course material

1. Before you begin the assignment, read the Inside Zappos CEO
Before you begin the assignment, read the Inside Zappos CEO Tony Hsieh’s radical
management experiment that prompted 14% of employees to quit Links to an external site.
article.For this interactive assignment, you are to take on the role of an internal consultant
that has been tasked with transitioning a large, traditionally multi-tier organization into a
holacracy. Your role as an internal consultant is to create a 7- to 10-slide PowerPoint
presentation for the executive board that addresses the following elements of the change
initiative.A descriiption of holacracy.Justify the need for change from the current
management model to holacracy.Use Kotter’s eight-step change leadership model to explain
how you would implement holacracy.Describe the proposed change using each of Kotter’s
eight steps of change leadership:Establishing a sense of urgencyCreating a guiding
coalitionDeveloping a vision and strategyCommunicating the change visionEmpowering
broad-based actionGenerating short-term winsConsolidating gains and producing more
changeAnchoring new approaches in the cultureExplain some of the anticipated problems
that may occur and recommend possible solutions.A references slide with a minimum of
two scholarly and/or credible sources.Attach the PowerPoint presentation to your initial
post. Create an email to the executive board that addresses the purpose of your change
management initiative. Provide a detailed explanation of why holacracy is a better fit for the
organization.Your initial post should be a minimum of 250 words.Here is the article:Zappos
CEO Tony Hsieh reveals what it was like losing 18% of his employees in a radical
management experiment — and why it was worth itRichard FeloniJanuary 28, 2016Tony
Hsieh TBI Interview illustrationTony Hsieh TBI Interview illustration(Mike
Nudelman/Business Insider)A few days into the new year, 50 employees quit their jobs at
Zappos. That was OK with CEO Tony Hsieh.It was the deadline for the 150 employees
working on an intensive tech project to decide if they wanted to take a severance package or
begin working under the self-management system known as Holacracy. Under it, there are
no traditional bosses or job titles, and the standard hierarchy is eliminated.Hsieh made the
offer last March to this team and the greater body of 1,500 Zappos employees with separate
deadlines, and ultimately 260 employees — 18% of the company — took some form of it.It’s
a big year for Hsieh (pronounced “shay”). His e-commerce site, known for its wide variety of
shoes and headache-free customer service, is rebounding from this radical shakeup and
now moving toward becoming a mobile-first company with significant profit
growth.Additionally, 2016 is the year that Hsieh’s other focus, the four-year-old Downtown
Project movement to revitalize Zappos’ Las Vegas neighborhood, is supposed to finally

2. bring back a return on the $350 million that Hsieh personally invested into it.We recently
sat down with Hsieh in Zappos’ Vegas headquarters to discuss his ambitions for the year,
why he decided to reinvent the way his company operates, and why he thinks it will
ultimately prove to be worth the struggle.This interview has been edited for length and
clarity.FINAL Tony_Hsieh_bioFINAL Tony_Hsieh_bio(Samantha Lee/Business
Insider)Richard Feloni:So here we are, January 2016. Looking back at 2015, what do you
think? How did the year go?Tony Hsieh: It was definitely an eventful year. There were a lot
of changes both internally and externally here at Zappos. We went all in with Holacracy,
which is really about self-organization, self-management, having employees really think
about how to self-direct their work, rather than managers telling them what to do.And then
externally, on the customer side, we really made a strategy change and decided to focus on
what we’re internally referring to as our “best customers” — really focusing on the brands
they want, elevating the level of service, the amount of personal contact. So it’s been a pretty
interesting and exciting transition on both of those ends.Feloni: Let’s talk about Holacracy.
