Risk perceptions of TMTs: impact on strategic change and conformity

Abstract

Research on how managers influence strategic change and conformity has largely ignored the role of risk perceptions in strategic choices as they have focused on some notions of ‘objective’ risk. Drawing on the psychology literature on risk, prospect theory and the threat-rigidity thesis, we argue that strategic change and conformity are influenced by the risk perceptions of top management teams (TMTs), which may or may not have a direct relationship with the ‘real’ situation at hand. We develop a framework which differentiates between risk perceptions based on potential loss of resources and loss of control, and show that these two dimensions affect strategic change and conformity differently. Further, we argue that risk attitude of TMTs and ambiguity in the organization’s environment moderate the relationships between perception of risk and strategic change and conformity. The hypothesised relationships were tested on data from two industries. Our results broadly confirm our hypotheses and show that risk perceptions play a role in strategic decision making. Including the concept of risk perception in our analysis of strategic choices not only helped resolve the apparent conflict between prospect theory and the threat-rigidity hypothesis, but also provided a more complete explanation for why different TMTs respond differently to similar situations.