Case Study: The Success and Failure of Holacracy at Zappos

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FUNDAMENTALS OF MANAGEMENT
A CASE STUDY OF ZAPPOS AND HOLACRACY STRUCTURE
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Executive Summary
This report summarized the case study of Zappos and the failure of Holacracy, new governance
structure. The report involved the basic introduction about the Holacracy and Zappos. Further,
the key symptoms and the problems were identified that were pertaining in the company. The
management theories were identified and applied as per the scenario of Zappos. This report also
threw light on the root causes of the identified problems along with the recommendations for
organizational performance improvement.
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Table of Contents
Introduction......................................................................................................................................3
Key management challenges...........................................................................................................4
Case Analysis...................................................................................................................................7
Recommendations..........................................................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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Introduction
Holacracy has become a new buzzword in the global business environment. Holacracy terms as
the innovative way of operating organization in the replacement of traditional hierarchy of the
management. In such type of structure, the authority or power disperses all over the organization
equally without any boundary. Zappos is the Las Vegas-based online retailer of shoes and
clothing and one of the subsidiaries of Amazon. Zappos considers as one of the companies that
adopted Holacracy as the new organizational structure. However, it was a complete failure move
for Zappos as after the implementation; numerous employees left the company. The company
refuses this claim since no such study had yet been conducted for determining the real reason
behind such a massive number of employee turnovers. Many employees were unable to integrate
their core value with the new organizational structure. The implementation of this new
organizational structure brings specific issues for the company. Holacracy is also considered as
the new form of self-management since it involves "no bosses and everyone is the boss"
principle.
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Key management challenges
Zappos was the first company that adopted the new structure of Holacracy. Holacracy in Zappos
was an earlier failure, but considering the current scenario, this new form of self-management
structure has been working to some extent. Holacracy provides the opportunities and freedom to
the people, teams, and departments to transform into self-managed bodies along with sticking to
the organizational goals and purpose. For ensuring the successful implementation of Holacracy
structure, Zappos not only undertook the training sessions of the employees but also started from
a small level. In the Holacracy culture, there is no boss, and without a boss, every person acts
like a boss, and this created the hidden entrepreneurship talent from within some of the
employees (Bernstein et al., 2016). The company had to deal with the numerous challenges while
adopting the Holacracy into the company’s structure. It should not forget that the company
selected only 10% of the employees for involving under the Holacracy governance structure in
the initial phase. Gradually, it covered all the employees of the company until the year 2015.
Symptoms of the vital management challenge
In the initial phase of Holacracy structure, the employees of Zappos were reluctant to accept the
new organizational structure. High resistance to change aroused in the company from the
employees since they believed that it would be contracting to their values and organizational
original management structure. The employees started disappointing with the changed
organizational structure. Poor job satisfaction led to a negative impact on employee performance
and productivity. After the implementation of Holacracy, the employees were started getting
treated as if they are the operating systems or machines (Van De Kamp, 2014). Holacracy
somewhere leads to the loss of human elements from the employees and keeping of emotions
aside. This governance structure provided a full degree of freedom to the employees using which
the employees were trying their best in different domain works. Holacracy delivers the
opportunity for employees to go beyond their job description and work in their field of interest. It
has affected the productivity of Zappos employees which ultimately lowered the organizational
performance.
Not every employee desires to have a boss-less job since the boss assists the employees in
different ways. For some of the employees, having a boss provides a backbone to them for
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attaining their objectives along with the organizational goals. Since their job stopped providing
them with satisfaction, the morale of the employees got decreased rapidly. At some point, when
the offer for employee retention came out, the employees started believing that these offers were
aimed only for the promotion of favouritism. It had emerged the negative environment in Zappos
which affected the employee productivity and performance. The whole working environment
transformed into one of the biggest platforms for contest rather than a professional work setting
(Bernstein et al., 2016). Every employee was a boss in that “contest” therefore, every employee
determined their vision and objectives. It led to the absence of a vision consistent with the
overall organization. Holacracy implemented as a social engineering platform, but rather it
became the place of dramas and complaints. The workplace was transformed into a high school.
Also, low pay scale to the employees became one of the biggest reasons that lowered the
employee morale.
