Today’s Chapter is based on the book “Delivering Happiness: A Path to Profits, Passion, and Purpose” by Tony Hsieh.

Tony Hsieh was an American internet entrepreneur best known as the longtime CEO of Zappos, where he built a billion‑dollar online shoe retailer famed for its customer service driven culture. Before Zappos, he co‑founded the online ad network LinkExchange, sold it to Microsoft for about 265 million dollars.

Here’s what I learned:

Culture

“Your culture is your most valuable asset. Guard it with your life.”
— Brian Chesky

Tony Hsieh understood that culture is the foundation upon which everything else in a company is built. It determines who you hire, how you treat your customers, and ultimately what your brand becomes in the world. Hsieh learned this lesson the hard way. After selling his first company LinkExchange to Microsoft for $265 million, Hsieh realized that he neglected the company culture which led him to this unhappiness that forced him to exit the business.

Hsieh writes, “The short story is that we simply didn’t know we should have paid more attention to our company culture. During the first year, we’d hired our friends and people who wanted to be part of building something fun and exciting. Without realizing it, we had together created a company culture that we all enjoyed being a part of. Then, as we grew beyond twenty-five people, we made the mistake of hiring people who were joining the company for other reasons. ”

By consequence, Hsieh ensured that corporate culture would be the cornerstone of everything he would build at Zappos. He understood that when people a company for the wrong reasons, it changes the entire dynamic within. As such, at Zappos, Hsieh made culture the number one priority, and he backed that priority with concrete actions.

“Our employees know that our number one priority at Zappos is our company culture.”
— Tony Hsieh

Learning from his mistakes at LinkExchange, Hsieh deliberated changed the layout of the office to only have one entrance in and out of the building forcing people to interact with each other. He also created “The Face Game”, where employees had to identify colleagues by their photos before they could log into their computers. This game reflects the reality that culture isn’t built through mission statements, but by the thousand of small interactions between people who know and care about each other.

Hsieh explains, “At Zappos, an additional step is required: a photo of a randomly selected employee is displayed, and the user is given a multiple-choice test to name that employee. Afterward, the profile and bio of that employee are shown, so that everyone can learn more about each other. Although there is no penalty for giving the wrong answer, we do keep a record of everyone’s score. Internally, we refer to this as ‘The Face Game.’”

Furthermore, Hsieh quickly realized that a corporate culture and brand are inseparate. While many companies spend millions on branding campaigns, trying to project an image to the world, while internally their culture tells a completely different story, Hsieh understood that you can’t fake a brand. What your customers experience is ultimately a reflection of what your employees experience every day. If you want to be known for exceptional service, you must first create an environment where people genuinely care about each other. He mentions that “Over time, as we focused more and more on our culture, we ultimately came to the realization that a company’s culture and a company’s brand are really just two sides of the same coin. The brand is just a lagging indicator of a company’s culture.”

As such, Hsieh defined Zappos culture in terms of 10 core values:

Deliver WOW Through Service
Embrace and Drive Change
Create Fun and a Little Weirdness
Be Adventurous, Creative, and Open-Minded
Pursue Growth and Learning
Build Open and Honest Relationships with Communication
Build a Positive Team and Family Spirit
Do More with Less
Be Passionate and Determined
Be Humble.

Nonetheless Hsieh mentions that a company’s specific values matter less to a company’s success compared to their commitment to them. He explains, “As it turns out, it doesn’t actually matter what your company’s core values are. What matters is that you have them and that you commit to them. What’s important is the alignment that you get from them when they become the default way of thinking for the entire organization.”

“At Zappos, our belief is that if you get the culture right, most of the other stuff—like great customer service, or building a great long-term brand, or passionate employees and customers—will happen naturally on its own.”
— Tony Hsieh

This reminds me of Richard Farmer, the founder of Cintas who believed that Cintas’ ultimate competitive advantage is their corporate culture. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”

“I swore that I would do whatever it took to develop obvious and authentic competitive advantages. Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I’m talking—again—about our corporate culture.”
— Richard Farmer

However, in order to implement a great corporate culture at Cintas, it was primordial for Farmer to create a vision for the company to lead his employees. Cintas’s vision was the following:

1. To be known as a company that insists on absolute honesty and integrity in everything we do.

2. To have a highly talented and diverse workforce which is harmonious and compatible with our corporate culture.

3. To have a uniform rental presence in every city in the United States.

4. To leverage that field presence to provide our customers with additional products and services.

5. To expand our uniform business into segments of industry we don’t normally service (such as hospitality, transportation, restaurants, and so forth).

