Interpreting punctuations: Impact on firms adaptive response

Abstract

Literature on punctuated change and firm adaptation identifies several factors that constrain or facilitate adaptation. The literature, however, overlooks the importance of firm interpretations during adaptations to punctuations in external environment. Interpretations would assume importance as often the permanence of punctuated change is not established a priori and therefore the response of firms would be shaped by how they view the situation – opportunity or threat. This study addresses this gap using the 1991 economic liberalization in India as a natural laboratory. We examine firm adaptations through changes in related and unrelated businesses of firms over time. Drawing upon literature on strategic issue identification and prospect theory, we observe that firms explore growth avenues in markets unrelated to their current businesses even as they exhibit risk averseness by focusing on select markets in case of their existing businesses. We attribute these differences in risk propensity to the way firms interpret and frame strategic issues.