Review: Zappos.com: Developing a Supply Chain to Deliver WOW!

Why this case? Zappos.com has made distinct resource and strategy decisions from its competitors – and set a new bar for customers Allows a good analysis of value chain and VRINE tools It’s not Nike!

Zappos.com has made distinct resource and strategy decisions from its competitors – and set a new bar for customers

Allows a good analysis of value chain and VRINE tools

It’s not Nike!

Key questions for today What are the company’s core competencies and sources of competitive advantage? How sustainable are they? How well does Zappos match resources with strategic goals? In light of the 2008 economic meltdown how would you expand the business or retrench? How would you expect the environment of a more cost-conscious consumer to affect Zappos’ business and what should Zappos do about this?

What are the company’s core competencies and sources of competitive advantage? How sustainable are they?

How well does Zappos match resources with strategic goals?

In light of the 2008 economic meltdown how would you expand the business or retrench?

How would you expect the environment of a more cost-conscious consumer to affect Zappos’ business and what should Zappos do about this?

At the Time of the Case, Zappos Is Already Hugely Successful and More Than Shoes

Five Forces tell us that the both the online retail and the shoe industry is moderate to highly competitive. Barriers to entry come from new technology development, access to suppliers/show manufacturers, brand and reputation Consumer s have a great deal of power due to competition from brick and mortar stores and ability to price compare via online engines, but strong product brands, stock availability, and superior customer service are critical to getting consumers in the door Suppliers hold some power since retailers need to carry the most popular brands Rivalry is medium-fierce since switching costs are low, brand spending and loyalty is high, and growth is slowing. Market is undergoing some consolidation with a lot of acquisition activity as well as product line extensions from existing retailers Yet Zappos has been successful in a nice market that most thought was ill-suited to online retailing. Why?

Barriers to entry come from new technology development, access to suppliers/show manufacturers, brand and reputation

Consumer s have a great deal of power due to competition from brick and mortar stores and ability to price compare via online engines, but strong product brands, stock availability, and superior customer service are critical to getting consumers in the door

Suppliers hold some power since retailers need to carry the most popular brands

Rivalry is medium-fierce since switching costs are low, brand spending and loyalty is high, and growth is slowing. Market is undergoing some consolidation with a lot of acquisition activity as well as product line extensions from existing retailers

Customer Value: Make a disproportionate contribution to customer value Competitor Differentiation: Be competitively unique – beyond those that are required to compete Extendability: Be used and applied in new product arenas. Truly core when it provides the means of entry into new markets Remember, There are Three Tests for Core Competencies (Pralahad and Hamel)

Customer Value: Make a disproportionate contribution to customer value

Competitor Differentiation: Be competitively unique – beyond those that are required to compete

Extendability: Be used and applied in new product arenas. Truly core when it provides the means of entry into new markets

What are Zappos’ core competencies and sources of competitive advantage? Huge inventory Customer service Information management on all aspects of operations – customer behavior, inventory, service, etc Full sales price on the internet Logistics Culture

Huge inventory

Customer service

Information management on all aspects of operations – customer behavior, inventory, service, etc

Full sales price on the internet

Logistics

Culture

Zappos has made different choices than its competitors Inventory Offer a selection a consumer cannot find elsewhere and reinforces the company’s brand promise Stock enormous number of styles, brands and sizes Today at Zappos: 1,242 brands - 135,853 styles - 729,703 UPCs - 2,820,699 total products available in our warehouse for immediate shipment!

Offer a selection a consumer cannot find elsewhere and reinforces the company’s brand promise

Stock enormous number of styles, brands and sizes

Zappos has made different choices than its competitors Customer Service Helps reduce the customer’s reluctance to purchase shoes online without trying them on, thus improving competitiveness vis a vis brick and mortar options Engrained in all that the company does – service levels, ease of returns, high degree of product information Uses stories and legends (similar to a Nordstrom) Used surprises to delight customers, such as overnight shipping

Helps reduce the customer’s reluctance to purchase shoes online without trying them on, thus improving competitiveness vis a vis brick and mortar options

Engrained in all that the company does – service levels, ease of returns, high degree of product information

Uses stories and legends (similar to a Nordstrom)

Used surprises to delight customers, such as overnight shipping

Zappos has made different choices than its competitors Information Management Data rich on all aspects of business – consumer behavior, inventory, service, etc. Adapted and shifted to improve search, selection and purchase process, e.g. integrate on hand stock info with selection Powered by Zappos supports market penetration via scalable applications using core Zappos technology

Data rich on all aspects of business – consumer behavior, inventory, service, etc.