You first heard about it at the 2012 Conscious Capitalism CEO Summit, and you then
approached its creator, Brian Robertson, after his presentation on Holacracy. How did you
decide the system was right for Zappos?Hsieh: Holacracy happens to be the tool we’re using
today, but the bigger theme is about self-organization and self-management.Many years
prior to meeting Brian, I had a nagging sensation that as we kept getting bigger, we kept
getting more bureaucracy built into the corporate structure. Because I wanted to stop this
trend, I was spending a lot of time thinking about how we could avoid losing a startup edge
and how we could empower every employee to act like an entrepreneur.I was looking at the
weaknesses of the typical corporate structure and how it’s not been resilient. If you look at
the Fortune 500 companies from 1955, 88% of them didn’t make it to 2014. Then you look
at what structures do work in nature, like the human body, and they’re all structures that
are self-organized. Frederic Laloux captures this best in his book “Reinventing
Organizations,” where he refers to these as “Teal” organizations.Feloni: Another book that
has influenced you in this area is Harvard professor Edward Glaeser’s “Triumph of the
City.”Hsieh: The easiest example of self-organization for people to wrap their minds around
is a city. The mayor of a city doesn’t tell its residents what to do or where to live, and when
people and businesses act in their own self-interests, that creates opportunities for
growth.An interesting thing about cities is that Glaeser’s research has shown every time the
population of a city doubles, innovation or productivity per resident increases by 15%, but
the opposite happens when companies double in size.Over the years at Zappos, I’ve done a
lot of research into how we can prevent the default future for most companies: death. And
not only how do we avoid that, but how do we become more innovative as we grow, in the
same way that cities do? That’s why we pursued self-management.Feloni: What do you
think is the biggest misconception people have of Holacracy in particular, or self-
management in general?zappos employeeszappos employees(Richard Feloni/Business
Insider)Zappos prides itself on exceptional customer service employees.Hsieh:The biggest
misconception is that it’s just total chaos and there’s no structure. It’s interesting, because
there actually is more structure in some cases and more explicit documentation on what
people’s different roles are, what their account abilities are. It’s easy, though, to just read

3. the headline of “No managers” and assume that that means no hierarchy. It’s actually a
hierarchy of purpose.Instead of a pyramid, power is distributed across different circles
dedicated to specific functions — we have about 500 circles at Zappos, and they fit in a
hierarchy relative to one another.A problem with Holacracy is that it’s hard to explain very
succinctly. Our training process takes awhile, and then even after you’ve gone through that,
it still takes several months to really understand how to operate inside of it.Another thing to
remember whenever you hear someone explain how they either love or hate Holacracy at
Zappos is that we’re in the super early days of it. It’s If you got handed the latest iPhone
running on the latest iOS, but there were no apps on it, then you would think that it was
probably useless. Part of what we’re going through right now at Zappos is that we’re
creating those apps for the Holacracy operating system. Since it’s the first time we’re doing
it, some of those apps turn out to be great and some may be false starts, but it’s all an
evolutionary discovery process and we share our findings with the world.Hopefully, there
are other companies out there that can borrow or modify our apps and then over time,
there can be a whole ecosystem of companies that are thinking about “How can we move
beyond the traditional command and control type of structure?” It makes the difficulties
worth it.FINAL Tony_Hsieh_by the numbersFINAL Tony_Hsieh_by the numbers(Samantha
Lee/Business Insider)Feloni: What were you seeing at Zappos that prompted you to offer a
severance package to employees last March if they didn’t want to go all-in with
Holacracy?Hsieh: At that time, only 85% of the company had made the transition to the
system. And what we found was that it was really hard for people to be half in one world
and half in the other because, if under Holacracy they had certain authority to do something
but their manager still functioned as if it were the old world, then conflict could arise. The
default became falling back on habits, and so it hindered the whole adoption process. That’s
why I set a hard deadline of moving to full implementation on May 1, so that we could just
“rip the Band-Aid off.”Feloni: About 14% of your employees left by May 1, and then by
January 4, 50 more employees working on the Super Cloud outsourcing of the website’s
basic functions to Amazon’s servers took an offer, for a total of 18% of the company. Did
that hurt at all, to see that reaction?Hsieh: So we put out a super generous offer, which
