When I heard the story of Tony Hsieh’s tragic passing, the meaninglessness of the tragedy struck me deep. The death not only cut short his young life but also culled the dynamism of his ideas and a promise of a better future. I did not know Mr. Hsieh, but many whom I respect knew him and held him in high regard. Om Malik wrote a beautiful, heartfelt essay on what Tony Hsieh meant to people pursuing their ideas.
I will write about the brilliance of Zappos, which was perhaps the biggest e-commerce acquisition of Amazon (1.2 billion USD in 2009), the first of their billion-dollar acquisitions.
Zappos was not a run of the mill internet retailer. It was a strikingly original idea, both in audacity and execution.
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Model Traps and Recipes.
When I am not pondering these essays, I teach a core operations class at a well-regarded university. Even though Supply Chain Operations is pretty much a quantitative “nuts and bolts” course, I warn students not to fall into the trap of formulating quantitative models for everything they see and jump into data evaluation.
It is almost dissonant advice, as I am usually an evangelist for analysis and analytics. Evermore than before, it is important to have a working model of things we see. Models explain many things, from the most mundane to the most intricate. For instance, we have envisioned models for how people walk around when they shop in a retail store. We have models for how people think about replacing their refrigerator or renovating their kitchen. Of course, for each person, the decision process is slightly different, but there are always common generalities. A mental model captures the commonalities in these decisions while allowing for slight differences in observations.
Models need not be quantitative, even though quantitative models help you in being precise about what is in the model and what is out.
It is best to think of models as a recipe for a dish — the ingredients can change, but the template remains usable with changes. Recipes don’t tell us much about the experience of tasting a dish, but the science behind how a dish came to be. Models, like recipes, are great for reproducibility, but not always for discoveries of new ideas.
The crucial point is this. We should not confuse the recipe for the dish. Dishes are more than recipes. Dishes are transformed by disparate associations: the company we have at the dinner, the extremes of the weather, the aching muscles after a long tiring day, the Proustian memories that abound with smells and textures (like the food critic discovers in the movie, Ratatouille). None of this is confused for the recipe.
Far too many of us confuse the business model for the business. A business can thrive even when the fundamentals “fail” to explain the business. How is that possible? Culture is one such fundamental association. Zappos truly rewrote the “fundamentals” on what we can sell on the Internet and how.
Products over Process
No one truly expected in the 1990s that Amazon will become the behemoth it has grown to be. Here is Jeff Bezos in an interview with Mathias Döpfner.
I remember, early on, we only had 125 employees, when Barnes & Noble, the big United States bookseller, opened their online website to compete against us, barnesandnoble.com. We’d had about a two-year window. We opened in 1995; they opened in 1997. And at that time, all the headlines — and the funniest were about how we were about to be destroyed by this much larger company. We had 125 employees and $60 million a year in annual sales — $60 million with an “M.” And Barnes & Noble at that time had 30,000 employees and about $3 billion in sales. So they were giant; we were tiny. And we had limited resources, and the headlines were very negative about Amazon. The one that was most memorable was just “Amazon. toast.”
Of course, one common question that often asked about Amazon is why they started as booksellers. The fairly straightforward answer (ex-post) is the item variety (or Stock Keeping Units SKU variety) in books.
We have the answer from Mr. Bezos himself. At the 1997 Special Libraries Conference, Jeff Bezos discusses why Amazon chose to sell books first.
I picked books as the first best product to sell online, making a list of like 20 different products that you might be able to sell. Books were great as the first best because books are incredibly unusual in one respect, that is that there are more items in the book category than there are items in any other category by far. Music is number two, there are about 200,000 active music CDs at any given time. But in the book space there are over 3 million different books worldwide active in print at any given time across all languages, more than 1.5 million in English alone. So when you have that many items you can literally build a store online that couldn’t exist any other way.
Amazon always had the “Long Tail” idea pat down. If you ranked all the items that are sold in the books category — the highest-selling books (e.g., Barack Obama memoir in December 2020) sell multiple times more than low-ranked slow-moving books. Low ranked items turn very slowly, and it is uneconomical even for a large bookstore to carry that, not just because of space limitations, but economic limitations.
Suppose a store has 30 copies of the best-selling book that sells out in a month. At this rate, they are roughly selling one book a day. Expressed in different terms, their inventory “turns” (nearly) 365 times in a year. On the slow-moving end, they could have a book that sells not over 1 or 2 copies a year (and hence “turns” one or two times). Books that are even lower-ranked, turn even more slowly — not only slow but also unpredictably. It is simply uneconomical to have one or two copies of hundreds of such slow-moving books in high real estate areas. Now, instead, put these slow-moving items in a warehouse in the middle of Idaho or Washington or Delaware. It is easy to hold them for cheap as long one can move them to customers quickly.
So, the more SKUs there are in a category, the smaller is the fraction of overall demand fulfilled by books in the store. As Bezos pointed out that there are 3 million different titles active in print and stores can only carry a few tens of thousands at best. The rest of the books are not available in any store, even though there is market demand for them.
By beginning the business in a category where most of the brick and mortar could not economically hold the inventory, Amazon was not competing with any company for selling those books, at least until the competing booksellers opened a website and warehouse. As the brick and mortar retailers (and a lot of competing web retail startups) were soon to learn, a warehouse and a website do not make an e-commerce firm. In the two-year span (1995-1997), Amazon had built operational capability in moving books (or any physical product) quickly to the customer.
Process over Product
To understand Zappos, we must ask a different question: Amazon soon started spreading their shelves to other categories? Why did they take so long to sell shoes?
A pure-play e-commerce firm (like Amazon circa 2000) loses the consolidation benefits and gains a higher product variety. But, there is one more aspect that is important. Every time Amazon puts a new product line in the warehouse, it moves it away from a customer, further into the supply chain.
Every customer-obsessed innovation by Amazon has been in trying to get the product “closer” to the customer, on the web. [As they showed, web alone is not the holy grail, by their eventual return to open stores].
One always joked not to judge a book by the cover — but e-commerce gave us a confirmation that it was ok to buy books online, just looking at the cover online. That is because what makes up an excellent book has very little to do with the product engineering of the book. Of course, shiny pages, hardcover, handy size, and such things fully describe a book. But shoes are different, the feel, touch, the sense of buying it — there is even a blog on shoes and books. Books are seen as erudite, and shoes, flaky. How wrong?
The cost of moving away from customers depends on the product itself.
The masterful accomplishment of Zappos was to move the product closer to the customer, by moving the “service” closer to the customer. This was only possible through culture.
As Tony Hsieh himself stated succinctly:
For individuals, character is destiny. For organizations, culture is destiny.
How did Zappos build the culture? what can e-commerce firms learn?
I will further explore Zappos and the role of culture on this blog. But it is time to remember another remarkable person who left us in 2020.