Strategic responses: integrating awareness–motivation–capability with prospect theory

Purpose This study examines how small and medium-sized enterprises (SMEs) navigate the strategic dilemma between high-risk strategic initiatives and low-risk tactical responses under conditions of resource asymmetry. By integrating the awareness–motivation–capability (AMC) framework with prospect theory’s gain/loss framing, we reconceptualize capability as a relative construct that shapes competitive decision-making. Design/methodology/approach Survey data from 300 Korean SME executives collected in March 2023 were analyzed using PLS-SEM. The proposed hypotheses were tested using segmented regression. Using a theory-derived reference point to distinguish SMEs as being in the loss- or gain-domain enabled the study to test prospect theory’s predictions regarding reference-dependent risk preferences. Findings SMEs perceiving capability shortfalls (loss domain) pursue resource-intensive strategic actions through heightened awareness and motivation. Critically, in the gain domain, a perceived capability advantage did not directly translate into tactical responses. These SMEs need to be motivated to enact a tactical response. SMEs' divergent responses directly contradict threat-rigidity theory’s prediction of uniform defensive responses to competitive threats, while strongly supporting prospect theory's reference-dependent framework. Practical implications A diagnostic framework enables managers to assess competitive domain positioning and select appropriate response strategies. The framework includes specific implementation guidance for loss-domain firms (structured decision processes channeling threat-induced motivation) and gain-domain firms (motivation-building mechanisms overcoming strategic inertia). Originality/value This study offers four contributions. First, it reconceptualizes capability as a relative, perceptual construct, extending AMC to resource-asymmetric contexts. Second, it integrates prospect theory’s gain/loss framing to explain why identical competitive pressures produce divergent responses. Third, it establishes motivation as the decisive mechanism that translates awareness into action, advancing AMC from a descriptive to a process-oriented model. Fourth, it provides empirical support for prospect theory over threat-rigidity theory in competitive dynamics.