CPID 713019
HRMG 6200: Managing People and Organizations
Leonard Glick and Burt Spector
Northeastern University
Spring 3 2017
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HRMG 6200: Managing People and Organizations,
Glick/Spector − Spring 3 2017
Northeastern University
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Table of Contents
“Medisys Corp.: The IntensCare Product Development Team” by Donnellon,
Anne; Margolis, Joshua D.
“Sun Hydraulics Corp. (A) and (B) (Abridged)” by Barnes, Louis B.; Kaftan,
Colleen
1
11
XanEdu Extra
An Excel−formatted spreadsheet containing the exhibits for the case above is available at
http://content.xanedu.com/hs/491119p2.xls
“Zappos.com 2009: Clothing, Customer Service, and Company Culture” by
Frei, Frances X.; Ely, Robin J.; Winig, Laura
27
XanEdu Extra
An Excel−formatted spreadsheet containing the exhibits for the case above is available at
http://content.xanedu.com/hs/610015p2.xls
“The Discipline of Teams (HBR OnPoint Enhanced Edition)” by Katzenbach,
Jon R.; Smith, Douglas K.
55
67
Bibliography
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4059
OCTOBER 30, 2009
ANNE DONNELLON
JOSHUA D. MARGOLIS
MediSys Corp.:
The IntensCare Product Development Team
It was just six months away from MediSys’s planned August 2009 launch of IntensCare, their new
remote monitoring system for use in hosptials’ intensive care units. The company was investing $20.5
million in the new system, which represented the most ambitious project in the company's 10-year
history.
Valerie Merz, marketing manager for IntensCare, was feeling enormous pressure as she reviewed
the agenda for the upcoming meeting of the product development team. Once again there was no
scheduled time to resolve the debate over the modular design that she knew was critical to successful
adoption and long-term success in the market. Without this modularity, she was certain that the
system would lose market share to the competition’s forthcoming products, both scheduled for
release within the year. And it wasn’t just her P&L that would take the hit; the team, and the whole
company, would look second-rate.
“Why isn’t Jack stepping up on this issue and getting it resolved?” Merz wondered. Jack Fogel,
senior production manager, was the project lead for IntensCare, but in Merz’s opinion, he was far too
focused on the details of the product side and far too little concerned about the business issues and
the impending launch. Perhaps it was time for her to blow the whistle and get the bosses involved.
How else could she get her colleagues to do the right thing for the company and not just for their
own departments?
MediSys: Background and Organization
MediSys Corp., a privately held U.S.-based medical device manufacturer, was founded in 2002.
Its annual revenues in 2008 were $400 million, and the company employed 1,750 people.1 The
company developed, manufactured, and sold medical monitoring systems for the hospital segment.
1 In 2008, the average value of annual shipments per paid employee in the medical equipment industry was approximately
$190,000.
________________________________________________________________________________________________________________
Babson College Professor Anne Donnellon and HBS Professor Joshua Margolis prepared this case solely as a basis for class discussion and not as
an endorsement, a source of primary data, or an illustration of effective or ineffective management.
This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
references to actual companies in the narration.
Copyright © 2009 Harvard Business School Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685, write
Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. 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 Harvard Business Publishing.
Harvard Business Publishing is an affiliate of Harvard Business School.
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4059 | MediSys Corp.: The IntensCare Product Development Team
MediSys’s first two products were highly successful specialty pulmonary and renal monitoring
systems. Though still relatively small, the company was very profitable. Its entrepreneurial culture
had fostered innovative thinking across the company, and as a result, numerous promising initiatives
were at various stages of development—from redesign to development of new systems.
However, the board of MediSys saw early signs that growth was slowing. Two well-known
public competitors, with deep pockets and strong reputations in the industry, had announced they
were moving into MediSys’s key markets with products designed to compete with IntensCare. A
similar competitive response seemed likely as MediSys launched future products as well.
Partly to counter this threat, an aggressive new president, Art Beaumont, was hired in January
2008 to sharpen strategic focus while preserving the innovative culture and restimulating rapid
growth. Within weeks, Beaumont introduced a series of changes. As shown in the MediSys
organization chart (see Exhibit 1), the company continued to be organized functionally; however,
Beaumont created an Executive Committee consisting of his five direct reports: the vice presidents of
sales and marketing, research & development, design and engineering, production, and
administration. His intention was to develop them into an executive team that would jointly create
and implement a strategy for growing the business swiftly. His early months in the job convinced
him that, despite the entrepreneurial culture, some of these managers had become entrenched in their
functional roles and that progress could take some time. While he worked on shaping his
management team, Beaumont also formalized a process for product development. He believed that
MediSys could outmaneuver its larger, richer competitors by speeding product development through
the use of cross-functional teams. Speed was the key. 2
New Product Development at MediSys
Historically, MediSys’s approach to product development was essentially sequential:
1.
Research & Development (R&D) staff typically started the development sequence by
proposing new technologies or new systems that could yield significant new business
opportunities.
2.
Once the leadership agreed on a new idea, Marketing developed product descriptions from
customer needs and responses to new MediSys concepts, and then passed these on to Product
Engineering and Software Design.
3.
Engineering and Software Design developed them into product specifications, and passed
those on to the Regulatory group who researched and, where necessary, conducted clinical
trials to test prototypes of the systems.
4.
Once these specifications were finalized, they were passed on to the production group, which
arranged for the fabrication and assembly of the products.
In August 2008, Beaumont introduced a new parallel system for product development in which a
”core team” of people assembled from all the critical functions—R&D, Marketing & Sales, Product
Engineering, Software Design, Regulatory, and Production—worked together continuously to move
a product from conceptual stage to final production. For every core team, a project leader was
designated to orchestrate its work, keep an eye on the complete project, secure resources for the team,
2 A widely cited economic model developed by McKinsey & Co. calculates that going 50% over budget during development to
get a product out on time reduces profits by only 4%, but staying on budget and getting to market six months late reduces
profits by a third.
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and serve as a liaison to senior management. Beaumont believed that the project leader needed to
have cross-functional expertise, a track record of high performance, and the respect of his or her
colleagues.
Most of MediSys’s professional employees embraced the cross-functional team design and parallel
development process. Conceptually, it fit their entrepreneurial and team-like approach, though it
was more disciplined and formal than they were used to. They understood that parallel
development required new ways of thinking and behaving, particularly in relationship to the
functional areas that had grown up with the company. "Parallel development doesn't allow people to
single-mindedly defend the position of their functional area," one employee noted, "or what's easiest
or best or cheapest for their own functional area. It forces people to look at the bigger picture."
While requiring that functions look at the "bigger picture," parallel development did not alter the
way reporting and evaluation occurred. All employees, including core team members, continued
reporting to their functional managers who continued to supervise and evaluate them.
Art Beaumont recognized that the management style of all the MediSys executives would also
have to change in a parallel development environment:
I know I am asking these folks to give up control, which will be hard for them in the context of
this major investment. But as the company has grown, a management style has evolved here
that doesn’t reflect the entrepreneurial spirit that everyone loves to brag about. It has become
much more of a command-and-control culture with an emphasis on technical excellence. Not
that we don’t need that, but the competition has become intense and our reputation is on the
line, so we need all the brain power and discretionary effort we can get. I think that crossfunctional teams are the only way to get that. But it will be challenging for my direct reports
and me to change our styles to be more patient, open, and trusting, and not to intervene.
History of the IntensCare Project
IntensCare had developed in typical MediSys fashion (see Exhibit 2 for a time line of this product
development effort). In September 2006, Aaron Gerson from the R&D group had the idea for a
patient monitoring system that would collect data on patients in intensive care units and post it to an
electronic database that could provide an integrated profile of an individual patient’s health and
would also send email messages to various physicians and nurses involved in the patient’s care. He
pitched this concept to Peter Fisher, a friend in Sales, who tested it with clients and found great
interest. The two invited a third friend from Software Design (who later left the company) to chat
with them about how this might work, and before long an ad hoc product development group had
organized itself informally to develop this opportunity.
Over the next year, this ad hoc group developed preliminary market research and product
designs, which they took to the senior leaders of MediSys to request funding for further product
development. In July 2007, the group was given $500,000 to be used for software development and
ongoing product engineering work. Progress was slow, as the team members were often pulled
away to work on other priorities in their functional areas. Fisher had been promoted to vicepresident of Sales and Marketing, but started working immediately to identify an external hire to
replace himself in this effort.
In August 2008, Beaumont formalized a core team and chartered it to accelerate the new
monitoring system. (See Exhibit 3 for his notes on a list of team members and their backgrounds that
Beaumont had obtained from Human Resources as he was planning the changes in the IntensCare
project.) The team members included two people from the original ad hoc group: Aaron Gerson, the
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R&D researcher who formulated the idea, and Bret O’Brien, a manager in product engineering. Jack
Fogel, senior production manager, was named project leader based on his extensive production
experience at MediSys and his track record for successfully managing the interface between
engineering and production. Dipesh Mukerjee was assigned to oversee the software design and
development (and had made it known immediately that he intended to outsource both functions to a
firm in India). Karen Baio was asked to represent Regulatory Affairs, and a new external hire in
Marketing—Valerie Merz—was assigned to oversee the product launch and manage the P&L for the
new product. Managing this as a business was Merz’s sole assignment for the next three years.
