The life-cycle and decline of a Dotcom firm: an effectuation approach

By

Israel Drori

Tel Aviv College of Management, School of Business Administration,

7 Rabin Blv. Rishon Letzion, Israel 75190.

Phone: 972-3-6407341, Fax: 972-36407382

Email: droris@post.tau.ac.il

Benson Honig

Wilfrid Laurier University School of Business and Economics

Waterloo, Ontario Canada N2L3C5

Phone 519-884-0710 ext.2909 ; Fax: 519-884-0201

bhonig@wlu.ca e-mail:

Zachary Sheaffer

Department of Management & Economics, The Open University of Israel, Ra'anana, 108 Ravutzky St. Israel 43107

Phone: +972-9-7781881 ;Fax : 972 9 7780668

e-mail: sheaffz@openu.ac.il

The life-cycle and decline of a Dotcom firm: an effectuation approach

We examine, longitudinally and ethnographically, a case of organizational

emergence and evolution, focusing on an Internet company during an economic bubble. We

follow the organizational actors in the firm during a seven year period that includes a boom-

to-bust economic cycle. The study seeks to examine how founders of an Internet start-up

engage in effectuation processes, and how life-cycles interact with organizational culture. We

observe the organizational tension resulting from clashes between the entrepreneur’s

changing vision and the members’ sense of organizational mission.

Much of the work on organizational performance focuses on successful or

surviving organizations (cf. Christenson & Sanchez, 1992; Hambrick & D'Aveni, 1988;

Wholey, Cherisnensen & Sanchez, 1992; Whetten, 1980). Although examples of

organizational failure are somewhat infrequent in the literature, they provide considerable

opportunity for insight and theoretical development (Weick 1993; Weick, 1993b). The result

is a success bias in the literature highlighting our view of the importance of understanding

organizational decline as a critical phase in the organizational life cycle (Kimberly & Miles,

1980; McKinley, 1993; Cameron, Sutton & Whetten, 1988; Weitzel & Jonsson, 1989). Just

as history is written by the victors, much of our understanding of organizational evolution is

characterized by a similar success bias (Cameron, Whetten & Kim, 1982). Empirical studies

of organizational decline have increased modestly since Whetten (1980) highlighted the

scholarly overemphasis on growth, and the accompanying importance of studying decline

and retrenchment (or downsizing). Whetten (1987) makes a number of succinct points

regarding how best to study decline, including the importance of sense-making,

organizational integration and coupling, interpersonal conflict, and the need to utilize

informants across the organizational spectrum. Thus, studying the process of organizational

decline in its entirety requires longitudinal case study across a wide range of organizational

actors. Because it is virtually impossible to identify decline before it begins, few studies have

been successfully able to empirically document the entire process (Ludwig, 1993).

Exceptions include cases, such as this one, where research activities were started for

alternative purposes, and continued throughout the process of decline.

Organizational decline may be due to several factors, both exogenous and

endogenous to the firm (in this work we consider both endogenous causes of, and reaction to,

organizational decline). From a structural perspective, organizations tend to increase their

reliability and accountability by institutionalizing routines and procedures (Hannan &

Freeman, 1984; 1989). Evidence shows that organizations have a great difficulty adjusting

when exogenous forces determine radical change (Amburgey, Kelly & Barnett 1993;

Christensen 1997). Theoretical perspectives on decline tend to mirror the empirical emphasis

on large and established organizations. A relationship between structural complexity and

organizational growth is predicted on that grounds that while larger organizations become

more dispersed and complex, and so require a larger administrative component, efficiencies

may be obtained that provide returns to scale (Blau, 1970; Scott, 2003). However, the

relationship between structure and decline is not necessarily direct, nor monotonic. First,

there may be a stickiness regarding the elimination of administrative components, due both to

legal and organizational norms, resulting in considerable lag time. Newer organizations may

be less susceptible to these forces. Second, organizations facing decline may act in defensive

ways that actually increase, rather than decrease, structural complexity. For example, a study

of declining school systems found that administrative head count actually increased, and that

declining school systems enjoyed increased resources (Ford, 1980). McKinley (1987), takes

this relationship one step farther by hypothesizing a disconnect between administrative

complexity and technical/structural intensity of declining firms, noting the disparate

requirements of invoking new resource consuming strategies. Further, excessive growth can

lead to decline and failure by placing constraints on the ability to coordinate an increasingly

complex organization (Probst & Raisch 2005). In any case, much of the literature suggests

that a wide variety of formal structures may yield either increased or decreased performance,

depending upon the application and nature of the formal arrangements (Abell, 1996).

One gap that still exists in the literature is that the bulk of decline research is

biased toward well established firms. Studies have examined downsizing (Chalos & Chen,

2002; Cameron et al. 1991), administrative characteristics (McKinley 1987; Hambrick &

D'Aveni 1988) and organizational attributes and resources (Cameron et al. 1987) with failure

often associated with diminishing resources (Castrogiovanni 1991). An important aspect of

decline, but largely missing from the empirical literature, is the process of decline in new

entrepreneurial organizations. This is a surprising omission, considering that statistics show

that only 37 percent of all businesses with fewer than 20 employees will survive four years,

and only nine percent will last 10 years (Altman, 1993; Dunn & Bradstreet, 1997). This

paper, which is based on long term in-depth field study of a dot.com during the bubble period

and beyond, examines the start-up life cycle and encapsulates many aspects of decline. The

study develops an effectuation framework, calling for the understanding of organizational

decline in terms effectuation processes that follow a series of strategic actions undertaken by

the firm’s founder. This research was motivated by the idea that new organizations are

subject to the processes of effectuation, whereby they must continuously reinvent themselves

in order to identify viable opportunities. In contrast to a causal approach, whereby an

organization engages in planning, obtains resources, and executes operations, effectuation-

based opportunities reward flexibility, adaptability, and renewal. Sarasvathy (2001: 245)

articulates the effectuation model as taking “a set of means as given and focusing on

selecting between effects that can be created with that set of means”. In her effectuation

view, rather than following a detailed plan of action towards a specific goal, she maintains

that actors frequently exploit resources at their disposal for an indeterminate and contingent

conclusion. Thus, instead of being open to all possible opportunities, the individual following

an effectuating process will pursue only what is possible given their own resources and

constraints.

The effectuation process that many new organizations pursue constrains the

ability of the organizational leader to plan, direct, and implement both vision and identity

throughout the organization. While the development of an organizational identity is itself

dynamic, the sense of organizational continuity and self-interpretation may become illusive,

as opportunities must be continuously refined, readapted, adjusted and transformed. In short,

the radically altering nature of the effectuating organizational development virtually prohibits

consistent, continual, and evolved strategic alignment. To date, the effectuation literature has

failed to note the development processes for organizational identity of new, rapidly evolving

firms in turbulent environments.

The Internet industry serves as our context for examining decline in a new

organization. In particular, the Internet is characterized by rapid technological innovation and

new forms of entrepreneurship. The nature of dot.com firms, which provide their services

and products through the Internet, requires a unique vision, strategy and structure (Kanter

2001). Their adaptation to their unique environment implies experimenting with technology

and content and strategizing and organizing within an inherent set of uncertainties.

In the next section, we discuss the relevant issues and theories related to the

Internet industry in general and to dot.com companies in particular. This is followed by a

methodological explanation and the presentation of the case. We next introduce an

effectuation framework and a summary of our approach, including limitations and suggested

future research.

The evolution of nascent organizations and their life cycle

Research on the evolution of organizations focuses on two primary yet distinctive

elements of organizational life: variation and longevity. Population ecologists tend to focus

on the selection processes of structural elements of maturation, over time (cf.: Miner &

Haunschild, 1995; Carroll & Hannan, 2000). Because populations become increasingly

identified by the survivors, they frequently observe isomorphism. The sources of variation

within organizations are of less interest to population ecologists (Aldrich 1999). When

Aldrich (1999: 23) claims that “evolutionary theory builds on the work of Thorndike,

Skinner, Watson, and Bandura” he steps into a thicket overly associated with behavioral

theory. In particular, behavioral theorists skirt the issue of agency and its implications - who

decides what behaviors to model, and what criteria do they utilize? The population

ecologists’ “black box” approach to the implications of why and how variations exist fails to

study or explain situations where agency determines the strength, character, and subsequent

outcome of the selected criteria. This literature mirrors the economist’s perspective, which

generally avoids focusing on entrepreneurial behavior (Barreto 1989).

