BUSI 504 Week 4 Case Study 2 Example

Redesign Without a Shared Diagnosis: Zappos and the Move to Holacracy

Introduction

In late 2013, Zappos, the online shoe and clothing retailer owned by Amazon, announced that it would replace its traditional management hierarchy with Holacracy, a self-management system in which work is organized into roles grouped in circles and authority is distributed by a written constitution (Robertson, 2015). In March 2015, chief executive Tony Hsieh told employees that those who did not want to embrace self-management could leave with severance; about 18 percent of the workforce accepted the offer (Bernstein et al., 2016). The case is often presented as either a bold experiment or a cautionary tale. This paper argues that it was both: the redesign itself was thoughtful, but it was imposed before the people who had to live in it had agreed on what problem it solved, reversing the order Spector (2013) recommends.

What Problem Was the Redesign Meant to Solve?

Hsieh's stated concern was that large organizations become slow and bureaucratic as they grow, and that cities, by contrast, become more innovative and productive per resident as they grow. He wanted Zappos to keep the energy of a small company at the scale of a large one (Bernstein et al., 2016). That is a reasonable concern, and research on new organizational forms takes it seriously. Puranam et al. (2014) argued that every organization must solve four universal problems, dividing tasks, allocating them, providing rewards and providing information, and that new forms are distinguished by the novel ways they solve those problems rather than by the absence of structure.

But the concern was the leaders' diagnosis. Zappos in 2013 was a successful company with a celebrated culture and strong customer loyalty. There is little public evidence that employees broadly experienced bureaucracy as the company's central problem. Spector (2013) argues that redesign should follow a shared diagnosis in which employees recognize the problem, because commitment to a solution depends on agreement about the problem. At Zappos, the diagnosis came from the top, informed by Hsieh's reading and his interest in self-organizing systems, and the employees were asked to accept the solution.

How the Redesign Changed Structure, Roles and Relationships

Holacracy changed nearly every element of formal design. Job titles and managers were replaced by roles, each with a defined purpose and accountabilities, and an individual could hold several roles in different circles. Circles were linked by lead links, who assigned people to roles, and by representatives, who carried tensions from one circle to another. Changes to roles were made in governance meetings under rules set by the constitution, while day-to-day coordination happened in tactical meetings (Robertson, 2015).

Lee and Edmondson (2017) reserve the label self-managing for organizations that push authority down through the whole structure by formal, codified rules, and they distinguish them from organizations that simply empower employees within a hierarchy. By that definition, Holacracy was a genuine self-managing design. Lee and Edmondson also note the costs of such designs: the time spent on governance, the difficulty of coordinating across many small units, and the ambiguity people feel when familiar markers of career progress disappear.

The relationship changes were as important as the structural ones. Employees who had reported to a manager now worked across circles, negotiated their roles in meetings and lost the clear path of promotion that titles had provided. Bernstein et al. (2016) observed that many self-managing organizations struggle with exactly this, because people need some stable reference points for status, pay and development.

How the Redesign Was Implemented and How Employees Responded

Zappos rolled Holacracy out in stages through 2014, with training and coaching. Early adopters reported real benefits, including faster decisions on some teams and the freedom to take on work outside a fixed job description. But progress was uneven, and in March 2015 Hsieh sent a long memo announcing that the company would move faster toward self-management, drawing on Laloux (2014), and offering severance to employees who preferred not to stay. About 18 percent accepted (Bernstein et al., 2016).

From the standpoint of Spector (2013), the offer was a people-alignment decision made before the redesign had earned commitment. It did produce a workforce more willing to try self-management, but it also communicated that the structure was not open to question, which sits uneasily with a system meant to distribute authority. It is hard to tell people that they now hold real authority over their work while also telling them that the system granting that authority is not up for discussion. Some of the employees who left were likely those most skeptical of the design, which meant the company lost the voices that a shared diagnosis would have wanted to hear. The research on participation suggests why the response was so large. Coch and French (1948) found that groups who participated in planning a change recovered faster and resisted less than groups who were simply told about it. Zappos employees participated intensively in governance meetings under the new system, but they had not participated in deciding whether to adopt it.