Problems identified
It has been noticed that the inception of Holacracy was undertaken with a positive view.
However, Zappos had to deal with certain challenges that affected the reputation and
performance of the company. Firstly, the company had to lose its more than 18% of the total
employees even after offering an attractive package (Eremina, & Puhakka, 2017). It should also
consider that most of the employees left the company not due to the Holacracy but because of the
better career opportunities or initiating a business. The symptoms identified above for the high
employee turnover were mainly the low employee morale, inadequate pay scale and poor job
satisfaction. Also, the employee turnover caused due to the non-possibility of the alignment of
the employee core values with the new governance structure. Job satisfaction became
challenging to achieve due to the complaints made by the employees since they did not want to
work hard for even a single day. Secondly, the coincidence of Holacracy inception and leaving
18% of employees attracted negative publicity for the company (Bernstein et al., 2016). The
customers and the whole market industry blamed this move of Holacracy into Zappos and
considered it as a failure. This situation had affected the market position of the company since
the employees are the representatives of the company in the external business environment and
such a high turnover rate harms the market position of the company.
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Thirdly, all these problems impacted directly on the financial performance of the company.
Initially, the shortage of employees led to a lower performance level of Zappos. After this,
negative publicity reduced the sales of the company. Not only had this, but the customers,
suppliers, investors and other stakeholders also got influenced by the issues of Holacracy (Turner
& Brunetta, 2018). It realized that the sales level of the company got decreased due to which the
company was unable to generate a high profitability level. Moreover, due to low profitability, the
investors and other stakeholders did not get the returns during those times. The company
structure lost its attractiveness for the investors and Zappos faced with financial issues. Lastly,
poor leadership was one of the severe outcomes of the inception of the new governance structure
named Holacracy in Zappos (Velinov, Vassilev, & Denisov, 2018). It is evident that the
company had to face poor leadership due to the boss-less environment. The main reason for poor
leadership was the lack of a unified vision that resulted in the bad performance of the employees
and the dispersion of the human efforts in a different direction.
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Case Analysis
Management theories refer to the set of guidelines and general rules established for the
management of an organization. These guidelines or rules are made majorly for the managers to
implement effective organizational management. There are different management theories
available to the manager such as systems theory, scientific management theory, theory X and
theory Y, human relations theory, principles of administrative management and bureaucratic
management. Considering the scenario of Zappos and Holacracy, it would be appropriate to use
Henry Fayol’s Modern Management theory and Bureaucratic Management theory of Max
Weber.
Modern Management theory
This management theory was established by Henry Fayol who is known as the Father of Modern
Management Theory. This management theory developed in a way that it can be applied to every
administration as well as the field. He divided the whole industrial activities into different parts
such as managerial activities, commercial activities, technical activities, and accounting activities
and so on. The managerial functions were grouped into the categories of planning, coordinating,
organizing, directing, and controlling. Under this theory, he proposed approximately 14
principles of management. These principles ensure the successful management within an
organization that result in growth and success (Dent, & Bozeman, 2014). Application of modern
management theory in the case study of Zappos can be made in the following way:
1) Division of work: This principle deals with taking the benefits of specialization by
dividing the entire organizational work into small parts. Using this principle, Zappos can
attain higher productivity from all the organizational levels.
2) Authority and Responsibility: According to this principle, responsibility takes place when
the authority comes. It means that a person is having authority also possesses the
responsibility. Both terms are inter-related in the context of the organizational
environment.
3) Unity of Direction: Unity of direction implies that an organization constitutes of different
groups and every group requires the unified objective or goals. It involves the practice of
assigning every group with one plan as well as one head.
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4) Centralization: This term states as the rights and authority of decision-making by the
higher authorities only. No participation of subordinates undertakes in the decision-
making process. Degree of authority centralization gets varied as per the needs and
demands of the situation.
5) Equity: In the context of Zappos, equity refers to the equal treatment to all the employees
irrespective of the discrimination based on race, colour, religion, gender, sex, and
nationality and so on. This principle compels the manager to behave with kindliness,
discipline, and fairness.
6) Unity of command: This principle supports the fact that every subordinate in Zappos
must get orders or command from one employer at a time. Every subordinate must assign
within one superior only since it leads to the elimination of confusion,
misunderstandings, and conflicts.
