.

· Pursue growth and learning.

· Build open and honest relationships with communication.

· Build a positive team and family spirit.

· Do more with less.

· Be passionate and determined.

· Be humble.

These core values differ from those of other companies in several ways. In addition to being untraditional, the core values create a framework for the company’s actions. This is exemplified in the company’s commitment to its customers’ and employees’ well-being and satisfaction.

11-4Zappos’s Customer-Focused Business Model

The Zappos business model is built around developing long-term customer relationships. Zappos does not compete on price because it believes customers want to buy from the business with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service. Everything at Zappos comes down to customer service, exemplified by its tagline “Powered by Service.”

11-4aShopping and Shipping

Zappos strives to make the shopping experience enjoyable. The website is streamlined for an easy shopping experience. Products are grouped in specialized segments, with some (like outdoor products) on their own mini-sites. Customers view each product from multiple angles thanks to photographs taken at the company’s studio, and Zappos employees make short videos highlighting the products’ features. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory.

The spirit of simplicity, innovation, and great service extends to Zappos’s inventory and distribution systems as well. Zappos has one of the few live inventory systems on the Web. If the Zappos website displays an item, it is in stock. Once the company sells out of an item, the listing is removed from the website. This reduces customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Its warehouses operate around the clock, which allows it to get a product to the customer faster. Fast shipping creates an instant gratification similar to shopping in a physical store.

Most companies have a negative view toward returns, but Zappos has the opposite mentality. It sees returns as the ability to maintain customer relationships and to increase its profits. Zappos offers a 100 percent satisfaction guaranteed return policy. If customers are not satisfied with a purchase, they can return it within 365 days for a full refund. The customer prints a prepaid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out.

While this strategy seems expensive, it actually works to Zappos’s advantage. The average industry merchandise return rate is 35 percent, but the company’s most profitable customers tend to return 50 percent of what they purchase. The customers who have the higher return percentages are the most profitable because they experienced Zappos’s customer service and return policy, which creates loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. This is what helps make Zappos so successful.

11-4bCustomer Service

What makes the Zappos business model unique is the company’s focus on customer service. The company established a method of serving customers and handling their issues distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy.

Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. According to Hsieh, Zappos encourages people to call the company because more interaction with customers increases their personal connections with the organization. Customer service representatives actively use social media sites such as Facebook and Twitter to respond to customer issues. Zappos also offers an app for customers to download. To encourage them to use the app, Zappos offers users 1-day free shipping simply for downloading the app to their devices.

Another key aspect of its customer service model is that nothing is scripted. Zappos employees have free rein in their decision making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable.

Zappos believes great customer experiences encourage customers to use the store again. In addition, its long-term strategy is based on the idea that great customer service will help it expand into other categories. While around 80 percent of company orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area it is passionate about and meets customers’ needs.

The company considers word-of-mouth marketing to be the best way to reach new customers. With over 75 percent of purchases made by repeat customers, it is evident that the Zappos mission to “provide the best customer service possible” works well for the company. Zappos has also engaged in forms of buzz marketing to spread the word. At one of the annual “Life is Beautiful” festivals in Las Vegas, Nevada, Zappos developed a Porta Party. This Zappos-branded mobile restroom included 40-inch waterproof television monitors, a “selfie station,” and prizes such as gum, whistles, and glow sticks given each time the user flushed. This fun and unusual public relations initiative was a hit among consumers and fit in well with the firm’s zany culture.

11-5Transparency

Transparency is a critical part of the Zappos model. Transparency is an ethical principle that involves maintaining open and truthful communication. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes employees should develop open and honest relationships with all stakeholders in the hope this will assist in maintaining the company’s reputation. Hsieh uses Facebook and Twitter to share information with employees and customers (he has 2.84 million followers on Twitter). When Zappos laid off 124 employees in 2008, Hsieh announced the decision via Twitter and later blogged about it. Although some companies hesitate to open themselves to public criticism, Zappos feels it has nothing to hide. In fact, most of the public posts on its social media sites are praise from customers.

11-6Zappos Insights

The Zappos business model is so successful the company offers tours and workshops. Its three-day culture camp costs $6,000 and teaches participants about the Zappos culture and how to develop their own successful corporate cultures. The company also created Zappos Insights, an online service that allows subscribers to learn more about Zappos’s business practices through blogs and videos. These programs have high profit potential for the company because they are built on what Zappos already does best.

11-7Corporate Culture

11-8Work Environment

Zappos is famous for its relaxed and wacky atmosphere. Employee antics include nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters feature an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “reply-all” hat when they accidentally send a company-wide email. This environment isn’t just fun; it’s also strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.”

11-8aHiring and Training

The key to creating a zany work environment lies in hiring the right people. The job application features a crossword puzzle about Zappos and asks potential employees questions about which superhero they’d like to be and how lucky they are. They may also check how potential employees treat people like their shuttle driver. Zappos is looking for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure their character fits with a high-integrity company. However, even Hsieh admits finding great employees is tough. He believes pursuing too much growth at once harms the company if the organization starts caring more about the quantity of new employees rather than the quality. Zappos gets approximately 30,000 job applications annually.

All new employees attend a five-week training program that includes two weeks on the phones providing customer service and a week filling orders in a warehouse. To make sure new employees feel committed to a future with the company, Zappos offers $2,000 to leave the company after the training (called “The Offer”). Amazon has adopted a similar practice.

Even after the initial training is over, employees take 200 hours of classes with the company—covering everything from the basics of business to advanced Twitter use—and read at least nine business books a year.

11-8bBenefits

Another aspect of Zappos that is unique is the benefits it provides to its employees. The company has an extensive health plan that pays 100 percent of employee medical benefits and on average 85 percent of medical expenses for employees’ dependents. The company provides employees with dental, vision, and life insurance. Other benefits include a flexible spending account, prepaid legal services, a 40 percent employee discount, free lunches and snacks, paid volunteer time, life coaching, and a car pool program.

Zappos determined that the pay structure and the process for employee shift signups were inefficient for the company’s needs. With Hsieh’s encouragement the company adopted scheduling software called Open Market. Under this new system, call-center employees would be given 10 percent time flexibility to pursue their own projects. Employees could decide when to work, but the compensation system was revamped to mimic the surge-time pricing of popular ride-sharing service Uber. With this compensation system, call-center employees working during periods of high demand would receive higher pay. In other words, Zappos’s hourly compensation for its call-center employees would be based on demand. Zappos hopes to expand this system to all departments eventually. For seniority-based jobs, this system holds risks. For instance, seniority-based incentives also take into account company loyalty, camaraderie with coworkers, and dedication that are also important to work productivity. However, Zappos believes the system works well for its call-center employees because many employees are employed for shorter periods.

11-8cWork-Life Integration

One of Zappos’s core values is “Build a positive team and family spirit,” so the company expects employees to socialize with each other both in and out of the office. In fact, managers spend 10–20 percent of their time bonding with team members outside of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says this increases efficiency by improving communication, building trust, and creating friendships.

Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees compile an annual “culture book” comprising essays on the Zappos culture and reviews of the company. The culture book helps employees think about the meaning of their work and is available unedited to the public. This is based on the principle of transparency.

As with its customers, the foundation of Zappos’s relationships with its employees is trust and transparency. The company wants its employees, like its customers, to actively discuss any issues or concerns that come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes “the best way to have an open-door policy is not to have a door in the first place.” Zappos’s management is open with employees by regularly discussing issues on the company blog.

However, this positive work environment comes with the expectation employees will work hard. Employees are evaluated on how well they embody the core