From the vantage point of the entrepreneur’s behavior, much of the leadership

literature focuses on charismatic or visionary qualities (Baum et al. 1998). Vision may be

defined as an ideal reflecting the shared values to which an organization should aspire

(House & Shamir, 1993). Vision is likely to impact closure and bonding social capital, which

are well recognized resources for both enhancing internal organizational trust and for

providing a glue that holds closely knit organizations together through the bonding of actors

(Adler & Kwon, 2002; Coleman, 1988; Granovetter, 1985; Putnam, 2000). Both

transformational leadership and managerial vision have been found to exert considerable

influence in producing unity, identification, shared common goals, and motivation in various

organizational fields (Pratt 2000; Tichy & Devanna 1986). Entrepreneur/CEO vision has also

been shown to produce both direct and indirect positive effects on venture performance

(Baum et al. 1998). Thus, in order to fully understand the evolutionary trajectory of an

organization, it is essential not only to observe the external, structural elements, but also the

internal cultural factors, such as vision, that lead to agency, bonding, group identity, goal

setting, and, eventually, to performance and survival.

Organizational culture, vision and structure in the nascent dot.com

Organizational culture is responsible for the internal factors that impact the

evolution of organizational life-cycles. The ability of a leader to inspire organizational

members to “buy in” is critical in establishing shared goals and objectives, trust, and group

identity. In fact, in the early stages of a firm, when there are few members and one

entrepreneurial leader, organizational culture may be dominated by one charismatic

individual (Kim, 1993; House & Shamir, 1993). Further, as the organization grows, potential

employees take into consideration how well they fit, and will elect to join, or not, based on a

perceived match (Chatman 1991). Culture also influences how effectively an organization

learns. Kim (1993) developed a model that demonstrates the importance of individuals

transferring their learning by affecting an organization’s shared mental model, including

mental frameworks (based on conceptual learning) as well as their routines (based on

operational learning). The link between an individual leader’s mental model, and the shared

mental model of the organization, is thus critical in accounting for the weltanschauung1 that

produces the shared group identity, goals, and strategic learning that results in sensemaking

(Weick, 1995).

The distinctive work style of E-culture challenge Internet companies to retain and

nurture what can be highly individualized forms of talent. One tactic for companies has been

to formulate strong identities and inspiring visions. As Kanter (2001: 264) states: “Leaders

must wake people out of inertia. They must get people excited about something they’ve never

seen before, something that does not yet exist. The theme provides the setting for the story

that has to come to life in order to raise aspirations and inspire action. A vision is not just a

picture of what could be; it is an appeal to our better selves, a call to become something

more. It reminds us that the future does not just descend like a stage set; rather, we construct

the future from our own history, desires and decisions”. Thus, as a dot.com firm enters into a

novel and uncertain environment, the internal organizational factors and processes ought to

be based on envisioning the path of the industry as a whole (Cassidy 2003).

1 A collection of beliefs about life and the universe held by an individual or a group

In new firms, and particularly new firms in emerging industrial fields, there is

little stability or certainty. Attempting targeted and specific goals is often limited by the

current operational paradigm (Christensen, 1992). Rational decision making models,

whether they be Weberian, Taylorist, hierarchical (March, & Simon,1958) or cybernetic

(Steinbruner,1974) are largely ineffective. Causal rationality presumes that organizational

activities can be planned, orchestrated, and implemented in a logical sequential fashion.

While rational models may, conditionally, be helpful to an existing entity, they are largely

inappropriate for an entrepreneurial venture – particularly one in a new organizational field,

where environmental constraints are rapidly emerging and changing. Effectual rationality is

when an individual evaluates the best outcomes given their own particular endowments, and

convinces others to join the process by sharing their world view. They utilize shifting

organizational objectives as a method of maximizing efficiency with available resources.

Dot.coms, which, by nature, operate in a shaky and fuzzy ‘virtual’ world, often lack the

ability to maintain, let alone sustain, competitiveness. Facing a myriad of diverse

environmental changes, they tend to be led by ephemeral, illusionary and futuristic business

models. They mirror other highly turbulent environments characterized by rapid change, fast

emerging and declining technologies, hyper-competition, and recurrent regulatory moves

(Bourgeois & Eisenhardt, 1988). During the dot.com boom, these firms were subjected to a

logic of the ‘madness of the crowds’ which implies a fierce competition which blinded their

reasonable business and organizational considerations (Wolff 1999, Perkins & Perkins, Zook

2005).

From a structural perspective, a start-up is fragile during the initial stages

following its inception, owing largely to the liability of newness (Aldrich & Fiol, 1994;

Barron, West & Hannan, 1994; Hannan & Freeman, 1989, Stinchcombe 1965). New

companies must secure adequate resources, forge social networks and alliances, deflect

competition, and establish market positions to capture adequate segments of market demands

(Aldrich, 1999, Gersick, 1994, Kanter 2001, Klepper 2002). The emergence of new

organizations is molded by the framework of its life cycle and the changes incurred between

and within various phases of business development (Greiner 1972; Kazanjian 1988; Quinn &

Cameron 1983). Stages include the initial phase of emergence, characterized by brokering

investments of capital, the formation of simple and informal structures, centralization, bold

risk-taking and demands for swift mastering of innovation management with adequate

responsiveness to constant change (Van de Ven, 1986). Each stage illustrates certain

characteristics and resources reflecting qualities of the organization’s congruence with its

business objectives, its ability to adjust to environmental perturbations (Meyer, 1982) and

strategically position itself within a competitive market (Porter, 1980). From a technological

perspective, each adaptation represents a subsequent “s” curve of its own, with a series of

curves overlaying each other with an upwards gradient (Christensen, 1992).

Accordingly, the entrepreneur/founder identifies his/her vision, designs an

organizational structure, forms alliances, shapes culture and determines a business strategy

which guides the organization through subsequent life-cycle stages. Changes may be

initiated as either a consequence of the introduction of fresh information calling for

modification of action and belief, or from incomplete information emanating from ambiguity

regarding action and belief (Fransman 1999; Sarasvarthy, 2001). Such effectuating variation

represents an ongoing process entailing unremitting efforts to survive competition and

withstand environmental hostility. In this vein, culture might well be served as a guiding

strategy of action through the ability of social actors to choose from certain cultural

repertoire (Swidler, 1986; 2001). Social identity, resulting from convergence due to close

proximity and team experience, or resulting from stability of institutionalized norms, is likely

to assist in the diffusion of knowledge and the creation of a core identity, culture, mission,

and/or purpose. Relevant components include shared codes and language, narratives, network

ties, trust, identification, and obligation (Nahapiet & Ghoshal, 1998). When management

provides stability, it has been shown to insulate firms from disruptive changes by providing a

transformational shield (Fischer & Pollock 2004). A leadership culture that reinforces

positive job attitudes may produce citizenship behaviors that provide considerable

organizational advantage (Podsakoff, & McKenzie, 2000). During the bubble period, those

involved in founding dot.com firms and their financial backers fell into a self reinforcing

process, which is described by Cassidy (2003) as being trapped in a peculiar competitive

logic of a speculative boom (p. 7). In such a logic of competition, those dot.com firms who

showed consistency in their futuristic vision, and at the same time built organizational

foundations, were at the forefront of the industry and provided a role model for others (Ried

1997, Ferguson 1999). Furthermore, dotcoms differ and may be categorized in terms of style

and substance. While the former focus on personality cults and style, embodying an

unstructured business model, the latter focus on customers, teamwork, and communication,

with attention to a clear bottom line (Kanter, 2001). Dotcom’s often implement an

organizational structure aimed at integration and collaboration outside and inside

organizations, and demand speed, seamlessness and constant flows of information (Kanter,

2001).

Evolution and effectuation in the nascent dot.com

Given both the importance of organizational culture, and reliance upon the initial

entrepreneur in determining the character of that culture, the effectuation process suggests

innumerable options that may or may not lead to successful outcomes. Further, options might

be chosen that may or may not operate in resonance with the surrounding institutional field,

or even with the internal dynamics of the emerging firm, resulting in friction between actors

resulting from the effectuation process. For example, an entrepreneur may change directions,

from developing a service business, to developing a manufacturing business. Since service

businesses have different cultural norms than manufacturing, and often require a different

workforce and organizational style, making such a switch without modifying or developing a

cultural shift may result in dissonance, conflict, inefficiencies, and even failure. Once

effectuated decision-making has begun, path dependant processes may undermine the ability

to change course, or otherwise adapt to a rapidly changing environment (David, 1985).