Beaumont approached the IntensCare project with a sense of urgency: "Two competitors have
announced that they will launch similar monitoroing systems within the year. We have to get this
product out the door on time and we cannot make a mistake." Beaumont committed an additional
$20 million to the rapid development of IntensCare and communicated the new IntensCare goal:
“Launch an innovative, world-class MediSys product by August 2009.”
The IntensCare Team
Before the IntensCare team was formally chartered by Beaumont, the group was convened by
Aaron Gerson and typically met every other Friday afternoon for an hour or so. When Jack Fogel
was appointed project leader, he continued this practice but he also met frequently with Bret O’Brien,
Gerson, and Mukerjee individually or together to brainstorm solutions to problems that had arisen.
In addition to Fogel’s various departmental responsibilities within production, he was responsible
for the final assembly of the IntensCare product. Fogel characterized his role on the team as follows:
I try to keep all ends tied together for the net result. Where are we on software development
and testing, engineering design, order and delivery of the component parts, and fabrication
planning? I tie all the pieces together to make sure they hit the floor at the same time. I make
sure communication is happening so that all things are getting done.
While the team had made significant progress in the six months since it had been reconfigured,
Fogel knew there were still difficulties to overcome if they were to meet Beaumont’s very aggressive
release date.
On February 2, 2008, Mukerjee sent everyone a terse text message that suggested even bigger
problems to come, as O’Brien’s critical path depended on getting the software in final form by May 1:
“Problems again with delivery dates from India. Need to talk to you asap.”
On February 7, O’Brien e-mailed Fogel:
Jack,
We are running into some serious engineering problems trying to fit the data displays and
battery units into the customer size specs Marketing provided. Can you spare some time
tomorrow to meet alone with me and Aaron to brainstorm solutions to this? I know we have a
meeting tomorrow afternoon with the whole team, but we need to do some serious thinking
together before we put this in front of the rest of the team. I can’t afford the time to deal with
Valerie’s predictable drama over this.
Bret
P.S. Have you talked to Dipesh recently about the delays with the software? Any updates?
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“Bret’s right,” Fogel muttered to himself; “Valerie is going to go through the roof if she hears
about these two major problems. We’d better get these issues and the specifics all nailed down before
we bring these up in the team meetings.”
Merz had her own critical path to product launch, and any major problems in product design
would create a cascade of delays in the marketing of the product that the IntensCare business plan
could not accommodate, from the production of marketing copy to the development and publication
of technical installation guides to the final development of the webpages devoted to the system. In
fact, she was hoping that an accelerated time line might leave room for at the least the initial planning
of how the monitoring system could be modularized for the variety of clinical situations where the
system might be used, from military surgery units to neonatal intensive care. While she was not
counting on this, she felt she had to demand it now if she had any hope of getting it in the next
version.
Merz’s experience to this point with her colleagues on the IntensCare team had not given her
much confidence in their competence in general or, more particularly, in their ability to deliver the
product that Beaumont and the market were expecting. She was very frustrated with Fogel as the
team leader. Having led two other major product development teams for her former employer, Merz
knew what was possible “when the team leader was really in the driver’s seat.” Yet, here she was
responsible for the IntensCare’s P&L, but not in a formal position to get the other team members to
deliver. She described her relationship with the product and the team this way:
I feel my position is mini-general manager. I have ultimate responsibility for profit and loss on
IntensCare. The engineers and production staff don't report to me, but I’m responsible for
refining the product road-map. If I don’t keep on them, they’ll stray to other projects. I
provide the technical support to customers: the training, the hotline, the technical support for
field reps. I’m in charge of pricing, advertising, and sales promotion activities. I have all the
responsibility but no authority to get others to live up to their commitments. I have no idea
what Jack is doing, but it looks like he is just another “good guy” who doesn’t want to ruffle
any feathers. Bret and Aaron always seem to have each other’s back. And who knows what
Dipesh is doing; I worry that this offshore development is going way off track and no one even
knows.
Bret O’Brien was the lead engineer on the IntensCare project; he also managed several other
engineers working on redesigns for the two existing MediSys systems and on one new system in the
early stages of development. At the formal start of the project six months earlier, O’Brien had two
other engineers reporting to him who worked full time on the IntensCare. However, due to recent
recession-driven companywide cutbacks, those engineers now split their time between IntensCare
and other projects. O’Brien knew from the beginning that his staff would be deeply challenged to
meet the aggressive deadlines: “It was already almost mission impossible; this product is as complex
an integration of software and hardware as any NASA project, not to mention all the other pressures
to accelerate the time line.” And that was before the staff reductions. Now his solitary focus was on
designing a high-quality product as quickly as he could. He had resigned himself to accepting the
constant berating from Merz about the time line, coping with it by avoiding her as much as possible.
“Let Jack give her the bad news,” he told himself “After all, they are the two that will get all the glory
for this product.”
O’Brien described his view of the roles of the various functions within the team:
We all have very different drivers, which really complicates our abililty to make good
decisions together. Marketing is revenue-driven, and this product should be a big revenue
generator. Production likes the product because it shows off their ability to manage a complex
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supply chain of software and hardware components. Of course, we in Design and Engineering
are also integrating the software and hardware elements into the design, but Dipesh and I are
too busy with our own parts of this complex project, and he spends so much time in India with
our software contractor that we never get to talk about integration in any big-picture way. I
operate pretty much on my own. My objectives in engineering are to deliver at cost, on time,
and with specified features. Dates are my driver, and quality too. And Regulatory—well, their
role is to throw roadblocks in front of everyone.
Karen Baio, the lawyer who represented Regulatory Affairs on the team, knew that she was seen
as an obstructionist by most of her teammates. “Sometimes their childishness really bugs me,” she
reported. ”They act like this whole effort is some kind of game we are trying to win, instead of an
important healthcare initiative that will save many lives and therefore must function perfectly and
operate within the law.” Baio’s patience and persistence were well-known throughout the company,
as she had been with MediSys for many years. She found Mukerjee and Merz increasingly difficult to
tolerate. Software developed overseas was notoriously problematic in the medical diagnostics field,
yet Mukerjee acted like this was a non-issue. A hotshot newcomer to MediSys (like Merz), he
regularly asserted his expertise and substantial experience with developing and testing medical
diagnostic software and dismissed Baio’s concerns about the time required for adequate testing of
externally produced software before integration into the IntensCare system.
But it was Merz who really got under Baio’s skin. “Valerie sees herself as MediSys’s savior,” Baio
commented. “She is self-centered, myopically focused on marketing, and very aggressive in our
meetings.” Like others on the team and even in Marketing, Baio wondered what signal Beaumont
was sending to the company by personally hiring someone like Merz. Baio described several
instances in which Merz downplayed the risks of failing to test the product thoroughly, insisting that
“lead users will help us test” the system once it was installed. Baio was almost looking forward to
the upcoming meeting where she suspected Merz would turn red with anger when she heard there
were expected delays in the product design—a rumor Baio had heard from Gerson.
For his part, Aaron Gerson was fairly confident that IntensCare would be a big hit in the
marketplace. He wasn’t as worried as his teammates about the time line and aggressive goals; he had
seen many an executive try to push product development faster and fail. He also knew the
competition well and didn’t believe they were capable of getting a better product to the market faster
than MediSys could. His only concern was the new offshore software development, an unknown
they had not dealt with in previous products. While Mukerjee seemed competent and confident,
Gerson was withholding judgment on whether this outsourcing approach could be both successful
and cost-effective.
A Sticking Point: Modular Design
One of the most hotly debated topics among the IntensCare team members regarded modules. By
creating a modular design within the system, the customer would be able to tailor the system to a
variety of clinical situations, (e.g., neonatal intensive care, day surgery, or field hospitals), and thus
have greater flexibility.
Merz firmly believed that customers demanded a modular design:
The hospital equipment distributors we have interviewed are insistent that a modular design
will allow them to sell our system into a much wider set of segments from hospitals to military
organizations to a variety of clinical arrangements. Furthermore, the two competitors who
have announced their plans to enter the field have described what is essentially a modular
design.
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While Merz believed that IntensCare had to be modular, she thought modularity might be
introduced in the second version, after the initial product introduction. She had not expressed that
view to her teammates because she feared that such a compromise suggestion would be used by
engineering as an excuse to continue ignoring the demand for modularizing anything.
O’Brien acknowledged that engineering had no intention of developing these modules – at least
for this version of the system. He and his staff were at capacity just trying to solve the internal space
problem, which was critical to meeting the launch deadline; they couldn’t waste time with
redesigning for modules. “Besides,” noted O’Brien, “modules were addressed only in the most
general terms in the original 2007 IntensCare business plan, so we never designed for them, nor did
we specify such requirements for the software people.” It seemed that the team was at loggerheads
over how to proceed on this issue.
February 13, 2009
IntensCare was behind on design, clinical testing, and production schedule. Still, the team was
fighting to meet the August deadline for introducing the monitoring system to the marketplace. The
marketers were busy preparing a training video for technical installation and another for medical
users; software designers in the United States and developers in India were in constant
communication about the programs; the engineers had their hands full with the space problem; and
the production engineers were ordering components and arranging the assembly lines. Regulatory
was revising clinical test protocols and schedules. The team as a whole still had to decide about
modules.