Adapted and shifted to improve search, selection and purchase process, e.g. integrate on hand stock info with selection

Powered by Zappos supports market penetration via scalable applications using core Zappos technology

Zappos has made different choices than its competitors Full Price Margins from full price allow the company to invest in things the customers expect or that set the company apart from others, e.g. service Pricing strategy distinct from competitors who compete on price and go with internet ease of price comparisons Sells at full price using small discounts to move slower selling items Logistics Products get to right place at right time with nearly 100% accuracy Processes can support a high number of returns – essential to deliver on customer promise and support the most profitable customers (who return alot) Return and restocking also essential to keeping the full price strategy since shoes have to be in new condition Constant assessment of operational effectiveness and efficiency Cross functional teams focus on continuous improvement Investing in automation throughout supply chain to increase productivity, product flow and access to inventory and delivery status Distribution center redesign as necessary

Margins from full price allow the company to invest in things the customers expect or that set the company apart from others, e.g. service

Pricing strategy distinct from competitors who compete on price and go with internet ease of price comparisons

Sells at full price using small discounts to move slower selling items

Products get to right place at right time with nearly 100% accuracy

Processes can support a high number of returns – essential to deliver on customer promise and support the most profitable customers (who return alot)

Return and restocking also essential to keeping the full price strategy since shoes have to be in new condition

Constant assessment of operational effectiveness and efficiency

Cross functional teams focus on continuous improvement

Investing in automation throughout supply chain to increase productivity, product flow and access to inventory and delivery status

Distribution center redesign as necessary

Zappos evolved its supply chain and logistics as customer requirements for product selection and service crystallized and were challenged. Drop ship Third party fulfillment and warehousing In-house inventory and fulfillment

Drop ship

Third party fulfillment and warehousing

In-house inventory and fulfillment

The logistics capabilities deliver on the customer promise and support the most profitable customers (who return alot)

Zappos has a strong culture from which it has not strayed. Culture Employees empowered and encouraged to think about new ways to build company, service customers and improve processes Team work with employee involvement in hiring and training Entrepreneurial and willing to try new things

Employees empowered and encouraged to think about new ways to build company, service customers and improve processes

Team work with employee involvement in hiring and training

Entrepreneurial and willing to try new things

VRINE can help assess the sustainability of each of these capabilities. The Test Is it Valuable? Does the resource or capability allow the firm to meet a market demand or protect the firms from market uncertainties? Is it Rare? Assuming that the resource or capability is valuable, is it scare relative to demand or is it widely possessed by competitors? Is it Inimitable and/or Nonsubstitutable? Assuming that the resource is both valuable and rare, how difficult is it for competitors to either imitate or substitute other resources that yield similar benefits? Is it Exploitable? If the resource or capability satisfied any or all of the preceding VRIN criteria, can the firm actually exploit it?

Is the competitive advantage derived from these core competencies sustainable and scalable? Sustainable? Scalable or Transferable to Expansion? Inventory Service Information Management Full Price Logistics Culture

Is the competitive advantage derived from these core competencies sustainable? Sustainable? Scalable or Transferable to Expansion? Inventory Yes – but at a high cost Service Yes – but at a high cost Information Management Yes Full Price Unclear – Recession behavior is giving mixed messages Logistics Yes – but increasingly able to be copied Culture Yes – but recession threatens

Is the competitive advantage derived from these core competencies sustainable and scalable? Sustainable? Scalable or Transferable to Expansion? Inventory Yes – but at a high cost Some risk as company moves into new product areas since customers have come to expect an almost unlimited selection Service Yes – but at a high cost Yes Information Management Yes Yes Full Price Unclear – Recession behavior is giving mixed messages Unclear Logistics Yes – but increasingly able to be copied Yes Culture Yes – but recession threatens Possibly – choosing new lines may or may not fit into business model; increasing size strains culture or make more “traditional”

What do these choices mean about the company’s cost structure? Note: The case is vague on costs, but you can make some general assumptions knowing what you do about how Zappos operates and is structured. Inventory Costs increased through higher inventory levels Customer Service Significantly higher costs through staffing and response level targets, but mitigated with improved automation Information Management Substantial ongoing investments in new applications Continued monitoring of analytics Full Price Not sure – may have some inventory writeoffs for slowers merchandise Logistics Substantial ongoing investment increases overall costs Increased costs through plant redesign and retraining (although short term) Culture Not sure – improved morale should reduce overall turnover and HR costs, but locks company into employees as well since harder to fire underperformers

Costs increased through higher inventory levels

Significantly higher costs through staffing and response level targets, but mitigated with improved automation

Substantial ongoing investments in new applications

Continued monitoring of analytics

Not sure – may have some inventory writeoffs for slowers merchandise

Substantial ongoing investment increases overall costs

Increased costs through plant redesign and retraining (although short term)

Not sure – improved morale should reduce overall turnover and HR costs, but locks company into employees as well since harder to fire underperformers

What can we learn from Zappos’ supply and value chain? Consistency throughout is key – choices are made so that activities and the value chain is configured to be consistent with the advantage desired and the markets chosen. R&D Inputs Operations Marketing & Sales Distribution Servicing Supplier Value Chain Firm Value Chain Customer Value Chain

Summary: What is it about Zappos’ strategy and implementation that have allowed it to be successful? The company’s success is largely due to how it has arranged its operations and targets within the industry. Zappos was also lucky; few others thought to attack this niche so there was little competition in the early stages. Zappos commands a premium for its shoe selection, purchase process and overall service levels that is integral to its experience, but not as transferable to other online retailing, e.g. books or tents. Zappos has focused on building relationships and providing tools to customers that will drive buyer loyalty and profitability The company has a consistent message that flows to how it allocates its resources – performance, fit and manufacturing

The company’s success is largely due to how it has arranged its operations and targets within the industry.