Changes, particularly when they are frequent, may result in heterogeneous group identity.

Competing networks and a preponderance of groups with weaker ties have been shown to

produce more conflict in organizations (Nelson, 1989). Thus, the imbalance caused by

mutually incompatible elements of vision, structure, and culture are likely to undermine the

organizational effectiveness, and may even be the cause of organizational demise. The burst

of the dot.com bubble practically eliminated this very new and dynamic organizational field.

Some argue that the ideology of a ‘disruptive technology’ that would destroy the old

economy firms was far fetched (Cassidy 2003). The assumption that information technology

alone would become the engine of the new sector is now largely disputed. Dot.com success

and survival requires a fundamental alignment between the participant’s vision and their

internal organizational characteristics (Verkinderen & Altman 2002)

Methods

Data collection was based on ongoing ethnographic field research conducted at Art, a

dot.com start-up between 1996-1998. Complementary work was carried out during the

course of 1999-2003. The field study was based on participant observation, including in-

depth open-ended interviews, participation in formal meetings and a review of the company’s

archival documentation and publications. The unobtrusive data were collected through two

major sources: The first, official documents which specify Arts' vision, business plans and

products and services description, company profile and web and press material which were

oriented mainly for outside purposes such as prospective investors and customers, and the

second, paper and electronic documentation, including the minutes of meetings, and founders

memos, which related to various operational, strategic and cultural aspects of the

organization and were mainly oriented inward. The multiple dimensions of these methods

facilitated triangulation and the collection of complementary data that strengthened our case

study, enabling us to cover more thoroughly the company’s development and extended

prospects for interpretations (Yin 1984; Eisenhardt 1989). Furthermore, the long term

ethnographic fieldwork enabled deep understanding of the effectuation process through an

intimate familiarity with the context and the unmediated observation of the interaction

between the founder and Art’s members (see also Miles and Huberman 1994).

Accordingly, for convenience of data analysis, the extended period in the field is

divided into distinct stages which represent both the business evolution of the company and

the nature of the field study.

The Diagnosis period (1996-1998), involved the period which was marked by the

changeover from multimedia to the Internet, and was devoted to the development of Art’s

basic Internet technology. During this period the consultants (ethnographers) worked at Art

intermittently during the week. They were engaged mainly in both participant observation

and organizational diagnosis. This entailed participating in daily staff meetings addressing

technical and content details and documenting the process and implications of the

organizational decisions taken during these meetings. We also observed artist graphics and

programmers at their workstations in an attempt to a) understand Art’s technology and

products b) detect work habits and coordinating activities and c) follow the work process of

the graphic artists and programmers individually, including mutual interactions and contacts

within the company. The diagnosis followed the sharp-image diagnosis guidelines (see

Harrison & Shirom, 1995) suggesting structured models for organizational diagnosis based

mainly on detecting ineffectiveness in the organization within the wider framework of an

open system approach (Scott, 1993). Methodologically, the organizational analysis

procedures employed the concept of 'theoretical sampling'; (Glaser & Strauss, 1967),

focusing on data which are relevant to the issues stemming from the terms of reference of the

consultancy work. This kind of data were not mutually exclusive with the research data and

as the work progressed, our field work methods converged in accordance with grounded

theory principles (Strauss & Corbin, 1990). Thus, early on in the fieldwork we followed an

iterative process of collecting data, analyzing the data, mainly through a memo system, and

seeking new and extended information based on our and informants’ assessments of relevant

issues. Furthermore, we developed close relations with certain people, both graphic artists

and programmers, who were our intimate key informants (Kumar, Stern & Anderson, 1993)

regarding Art’s unique culture and the intricacies of the Internet at large.

At the beginning of our work, when Art was relatively small, (approximately 20

employees), most were 'key' informants. Later in the field work, with the expansion of Art,

we selected additional informants on the basis of the relevant data. Eventually, in accordance

with grounded theory approach, our pool of key informants remained fixed, as data collection

and subsequent analysis converged into certain categories. These categories represented the

major themes of our research and we practically arrived at 'theoretical saturation' in a six

month period (Strauss &Corbin, 1990), easing our need for regular meetings with the key

informants.

Our field work consisted of separate semi structured interviews (between 30-60

minutes) conducted by a senior researcher. These interviews, conducted over a period of 4

years, involved 146 interviews with 44 different members of the organization. All these

interviews were recorded and transcribed verbatim. The 45 interviews were all the VPs and

those who belonged to the founding team, which later assumed various management roles,

and new programmers and graphic artists within the various technological and content teams,

including marketing technological and business development mangers.

The questions were focused on Art experiences, its evolution, current strategy,

indications regarding its culture and perceptions of the founder’s vision, his leadership and

the prospects of the Internet at large. As the field research progressed, various themes

emerged mainly with regard to the ongoing management style and decision making process

of the founder, and Art’s strategic actions. Subsequently, the interviews become more

structured and focused, allowing us to organize our data collection around a set of themes

which proved representative of the major concerns of Art, as an emerging start-up.

Recurrent interviews with the same informants were conducted during the four year

period, with issues raised either from our participant observation or from other informants.

The long duration between the interviews and our intimate knowledge of the organization

allowed us to reduce and screen pitfalls and biases stemming from attempts aimed at

manipulation. In addition, we employed an interview technique which asked the informant

to present his/her point of view on a certain team, before addressing direct questions related

to our assessment of the situation.

During the diagnostic period, we conducted weekly meetings with the founder during

which we discussed issues concerning our diagnosis and recommendations regarding the

required organizational structure, and other relevant issues concerning the ongoing handling

of the organization. These meetings provided a unique opportunity to develop close relations

with the founder. This, in turn, facilitated our acquaintance with his worldview and values

underlining his managerial style.

The consultancy assignment resulted in a series of recommendations regarding the

desired organizational structure and organizational practices. In 1997, we continued to coach

Art on various organizational matters, and became practically in–house ‘consultants’. During

that period, we visited Art once or twice a week, and occasionally socialized with employees

and management alike. The immersion process had later developed into full membership

(Adler & Adler, 1987).

The Full Membership Period. In 1998 one of the researchers decided to accept the

founder’s job offer and became Art’s HR Manager. The offer marked the changing course in

our fieldwork. Consequently, we decided to change the pattern of data collection through

observation. While one of the researchers assumed her role as HR manager, the other

researcher’s job was terminated. The HR manager continued to record events in accordance

with issues identified as closely linked to the research objective of studying the Art’s cultural

and organizational development. Field notes were taken in an ad-hoc manner documenting

the 1998 to mid 2001 period. During 1998-2001, we had regular sessions aimed at discussing

issues pertaining to the research, and professional dilemmas involving Art’s HR

management. We established working protocol that contributed in the evaluation of

developments at Art. This was done chiefly by signaling key events, analyzing them and

determining a follow-up agenda.

Follow-Up and Update Period Between 2001-2003 Art’s major activities moved to NY

and data collection was reduced substantially. We communicated periodically via email and

the main data collection focused on maintaining the protocol, primarily the recording of key

organizational events and subsequently the process of Art’s death in mid-2003. The return of

the founder to Israel, after the closure of the company in NY at the end of 2003, and Art’s

resurrection in 2004, marked the last stage of our data collection. In that period, we

conducted two semi-structured interviews (45 minutes each). In these interviews we briefly

reviewed the history of Art, and the prospects for its future.