we’ve done in the past anytime there were big transitions, like when we moved from San
Francisco to Las Vegas in 2004. The offer then and the offer last year was they could either
stay or take three months’ pay or one month’s pay for every year they worked, whichever
was greater.There were some employees that had been with us for over 12 years and
basically they had the option to take a year’s severance.This new environment isn’t right for
everyone, because some employees just want to know what steps one to 10 are and be told
by a manager that they’ve done a good job when they finish. In this new self-managed
world, employees sign up for a role or a circle, and each of those has a purpose associated
with it that employees have to figure out how to make come alive. And so it gives them a lot
of freedom, but I understand at the same time that amount of freedom can be super scary
for some people.tony hsiehtony hsieh(Richard Feloni/Business Insider)Hsieh, like nearly
every Zappos employee, has an open desk cluttered with colorful decorations.What we
found, though, was, at least anecdotally, that about half of those who took the offer did so
not because of Holacracy, but because they really had wanted to actually go out and do

4. something else they were passionate about, like start their own business. Because now, with
a year’s severance, for example, they had the funds to try it out and they also knew that they
could, 12 months later, come back to Zappos, which we allowed them to do.I heard a story
about someone who took the offer because she considered it a good opportunity to take
care of a sick family member in Texas.Feloni: So do you feel like giving this offer was a
necessary decision that you had to make?Hsieh: It’s just more in line with how we’ve always
done things at Zappos. We could have just as easily not given any offer and then just said,
“This is what we’re doing.” But we’ve always prioritized company culture and how we treat
employees. We actually still do this for all our new hires: They go through a five-week
training program and at the end of the five weeks, they can take $2,000 and quit.We want to
make sure that employees aren’t here just for paychecks and truly believe this is the right
place for them.Feloni: And if your vision is realized, what will success look like under this
new self-managed Zappos?Hsieh: I want employees to operate in the intersection between
what they’re passionate about and what’s going to help move the company forward. I want
them to be able to come up with an idea and then, rather than having to go through a
bureaucratic approval process, they can run with the idea and find people who’d like to join
them.And from the overall company’s perspective, I want to add more innovation and
productivity as we add more employees. It goes back to the city analogy.Another layer to
that is that different mayors of different quality can come and go through the city, but the
city stands throughout the change. In the same way the city isn’t dependent on a mayor, I’d
ultimately like for Zappos’ future to not be dependent on me as its CEO.I’d ultimately like for
Zappos’ future to not be dependent on me as its CEO.Feloni: Last year I spoke to John Bunch,
head of the Holacracy implementation, and he essentially said that even if the company had
to abandon Holacracy because it wasn’t working, the transitions that already were put in
place would have been worth it. Is that something that you agree with?Hsieh: Yeah,
although I wouldn’t really think of trying something instead of Holacracy as abandoning it. I
would think of it as we’re learning that there are some things about Holacracy that are great
and then some things that maybe aren’t the best fit for our culture.It would be like if I asked
you, “Did Apple abandon the first iPhone?” You can either say they abandoned it or you can
say they improved upon it over time.Feloni: You told me last year that fewer decisions
require your approval now at the company. Now that Zappos is fully functioning as a self-
managed organization with distributed power, how has your role as CEO
changed?Tony_Hsieh_holacracy vs. hierarchyTony_Hsieh_holacracy vs. hierarchy(Samantha
Lee/Business Insider)Click here to learn more about how Holacracy works >>Hsieh: I
would say in general, both historically and with Holacracy, I’ve always viewed my role as
just kind of jumping around to wherever the organization needed me the most. And so over
the past year and probably this year, as well, a lot of that is really focused on either
Holacracy education or helping come up with systems or processes in this new
world.Feloni: You invested $350 million of your own money into Downtown Project in
2012, with the goal of revitalizing 50 acres of downtown Vegas. How was that an outgrowth
of the ideas that you were exploring for Zappos?Hsieh: When we first moved to downtown
Vegas, we took over the former City Hall, which we’re sitting in right now, about two and a
half years ago. And at the time this whole area was a lot more dangerous than it is today,

5. and we wanted employees to be able to live, work, and play within walking distance of