Art Beaumont was aware of the difficulties confronting the team:
We have several problems going on right now. But I know all these people are really working
hard to resolve them. Now, if I jump in there and shout or accuse them, what I'd basically be
saying is that I don't have faith in the people I've assembled to get the job done, and I don't
think they're giving it their best effort. And that's not what I should be doing. My job is to
support them, not to shout at them.
Still, pressure was intense. Production would have to start soon to assure projected market
introduction. Any additions or changes to the design would threaten a delay in production. At the
same time, IntensCare had to meet strict quality and regulatory standards as the company adjusted
the product to satisfy market needs.
As Valerie Merz was headed to lunch just before the Friday meeting, she walked past a conference
room near Bret O’Brien’s office. She couldn’t help hearing him complaining loudly to Fogel:
Look, Jack, if you don’t get that woman off my back about this modular issue, I am going to
demand to be let off this team. As it is, there is no way I can even come close to meeting our
scheduled milestone of handing the design off to your people! And you know there are even
worse delays coming from the Indian software team. Why don’t you call off today’s meeting
and we’ll get your boss and mine in here and give them the straight story?
Merz stopped in her tracks, tightened her fists, and took three deep breaths. If she walked into
that conference room, there was no telling what she might do or say. Maybe she should turn around
and walk right into Beaumont’s office and hand in her resignation.
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Marketing Manager,
IntensCare Business
Leader
Senior Production
Managrer &
IntensCare Project
Leader
Note: Shading indicates IntensCare core team members; asterisk indicates Management Committee members.
Senior Engineering
Manager
Software Design
Manager
Valerie Merz
Jack Fogel
Bret O’Brien
Ø
Ø
Ø
Sales & Marketing
Production
Design &
Engineering
* Peter Fisher, VP
* Martha Hill, VP
Ø
President
* Art Beaumont,
* Len Broman, VP
MediSys Organization Chart, 2009
Dipesh Mukerjee
Exhibit 1
Scientist
Aaron Gerson
Ø
Research &
Development
Arnie Frederick, VP
Regulatory
Affairs
Karen Baio
Ø
Administration
* Zoe Thompson, VP
4059 -8-
MediSys Corp.: The Intenscare Product Development Team | 4059
Exhibit 2
Time line of IntensCare Product Evolution
September 2006
R&D person gets inspiration for the product
October 2006
Sales person vets the concept in the market
December 2006
Conversations include software designer
June 2007
Ad hoc team presents product concept to senior leaders
July 2007
Senior leadership of MediSys allocate $500,000 to development of IntensCare
January 2008
Beaumont hired as president
August 2008
Beaumont formalizes NPD and charters a core team to develop IntensCare
August 2009
Projected IntensCare launch date
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4059 | MediSys Corp.: The IntensCare Product Development Team
Exhibit 3
Beaumont’s Annotations on HR’s List of Prospective Team Members for IntensCare
Karen Baio, Regulatory Affairs
Employed in 2002. J.D. 1989 from University of Illinois. Previously employed by
Pfizer.
Zoe Thompson rates her as high performer.
Sharp woman. Watch for general
counsel potential.
Jack Fogel, Senior Production Manager
Employed in 2002. B.Eng. 1971 from Tufts University. Led the renal monitoring
system launch. High performer, well-respected by colleagues in production and
engineering. Seems a bit laidback for this job, and not as business-focused as I’d like but no one else has
the experience of launching such a product
Aaron Gerson, R&D
Employed in 2002.
products.
PhD 1972 from M.I.T. Lead scientist on both monitoring
Has four patents.
High performer.
Created the IntensCare product
concept and was ad hoc leader of the group that did early development of the
project. Brilliant, need to keep this gug involved in company long-term. Could replace Arnie if he wanted to
Valerie Merz, Marketing Manager
Employed in 2008. MBA 1997 from Stanford University. Came with very high
recommendations from competition. Peter Fisher rates her as his top performer.
I like her. A real go-getter, could be GM material when we grow up.
Dipesh Mukerjee, Software Design
Employed in 2004.
2002 M.I.T. graduate, previously employed by General
Electric Healthcare. Ambitious guy, very intelligent. This may be too much for him at this stage, but I
think he is determined to prove himself.
Bret O’Brien, Product Engineering
Employed in 2002. M.S. 1991 from Georgia Tech. Previously worked for Philips.
High performer.
Led the engineering effort on the pulmonary systems.
Lee
Broman rates him highest performer in the group and has personally groomed
him as a manager. Part of ad hoc team for early development of IntensCare. This
guy seems very expert but narrow. Can he be developed into a project leader? Does he get the business issues?
Fisher says he’s passive aggressive.
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Harvard Business School
9-491-119
April 4, 1991
Sun Hydraulics Corporation (A and B) (Abridged)
Bob Koski said that he thought like an engineer, although he had started out wanting to be an
architect and bridge builder. He enjoyed developing innovative solutions for complicated problems.
In ten years with Dynamic Controls, Inc. (from 1959 to 1969, a decade during which Dynamic
Controls' annual sales grew from $600,000 to $5 million), he had risen through the ranks from
product engineering to industrial sales, marketing, new product development and into top
management. By 1969, as V.P.-Director of Corporate Development, he held the second highest
position in the company, behind the company founder.
Bob Koski had also been called a maverick and an idealist. In 1970 at age 40, he left Dynamic
Controls. His goal was to create a new company that would avoid the human relations problems and
pitfalls he had observed virtually everywhere in the world of organizations. He gave himself three
years to get his new business on its feet. He assumed it would take at least five years of operations to
gain a reputation with distributors and at least three years to begin showing a positive cash flow. He
intended to spend a full year planning and preparing the new operation. The new firm would be
called Sun Hydraulics Corporation and would develop and manufacture hydraulic valves and
cartridges to precise and exacting specifications.
While he expected to stay in the design, manufacture, and sales of fluid power products,
initially, Bob was not exactly sure how the Sun Hydraulics' product line would evolve. Industry
growth and his own product development capabilities seemed to indicate that there was room for
Sun Hydraulics in the specialized component marketplace. Bob believed the new company, if
successful, could eventually grow at least as fast as the company he was leaving. Exhibit 1 gives his
10-year growth projections for Sun Hydraulics under pessimistic, realistic, and optimistic
assumptions.
Bob also wanted to exercise some control over the pace of growth. He did not want the
organization itself to grow beyond 200 to 250 employees in any one location. Of immediate concern to
him was the barrier problem of human displacement due to growth, while maintaining his primary
goal of designing a dignified working environment for technical, manufacturing, and clerical
personnel alike.
Research Associate Colleen Kaftan wrote this case with Professor Louis B. Barnes as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1991 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write
the Publishing Division, Harvard Business School, Boston, MA 02163. 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 Harvard Business
School.
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The Problem and its Manifestations
According to Bob Koski, the single most obvious culprit in "standard" organizations was the
organization chart and what it signified. The mere existence of a formally defined hierarchy tended to
force individuals into defensive, unproductive and damaging behavior patterns which prevented the
organization from responding to changing business requirements. He believed that rigid
organizational structures all too frequently caused key employees to leave the company or, at a
minimum, "took the fire out of people's eyes."
For example:
Every key individual in the company I helped to build (with one exception, and he
was physically located elsewhere) left the organization. I think they were driven out
by pride caused by organization charts. Organizational restructuring, for them,
represented above all a series of demotions.
These people were quite competent. Unfortunately they were given titles like Vice
President of something, or Manager of something. As the company outgrew their
capabilities and needed to hire or promote more talented people who would appear
on the organization chart as their superiors, there was no place the old-timers could
go that would satisfy their egos. They had to leave. They could not stay and save face
with all the other employees. They had to leave.
So, if that was the effect of having an organization chart, then it really was a tragedy
because they lost all the talent, all the know-how, all the accumulated experience
those people represented.
Another problem Bob associated with typical business organizations was the process he
called "ossification"—an exaggerated focus on prescribed procedures as they "congealed" over time in
the minds of employees:
I think ossification takes place when, for promotion, it becomes more important that
a person know how the business works internally than anything about the external
activities of the company. At that point in time, it's as if a cancer has taken over that
is very difficult to stop. By not having an organization chart that people only look at
sideways to see who is above whom, and by not having job descriptions and titles, it
might be possible to defer that process of ossification.
Now, all of the management thinking I've read in the past says that the way to get
things done efficiently is to start with a process of describing jobs clearly. But if you
do that, it almost always seems that you go through a life cycle. On a month-tomonth basis, you can follow a sequence of predictable events which have tragic
consequences down the road.
"Articulate" people rise in power and assume control. "Knowledgeable" people, if not
also articulate, become discouraged and either leave the organization or settle into
middle management positions as passive obstructionists. The process takes about
eighteen months.
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Elements of a New Design
Koski felt that the first measure of Sun Hydraulics' success would be the company's record in
attracting and keeping talented engineers. Their design contributions would be critical to Sun
Hydraulics' performance in the fluid power industry. In addition, how they related to shop and other
employees would determine Sun Hydraulics' ability to develop, manufacture and market quality
products. This in turn would shape Sun Hydraulics' reputation with distributors, customers, bankers,
suppliers, and others on whom the fledgling company would depend as it carved its place in the
market.