Data Analysis

We inductively analyzed the data, using the naturalistic research guideline and

grounded methodology principles which reflect coding and categorization of content themes

and the respective interpretation provided by the informants (Miles & Huberman, 1994,

Silverman Strauss & Corbin, 1990). In analyzing the field notes, we first singled out both

temporal and contextual grand categories. These were all recorded chronologically (Peterson

1998). Categories included business models, product development, artistic values,

organizational structure, artists’ work system, programmers’ work system, everyday life,

vision statements and the founder’s perspectives on values and vision, and members’

perspectives on Art’s culture substance and forms. For this purpose, we relied largely on the

memos attached to our field notes. Within categories we followed a grounded

methodological approach, identifying themes and developing a framework of interpretation

(Strauss & Corbin, 1990). This process started with aggregating those events and phrases

relevant to the identified major themes relating to effectuation culture, followed by axial

coding for investigating the relationship between and among categories. This led us to the

development of a conceptual framework attributing thematic meanings to events and stories,

and mapping out interrelationships between categorized sets of data (Pettigrew, 1990;Van

Maannen, 1983,). Where several possible conceptual frameworks appeared within a category,

those that seemed most relevant to our research model of effectuation culture were selected.

Such decisions were recurrently debated from initiation to the conclusion of this study. We

moved back and forth between categories until saturation, and to the point in which we had a

close knit set of core categories. We also had residual categories containing large sections of

data that were not directly related to the main themes on which we developed our conceptual

framework regarding effectuation culture.

Reliability: While data were analyzed, we had to consider a caveat emanating from our

multiple/dual roles, and carefully assess amongst us the informational contexts and

circumstances of its collection (Lincoln & Guba, 1985). At this point, two other experienced

scholars joined the research. The two new members participated in the data management

phase, meticulously organizing the various data sets. After deliberation and tests we ruled out

using specialized qualitative data management software (Nvivo), we decided to organize our

data in Word. We divided into two teams, the first, led the analysis process, while the second

evaluated its work and offered changes and amendments. The first team usually arrived at a

few alternative conceptual frameworks within each category, and after jointly reviewing

them we chose the most relevant to our research objectives. We maintained the two team

system during the entire data analysis, and as long as we moved forward in the process we

started to get a sense of our theoretical direction. Eventually, this led us to develop the

cultural effectuation theory.

The nascent days: the creation of culture and effectuation at Art

Art was founded as a computer graphic’s company in 1993 by Elan, then a

graphic artist aged 23. Art’s emergent period was marked by a series of rather ad-hoc ideas

and decisions as Elan outsourced his talent as a graphic artist and produced computer graphic

displays for the printing industry. The innovation, creativity and artistry reflected in his work

earned him a reputation and considerable popular demand. As his business and opportunities

developed, partnerships were required to serve a widening array of projects. Elan and a small

core group of computer graphic artists shared responsibilities related to creative activities,

but increasingly grew dependent on other partners to handle the company’s logistics,

financing and marketing. In 1994, the nascent company (20 employees, including designers,

illustrators, animators, photographers and musicians), shifted focus towards the entertainment

software market, mainly producing CD ROMs, titles and computer games for companies

such as News Corp., Apple, IBM and Broderbund. In 1996, Art discovered the Internet,

developing cutting-edge multimedia products, including its proprietary visual communication

technology. Art was conceived by its founder as a “'cutting-edge, visual, digital arts Internet

company, that would bridge technology and art revolutionizing the way people and

companies communicate on the net” (Internal art's Memo 1996). From 1996-2000, the

company grew rapidly and employed more than 80 professionals in various areas. They

included programmers, graphic artists and system engineers. From 2000 until its closure in

2003, Art headquarters and marketing were situated in NYC, while development and support

remained in Israel. In 2004 the company “resurrected” and started to provide its WAP

services to various cellular phones companies.

Art was neither created as a dot-com organization, nor as a discreet

entrepreneurial firm. Rather, it emerged gradually through an effectuation process whereby

the entrepreneur knew only vaguely where he was leading his nascent organization. This

presents somewhat of a dilemma for entrepreneurs attempting to focus on knowledge as a

strategic asset. What knowledge should they pursue when, and how should it be managed?

Given the importance of the knowledge economy, particularly in light of globalization,

effectuation processes present an obstacle to systematic management of knowledge as a

resource. How can entrepreneurs develop a strategy for knowledge accumulation before the

identification of the organizational “end game”?

In Kanter’s (2001) terminology, Art had its roots as a substance organization, in

which members shared a community ethic, were focused on open and abundant

communication, and wanted to reward genuine hard work and fun. Thus, it had the capability

to evolve into a successful dotcom venture, as it embodied critical factors necessary for

success in the turbulent web-commerce environment. Unfortunately, this very flexibility

would seem to constrain the ability to identify a link between knowledge management and

business strategy, in the early stages of organizational evolution.

There were four main dimensions to the model of cultural effectuation that

characterized Art’s life cycle from its inception to its death. Next we discuss each of the four

developmental dimensions as Art evolved through four different life-cycle phases. We

depict these phases in figure 1.

-------------------------Figure 1 about here --------------------------

The Emergence of Artistic Culture

Initially, Elan established Art on a unique set of artistic standards described as

“young, fashionable and crazy MTV style”. The company reflected the personality and

artistic orientations of its founder. As Elan explained:

When I started working. . . everything I did had to follow those rules: creativity

and innovation. Every project had to be something new; the final touch on everything. It had

to be of the highest standard.

Elan’s principles of creativity and innovation in computer graphic art developed

into Art’s work doctrine, regardless of the nature of the product. As one of the employees

stated: “It’s like putting Van Gogh to work painting signboards for butchers.” From the very

outset, these values infused Art’s staff to aim for excellence in all endeavors. Any task at

hand became a struggle for creativity, regardless of the returns. The first founding stage in

the life of the company was characterized by the founder’s experience and ambitions, which

served as a key catalyst in formulating the company’s practices, (i.e the artistic nature of all

products), which was central regardless of the customers’ demands or the common standard

of the products (cf. Bourdieu, 1977). Such enactment was embodied in Elan’s relentless

efforts to foster commitment to creativity and innovation amongst his staff. Moreover, the

founder’s conviction and belief that Art’s “style” and ability to be “one of a kind” would

secure and sustain Art’s success motivated and enthused Art’s staff.

The predominance of artistic creativity led to the construction of an interpretive

scheme (Bartunek, 1984) emphasizing homogeneity, pertaining to the centrality of Art’s

artistic culture. During the company’s early days this cultural homogeneity, or

weltanschauung, insulated Art from such pressing concerns as competitiveness and business

considerations. This also reflected how Elan, as the founder, maintained a clear and highly-

respected form of authority, and was effectively pivotal in fostering and shaping Art’s

organizational culture. However, this strategic line of action also exemplified practices and

values of the close group which comprised Art in its early days. It eventually shaped both

Art’s artistic practices and the values and meaning attributed to them by Art members.

During this period, Art was seen as a unique cultural platform whose members

adopted artistic practices which created a new and unique context to its style and form of

operation, and the nature of its products (Sewell, 1992; 1999). The Art framework, a way of

looking at the world, united the group in terms of a shared mental model that aided in the

production and absorption of new knowledge (Kim, 1993), producing a common platform for

sense making (Nonaka, 2002).

Accordingly, at the founding stage, Art was composed of a small tightly-knit

group of mostly graphic designers, whose common values and aspirations accentuated the

notion of full self-expression in an ideal environment. During that stage, Art functioned as a

near-cult, fully attuned to a guru-like CEO, whose artistic aspirations and values imbued the

nascent firm (Weick, 1995). When new information was required, it was rapidly targeted and

disseminated through the group, providing an ideal environment for framing strategic

knowledge. Table 1 presents the forms of effectuation during the emergence of Art’s unique

artistic culture.

[Insert Table 1 about here]

Thus, the nascent period of Art marked the shaping of its basic core values and

practices which represents both its legacy and the ‘compass’ of its strategies of action during

its lifecycle. We thus introduce our first proposition:

Proposition 1: Managerial vision will be critical in establishing a shared

social identity for the members of a dot.com in a new organizational field.

Multimedia and Games: Institutionalization and the Reconstruction of Artistic Values

A period of spectacular and sudden growth for the company was sparked when it

captured considerable acclaim at an international multimedia exhibition, Milia, in Cannes,

France in February of 1995. The event quickly raised the company’s profile from a parochial

status to the forefront of the multimedia and computer games world. At the exhibition, Art

presented samples of its multimedia titles, its futuristic ideas and its business philosophy, and

a “manifesto” declared:

“We are witnessing the dawn of a new era in which multimedia will become the sole channel of communications. Art will meet the challenge of leading the field and will apply its knowledge and creativity in R&D to the production of innovative graphic art products for television and for the entertainment market. Excellence is the key word in our creative process, from ideas to products. Striving for excellence will ensure the future development of the company.”