What a Shared-Diagnosis Approach Would Have Done

A redesign grounded in shared diagnosis would have opened with an inquiry instead of an answer. Leaders could have asked employees across the company where decisions were slow, where good ideas died and where the hierarchy blocked customer service, using a structured framework to keep the conversation focused. If those conversations had confirmed Hsieh's concern, Holacracy could have been piloted in the units that felt the problem most, with results shared openly, before the company committed. Beer et al. (1990) argued that successful change spreads from units that have solved real business problems, not from programs launched at headquarters.

Such an approach might have produced a less radical design. It might also have produced the same design with far more commitment. Either outcome would have avoided the situation in which employees experienced a self-management system as a mandate.

In practice, such a process could have unfolded in four stages over roughly a year. First, leaders would share the data behind their concern, such as how long decisions took and how often front-line ideas stalled, and ask employees whether it matched their experience. Second, small cross-functional groups would diagnose where the hierarchy helped and where it hurt, since some of what managers did, such as coaching and settling disputes, might be worth keeping. Third, two or three volunteer units would pilot self-management for a defined period, with measures agreed in advance. Fourth, the company would decide, with the pilot units' results and testimony in hand, whether and how to extend the design. Each stage would build the readiness that the 2015 memo tried to create by decree.

A Biblical Perspective

Paul compared the church to a single body made of many parts, each doing different work, where no part may dismiss another as unnecessary, and each suffering or rejoicing with the others (English Standard Version Bible, 2001/2016, 1 Corinthians 12:12-26). The passage offers a striking parallel to Holacracy's emphasis on roles over rank. It also offers a correction. In Paul's picture, the members belong to the body before they are assigned a function, and their worth does not depend on accepting a particular structure. A redesign that tells members to adopt the structure or leave reverses that order. Christian managers can admire the aspiration to give every member a meaningful role while insisting that the people come before the design.

Conclusion

Zappos's adoption of Holacracy shows both the promise of radical redesign and the cost of skipping shared diagnosis. The new structure answered real questions about how large organizations stay responsive, and research on self-managing organizations confirms that such designs can work. But Spector (2013) places redesign after diagnosis for a reason: people commit to solutions for problems they recognize. Zappos's employees were given a solution and then a choice to accept it or leave. A more patient process, beginning with the employees' own view of the problem, would likely have kept more of them and produced a design more fully their own. The lesson reaches well beyond self-management: any redesign, however clever, depends on the people asked to work inside it.

References

Beer, M., Eisenstat, R. A., & Spector, B. (1990). Why change programs don't produce change. Harvard Business Review, 68(6), 158-166.

Bernstein, E., Bunch, J., Canner, N., & Lee, M. (2016). Beyond the holacracy hype. Harvard Business Review, 94(7/8), 38-49.

Coch, L., & French, J. R. P., Jr. (1948). Overcoming resistance to change. Human Relations, 1(4), 512-532. https://doi.org/10.1177/001872674800100408

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Laloux, F. (2014). Reinventing organizations: A guide to creating organizations inspired by the next stage of human consciousness. Nelson Parker.

Lee, M. Y., & Edmondson, A. C. (2017). Self-managing organizations: Exploring the limits of less-hierarchical organizing. Research in Organizational Behavior, 37, 35-58. https://doi.org/10.1016/j.riob.2017.10.002

Puranam, P., Alexy, O., & Reitzig, M. (2014). What's "new" about new forms of organizing? Academy of Management Review, 39(2), 162-180. https://doi.org/10.5465/amr.2011.0436

Robertson, B. J. (2015). Holacracy: The new management system for a rapidly changing world. Henry Holt.

Spector, B. (2013). Implementing organizational change: Theory into practice (3rd ed.). Pearson.