Bob expected Sun Hydraulics to develop a personality of its own based on its employees'
contributions over time. From the outset, however, he intended to emphasize several specific ways in
which Sun Hydraulics would differ from more typical organizations. These included:
1. Horizontal Management
There would be no hierarchy, no titles, no formal job descriptions, no special benefits, no
reporting relationships, and no close supervision in Sun Hydraulics. People would be expected to
decide for themselves, based on widely shared information on operations, how best to contribute to
the company's objectives. Both manufacturing and office personnel would be expected to work with
others in the organization as they deemed necessary to accomplish their tasks. "Horizontal
management" would encourage the formation of "natural clusters" or groups to achieve whatever
work had to be done. "Thinking" would be a shared responsibility, so would decision making.
Bob characterized the essential differences between "horizontal" and "hierarchical"
management in terms of a then popular approach to understanding human relationships. This
framework classified many typical working relationships as "parent-child" interactions. Bob hoped
that horizontal management would create an "adult-adult" environment at Sun Hydraulics.1
Some functions, such as salary setting and performance reviews, would be difficult to
perform in an entirely horizontal organization but Bob expected the organization to develop new
ways of approaching these functions within the framework of horizontal management. In every case
the driving value was to be one of mutual respect.
2. Eliminating Intimidation
Critical to mutual respect was the elimination of what Bob called "intimidation functions" in
the organization. For example, Sun Hydraulics would have no purchasing agent, a job Bob described
as "intimidating suppliers." Instead the company would strive to build solid working relationships
with suppliers who would be trained to understand Sun Hydraulics' needs and be motivated to
respect them out of shared long-term interests.
Likewise, there would be no quality inspectors in the plant. Each shop employee would be
responsible for the quality of his or her own work. The high standards for Sun Hydraulics' precision
products would be understood and emphasized by all. Whenever quality problems arose, the person
discovering them would be expected to initiate corrective action rather than merely point out the
error to someone else. This might entail reworking, scrapping, or joint problem-solving with other
individuals or departments as required to eliminate the flaw. Each and every product would be
1 The references to "parent-child" and "adult-adult" relationships were developed by Eric Berne in his book
Games People Play: The Psychology of Human Relationships (New York, Grove Press, 1964).
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subjected to extensive functional tests before shipment to assure consistent product quality and to
catch any errors.
3. Operational Communications
The foundation for Sun Hydraulics' unorthodox climate would be a wide-open system of
operational communications. By that term, Bob Koski meant that all information pertinent to the
company's operational activities would be made available to all employees.
If we want to encourage self-management, we have to figure out a way to give
people the information they need to decide what they want to do. This is predicated
on the notion that people have a hard time doing nothing. If they're going to do
something, most people would rather do something useful than something nonuseful, and given an opportunity to figure out what's most useful, they might just do
that.
So the first task of horizontal management, to me, is to dismantle the power structure
that controls operational communications, making sure that everybody has equal
access to whatever information they need to do their jobs.
Ideally these open communications would allow shop employees to schedule their own
work. Scheduling was a particularly important problem in manufacturing the kinds of products Sun
Hydraulics would make. For one thing, the production processes were complicated and lengthy.
Typically it took several weeks longer to manufacture a set of hydraulic valve parts than the lead
time the customers were willing to give.
Since, it was very difficult to forecast sales within acceptable ranges of accuracy, most
companies experienced problems with inventory control and/or with chronic stress in meeting short
delivery deadlines.
These "hassle factors" led shop employees in typical hierarchies to lose respect for the
decision makers in management. It was also an area in which Bob expected Sun Hydraulics to
outperform the competition with its emphasis on open communications and self-direction. If each
employee were encouraged to work at reducing the production scheduling problem from his or her
own perspective, the collective solutions would be more comprehensive and easier to implement:
My understanding is that hierarchies were originally developed because workers
were unwilling, uneducated and uninformed. There were very limited capabilities
for passing information. Informed people were the thinkers; uniformed people were
forced to be doers. It was a very efficient system for that time.
Today people aren't threatened any more by anything and you have great potential
for communications. I think horizontal management is first made possible by
universally available information. The more we develop it, the more it will enhance
self-management.
4. Group Self-Management
As an outgrowth of horizontal management and open communications, Bob expected that
natural clusters would emerge among employees according to their work locations and tasks. Many
natural clusters would include both office and plant people working together, for example, to
develop new products or processes.
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Where necessary, these groups would perform the control functions that were usually built
into the hierarchy in other companies. In matters such as job-related behavior, Sun Hydraulics'
employees would feel responsible to their peers rather than to a superior imposing external rules. For
example, shop safety rules would be written by the workers involved who afterwards would be
responsible for their implementation.
Most training would occur within these work groups with minimal formal structure. New
employees would be brought into the group and given basic orientation by their peers. They would
be encouraged to ask any group member for help when needed.
Contrary to industry wide practices, there would be no standard production times or
procedures and no piece rate pay incentives at Sun Hydraulics. The focus would be on the group's
contribution rather than on any individual's performance record.
5. The Decision-Making Process
Decision making was another area in which Bob Koski wanted Sun Hydraulics to be different
from other companies. Many "people problems" he'd seen arose from the power struggles embedded
in typical decision processes. In analyzing the problem, Bob had identified four recurrent roles in
decision making:
x
The "author" — the discoverer of the need for a decision (who usually assumed
proprietary rights to the decision).
x
The "executive" on the formal or informal organization chart, who most people believe
should make the decision (who would regard other decision makers as encroaching on
his prerogative).
x
The "expert" — the party most knowledgeable about the subject of the decision (who
could be expected to defend this position).
x
The "soldiers" — the person(s) most affected by the decision on a day-to-day basis.
In Sun Hydraulics Bob hoped to instill the understanding that all four parties should work
together to arrive at joint decisions. "Authors," "experts," and "executives" should be encouraged to
subordinate themselves and to serve as consultants to the "soldier(s)" who would either make the
decision or, at a minimum, be comfortable with a consensus decision. He expected the decision
discovery process to enhance both the quality and the implementation rate of the decisions that
resulted.
6. The Ideal Employee
One quality in particular seemed important when it came to the kind of people Bob sought in
creating Sun Hydraulics. That was the person's ability to be an accurate judge of his or her own
competencies. Even beyond skills and intellectual capacity, Bob planned to focus on accurate selfassessment as a critical asset for prospective employees and colleagues.
It seemed to him that much of most managers' day-to-day activities was spent resolving
problems created by people who were not good judges of their own competencies. Without these
problems there would be little need for managers as a separate class of employees.
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Bob knew that some people would consider this assumption highly idealistic. However,
using self-knowledge as a key hiring filter, he expected to assemble enough skilled and talented
people, from Sarasota, Florida and elsewhere, to make Sun Hydraulics a reality.
The Formal Plan
Bob Koski set down his ideas in a 34-page document entitled, "Sun Hydraulics Corporation:
Plans and Objectives." Early in 1970, he circulated the handwritten report to four local bankers and a
number of family members and other people likely to be investors interested in the new start-up.
His plans and objectives included detailed 10-year projections about sales, number of
employees, space requirements, and the development and construction of Sun Hydraulics' first plant.
There were also the pro forma financial statements under three alternative sets of assumptions shown
in Exhibit 1. These in turn were supported by descriptive statements on the fluid power components
business and Sun Hydraulics' product, manufacturing, and distribution policies.
In Bob's mind, though, his overriding purpose was most accurately stated in the sections on
Sun Hydraulics' corporate creed and philosophy:
CORPORATE CREED
The creed (or philosophy) of a company when clearly expressed and enthusiastically
used creates the foundation of a corporation's internal and external personality.
For this new corporation to quickly establish itself and maintain a high product
standard while growing rapidly it will be important to develop an ethical,
aggressive, responsive and stable impression on customers, distributors, employees
and vendors as soon as possible.
Perhaps most importantly, the ultimate quality of a corporation is largely determined
by the character of its employees who are attracted into employment and develop
because of the corporation's environment.
THE PHILOSOPHY OF SUN HYDRAULICS CORPORATION
To obey the "golden rule" in all relations both within and without the company no
matter how difficult this may seem at the time.
To respect the dignity of every individual and to be courteous at all times.
To honestly and fairly make and meet our commitments with customers,
distributors, employees and suppliers and to establish stable relationships with them.
To be a leader in our chosen fields of activity and in the development of our industry
and community.
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To be a growing company so that employees are continually provided an
opportunity for additional responsibilities.
To constantly improve our products and services so that they are worth more to our
customers and to constantly improve our operational methods so that we can afford
higher than average wages.
To provide steady and continuous employment for persons hired with reasonable
working hours and safe working conditions.
To encourage employee self-improvement and to promote from within whenever
possible.
To keep employees and stockholders informed of company policies, procedures and
plans.
Fifteen Years Later
In 1985 Bob Koski described Sun Hydraulics' actual performance record for the casewriters:
We followed our pre-incorporation plan so closely that 10 years later we were within
a percentage point—after correcting for inflation—of our most optimistic projections.