Farmer explains that it is important for a company to have a vision and to share it to its employees. In fact, he explains that “employees are not just doing a job. They’re sharing a vision. If they share a vision, a job is more than a job.”

He uses the following anecdote to explain the importance of having a common vision among a company:

“I used to tell the story about a man walking down the street in the middle of a big city and how he came upon a construction site. Bulldozers and earthmoving machines were busy on the site. People were working hard. He came across three men in a ditch. He asked the first man, “What are you doing?”
“I’m digging a ditch,” the first man said.
Our protagonist asked the second man, “What are you doing?”
“We’re digging a ditch for the water line for that building going up over there, the second man said.
Our protagonist asked the third man, “What are you doing?”
The man looked up and replied, “We’re building a cathedral. It will be a big beautiful cathedral with five big tall spires and beautiful stained glass windows. It will seat 500 people. It will be the most beautiful church in this city. That’s what we’re doing.”
Every time I’d tell that story, I’d ask my audience which of those men do you think is most motivated. Obviously the man building a beautiful church will be more committed than the others because he shares a vision. He may be in a ditch, but he is proud of what he is doing. That simple story demonstrates why it’s important to have a vision and share it with everyone.”
— Richard Farmer

“Someone is sitting in the shade today because someone planted a tree long time ago.”
— Warren Buffett

Tony Hsieh was a long-term thinker. He understood that the decisions that create lasting value are often the ones that look foolish in the short run. This philosophy permeated every aspect of how he ran Zappos, from customer service to inventory management to the eventual sale of the company to Amazon. His understanding of long-term thinking was shaped partly by an unexpected teacher: poker. As a matter of fact, Hsieh became an avid poker player and he recognized commonality between both the card game and business.

He writes, “One of the most interesting things about playing poker was learning the discipline of not confusing the right decision with the individual outcome of any single hand, but that’s what a lot of poker players do. If they win a hand, they assume they made the right bet, and if they lose a hand, they often assume they made the wrong bet.” He explains that in the short-run, in poker, good decisions don’t necessarily provide a good outcome due to factors beyond your control. However, in the long run, poker players with a good decision-making process will win a majority of the time.

This philosophy of taking decisions for the long-term was tested repeatedly at Zappos and the most dramatic expression of long-term thinking came in how Hsieh approached customer service. While most companies view customer service as a cost to be minimized, Hsieh viewed it as an investment for the future.

“In the United States, we offer free shipping both ways to make the transaction as easy as possible and risk-free for our customers. A lot of customers will order five different pairs of shoes, try them on with five different outfits in the comfort of their living rooms, and then send back the ones that don’t fit or they simply don’t like—free of charge. The additional shipping costs are expensive for us, but we really view those costs as a marketing expense.”
— Tony Hsieh

While free online returns may be the norm nowadays, it was not always the case. Hsieh was an early adapter of this policy as it built trust. Customers who knew they could order with zero risk became loyal customers for life. They told their friends. They came back again and again. Over time, the marketing expense of free shipping generated returns that no advertising campaign could match.

This long-term perspective also shaped how Zappos handled its call center. While most companies outsource customer service to the lowest bidder, Hsieh insisted on keeping it in-house and investing heavily in it. He writes, “We receive thousands and thousands of phone calls and e-mails every single day, and we really view each contact as an opportunity to build the Zappos brand into being about the very best customer service and customer experience. Seeing every interaction through a branding lens instead of an expense-minimization lens means we run our call center very differently from most call centers.”

The math here is simple but counterintuitive. If you view each call as a cost to minimize, you train your employees to get off the phone as quickly as possible. If you view each call as a branding opportunity, you train them to build relationships. One approach saves money today. The other builds loyalty that pays dividends for years.