Art’s “chutzpah” reaped considerable rewards, winning a contract with a few

international news and entertainment firms to produce multimedia titles for educational

purposes and a few computer games. Working with multinationals compelled Art to rapidly

transform its nascent ideas into marketable products with clear technological and content

specifications – essentially, Art was moving from a cycle of exploration to one of

exploitation (March & Olsen, 1991). This presented new challenges for Art’s founder. It was

now competing with firms that had an established record in strategic knowledge management

in a particular industry. Elan reorganized the company and aligned its strategy by

reconstructing the artistic practices for the new context and for the transformation into a

multimedia and computer games company. However, following this effectuation process, the

organization was forced to re-invent itself in a considerably new and different light. Notably,

because a certain cultural homogeneity was previously established, altering the

organizational focus as a result of a new and radically different opportunity threatened the

very nature of what the organization stood for. For example, a conspicuous difficulty lay in

acknowledging the necessity of subjugating artistic ideas to the limits of technological

advances. The company’s entry into the international market forced Art to expand its

accountability beyond its own internal sphere, and to adjust its operations to the customers’

artistic demands. Furthermore, in contrast with its familiar status as subcontractor, Art was

now confronted with the task of assuming full vertical responsibility for all aspects involved

in producing a multimedia project, from design, to budgeting, to the execution of the project.

This required a more formal organizational structure that, in many ways, presented a

contradiction to Art’s established organizational values.

Work at Art became increasingly hectic, and indicators of the “tech culture”--

round-the-clock devotion with total self-commitment and self-subjugation to work (cf.

Kaplan, 1994; Stolze, 1996)--became an ingrained part of the organizational culture. For Art

members, these circumstances called for a reexamination of the firm’s basic assumptions.

Working with international corporations presented a formidable challenge,

requiring Art to rapidly convert embedded (organizational) informalities to meet new and

higher standards. Structural changes and work processes were designed with product teams

allotted specific tasks, including criteria, dilemmas and customers. This necessitated

compromises, primarily a deterioration of Art’s prioritized high artistic standards. The

founder practically ignored internal skepticism, ambiguity or asserted opportunism

concerning Art’s artistic standards, values and goals. As the pressure from customers

mounted, work grew to be more hectic and ad-hocratic. Elan had already identified the

Internet as the ‘new exciting thing’ overlooking Art’s ongoing multi-media and games

project. Eventually he decided to eliminate these projects, leaving only one team to cater to

multimedia projects in progress.

In short, Art experienced a major transformation owing to converging forces of

effectuation and agency (Jensen & Meckling, 1976; Savarsvarthy, 2001). In order to cope

with the new challenge, the founder merged practices which apparently reflected different

and even contradictory domains, namely, Art’s values and the customer’s orderly procedures,

or need for bureaucratic routines. Table 2 present the modes of effectuation which were

marked by the need to integrate orderly work practices and routines require by the clients.

[Insert Table 2 here]

Thus, Elan was following his own interpretation of the most effective way to

tackle existing contingencies while retaining the meaning of Art's artistic values. Here, we

observe that the entrepreneur had a clear vision and recognized the need to deviate at critical

junctures of the organizational evolution. Handicapping his ability to refocus organizational

goals was the strong egalitarian cultural environment previously developed at Art. These

values were inculcated to the extent that they produced a persistence or stickiness in favor of

organizational norms and artistic values Thus, despite the need to focus on a more concrete

business model and pursue strategic learning in that direction, the cultural norm based on art

for art’s sake persisted, producing sustained conflict and operational inefficiencies. This

persistence demonstrates what we call an “effectuation echo”. Essentially, one sub-group of

the organization continues along its former path - the echo, while another follows an entirely

different set of goals and strategies (see figure 1). It is essentially a specific case of

knowledge stickiness, whereby it becomes difficult to legitimize new knowledge integration

due both to a lack of motivation and organizational ambiguity (Szulanski, 1995). We depict

this process as it evolves, iteratively, in figure 2.

---------------------------------figure 2 about here ---------------------------------

Thus, the effectuation echo was caused by a radical organizational transformation

that was not accepted by all members. Art leapfrogged from its nascent period consisting of

a ‘garage’ type enterprise focusing on exploring artistic identity through a limited market

embodying an organic, egalitarian style of organizing, to a more departmentalized and

bureaucratic structure, demanded by its new markets and tasks. We state this transition

formally as follows:

Proposition 2: Entrepreneurs of dot.com will favor an effectuation based approach, leading to experimentation with the factors of organizational structure, vision and culture, defined at the founding stages.

The Internet Stage: Searching for Models and Bureaucratizing

The beginning of 1996 brought a major transformation, as Elan identified the

Internet as “the essence of the brave new world,” and shifted the company’s focus from

multimedia towards technological development aiming at Internet applications. This shift

resulted in increasing the workforce to nearly fifty people, which augmented expenses

considerably. Two options for “taking partners for money” were available, a bid from an

American graphics software company offering a buyout, and a venture capital group

requesting a minor share. Art preferred the latter as it left all managerial, content and

business decisions in the hands of its founder.

Art’s preoccupation with developing Internet applications induced the third phase

of changes in the organizational structure. Instead of the previous nonhierarchical and largely

flattened structure, an outgrowth of organic growth, Art was redesigned into a functional

structure. Art hired R&D, finance, business development and HR managers. This radically

changed the nature of communication within the organization. Art was transformed from a

customer driven culture based on openness, trust, empowerment, and collaboration, to a

sluggish, bureaucratic organization typified by poor cross functional coordination, all of

which stifled innovativeness, creativity and measured risk taking. The technical staff (under

the VP for R&D) was divided into two teams. The 3D development group focused on

“Banner Maker,” intended for the advertising industry, and enjoyed the most prestige. It was

larger, and comprised of full-time tenured employees. The 2D group developed Internet

greeting cards and was smaller, consisting of mostly part-time, younger and relatively

inexperienced employees. The functional structure resulted in a distinct hierarchy (core and

periphery) in terms of prestige, seniority, professional skills and know-how. Each of these

sub-groups carried out their own distinctive effectuation echo, in part predetermined by the

unique cultural characteristics of their sub-group, as determined by the constraints of the

tasks involved. Noteworthy is that it was difficult and probably undesirable, to settle on a

single learning strategy appropriate to all different activities. Rather, each requires a

distinctive strategy commensurate with the task, considering such factors as exploration or

exploitation, bureaucratic routines, and the like.

The early days of Art’s engagement with the Internet were marked by a strategy

labeled by Kanter (2001) as “improvisational theatre”, developing the organization’s ‘story’

as a corollary of continuous interaction with its ‘audience, which eventually resulted in

pursuing new directions (p.106). Art’s improvisational strategy was characterized by

spontaneous experimentations (Weick, 1998) aimed at assessing strategic courses emanating

from the development of different Internet-enabled technologies and their potential

applications. This experimentation was described by the founder as “shooting at all

directions,” attempting to sustain Art’s competitive edge within the Internet domain. Such a

strategy is well suited for effectuation processes (Sarasvathy, 2001). March & Olsen (1991)

refer to the search for new knowledge as exploration, contrasting it with exploitation.

Because knowledge gained from exploration is susceptible to obsolescence owing to a

rapidly changing environment, it is a risky endeavor. This leads to our third proposition:

Proposition 3. In a dot.com firm, when managerial vision, structural form, and organizational culture are in resonance with the need for improvisation, an effectuation process is the preferred strategy of action.

Internet Culture: Variation in forms of System and Practice

For companies such as Art, survival in the Internet industry required a constant

search for innovation and creativity, the pursuit of an exploration strategy towards

knowledge accumulation. Elan believed that Art’s sole relative advantage and imperative was

to retain a high profile presence on the ‘Net’. He stated his strategy in this vein:

“I work constantly in high gear, running from team to team, making them crazy. The Internet is the universe next door, but all the same, it is a universe and I need to find what will work. I know I drive people crazy in my quest for what will work; I want them to remain creative. I explain that we resemble James Bond’s laboratory; creativeness, innovativeness and extraordinary art. The technology and the Internet shouldn’t blur our strength in creativity.”