Sun Hydraulics' business results were impressive. Sales had grown by 30–35% annually,
some 25% beyond the National Fluid Power Association's industry average (see Exhibit 2). Growth
had been orderly and controlled according to the original plan. Profits were usually twice the
industry average, while many products were priced up to 10% below comparable offerings from
competitors. During an industrywide slump in 1982 and 1983, Sun Hydraulics had remained
modestly profitable by scaling back production and reducing inventories, and had done so early
enough to avoid any layoffs.
Even more important to Bob was the employment record: other than a senior designer's
reluctant departure in 1985 for health reasons, the company had not lost a single key individual in 15
years of operations. Among the 10–12 people generally recognized as the most creative hydraulics
engineers in the U.S., four had chosen to come to Sun Hydraulics. Although compensation was not
appreciably higher at Sun than at other similar companies, the case writers found that virtually all
Sun Hydraulics employees they talked with agreed that the company was an extraordinary place to
work. Sun Hydraulics had also received widespread industry recognition for its innovative designs,
its quality products, and its highly ethical business standards.
The Organization
By 1985, Sun Hydraulics' product line was marketed in a 200-page catalogue of precision
manufactured hydraulic system components. Sun's components were standard precision products,
sometimes with tolerances to the millionth of an inch. The company responded to individual orders
of these products and prided themselves on fast delivery time and low inventory requirements. These
components were sold to distributors who could order them on short notice from Sun's catalogue. All
end product users ordered through the catalogue or from distributor knowledge of Sun's newest
components. The company counted some 170 employees in Sarasota, Florida as well as six others
employed in small marketing and warehousing operations in the U.K. and Switzerland.
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The main facility had been built in 1980 on a beautiful site bordering a rustic lake and bird
sanctuary. The plant was five times as large as the previous factory, originally built in 1970 and
expanded in 1975 to accommodate the company's early development.
There were glass partitions between the plant and the open-plan office space, but both office
and shop people could frequently be observed "crossing over" to the other part of the building. All
employees shared a common lunchroom facility, which included outdoor picnic benches on a deck
overlooking the lake and bird sanctuary.
About 20% of Sun Hydraulics' outstanding stock had been made available to a few highly
competent employees whose contributions were critical in shaping the company's future in the
marketplace. These stock options were offered only to key employees who were already contributing
valuable input, as an incentive to stay with Sun Hydraulics. They were never used as an incentive for
individuals considering joining the company. In addition the company made annual contributions to
employee's 401K retirement plans.
Beyond this, there were no perquisites or special benefits for anyone in the company. There
were no formal job descriptions, no organization charts, and no prescribed reporting relationships.
Nor were there official titles aside from two that seemed indispensable for interactions with the
"outside world" (Bob Koski was president and Bill Clendenin was controller). No correspondence and
no business cards included titles. In the words of one executive:
There are hardly any heroes in our organization. When something good happens, we
try to suppress the hype. When something bad happens, we try to suppress the
"down."
The Office
About 25 "office people" made up the administration, product design, marketing, and
computer programming functions at Sun Hydraulics. The group Bob Koski called the "management
team" tended to be closely involved in each others' activities and to "get things done collectively." The
idea of collective responsibilities had led to an organizational concept Bob Koski called "shared
offices." A "shared office" included several people commonly identified with the activities that might
normally be assigned to a single person as department head in a more typical organization. Exhibit 3
shows Bob's graphic representation of the "shared office" arrangement at Sun Hydraulics. The
drawing was his first attempt ever to prepare anything resembling an organization chart for the
company in response to a request from the casewriters.
Hiring and responsibilities Most office people were hired after long discussions about Sun
Hydraulics' unusual philosophy and practices, and about the areas in which the prospective new hire
might be able to "fill a vacuum" in the company's activities. There was invariably greater emphasis on
the qualities of the person and his or her fit with the organization than on the "vacuum" or the job to
be done.
For example, a vacuum might go unfilled for months until the "right" person was found. On
the other hand, a good person might be hired long before there was a vacuum evident in the
company. Even when people were brought in with specific "vacuums" in mind, their own choices
about job activities might take them into entirely different areas. One engineer, who had been hired
with a product development function in mind, had "become intrigued with the computer" in his first
days on the job, and had since concentrated entirely on creating new programming applications.
A talented product-design engineer hired from outside the company had not yet moved to
Sarasota some 9 months after joining Sun Hydraulics. According to several of his new colleagues in
Sarasota, this man had decided to spend time "wandering around" learning more about the market
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and its needs. They were certain that one way or another his wanderings would be of benefit to the
company. No one had fixed ideas about when or even if he would join them in the Sarasota office if
his wanderings proved fruitful.
Each individual was expected to choose the range of activities in which he or she could best
contribute to the organization. Frequently, these choices led to a natural expansion and sharing of an
individual's responsibilities. For example, one person whose activities initially consisted largely of
administrative and clerical work found that both plant and office people tended to approach her with
questions and problems about working relationships and other "personnel" issues. After a few years
with Sun Hydraulics she was recognized as the person most responsible for "human resources" and
related matters in the company.
Office Layout The controller, Bill Clendenin, and his assistant had the only enclosed offices in the
building. The others, including Bob Koski, used workplaces separated from each other only by waisthigh sectional dividers. A small glass-walled library and a larger conference room were available for
impromptu meetings by plant and office employees alike.
Some people found it difficult to adjust to working in the open office plan. One engineer
temporarily decided to change his working hours in order to have "quiet time" in the evenings to
finish preparing the new catalogue. Another set up a provisional work space in a storage area to
which he retreated occasionally to work on special projects.
Interactions For the most part, however, the office design was successful. Bob Koski thought the
arrangement was helpful for communications in the absence of scheduled meetings:
There are no formal meetings at Sun Hydraulics. Meetings are generally
impromptu and people vote themselves in or out based on their interests. Typically
two people will begin a discussion and discover they need some information. They'll
go together as a pair to see another person. That frequently draws a small crowd
until people see whether they're interested or not, and the problem almost always
gets taken care of on the spot.
The same flexibility was apparent in interactions with people from outside the company. Bob
Koski believed the absence of titles, while confusing to outsiders, contributed to getting things done
at Sun Hydraulics:
If a salesman were to walk in the door, the first thing he'd say is, "I want to
talk to the VP of so and so." We ask what he wants to talk about and then send him to
the right person. If he asks what that person's title is we tell him there aren't any
titles. They're usually looking for someone who can make a decision. Since I always
refuse to make decisions, they give up on me. I think I could sabotage Sun's system
simply by making decisions. I just don't.
The Plant
Like the office area, the shop was clean, airy, and generously adorned with green plants.
Work benches and heavy equipment were arrayed in an extended horseshoe around the main door,
according to the production sequence. Production floor space had increased fivefold with the move to
the new facility in 1980. A number of "old-timers" remarked that the increased size and the addition
of 50 new shop workers since the move had somewhat limited opportunities for close, friendly
relationships that they remembered from the previous facility. Others thought the new plant had
simply enlarged and enhanced the area in which the friendships with fellow employees could
develop.
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One recurring comment was that with 170 people now working at Sun Hydraulics, "It takes a
lot longer to get to know everybody's name." Another common remark was that the enlarged space
"makes it much harder to sing rounds with the people in the next department."
"Family groups" and lead persons. There were 12 departments or family groups in the plant,
from the lathe group, to drilling, tool making, machining, deburring, stamping, and packing. A test
bench served as work table for trying out new product ideas in conjunction with the design and
development process so that production workers could provide input and gain familiarity with new
products before they entered the production phase.
The family groups worked closely together with little formal division of individual roles as
each member learned more and more jobs within and even across departments. One benefit of the
"family" relationships that developed over time was a natural tendency to find better ways of
working. Several departments had developed new methods that increased their productivity by 400%
over a period of 4–6 years, without resorting to any new or unusual equipment.
Each group included at least one informally-designated "lead person." The lead people (also
called "supervisors" although the use of such "standard" terms was not encouraged) were generally
people with longer tenure, the most experience, and the broadest skills in the department.
Lead people tended to emerge from within the groups. They often took the initiative in
training new people to do the various tasks in the group. Beyond that, their role usually included
other activities such as introducing new employees to the group, taking responsibility when the
group needed to resolve a problem jointly with another group, and coordinating the department's
overtime schedule.
Plant supervision. There was a single official supervisory level in the plant. Two managers and
their assistants were available to oversee daily production and materials. Their only formal
supervisory task was to conduct individual wage and performance reviews semiannually with each
of the workers in their departments. In addition, they worked closely with managerial and clerical
people in a "shared office" for other decisions regarding the production function.
The key figure in this "shared office" group was Bob Devereaux, who had come to Sun
Hydraulics in 1979 after managing a series of plant turnarounds for a much larger company. He
shared a small glass-walled office adjacent to the plant with Bob Voorhees, a 14-year veteran whose
responsibilities Bob Koski described as "a sort of roving superintendent." Directly across from their
work space was another glass-walled enclosure in which two schedulers monitored and coordinated
shop activities with a battery of eight computer terminals. Together the members of this "shared
office" group accomplished many of the tasks that would have been called "production and
operations management" in a more typical hydraulic components plant.