Zappos was also lucky; few others thought to attack this niche so there was little competition in the early stages.

Zappos commands a premium for its shoe selection, purchase process and overall service levels that is integral to its experience, but not as transferable to other online retailing, e.g. books or tents.

Zappos has focused on building relationships and providing tools to customers that will drive buyer loyalty and profitability

The company has a consistent message that flows to how it allocates its resources – performance, fit and manufacturing

How should Zappos respond to the 2008 economic slowdown and the increase in cost consciousness? Your conclusion will depend on: What you think Zappos’ true intentions are – be content as niche retailer or grow aggressively? What you think other online retailers will do – go after Zappos’ or other smaller players? How you view the costs to respond - are the costs an “investment” or a cost? History tells us retrenching or repositioning needs to be carefully contemplated: Cutting costs or prices to retain or “save” customers can change brand image. Internet shopping means that you cannot target smaller segments of customers – any price cuts are across all segments

Your conclusion will depend on:

What you think Zappos’ true intentions are – be content as niche retailer or grow aggressively?

What you think other online retailers will do – go after Zappos’ or other smaller players?

How you view the costs to respond - are the costs an “investment” or a cost?

History tells us retrenching or repositioning needs to be carefully contemplated:

Cutting costs or prices to retain or “save” customers can change brand image.

Internet shopping means that you cannot target smaller segments of customers – any price cuts are across all segments

What are some options going forward and how do these offer “fit” and consistency? Core shoe business Non-shoe products Private label business Powered by Zappos Geographic expansion Cost of service Service expansion 6pm

Core shoe business

Non-shoe products

Private label business

Powered by Zappos

Geographic expansion

Cost of service

Service expansion

6pm

What are some options going forward and how do these offer “fit” and consistency? Core shoe business – Continue to find new brands to surprise and delight and enhance search and discovery process while cutting non-profitable SKUs Non-shoe products – Indications are that consumers will demand the same level of selection as shoes and that may distract with high cost to support and other entrenched competitors Pick products that benefit from value of service, rapid delivery, try/return promise, SKU-intensive, salable at full or near full price Yes: apparel and accessories No: camping gear, electronics, video games Private label business - Jury is still out at time of case and products seem to be low turnover Powered by Zappos – Has strong fit with existing competencies and is scalable without dilution of company resources

Core shoe business – Continue to find new brands to surprise and delight and enhance search and discovery process while cutting non-profitable SKUs

Non-shoe products – Indications are that consumers will demand the same level of selection as shoes and that may distract with high cost to support and other entrenched competitors

Pick products that benefit from value of service, rapid delivery, try/return promise, SKU-intensive, salable at full or near full price

Yes: apparel and accessories

No: camping gear, electronics, video games

Private label business - Jury is still out at time of case and products seem to be low turnover

Powered by Zappos – Has strong fit with existing competencies and is scalable without dilution of company resources

What are some options going forward and how do these offer “fit” and consistency? Geographic expansion – Zappos’ based promise on culture-specific buying behavior and distribution processes, yet still has only reached 3% of US market Cost of service – Potentially provide incentives for using cheaper shipping, use less expensive ways Service expansion – Prepare now for increased volume in call centers and set targets to get more than 3% of US market 6pm – Part of Zappos’ business that caters to cost-conscious consumers

Geographic expansion – Zappos’ based promise on culture-specific buying behavior and distribution processes, yet still has only reached 3% of US market

Cost of service – Potentially provide incentives for using cheaper shipping, use less expensive ways

Service expansion – Prepare now for increased volume in call centers and set targets to get more than 3% of US market

6pm – Part of Zappos’ business that caters to cost-conscious consumers

Key Class Take-Aways: Resources A sustainable competitive position is based on what is valuable to buyers. Buyer value analysis is a critical tool rather than some abstract theory. Companies need to consider carefully the costs and the sustainability of the position. Competitive advantage arises out of aligning internal resources across the value chain. Success arises out of a set of coordinated actions across a company’s value chain A value chain focus supports companies when they need to reposition in the face of competitive or environmental shifts. You must carefully consider entering a market where you do not clearly offer a superior or distinct value proposition!

A sustainable competitive position is based on what is valuable to buyers. Buyer value analysis is a critical tool rather than some abstract theory.

Companies need to consider carefully the costs and the sustainability of the position.

Competitive advantage arises out of aligning internal resources across the value chain.

Success arises out of a set of coordinated actions across a company’s value chain

A value chain focus supports companies when they need to reposition in the face of competitive or environmental shifts.

You must carefully consider entering a market where you do not clearly offer a superior or distinct value proposition!