Knowledge discovered through exploration must eventually be exploited. The

essence of Art’s traditional family-like culture, stressing individuality, cohesion and

egalitarianism, considered by its members as conducive for leveraging creativity and

innovativeness, gave way to formalization and a more instrumentally goal-oriented culture.

Thus, in line with Sewell’s conceptualization of culture (1999:51), the potency of Art

stemmed from the founder's ability "to play on multiple meanings of symbols”—thereby

redefining situations in ways that they believe will favor their purposes. Creative cultural

action commonly entails the purposeful or spontaneous importation of meanings from one

social location or context to another

Eventually, Art’s weltanschauung broke apart as distinctions were drawn along

two lines. First, between the Internet team (programmers and graphic artists) and the

periphery (multimedia team) and the second, between graphic artists and programmers.

Demarcations between the core and periphery set off power struggles between rival cliques

vying for the founder’s favors. Many resentfully complained about cronyism, clique rule,

overly centralistic and top-heavy managerial style. Within the framework of a start-up

environment, the essence of Art’s traditional family-like culture focused on individual

bonding and egalitarianism (weltanschauung). This gave way to a highly formalized work

environment and a conspicuously goal-oriented culture, in which the company’s concerns

were not necessarily a reflection of individual well-being.

The differentiation between graphic artists and programmers effectively created

two subcultures, each with its own patterns of organizational learning. The creative group

was strongly attached to Art’s core ideology emphasizing closely-knit teamwork, artistic

creativity and product image. The more pragmatic programmers were more concerned with

professional advancements, and followed an exploitation strategy. The creative team

constituting the company’s founders, felt vulnerable. They clung to Art’s core values

embodying the company’s identity and artistic purposefulness, its explorative learning

processes. Many of the graphic artists and multimedia staff also believed that artistic

creativity had to be emphasized if Art was to succeed.

The creative team, the company’s founders, saw themselves as increasingly

vulnerable, clinging to Art’s core values. For them, these embodied the company’s identity

and determined its normative behavior, highlighted by an explorative approach to learning.

These values represented their reciprocal relations with Elan and egalitarian commitment to

the company.

For the programmers, such artistic values offered no substance, merely

encouraging individual expression. Programmers continued to be committed to their own

ambitions, rather than to Elan or to Art’s values. A highly competitive global market

demands that programmers essentially relearn their trade at regular intervals, effectively

driving them towards individualistic and instrumental strategic learning activities. Staying

current with new technologies often entails betting on the success of one particular language

or technology (Barley & Kunda, 2004). Betting on a core technology or program is an

important strategy in maintaining a prominent position, and loyalty often spans

organizations. Thus, the programmers contended that Art must compete with other

organizations in order to retain them. Egalitarian ambitions had all but disappeared. This is

because it was demonstrated that economic and personal interests superseded collective and

artistic ideals, and hence engendered a growing cleavage between owners and employees. A

perception developed that management was exploitive, dissolving trust and, along with it, an

entrepreneurial organizational culture (Jelinek & Litterer, 1995). Table 3 present empirical

evedince for the conflict over hegemony of Art's vision and ideology in accordance with the

respective ethos of the graphic artists and the programmers.

[Insert Table 3 here]

During the process of transforming the company towards the Internet, Elan

realized that the meaning of Art’s values implied taking a strategic course of action out of a

diverse repertoire (Swidler, 1986; 2003). When asked about the issue he commented:

“The designers and the programmers are different, nothing will change that. They both believe in the merit of Art’s creative thinking and understand why I’ve always rallied for it, but they see it differently. The designers see those values as a Kibbutz and the programmers see them as a work standard.

Q: and for you?

A: For me, creativity and innovation are a must, not only a Kibbutz, and not only as a work standard, but as our compass and road map.”

Thus, Elan considered Art’s values as the cornerstone of its action, illustrating

both a tangible reality and an ideological conception, but he also recognized the importance

of shifting his strategic direction towards a more marketable output. Notwithstanding, with

the transformation to the Internet entailing organizational changes, involvement of external

financiers, and frequent changes in Art’s business model, Elan downplayed the importance of

initial organizational values as a moral standard of behavior. Elan’s instrumental handling of

Art’s values required a strategic shift from exploration to exploitation. Conflicts created

between the dominant actors, the Graphic Artists and the programmers, eroded Arts'

coherence. As Elan attempted to transform Art, an effectuation echo created dissonance

between the expected former values predicated on an artistic core value rooted in Art’s

legacy. Rather than trying to influence direction, a tactic that many strategic leaders utilize

(Hitt & Ireland, 2002), Elan’s attempt to impose a new direction created cleavages that lost

vital momentum and group consensus.

Proposition 4a: The more specific the internal conflict in a dot.com between technology and content the more effectuatuion process become the leading strategiy of action.

Decline and Death

In early 2000, the company opened its New York offices. The Tel Aviv office

maintained responsibility for technological development, support and services, while an

American-Israeli business development team headed by the founder was set up in New York

to design and implement marketing strategies. Painfully, Art’s founder realized that

marketing and sales precede art and hype in the business world.

Following market research, Art’s strategy focused on the entertainment

industry (record labels, advertising agencies and toy manufactures). Acquisition of customers

was slow and expensive, owing to difficulties in accessing the leading player in the

entertainment and advertising industry, and the merit of Art’s products which were tagged by

customers as “nice to have” but not essential to their core business. Meanwhile, like many

companies in the Internet industry, Art became cash strapped. The company spent lavishly

and recklessly on things that were part of the Internet show. As its founder comments:

“It was an irony because you had to behave like other companies around you to keep up a strong and appealing face to your clients and to the work force, and at the same time you are making all the mistakes that will lead to your death. We were spending money on company vacations, traveling around the US to try and get clients, moving to new offices, hiring a lot of people some of them not complying with the high standards we set in the past. The feeling was that we had to do those things to succeed. You had to look strong and ambitious like your competitors.”

The above quote illustrates Arts' practices as enactment of action whereby the

founder carried out symbolic activities for the sake of adapting to the Internet environment.

Art found itself in an organizational vice, pressured on the one hand by expectations

surrounding a new organizational field and the need for legitimacy, and on the other, by the

previously existing internal culture that rejected the new organizational form and activities.

In the case of Art, an organizational conflict resulted when Elan attempted to shift his

strategic direction without understanding the environmental impact or sacrifices necessary by

all members to enter a new organizational field. Further, he misconstrued the implications of

the dissonance created as a result of conflicting cultural and strategic models. Art’s core

values, which provided a source of comparative advantage, were no longer being utilized,

threatening their absorptive capacity, what Cohen & Levinthal (1990) refer to as “lock out”.

Art, by moving away from its core excellence, was losing the capability of recognizing when

and where to invest in future related opportunities.

Meanwhile, deals were sluggish. Contrary to the envisioned strategy, Art’s

customers declined to adopt the services on a large scale. By mid 2000, it was apparent that

Art was not moving towards economic viability. It initiated acquisition negotiations with

three media moguls.

Although a due diligence process was started, it was too late, the Internet bubble

exploded, and the media firms backed off. Then came 9/11 and the subsequent recession

precluding any possibility of a deal. During 2001-2002, Art witnessed further deterioration of

its business. The effect of the stock market ‘bust’ was felt in New York’s ‘Silicon Alley’ and

consequently, Art’s network within the Internet industry shrunk considerably (Hoang &

Antoncic, 2003) Art’s founder wryly recalls:

“It was frustrating to see how we tried to speak with contacts we had in lots of companies and, one by one, many of our key contacts left their companies. The Internet market collapsed entirely and big companies were shutting down everywhere. It was clear that the business model would not bring Art success; companies and consumers are not investing money in Internet applications.”

In 2002 Art’s board decided to cease all operations and liquidate the company’s

remaining assets. All employees were laid off with the exception of a core group of seven

R&D programmers in Israel and the founder in New York. Towards the last quarter of 2002

Elan made one last attempt to save the company by shifting its business model, one more

“stab” at the effectuation process.