In fact, while all of the members of this "shared office" acknowledged the tremendous
difference between Sun Hydraulics and other, more hierarchical organizations, some had difficulty
describing their collective work activities without using the "standard" terms and titles familiar to the
other companies. According to Bob Voorhees:
I joined Sun Hydraulics about a year after it was founded. In those days I
had a hard time getting Bob Koski to let us use words like "foreman," "supervisor,"
and "manager." We know our ways of getting things done are different from other
places, but we still have to use their words because people have to know where to go
for help. They need to know who's running the shop. Otherwise it just gets too
confusing, especially for the ones who come here from other companies.
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Even though people sometimes used "standard" terms to talk about their work at Sun
Hydraulics, Bob Koski maintained that the working relationships they described were more
"horizontal" than "vertical" in nature. Bob Devereaux clarified the conscious mechanisms by which
Sun Hydraulics' people enacted this horizontal environment:
One of the things we've been doing—and we've tried to build it in to every
part of the organization—is to keep pushing decisions and responsibilities down so
they're at the lowest possible level. We've consciously avoided creating any elite
groups or formalizing any structure. We knew that once we built it in we wouldn't be
able to get it out.
For example, when a complicated new generation of CNC flexible machining centers was
brought into the plant, the operators themselves were sent to the vendor's factory to be trained in the
computer programming functions. This unique approach (no other company had ever asked the
vendor to train relatively unsophisticated shop workers to program these highly advanced machines)
avoided the usual practice of forming a group of specialized programmers and instructors. At the
same time it ensured that the skills needed to run and maintain the machines remained "right down
at the operator level." The machine tool vendors noted that they had never seen a better acceptance
rate and a faster start-up time in any other installation of the machines.
Production scheduling Another area of shared responsibilities took place in the scheduling of
each group's daily activities in the plant. Groups received regular updates on the products that were
needed, from computer terminals placed arount the plant. Groups were expected to plan their own
activities to accomplish as many of the tasks on their lists as possible.
This self-scheduling procedure was in the process of being fully automated in 1985. The new
software programs developed in-house, would provide "live" data (based on known immediate and
computer projected orders rather than on staff-generated sales forecasts) about components parts to
be produced, delivery dates, and order priorities for anyone in the plant who wanted the
information.
Sun had tried to find commercially available software, but none was available, so the
company developed its own. Within this framework of "universal information", shop workers were
encouraged to make their own decisions about what to produce and when. As more terminals
appeared on the production floor, and as employees got used to operating them, the system would
help reduce inventories while affording greater flexibility in responding to customers' orders.
Overtime and cross-training Shop workers worked a four-day, ten-hour day, and could choose to
come in for available overtime on Fridays and Saturdays at their own discretion. They could also
choose to do overtime in areas other than their own, and departments frequently "helped each other"
in this way when the personnel were cross-trained.
Cross-training occurred naturally when people showed an interest in switching departments
or in "helping out" in busy areas. The same mechanisms operated even more strongly within the
"family groups" so that many employees were capable of doing most or all of the jobs within their
department groups.
11
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491-119
Sun Hydraulics Corporation (A and B) (Abridged)
Current Concerns
Bob Koski completed Units I, II & III of the Owner President Management Program at the
Harvard Business School in ten months.2 There he expressed concern over several aspects of Sun
Hydraulics' situation, even though he was very pleased with company's progress. The company was
now considered a technical leader in its field, but Bob had certain doubts. Others expressed greater
reservations.
First of all, Bob wondered whether the size of a company or the age of a company was the
cause of "ossification". Were Sun's organizational practices an exportable method of management, or
were they simply a reflection of one person's — his own — management style. What were the critical
elements contributing to Sun's success so far? Could similar culture patterns be developed at a new
manufacturing plant that was to be established in Coventry, England? Should they risk attempting to
transplant human behavior as well as business-technology patterns in Europe? Most informed
business consultants thought this would be a disaster!
Controller Bill Clendenin expressed even graver long term concerns:
Bob is the visionary. He's the one who doesn't let himself get detoured from the long
term goals. We do the detail work, but he's the visionary. He and I differ in that he
doesn't think he's that important. Unless we find a way to make him personally not
too important, we may end up looking much more like a conventional company as
time goes on.
Bob Koski felt that if Sun's human resources were dependent on a management "style"
sustained only by his personal input, he should collapse the dream sooner rather than later in order
to avoid more painful unplanned transitions in the future. On the other hand, if Sun's approach had
wider applicability, he wondered what actions and steps to take next. Specifically, could Sun's
horizontal management be even further extended in its hiring and firing, training, performance and
salary reviews, lead person roles, shared offices, discipline issues, and communications in general?
He concluded that there was much to be done, but wondered where to start.
2 Each OPM unit was three weeks long. Most participants spread the three units over a three year period, but
Koski's prolonged absence from Sarasota was not unusual for him. He typically spent over half of his time away
from the plant exploring technological and managerial ideas elsewhere.
12
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23
5
6
11
18
22
30
38
49
59
75
95
110
No.
$
10,000
75,000
185,000
300,000
425,000
575,000
750,000
950,000
1,150,000
1,450,000
1,800,000
2,150,000
Employees
Pessimistic Sales
Sales
Growth Projections
3,000
3,000
5,000
5,000
5,000
10,000
10,000
10,000
15,000
15,000
25,000
25,000
Sq. Ft.
Floor Space
25,000
125,000
250,000
370,000
520,000
690,000
900,000
1,175,000
1,500,000
1,900,000
2,350,000
3,000,000
$
Sales
5
9
15
19
26
34
46
59
75
95
115
150
No.
Employees
Realistic Sales
Source: "Sun Hydraulics Corporation: Plans and Objectives," internal document prepared by Bob Koski in 1969.
Note: Considerable data exist to support the proportions of sales, employees and space.
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Year
Exhibit 1
Sun Hydraulics Corporation (A and B) (Abridged)
3,000
3,000
5,000
5,000
5,000
10,000
10,000
15,000
15,000
25,000
25,000
40,000
Sq. Ft.
Floor Space
35,000
140,000
270,000
390,000
570,000
800,000
1,125,000
1,500,000
2,000,000
2,600,000
3,400,000
4,300,000
$
Sales
6
8
16
22
29
41
56
73
95
120
165
200
No.
Employees
Optimistic Sales
-13-
3,000
3,000
5,000
5,000
10,000
10,000
15,000
15,000
25,000
25,000
40,000
40,000
Sq. Ft.
Floor Space
491-119
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24
Sun Hydraulics vs. Industry Average: Monthly Sales 1972–1985
Source: Company records
Company = Sun Hydraulics Corporation
NFPA = National Fluid Power Association
Exhibit 2
Sun Hydraulics Corporation (A and B) (Abridged)
491-119
-14-
Sun Hydraulics Corporation (A and B) (Abridged)
Exhibit 3
491-119
"Shared Office" Organization at Sun Hydraulics
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9-610-015
REV: JUNE 27, 2011
FRANCES X. FREI
ROBIN J. ELY
LAURA WINIG
Zap
ppos.co
om 2009
9: Cloth
hing, C
Custom
mer Serv
vice, an
nd
Company
y Culture
n July 17, 200
09, Zappos.co
om—a privateely held onlin
ne retailer of shoes, clothing, handbagss, and
On
accesssories—learneed that Ama
azon.com, Incc.—a $19 billlion multinattional online retailer of b
books,
electronics, toys, and other merrchandise—ha
ad won its bo
oard of directtors’ approvaal to offer to m
merge
the tw
wo companiess. (See Exhibits 1, 2, 3, and 4 for selected
d financials fo
or both compaanies.)
Am
mazon had beeen courting Zappos sincee 2005, hoping
g a merger w
would enable A
Amazon to ex
xpand
and strengthen
s
itss market sharre in soft-linee retail catego
ories such as shoes and apparel—categ
gories
the co
ompany conssidered strateegically impo
ortant to its b
business grow
wth.1 While Amazon’s in
nterest
intrig
gued Zappos’ CEO, Tony Hsieh, and chairman, C
COO, and CF
FO, Alfred Liin, the two ssenior
execu
utives had no
ot felt the tim
me was right until now. A
Amazon’s offfer—10 millio
on shares of stock
(valueed at $807 miillion),a $40 million
m
in cash
h and restricteed stock unitts for Zappos’’ employees, and a
promise that Zap
ppos could operate
o
as an
n independen
nt subsidiary
y—was on tthe table. Zaappos’
financcial adviser, Morgan
M
Stanlley, estimated
d the future eq
quity value o
of an initial pu
ublic offering
g to be
betweeen $650 million and $905 million; this estimate skeewed the Amaazon offer—aat least in financial
termss—toward thee high end off Zappos’ estiimated markeet value. (Seee Exhibit 5 fo
or market valu
ues of
comparable onlinee and footwea
ar retailers.) Hsieh and Liin knew thatt much of Zap
ppos’ growth
h, and
hencee its value, ha
ad been due to
t the company’s strong cculture and ob
bsessive emp
phasis on custtomer
servicce. In 2009, they
t
were foccusing on th
heir three Cs—
—clothing, cu
ustomer serv
vice, and com
mpany
culturre—the keys to
t the compan
ny’s continueed growth. Hssieh and Lin h
had only a few
w days to con
nsider
wheth
her to recomm
mend the merrger to Zappo
os’ board at th
heir July 21 m
meeting.