7) Remuneration: Employees are liable for getting fair remuneration through fair payment
method. Fair remuneration would assist Zappos in providing satisfaction to the
employees and employers as well. It is vital for the company to understand the fact that
remuneration enhances employee satisfaction and remuneration may be financial or/and
non-financial.
8) Discipline: Discipline is one of the crucial requirements for every type of organizations,
but the methods are different for every organization. Zappos can ensure successful
management through discipline by supervision and agreements.
9) Scalar chain: Scalar chain implies the chain that encompasses all the organizational
personnel initiating from the top authority moving to the lowest level of employees.
Zappos employees require the adherence of this authority line for maintaining discipline
as well.
10) Subordination of individual interest to the group interest: This principle follows the rule
of giving more importance to the group interests than the individual interests, and it is
mainly applicable on the managers and employees of Zappos (Kitana, 2016).
11) Order: The principle of the order implies the placement of the right person to the right
job. Also, the processes of Zappos must be an appropriate place, and the workplace
conditions must be safe and healthy for the employees.
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12) Esprit de Corps: This principle compels the managers and Zappos to drive for the
promotion of team building, feeling of unity and team spirit.
13) Stability of tenure of personnel: Zappos must strive for the personnel planning to reduce
the employee turnover to the minimum level. Efforts must be undertaken for the
minimization of the employee turnover.
14) Initiative: Zappos managers should take initiatives along with providing the same
opportunities to the employees for enhancing their zeal and enthusiasm.
Bureaucratic Management Theory
Max Weber discovered this theory in the nineteenth century. Bureaucratic management theory
implies systematic organization development in the way of ensuring effectiveness and efficiency.
Weber inculcated basic principles into the bureaucratic management theory that focus on the
hierarchy, division of labour and rules. The bureaucratic principles comprise hierarchical of
authority, rules and requirements, career orientation, formal selection, task specialization, and
impersonal relationship. Zappos can apply this theory by integrating the essential elements
provided by Weber into the organizational structure. This theory states the hiring of personnel
based on education and qualifications rather than other reasons (Khorasani, & Almasifard, 2017).
This personnel should assign authority and responsibilities as per their specialization and
qualifications. Moreover, Zappos can make sure to maintain the work-based relationships only
instead of encouraging a personal relationship.
Root causes of the problems
The identified problems in Zappos comprise high employee turnover, weak financial
performance, poor leadership, and negative publicity. It can be said that the inception of
Holacracy in the company gave birth to all these issues. Insufficient training can consider as one
of the root causes of these problems. The company applied the Holacracy structure to all the
organizational levels within a short time. The employees showed resistance to change where
instead of motivating these employees using different ways, Zappos allowed the employees to
leave the company and offered monetary incentives only. Zappos required conducting market
research before implementing the Holacracy structure as to how the structure can be handled or
what considerations must be integrated (Van De Kamp, 2014). Lack of leadership, understanding
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among the employees and lack of employee morale led to the failure of the Holacracy structure.
Also, the employees did not possess sufficient skills and capabilities for accepting this structure
effectively. Moreover, it can be said that management and employees shared a weak relationship
and understanding. Due to this, the high turnover rate of employees had to be dealt with by the
company.
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Recommendations
The failure of Zappos initiative for the application of Holacracy structure made the industry
learnt some key lessons. It has been noticed that the key issues were concerning the employees
due to whom the company had to lose the significant number of employees. Firstly, the
application of Holacracy structure requires the training programs for the employees for
developing the skills and capabilities necessary such as leadership, cooperation, assistance,
honesty, patience, communication and other skills. Also, the reputation of Zappos had been
harmed severely due to the employee turnover at the initial phase of Holacracy. Incorporating
corporate social responsibility and employee development at the company must be highly
focused on regaining the positive brand image (Krasulja, Radojević, & Janjušić, 2016). A team
for financial management and planning would be highly recommended for recovering the
financial performance of the company. Apart from this, more marketing activities require the
implementation and expansion of distribution channels for enhancing sales. Instead of bringing a
new leader to the company, Zappos should develop a leadership team within the existing
organizational personnel. Monetary and non-monetary incentives require high consideration for
the improvement of employee morale.
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