The move to NY was somewhat dramatic for Art’s members. It epitomized the

earlier schism between artists and programmer sub-cultures and highlighted conflicts

resulting from disparate learning strategies, manifested as effectuation echoes. The move

signaled a perceptible division of tasks between Tel-Aviv and New-York, with the former

engaging mainly in product development, maintenance and support while the latter primarily

in marketing. This demarcation made the cultural boundaries between the two groups more

permeable and less distinct. Consequently, the groups were engaged in incessant conflicts

competing for control over Art’s priorities and resources. Israelis felt they were the senior

office people, developing the technology - they knew it best and it was hard for them to be

demoted to a status of mere ‘executers’. The newly delineated work procedure was to have

marketing define all tasks, and for R&D to execute these tasks without being a consulted

regarding the goals and day-to-day operations. The NY office complained about the Israeli

office’s slow response, red-tape and exaggerated sensitivity to issues of authority and

hegemony. Many employees in both NY and Tel Aviv felt that the two offices were separate

organizational entities. Furthermore, employees in both countries lacked knowledge

regarding the other's organizational roles, and coordination and cooperation became difficult

and cumbersome.

The most apparent change was the dearth of a motivating leader in the Israeli

office. With Elan's departure, a void was created. Israel's office chiefs were efficient

operationally, but lacked vision and were weak in the area of leadership. The new employees

in Israel did not know Elan, who traditionally assumed the role of selecting and socializing

new recruits in accordance with Art’s unique creative culture and history. Moreover, owing

to the work demands, recruitment stopped short of opting for exceptionally talented

employees, therefore, mediocre staff members began filling in the available positions.

Comparing this stage of the company's life was aptly described by Elan, after returning from

a visit to Israel in August 2000:

“I couldn't believe the way they are working here, it looks like the Histadrut (Israeli Labor Federation). They come to work late, drink their cappuccino, work a little, have another lunch break and then get refreshments before they go home. Only a handful of employees believe in what we are doing, most of them are here just because they need a job”

The conflict between the two offices raged throughout 2001. Elan claimed that the

Israeli office engaged in lavish and ill-conceived spending that hazardously depleted

resources and forced drastic downsizing and downs coping of the company’s activities in

Israel. The NY employees were told that the layoffs were necessary in order to recruit more

employees and funnel additional funds to NY. The lack of candor displayed by Elan for each

of the organization’s locations highlights how far he moved from the original goals,

characteristics, and norms of Art.

Proposition 5: The decline of a dot.com in a new organizational field follows

an effectuation process which marked by fragmentation within the company and misalignement with the environement..

Postscript

In 2003, the board of directors decided to liquidate and close the company and

Elan returned to Israel. In 2004, believing that current opportunities lay in the wireless

market, he started focusing on meeting potential clients, and working with a small team in

Israel, making necessary adjustments to a new technology. The business model shifted from

making Art a marketing tool, and getting money based on the Art exposure, to offering cell

phone users tools to make multi media messaging with telecom companies, based on revenue

sharing. However, this endeavor, based primarily on the founder’s efforts, eventually proved

unsuccessful. It seems that the lifecycle of Art in its decline has started where it begins—a

nascent dot.com.

Discussion

For nascent firms, where the effectuating organization is quite small, alternative

methods may effectively unite organizational actors. For example, they may adopt

mechanisms to support a charismatic leader, effectively developing a cult-like approach to

leadership. Alternatively, they may unify around a founding core value or theme, however,

they run the risk of alienation should the effectuation process lead astray of core values. In

either case, they will be subject to rapidly changing strategic directions. We depict these

changes in Figure 1. As illustrated, the founder, director, or leader of a nascent effectuation-

based organization is required to repeatedly redesign and redirect the strategic and

organizational characteristics necessary for maximizing each opportunity. Thus, a firm might

begin primarily as a service based organization, migrate to manufacturing, and conclude as a

marketing organization. Each strategic shift necessitated by perceived opportunities, despite

possible clarity to the organizational leader, must be diffused throughout the organization.

We note that not all actors will view such shifts in a favorable light. The resulting tension

between sub-cultures that adapt to the new strategic directive, and those that persist with the

previous norms, goals, and strategies, may severely undermine the continuity of

organizational culture, resulting in decline and even lead to failure.

Drawing on the dynamic and complex nature of values and goals during the

“social construction” phase, this case study demonstrates how a founder’s values may

tenaciously affect an organization and initially facilitate a drive towards fulfilling designated

goals. Initially, the diffusion of a clear and focused group ethic yielded considerable group

harmony and organizational efficiency. Problems arose, however, when the effectuating

entrepreneur attempted to redesign the organization in order to capitalize on new perceived

opportunities. For Art, Organizational learning was limited to the founder’s repertoire of

alternative cultural and strategic options, constrained by his inability to convince others of

newly perceived strategic opportunities. The study illustrates how the interchangeability

between ideology and values initially facilitated organizational evolution. It also

demonstrated the cultural hazards involved in pursuing an effectuation process. We observed

an organization incapable of adopting indispensable new cultural norms in an emerging

organizational field, the Internet, causing severe intra-organizational disagreements that

eventually led to dissolution.

Art was founded according to an ideology reflecting Elan’s artistic ambitions and

core values. It did so slowly, through adaptation and evolution, forging an identity and a

strategy based on a unique graphic arts company dedicated to creativity, innovativeness,

measured risk-taking and excellence. The initial organizational and cultural evolution at Art

was achieved through the principle of affective rationality (Heise, 2002). Key actors

developed a shared cultural sentiment or weltanschauung predicated on their common

aesthetic values and orientations. Forming a competitive publicly traded firm, nor

opportunistically changing domains, including shifts to multimedia and the Internet, were not

among the initial objectives of the founder, nor that of key participants, the ‘creative talent’.

As Elan sought to develop his organization, he made use of explorative

effectuation processes to identify a variety of cultural frameworks that fit the ideological

needs of the activities he had in mind. These frameworks were not invented by Elan, rather,

they existed as competing sub-cultures or community structures that concurrently existed in

or near his current span or reach (Swidler, 1986). Such values and sentiments shape the

fabric of cultural identity (Heise, 2002). When Elan began, he utilized a cultural ideology

embedded firmly in Art’s – “young, fashionable, and crazy” motto. In the next stage, Elan

attempted to adapt his organization to mirror a business model rooted in the multimedia

business he was pursuing. This required a new and different learning strategy capable of

exploiting ideas, as opposed to primarily generating them. Elan’s strategic modifications

necessitated structural shifts consisting of reorganizing into a more commonly specialized

firm, with rationalized and prioritized activities determined by customers. This represented a

noticeable shift away from the pre-committed ethical norms, and resulted in what we call an

‘effectuation echo’ – a sub-group of organizational members that refused to adapt or modify

their practices, outlook, or goals according to the new modality, and persist in applying

previously established cultural norms. In effect, many of the original members of Art were

sticky learners (Szulanski, 1995).

During the Internet stage, Elan once again attempted to transform his company,

this time mirroring the emerging “dot-com” firms. He drew on newly established Internet

cultural norms of exuberance, with the accompanying references to paradigm shifts, growth

and innovation (Kanter, 2001). The Internet cultural stage also required a functional

business-oriented organizational structure, complete with departments, branch offices, lavish

spending, and the accompanying bureaucracy. It incorporated specialized workers

(programmers) who maintained instrumental learning strategies in direct conflict with those

of Art and unrelated to the needs of the new dotcom firm. In his last reconfiguration, while

attempting to resurrect or salvage the organization, Elan diverted attention to the wireless

market, dismissing his loyal staff and running instead with a skeleton R&D team. We

observed that in each of these transitions, Elan failed to effectively disseminate the

importance of the new cultural shifts and strategic goals throughout the organization. The

resulting conflicts generating from the effectuation echos resulted in group alienation,

inefficiency and discord, leading to eventual demise.

Art provides an example of a knowledge intensive global start-up in a rapidly

changing market. As environmental opportunities changed, Elan’s recognition of

opportunistic shifts drove him in an attempt to reinvent Art’s organizational culture and

reconfigure its strategic direction. Although Art was able to grow by pursuing opportunities,

considerable dissonance was engendered as a result of conflicts between its core ideology

stressing artistry and excellence, and the necessary radical adjustments needed to conform to

the demands of the marketplace. Different organizational structures, necessary for their

respective strategic orientation, created discord. Employees viewed transformation as a threat

to their existing culture, as a bureaucratic “sell out”, in conflict with their own cultural

sentiments. Thus, albeit not fully realized, Art lost its strategic advantage as employees who

were responsible for creative activities and organizational learning, eventually lost

motivation, performed sub- optimally, or left.