Zapp
pos and th
he Rise of Online Fo
ootwear Reetailing
In late 1998, Niick Swinmurn
n, a 26-year-o
old marketing
g manager fo
or an online ccar-buying seervice,
went to a San Fran
ncisco–area sh
hopping mall to purchasee a pair of Aiirwalk shoes but could no
ot find
any in
n the color, style, and size he wanted. Sw
winmurn turrned to the Intternet but waas frustrated b
by the
a Stock
k value based on the average closiing price of Ama
azon shares for th
he 45 trading day
ys ending July 177, 2009.
_______
_______________
_______________
________________
___________________________________________________________________
Professo
ors Frances X. Freii and Robin J. Ely
y and Senior Resea
archer Laura Winiig, Global Research
h Group, prepared
d this case. HBS ccases are
develop
ped solely as the ba
asis for class discusssion. Cases are no
ot intended to serv
ve as endorsementss, sources of primaary data, or illustraations of
effectivee or ineffective man
nagement.
Copyrig
ght © 2009, 2010, 2011
2
President and
d Fellows of Harva
ard College. To orrder copies or req
quest permission to
o reproduce materials, call
1-800-54
45-7685, write Harv
vard Business Scho
ool Publishing, Bostton, MA 02163, or go to www.hbsp.h
harvard.edu/educaators. This publicattion may
not be digitized,
d
photocopied, or otherwise reeproduced, posted,, or transmitted, wiithout the permissiion of Harvard Bussiness School.
27
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Zappos.com 2009: Clothing, Customer Service, and Company Culture
lack of online footwear-only retailers: “[There were] a bunch of little sites but nothing that jumped
out at you,” he said.2
His experience inspired him to create an online footwear retail site, and in June 1999, Swinmurn
launched ShoeSite.com. “We are taking a more dynamic approach to what has been a poorly
presented category online,” said Swinmurn, who soon renamed the site Zappos.com because, he
explained, it was easy to remember and there was a “recognizable relation” to zapatos, the Spanish
word for shoes.3
Zappos initially secured inventory through independent shoe stores, but by October 1999, the
company had begun creating direct relationships with footwear manufacturers. By the end of 2000,
Zappos offered more than 100 brands, including Bostonian, Sperry, Dexter, G.H. Bass, and Tommy
Bahama.4 The manufacturers agreed to ship orders directly to Zappos’ customers so that the
company could avoid carrying inventory.
In 1999, there were more than 1,500 retailing sites on the Internet with footwear offerings—though
most were apparel retailers stocking a handful of complementary shoe styles.5 U.S. online shoe sales
were just under $48 million—less than one-tenth of 1% of the $37 billion U.S. footwear market. By
contrast, mail-order catalog sales were 6.4% of U.S. footwear sales.6
The online footwear industry gained a higher profile after Nordstrom joined its ranks. The highend retailer had launched its own apparel website in 1998 and learned that shoes sold
disproportionately well online (30% of sales), compared to retail store sales (20%).7 As a result,
Nordstrom launched its own dedicated shoe site in the summer of 1999 with a $17 million advertising
campaign.8
By the end of 1999, Zappos had begun to institute services such as free shipping, which fueled
growth.9 Indeed, from its inception, Zappos focused on delivering outstanding customer service to
make the online shopping experience as easy and as close to a visit to a retail store as possible. For
example, visitors could print a shoe sizing template or initiate live online chat sessions with product
experts.10 In addition, each shoe was photographed from nine different angles by Zappos
photographers. Zappos employees wrote product descriptions for each shoe that included far more
details about style, fit, and materials than those prepared by the shoes’ manufacturers.
Early 2000s
By 2000, Zappos had 150 brands and 400,000 pairs of shoes in stock and was billing itself as the
world’s largest shoe store. The company had begun to switch from having manufacturers ship
directly to its customers to carrying inventory.
In January 2000, Zappos secured $1.1 million in venture capital funding from Venture Frogs, an
investment and incubation firm that Hsieh and Lin had formed two years earlier. Venture Frogs
specialized in early-stage Internet, e-commerce, information, and telecommunications technology
companies that were entering a “phase of unusual growth.”11 Hsieh and Lin knew something about
such companies, having started—at the ages of 24 and 25, respectively—LinkExchange, an
advertising network that they sold to Microsoft for $265 million in November 1998.12 Hsieh and Lin
met in college when Hsieh was running a pizza business (he rented his dorm’s kitchen at night to
make pizzas for students), and Lin, who bought whole pizzas and resold them by the slice in his
dorm, was his best customer. When they encountered Zappos, said Lin at the time, they were
“thoroughly impressed” with what it had accomplished over the previous seven months. “With our
2
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investment,” they conjectured, “Zappos.com can continue to hold their position as the world’s largest
shoe store.”13
When PC Data Online released its annual ranking of the top 10,000 e-commerce websites
(segmented by category) in 2000, Zappos was honored as the highest-ranking “pure-play” online
footwear retailer.14 Zappos offered a larger selection of footwear than any other shoe store, online or
offline. Zappos sales were outpacing online sales of retailers such as Lands’ End, J. Crew, and
Abercrombie & Fitch.15 The site’s overall ranking (1,134) indicated a 0.9% reach, which meant that
almost 1% of all Internet users visited Zappos’ site during June 2000.16
The investment community, however, was growing disenchanted with online footwear retailers.
Some analysts claimed that the online footwear industry was little more than a high-tech catalog,
serving to supplement sales for established brick-and-mortar chains or as a means for customers to
research future in-store purchases. “The footwear market is not a hotbed of activity,” said one analyst
in 2001. “We view [it] as relatively laggard versus other categories of online retail. This is a market
filled with more browsers than buyers, and dot-coms that don’t have an offline presence are going to
have a relatively inefficient business.”17
Hsieh joined Zappos as co-CEO (with Swinmurn) in May 2001, noting that Zappos was “the most
fun and the most promising” of all the companies he had encountered as a venture capitalist and
would probably generate the greatest return for Venture Frogs. His instincts were good. By year’s
end, Zappos had grown to $8.6 million in gross merchandise sales. “We’re still not at the point where
we’re trying to maximize our profit, because we still think there are a lot of growth opportunities,”
Hsieh said at the time.18 In 2002, he announced a financial goal for Zappos: to grow to $1 billion in
gross sales by 2010.19 In 2003, Hsieh became sole CEO and Swinmurn became chairman.
2005 to 2008
By 2005, Zappos had outgrown its San Francisco headquarters. The company employed 100 call
center staff and was in search of a less expensive base of operations. Las Vegas, Nevada, emerged as
the best option because wages were lower and workers plentiful. In addition, the city was considered
a good fit for the Zappos lifestyle. “Las Vegas is a 24-hour town and we have a 24-hour call center,”
said Donavon Roberson, Zappos’ business development account manager. After receiving $35
million in investment capital from Sequoia Capital in 2005, Zappos moved its headquarters to Las
Vegas.
Swinmurn, however, did not fully enjoy the move and the growth. “[Zappos] had become about
processes and lawyers and getting a bunch of people to sign off before you could do anything,” he
said. “I prefer . . . being able to jump in and change things.”20 Shortly before Swinmurn left to pursue
other interests, Lin joined as CFO, later taking up the roles of chairman and COO as well.
In the meantime, the online footwear retailing industry had grown to $2.9 billion in 2006,
compared with just $954 million in 2002, and was projected to reach $5.2 billion by 2010.21 Zappos, a
$597 million company in 2006, faced new competition from mega-retailers: Gap Inc.–backed
Piperlime.com and Amazon.com, which owned Endless.com, both launched footwear sites in early
2007.22
By 2008, Zappos had become a $1 billion retailer and reported net income of $10.8 million on 2008
net revenue of $635 million.23 (See Exhibit 6 for gross sales by year.) The company employed 700
“team members,” as employees were called, in its Nevada office: 300 in its call center, 200 in
merchandising, and the balance in supporting departments ranging from legal to accounting.
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Zappos.com 2009: Clothing, Customer Service, and Company Culture
The First C: Company Culture
Zappos’ leadership viewed the company culture as the differentiator that afforded the company a
competitive advantage. “Our belief is that if you get the culture right, then most of the other stuff—
like great customer service or building a long-lasting, enduring brand—will happen naturally,” Hsieh
said. Lin agreed:
I attended a conference where someone in the audience asked Starbucks chairman/CEO
Howard Schultz why everyone at Starbucks smiled, and he said, “We only hire people that
smile.” We try to do the same thing at Zappos. We only hire happy people and we try to keep
them happy. Our philosophy is you can’t have happy customers without having happy
employees, and you can’t have happy employees without having a company where people are
inspired by the culture. We view this as a strategic asset. We may have 1,200 to 1,500 brand
relationships and a good head start against the competition, but that can be copied. Our Web
sites, policies—all can be copied, but not our special culture.
