The secret to Zappos' success: No managers

In lieu of bosses and a hierarchical management structure, Zappos comprises about 500 "circles" - each essentially a working group or committee of several employees.

On Tony Hsieh's desk, next to a jumble of trinkets and three Coke Zeros, is a stack of books topped by "Rocket: Eight Lessons to Secure Infinite Growth." Aside from the title, with its pitch to the executive suite, you would never guess this was the chief executive's work spot, flanked as it is by the same low cubicle partitions as any other desk at Zappos.

Zappos disrupted the retail industry 15 years ago when it launched as an e-commerce platform for selling shoes, focusing its strategy on customer service in the form of friendly call centers as well as free shipping and returns. Hsieh projected this year that profits would nearly double in 2015, to $97 million. But there's another reason people are studying the company these days: Its nearly 1,500 employees are operating without any managers.

Hsieh decided about a year ago to get rid of all bosses. And as the holiday crunch begins, many are watching how that decision is holding up under the strain of the retail industry's most important and demanding season. No one reports to anyone anymore. Instead, employees self-manage and belong to different decision-making circles that keep the company operating. It's called a "holacracy."

Much has been made of Hsieh's organizational daring. And many wonder: Is this experiment to create a supervisor-free workplace really working? But a more fundamental question might be: Why is he doing this?

That copy of "Rocket" might be a clue.

The first thing to understand about Hsieh's decision to introduce self-management to Zappos is that he sees it as a strategy, not an experiment. According to Hsieh, the restructuring is ultimately in service of an expansion into new industries. The long-term goal, he says, is to move Zappos beyond shoes or clothing or even e-commerce.

And blowing up the internal bureaucracy is the first step.

He has long been interested in leadership and organizational research. He wrote a book on workplace culture, "Delivering Happiness," five years ago to outline his philosophy on the topic. Hsieh's first opportunity to shape an organization of his own came in 1996 when, at 23, he co-founded the Internet company LinkExchange. He sold it little more than two years later to Microsoft for $265 million.

See video: Hsieh's rationale for not having bosses

In some ways, that wealth affords him the luxury of radical experimentation at Zappos. The shoe company's headquarters seem a bit like a child's dreamscape. On a fall day, old video-game music is piped outside through courtyard speakers and employees play a live-action version of Pac-Man, donning costumes and weaving their way through a maze. Inside, the decor echoes the colorful kitsch of downtown Las Vegas, where the company is now based. The office is a labyrinth of modular workspaces, disguised beneath several layers of arcade toys and decorations from holidays that have gone by, then come again.

But Hsieh is as tactical as he is whimsical. And to him, the new organizational structure is a competitive move.

I guess in some ways it's analogous to Virgin, they started out in music and now they do airlines and a hundred other businesses.

But where Virgin is "about being hip and cool," he says, Zappos would keep its hallmark -- customer service -- at the crux of its new ventures. His corporate strategy team is looking to identify areas where its focus on a great customer experience could help Zappos disrupt and dominate a new market.

The team has brainstormed entering classic service industries, with something like a Zappos hotel or airline. And it has explored, seemingly in some depth, "even crazy stuff, like porta-potties," Hsieh said, which is a $2 billion-a-year industry in the United States.

"It's not a great experience anywhere, but imagine if you went to a festival or something and you saw a Zappos porta-potty," he said. "I mean, we've talked about how it could be as simple as there's a DJ out front so it's a porta-party while you're waiting. Or it's just a really amazing, clean experience."

Though Hsieh may see customer service as the thread binding any new ventures, Scott Galloway, a branding expert and a professor at New York University's Stern School of Business, says that focus is unlikely to help Zappos transition to industries so far afield. "It's lazy and naive to think that your brand could carry the day," Galloway said. "This is an execution question."

A more realistic expansion, Galloway offered, would be something like call centers or e-commerce platforms that Zappos could sell to other businesses. Even at Virgin, he said, far more ideas have failed than succeeded. And even a retailer such as Nike, with greater brand resonance and reach than Zappos, hasn't broadened beyond sports and apparel.

"There's no denying Zappos is and was a great company, but they also got very lucky," Galloway said.

In a different era and different timing, Zappos would be a trivia question about companies that go out of business.

But mastering the execution, to Hsieh's thinking, is precisely where holacracy comes in.

He sees bureaucratic structure as the big hurdle to any company's ability to transform itself and stay relevant as the market shifts. If he could create an organization with the freedom to morph continually to fit new missions, Hsieh posits, then he might have found a way to broaden the industries it can play in as well.

In lieu of bosses and a hierarchical management structure, Zappos comprises about 500 "circles" - each essentially a working group or committee of several employees. Hsieh says the circles could ultimately represent new business lines or start-ups within Zappos.

The dismantling of management by supervisors, according to Hsieh, is a way to "really just have everyone at Zappos act like an entrepreneur." By smashing the corporate ladder, he is hoping to keep and attract a specific kind of worker - the kind who is disruptive, bold and who would otherwise leave to realize his or her own great new idea.

If there's one thing Hsieh knows about entrepreneurs, it's that they don't like reporting up a bureaucracy. At 23, he left a job at Oracle to start his own venture. Despite the pay and prestige - and the pride his Taiwanese immigrant parents took in his good corporate job after graduating from Harvard -- he found himself unhappy and confined by the corporate structure.

So in many ways, Hsieh is trying to crack the code on a problem that plagues every large company, even those such as Facebook that began as start-ups not long ago: How do you encourage an employee with a killer business idea to pursue it at your company, rather than jump ship to start a venture and be the boss?

Hsieh's betting that the answer is to structure Zappos more like an incubator or holding company than like a traditional bureaucracy with a single-minded mission. That would, at least in theory, offer entrepreneurial employees an enticing proposition: Pursue your idea with the resources and support of a major company without having to answer to a bunch of supervisors.

I would hope that in the future employees see Zappos as really a less risky way than just the pure entrepreneurial route to follow their passions.

That would also let Hsieh recast his role to more closely resemble the one he had before becoming the chief executive of Zappos. After selling LinkExchange, he became a venture capitalist -- investing in the ideas of other entrepreneurs. Zappos was one of those ideas, and it was an unplanned turn of events that led him to become its CEO 15 years ago. In 2009, Amazon bought Zappos for about $1.2 billion, but left Hsieh in charge and promised him autonomy in running the company. (Amazon founder and chief executive Jeffrey P. Bezos also owns The Washington Post.)

"What he's talking about in terms of a broad vision is really bold and adventurous. You've got to admire it. But that would take years," says Lee Peterson, an executive vice president of brand, strategy and design at the consulting firm WD Partners. "A lot of the dot-com guys grew up around big ideas, but then the reality of execution takes hold and gets a lot more tricky."

Since the management structure changed at Zappos, about 14 percent of its 1,500 employees have taken buyouts rather than stick around. That's prompted a number of observers to question whether Hsieh's approach to creating a happy workplace has backfired.

Hsieh says he knows that "not everyone is comfortable with all this blank canvas." And he's not trying to make every worker happy; he's trying to make the type of employees he wants happy.

"We'd lost the ability to adapt and change at the speed we wanted to," says John Bunch, who is leading the management overhaul at Zappos. "The big win is that the transition has not gotten in the way of operations. The next phase is actually leveraging it."

The first indication of its success may come early next year, when Hsieh anticipates Zappos will unveil its first venture in another field. What field? He says he'll tackle that question once the company, without any bosses to crack a whip, gets every holiday package delivered.