Conclusions

In this study, we show the case of an effectuating entrepreneur who chose

strategies and cultures from available norms, much as one might select a particular suit of

clothes to portray a legitimate, efficient and workable self-image. From an institutional

perspective, this was a mimetic strategy (DiMaggio & Powell, 1983). Much as with fashion,

savvy leaders pick and choose from an array of cultural and strategic alternatives, attempting

to convey sophistication and depth of knowledge. Elan drew on both pre-existing models, as

well as cutting edge culture to dress his organization, signaling and conveying legitimacy,

market fitness, leadership, and opportunity throughout the effectuation process.

Organizational culture became a selective and instrumental commodity, following a

theoretical framework that presents “culture as institutions devoted to specialized activities”

(Sewell, 1999:41). However, Elan’s individual role, from collective agent provocateur, to

that of entrepreneur, and later, Dot-com visionary, required systematic role reidentifications

by Elan and his group (Heise, 2002). Not everyone was willing to subscribe to his evolving

persona, and many group members preferred to remain with preexisting cultural paradigms, a

result of effectuation echo. The result of these transitions yielded considerable organizational

friction, the departure of key and formerly loyal members, and the undermining of the initial

camaraderie conceptualized at Art’s nascent phase.

This study makes a contribution by empirically documenting attempts to invoke

strategic shifts at the nexus of cultural studies and effectuation theory. The type of

effectuation processes pursued by Elan entailed a rather autocratic approach: he chose the

direction, selected what he determined to be the opportune culture and strategic direction,

and expected Art employees to “fall in line”. As Elan pushed the organization into what he

believed were new opportunities, he failed to consider the impact of Art on his choice of the

commensurate organizational culture, managerial systems, learning systems, and operating

systems necessary for the transitions to take hold in the marketplace. At each new turn of

organizational strategy, a cultural echo representing the original or previous iteration’s core

values reverberated, causing tension, dissonance, and exit of key employees. In healthy

organizations, these echoes may be the source of spin-offs that eventually support the

original firm’s network position, or promote diversity of opinion within the organization. In

the case of Art, however, entering a highly turbulent environment with limited resources, the

outcome led to a loss of its primary competitive advantage, eventually leading to the demise

of the firm.

This case also provides insight into the character of Internet and virtual

businesses. As new opportunities arose, Art began to focus on Internet-service related

activities, forcing changes to the original organizational priorities and operations. The new

aim of “bringing life to the Internet” necessitated adherence to a wide array of technological

and market-related developments in order to sustain competitiveness, arenas where Art had

limited expertise. Transitioning to a new and volatile emerging field required excellence in

qualities other than those of artistic innovation. It also necessitated hiring new employees

whose loyalty and strategic learning interests were highly individualistic (Barley & Kunda,

2004), at odds with the carefully nurtured weltanschauung. The shift to the Internet

demanded radical organizational and cultural changes that mirrored the emerging

institutional field. In attempting to gain legitimacy, Elan pursued a mimetic strategy with an

organizational structure that was more business oriented, but required sacrificing much of the

pioneering spirit and close-knit sense of togetherness he carefully nurtured at the outset.

By observing Art across its entire life cycle, we can see that Elan’s effectuation

activities not only failed to yield a discrete organizational strategy, but also resulted in

sacrificing the one strategic advantage Art had developed. Shortly after diverting attention to

the multimedia industry, Elan had to negotiate the formation of two concurrent and mutually

incompatible subcultures. While he attempted to cater to each of them in the process of

delineating Art’s goals, he lost their credibility on two accounts. First, by representing

different meanings to different sub-cultural groups (designers and programmers) and second,

by becoming too abstract and detached from observable norms and behaviors practiced at

Art.

In sum, we found that values and goals were employed by the founder in a

dynamic interplay, attempting to complement each by lending both tangible and ideological

meanings commensurate with organizational and business realities. When ideology became

less influential on action, tangible aspects assumed the role of active strategic leadership.

When tangible aspects wore off or were dissipated, Elan attempted to employ ideology.

Elan’s varying interpretations of Art’s values smoothed the progress of effectuation and

adaptation to the Internet era by intermittently changing its focus according to alternating

business models. This case study shows that organizational culture possesses flexible

characteristics and, to an extent, may be a useful tool enabling founders to effectively steer

their organizations through environmental opportunities, perturbations and ever growing

hostility. Dissonance from this process is liable to yield dysfunctional results, as we observed

a case where such dissonance led to the demise of the firm.

The experience of Art demonstrates both the overarching influence of ‘artistic’

culture (or any closely knit organizational culture) in launching a new venture, and the

potential inadequacy of transitioning this strategic advantage into core business models

through centralized and autocratic processes that fail to account for sub-cultural norms and

sentiments. Art highlights the potential strengths and weaknesses in identifying useful sub-

cultural themes from available normative sentiment, and leveraging these towards effective

models of organizational learning. Art also demonstrates some of the weaknesses inherent in

effectuation processes, particularly in the failure to consider the cultural ramifications of

radical transformation.

Further study is warranted to better understand the implications of cultural

persistence on the evolution of nascent firms in turbulent task environments. While evolution

and change as courses of action are well documented, little in known about the uniqueness of

cultural persistence in uncertain and volatile environmental circumstances. In this vein, it

would serve scholarship as well as practitioners to identify improved methods of engaging in

repeated cultural and strategic organizational learning and transformation. Even though the

Internet is inherently global, it would be interesting to conduct a comparative study in which

nascent firms from different cultures were investigated. We suspect that firms evolving in

different cultural settings will eventually have diverse characteristics.

The importance of entrepreneurial companies in the wider domain of the Internet

industry is likely to continue. Many will fail, and our understanding of organizational decline

continues to be rather limited. Much scholarship tends to be success-biased and hence less

likely to focus on decline or failure. Future studies examining the specific nature of

organizational learning and strategic adaptation, particularly those employing a macro

perspective and closely observing failure, would be of considerable scholarly interest. .

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Art Founded on Homogeneous Cultural Norm

CORE CULTURE

Echo to core

Open NY Office Viral Marketing

B2B Travel,Media,

Financial Industries Echo to

core

Echo to core

Echo to core

Multimedia and Computer Games, First deviation from

core ethic

Figure 1 Evolution of “ART”

1996-2003

Greeting cards for Internet

Founding of new Effectuation Based

organization

Stickiness for members

unwilling to deviate

(Effectuation echo).

Cultural clash with those

who adapt to new direction

Feedback loop for next effectuation iteration

Figure 2. Effectuation and the Adaptation of Organizational Culture

Leader attempts to

shift strategic

Founding members establish new

culture ( may be Hype,

Cult or Charismatic)

New opportunity

requires radical shift in

activities and/or operations

Table 1: Modes of effectuation during the emergence period: Empirical evidence

Empirical Evidence Modes of Effectuation

"We didn't concern ourselves with the purpose of our work, it could be for advertising tooth paste or for presentation of a door to door salesmen. Our artistic mark had a life of its own regardless of what it was for or how much work you had to put into it”. Eric, the first programmer at Art.

The evolution of core value

“What we used to have in Art in its first days was basically an inflated ego. Elan took care of that. He is excellent at boosting people’s egos. We felt like a sayeret [Israel Defense Force reconnaissance unit]. We wouldn’t have had any problems finding much more lucrative jobs, but the money was not important—it was the dream of doing it differently; improvise, do whatever you feel like doing, let your creativity flow. Our work was not craft but art.” Yaron, a key Art’s Graphic Artist

Freedom of experimenting

Table 2: Modes of effectuation during institutionalization and the reconstruction of artistic values: Empirical evidence

Empirical evidence Modes of effectuation

“We changed our priorities. New guidelines were abruptly handed to us and stated, in fact, that art and creativity were not enough. We suddenly realized that there were many things we didn’t know; our weaknesses were exposed. Eventually, the visual results were not what we expected, not up to our standards, and it happened to an experienced and qualified team" Michal, multimedia project leaders

The need to integrate routines of work processes into the creative

work

"Our art work, the creative style, is embedded in our identity and way of doing things, which was always a nonconformist, lassiez fair style. Presently, we are not working for ourselves, and so we have to comply with

, and we are doing it without compromising our art whatsoever, even if ]the customers [BrotherbandNews or it costs us more and we are not making money out of it" Elan, Art's founder

Compromise