In 2005, just after moving its company headquarters, Zappos had debuted its list of core values—
developed as a means to ensure that everyone in the company played a role in building and
supporting the culture. To create what would become the company’s 10 core values, Hsieh solicited
feedback from employees on what those values should be and, from that feedback, compiled an
initial list of 37 potential core values and sent it to everyone in the company. A yearlong evaluation
process pared the list down to 10. (See Exhibit 7 for Zappos’ core values.) “We now have a set of
committable core values, meaning we are willing to hire and fire based on whether people are living
up to those core values, independent of whether they’re doing their specific job function well
enough,” said Hsieh. “Most organizations don’t care about culture, at least not at the senior level. But
if you truly care and manage for it, it is like managing anything else in the business. It is not hard;
you just have to fundamentally support it.”
Many of Zappos’ 10 core values were grounded in research on factors such as worker efficiency
and productivity. For example, Hsieh cited a study that found that people were happier and more
engaged in their work if they made friends on the job. As a result, Zappos developed core value 7—
build a positive team and family spirit—and encouraged managers to spend 10% to 20% of their time
socializing with team members outside of work. “There’s not so much separation between work and
life here as there is at most companies,” said Hsieh. “Zappos is like a lifestyle.”
Zappos’ culture soon caught on, attracting interest from other companies, the media, and
academics interested in learning about the company. Zappos welcomed any and all visitors by
offering guided tours of its Las Vegas headquarters. Visitors encountered a three-ring-circus
ambience. In the lobby stood a three-seat shoeshine stand (like those traditionally found in railway
stations) populated with full-sized costumed skeletons. A freshly stocked carnival-style popcorn
machine sat next to the reception desk, and opposite that stood a Dance Dance Revolution arcade
game. (See Exhibit 8 for photographs of the Zappos headquarters.) The decor was testament to
Zappos employees’ drive to “create fun and a little weirdness.”
Zappos hosted 8 to 10 tour groups per day in 2009. Roberson, who occasionally served as tour
guide, led visiting academics down a corridor past the legal department to “Monkey Row,” a group
of cubicles positioned underneath a canopy of dense plastic vines, where senior managers, including
Hsieh and Lin, sat. As the group passed the call center, merchandising, and accounting departments,
Zappos employees greeted them with waves, hoots, cheers, and even, literally, bells and whistles.
Roberson noted that the tour roughly followed the company’s unofficial parade route: departments
often sponsored themed parades—sometimes costumed—through the headquarters’ halls.
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Just across the hall was Dr. David Vik’s office: “For when you need a checkup from the neck up,”
explained Roberson, who noted that Vik was a retired chiropractor turned full-time employee
performance coach. Next to Dr. Vik’s office was a wall-mounted “confession bell,” which employees
rang for acts of public contrition (e.g., when they hit “reply all” on an e-mail). “They then make the
walk of shame up to the bell to announce their transgression,” explained Roberson.
In January 2008, Hsieh sent an e-mail to all Zappos employees asking them to write a few
sentences describing what the Zappos culture meant to them. “We asked them to tell us what is
different about it compared to other company cultures and what they like about the Zappos culture,”
explained Roberson. The resulting responses were compiled and published—unedited—in a 450page book.
Hiring for Cultural Fit
Zappos screened job applicants to ensure they would fit within the Zappos culture. The
evaluation began with the initial application—which featured a crossword puzzle on its cover and
cartoon characters posing off-beat questions. (See Exhibit 9 for a sample page from the Zappos
employment application.) Applicants were asked to name their personal theme song, to rate
themselves on a “weirdness” scale, and to assess how lucky they considered themselves to be. “If
someone rates herself as being on the high end of the lucky scale, then she is probably going to be the
type of person that we’re looking for, who will be creative, adventurous, and can think outside of the
box,” said Christa Foley, recruiting manager.
All candidates underwent two interviews: a traditional skills-based interview conducted by the
hiring manager and a “culture” interview conducted by recruiters in the human resources
department. “The hiring manager will look for fit with team, relevant experience, and technical
ability. The recruiting department is interviewing purely for culture fit. Candidates have to pass both
interviews to be hired. We have actually passed on hiring a lot of really talented people that we know
could make an immediate impact on the top or bottom line, but if they’re not a culture fit, we won’t
hire them,” said Hsieh.
“We ask 10 to 15 behavioral-based interview questions for each of our core values,” Foley
explained. “A successful candidate may not necessarily score high on each core value, but they
cannot oppose any core value.” That said, there were some deal-breaker questions. For example, if a
candidate scored at either the very top or very bottom on the weirdness question, he or she would
not be considered a good fit for the company. Coming up short on humility, another of the
company’s core values, could also disqualify a candidate, particularly for hires at the senior
management level. “If someone is egotistical,” Hsieh explained, “there’s not even a discussion; we
know we’re not going to hire them.”
Orientation and Initial Training
All new hires were expected to complete four weeks of paid training, which focused largely on
call center training, regardless of the position of the new hire. “If you don’t pass your four weeks of
training, no matter what department you’re in, you won’t keep your job at Zappos,” said Foley. In
addition, the company weeded out uncommitted new hires by offering them $2,000 to leave the
company; the offer was made during the first week of training. “The offer started at $100, but we
slowly raised it because we want more people to take it,” explained Rob Siefker, customer loyalty
team (CLT) manager, though he noted that very few accepted the offer.
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Zappos.com 2009: Clothing, Customer Service, and Company Culture
Pipeline
In 2008, Zappos’ training communications and process developer, Roger Dana, and his team
formalized a pipeline: a process used to develop employees from entry level to “the highest level of
management.” The pipeline required that all employees undertake 225 hours of “core level” training;
this included 160 hours of initial new hire/customer loyalty training as well as additional courses on
communicating effectively, coaching others, overcoming conflict, and managing stress. The newest
class was entitled “Science of Happiness.” “I’ll admit, we went back to our desks and giggled a little
bit when Tony asked us to develop a class on happiness,” said Dana, but he explained that Hsieh had
spent a year researching the science of happiness and believed a class on the subject—which Hsieh
defined as finding meaning and a larger purpose for life—would support the corporate culture.
“Zappos’ larger purpose should be about spreading happiness—delivering happiness to the world,”
said Hsieh.
Through the implementation of the pipeline, Zappos was highly transparent about the skills and
courses employees were required to master in order to progress within the company. “We’re a
nonhierarchical company,” explained Foley. “Everyone’s role is important, and everyone has the
same foundation,” she said. Dana elaborated: “The pipeline sets the expectation that anyone could
potentially rise to senior management.” Indeed, after completing management training, managers
could opt to undertake an additional 39 hours of leadership training, which included courses entitled
“Inspiring Great Teams,” “Leadership Zappos Style,” and “Cultivating Culture.” In addition,
aspiring leaders were expected to teach either a pipeline or department course and deliver a
presentation to Zappos employees, visitors, or a local school.
The Second C: Customer Service
Hsieh and Lin believed that a significant part of the company’s rapid growth was due to its
customers’ loyalty (75% of Zappos orders were from repeat customers), which they attributed to their
obsessive focus on delivering superior customer service. For the 96% of sales placed via the Zappos
website, customer service took the form of fast, free shipping (in both directions); a wide selection of
more than 1,200 brands (2.9 million products in inventory); the availability of special sizes; and a
highly intuitive, consumer-friendly interface. Customers could simultaneously search by style, size,
width, color, and gender and expect to find tens if not hundreds of matches—certain to be in stock
(the site displayed only those shoes that were in inventory.)
While the vast majority of customers placed their orders directly through Zappos’ website, an
average of 5,100 calls per 24-hour day were handled by CLT members (call/contact center
representatives). The CLT members were considered problem-solvers, since often customers who
called had questions they could not answer for themselves using Zappos’ website. For example, a
CLT member might help a customer find a brand Zappos did not carry; indeed, in such a
circumstance, CLT members were instructed to use the Internet to search for the shoes at multiple
competitor websites.
In many traditional call centers, workers were given a time limit—perhaps 180 seconds or less—to
finish a customer call. “Here, there’s nothing like that,” said Dana. “We want customers to think,
‘Wow, I didn’t feel rushed.’ Our vision is that they’ll tell 10 of their closest friends and they’ll become
customers.” Zappos CLT members were held accountable for “wowing” customers with their
outstanding service. “Quality assurance team members listen to the calls to ensure that CLT members
establish a personal, emotional connection—we call it PEC—with customers,” explained Lin.
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CLT members were authorized—even encouraged—to take as much time as necessary to assist
customers with their orders, answer their questions, and troubleshoot their problems. On July 5, 2009,
one CLT member set a record with a 5-hour, 20-minute call from a woman interested in MBT “antishoes,” which simulated the effect of walking on soft, uneven ground; the previous record was just
over 4 hours, set by a call with a woman suffering from a condition that dulled sensation in her feet.24
In both cases—and as often happened when CLT members engaged with Zappos customers—the
conversations turned personal. “We started talking about her sister,” said one CLT member. “She
told me childhood stories,” said another.25 After such conversations, CLT members routinely sent
handwritten thank-you notes to customers—thousands each month—and were quick to send
bouquets of flowers or boxes of candy in sympathy or celebration. One CLT manager recalled that
Hsieh had once remarked tha...
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