As such, when Hsieh was considering selling Zappos, it was an easy decision to sell it to Amazon. Yet, he insisted on an all-stock transaction instead of taking cash which turned out to be an amazing decision for those that remained invested in the long-term success of Amazon. Hsieh mentions, “In our minds, that felt too much like we were selling the company. Selling our company wasn’t our goal. We wanted to continue building the Zappos brand, business, and culture. And we wanted to continue to feel like owners of the company. So we pushed hard for an all-stock transaction, meaning that Zappos shareholders would simply trade in their stock in exchange for Amazon shares. In our minds, this was much more in the spirit of the marriage that we were envisioning, analogous to when married couples get a joint bank account.”

“If we spend our money carefully and continue to constantly improve the customer experience, we will reach over $1 billion in shoe sales a year in the not too distant future. I know $1 billion sounds impossible at first—but so did our current sales volume 3 years ago. But the reality is, it’s actually not that crazy a number, and it’s a very achievable goal: By 2010, total footwear sales in the US will be over $50 billion a year. Online footwear sales will be 10% of that—$5 billion a year. If we continue to be the leader in our space because of our relentless focus on improving the customer experience, then there is no reason why we won’t be doing at least 20% of all online footwear sales by then.”
— Tony Hsieh

This reminds me of how Jeff Bezos ran Amazon with the same mentality: that long-term vision is necessary. As a matter of fact Bezos once said that long-term thinking shareholders can allow Amazon to make constant innovations, despite having failures from time to time. As such, Bezos was not timid in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off. He explains, “We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”

As a pioneer in the technology industry, it is in the Amazon’s DNA to be committed to constant improvement, experimentation and innovation. This can be done by investing into new businesses. However, Bezos mentions that it is also his responsibility to make sure that any opportunities they invest in must generate the same return on capital that investors expected when they invested in Amazon. This can only be done by taking a long-term and true ownership approach.

“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
— Jeff Bezos

“Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.”
— Albert Schweitzer

Tony Hsieh genuinely believed that a company’s core ethos is to deliver happiness, for the customers, the employees and for the founder himself. This belief shaped everything from Zappos’ customer service philosophy to its approach to employees development. This idea came to Hsieh after he became wealthy via the sale of LinkExchange. He writes, “I made a list of the happiest periods in my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy.”

As such, when he took over the CEO position at Zappos, the focus on happiness manifested in the goal of helping employees find meaning in their work. He writes, “Our goal at Zappos is for our employees to think of their work not as a job or career, but as a calling.” To achieve this, Zappos also heavily invested in employee development and to create clear paths for growth for its employees.

“Our vision is for almost all of our hires to be entry level, but for the company to provide all the training and mentorship necessary so that any employee has the opportunity to become a senior leader within the company within five to seven years.”
— Tony Hsieh

Furthermore, Hsieh understood that people who feel they are growing and have a future are happier at a company, and happier employees create better customer experiences. It was a virtuous cycle that reinforced itself. In fact, the ultimate expression of happiness as a business model came in how Zappos thought about its customers. He explains that “At Zappos, an example of the customer hierarchy at work would be: Receives correct item (meets expectations). Free shipping (meets desires). Surprise upgrade to overnight shipping (meets unrecognized needs).”

This framework of exceeding a customer’s expectations creating happiness is the essence of Zappos’ first core value: to deliver WOW through services. Meeting expectations is only the baseline. You don’t get credit for it, you just avoid being punished. Meeting desires is good, but it’s still within the realm of what customers already know they want. The magic happens when you meet unrecognized needs and when you deliver something customers didn’t even know to ask for. That’s when you create WOW.

Hsieh writes, “WOW is such a short, simple word, but it really encompasses a lot of things. To WOW, you must differentiate yourself, which means do something a little unconventional and innovative. You must do something that’s above and beyond what’s expected. And whatever you do must have an emotional impact on the receiver.”

And creating WOW wasn’t just about making customers happy. It was about making employees happy too. When employees have the power to create emotional impact, work becomes meaningful. It stops being a series of transactions and becomes a series of human connections. That’s the essence of delivering happiness.

“What’s interesting is that if you keep asking yourself “Why?” enough times, you’ll find yourself arriving at the same answer that most people do when they repeatedly ask themselves why they are doing what they are doing: They believe that whatever they are pursuing in life will ultimately make them happier. In the end, it turns out that we’re all taking different paths in pursuit of the same goal: happiness.”
— Tony Hsieh

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Culture

Long-Term

Happiness

Beyond the Book

Biography Nuts

#167 Three Lessons from Tony Hsieh (Zappos)