work. So the Downtown Project team and I wanted to help fund small businesses, tech
startups, and a school and health clinic.Though Zappos and Downtown Project are entirely
separate, I wanted to encourage Zappos employees to go out into the community and to
encourage people in the community to come onto Zappos’ campus, to have more of those
innovation-driving “collisions” with other people, businesses, and industries.Feloni: How do
you feel about where Downtown Project is today?Hsieh: When we started, the goal was that
by the end of year five, which is the end of this year, was to make a profit. Right now, we’re
pretty close to being on track for that goal.The more interesting thing for me outside of the
numbers is really, “Are small businesses and people not affiliated with us moving on their
own to the area?” And the answer is, “Yes.” One of our intentions was to get to the tipping
point where they came here because they like the vibe we created.zappos
headquarterszappos headquarters(Zappos)Zappos’ downtown Las Vegas headquarters is in
the old City Hall building.Feloni:You tried implementing Holacracy with the Downtown
Project managing team, but they abandoned it in the fall of 2014. Were there lessons that
you learned about implementing Holacracy and how it functioned that you were able to
bring over to Zappos after trying it at Downtown Project?Hsieh: In that case the timing
wasn’t right for Downtown Project. The team was trying to build something significant from
the ground up while also trying to learn Holacracy.Whereas at Zappos, we have an existing
business that, while we’re always trying to improve and so on, we’re not trying to figure out
the entire business from scratch. We have more resources to figure out Holacracy.Feloni:
What do you think it is about your personality or your experience that drives this constant
need for experimentation and trying new things?Hsieh: There’s the creativity aspect of it,
but it’s also rewarding for me to remove roadblocks to someone’s idea so that it can become
reality.Feloni: Do you ever doubt yourself as you’re going through the ambitious projects
you take on?Hsieh: I always doubt individual ideas, but I know that if you just do more of
them, then statistically some of them are going to work. The ones that do work are the ones
that you double down on.In some ways it’s analogous to playing poker, where if you only
play hands that you’re absolutely sure you’re going to win, you’re not going to be the best
poker player or win the most money at the table. On the flip side, that doesn’t mean you
play every hand, because you’re not going to make money.I’ve always played, in poker and
in business, for the highest expected value, and so even if there’s a 20% chance that
something might work out, if the payoff’s going to be 10 times as much as you put in, then
you should make that bet every single time.If the payoff’s going to be 10 times as much as
you put in, then you should make that bet every single time.A lot of companies, especially
bigger corporations, instead think, “Oh, 20% chance of success means 80% chance of failure
— we should kill that project.” I’d rather say we should do 10 similar projects and then two
of those will work out. Those could be the two that completely change the company.Feloni:
Was your decision to move from a spacious apartment into an Airstream trailer in the fall of
2014 one of those instances where you wanted to push yourself creatively?Hsieh: I did it
because I wanted to maximize serendipity and randomness in my life. If you lived in a house
in the suburbs, your neighbors and friends don’t randomly walk into your house, in the
same way that everyone in the Airstream park interacts with each other.For example, two

6. nights ago we had a bunch of musicians stop by, and Dan Reynolds, the lead singer of
Imagine Dragons, starts a rap battle with another performer. That’s the type of situation you
can’t plan for, but it happens all the time at the Airstream Park and generally happens a lot
more in downtown Vegas than any other city I’ve been in.Tony_Hsieh_why does he live in a
trailer parkTony_Hsieh_why does he live in a trailer park(Samantha Lee/Business
Insider)Feloni: At this point, you’ve been a public figure long enough for people to either
consider you a genius or crazy. How do you see yourself?Hsieh: Probably neither. I don’t
know. I just enjoy learning new things and then forming my own perspective of the world.
By definition, because something I pursue is new or different, then it’s going to resonate
with some people and not with others.Feloni: You’ve said in other interviews that Zappos
was never to you just about selling shoes or clothes, but that it’s been about building a
culture internally and with customers. What do you want Zappos to become?Hsieh: I would
like it to be a whole new way of working and living that infects other companies. We like
being at the forefront of newer things.There are so many people working at bureaucratic,
big corporations who are unhappy. Hopefully, we can help change that.NOW WATCH: The
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