This chapter provides an overall understanding of this study. The chapter begins with the background concerning the research area which also shows the importance of the study, followed by the problem statement, which guides the reader to purposes of the research, the research questions, significance of the study, limitations and finally definitions of the terms to be used in the study.
Background of Study
In a world of increasingly global competition, companies have to put even more special attention on their performance to succeed in the current organizational environment.
Companies now face global competition, extremely unpredictable environments, rapid technological change, hypercompetitive markets, and an increasing emphasis on price and quality by demanding customers (Cullen & Parboteeah, 2013). Hence, an improvement in business performance becomes fundamental to achieve for most companies.
Several models have been suggested by organizational researcher, who proposed different approaches of business performance, some of the better known are the goal attainment model (Price, 1972), the resource model (Yuchtman & Seashore, 1967), and the multiple constituency model (Connolly, Conlon, & Deutsch, 1980). In general, the goal attainment implies that the greater the degree to which an organization achieves its goals the greater its effectiveness (Price, 1972); the resource model define the effectiveness of an organization in terms of its bargaining position, as reflected in the ability of the organization, the greater the ability of the organization to exploit its environment, the greater its effectiveness (Yuchtman & Seashore, 1967); and the multiple constituency model refer to effectiveness not as a single statement, but as a set of several (or perhaps many) statements, each reflecting the evaluative criteria applied by the various constituencies involved to a greater or lesser degree with the focal organization (Connolly, Conlon, & Deutsch, 1980).
Since, no consensus remains related to a definitive accepted model for a single best measure, the measure of business performance adopted in this research represents the degree to which a company achieved its business objectives (Elenkov, 2002).
Moreover, among the key factors identified to create competitive advantage, which in turn is linked to business performance, is innovation. Companies achieve competitive advantage through an act of innovation (Porter, 2011). Innovation has been found by many studies to drive a company’s growth, becoming, itself, a key factor in today’s organizational
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environment. Innovations are vital to a firm's survival and success, as they can satisfy customer needs and requirements more effectively than existing offerings (Yalcinkaya, Calantone, & Griffith, 2007). Price Waterhouse Coopers (PWC) provided a compelling study regarding the importance of innovation, by analyzing the financial results of 399 companies based in seven countries, found a significant “growth chasm” between companies it identified as most innovative and least innovative (Tucker, 2002). Therefore, the importance of innovation in the business world today is undeniable as well as its role as a powerful force for change and growth.
Here, the role of effective leadership is crucial, in influencing followers in a positive way, not only at the individual level but also at the organizational level. Leaders are expected to listen to followers and be responsive to their needs and concerns and include them in decision making, mentoring, coaching, empowering, developing, supporting, and caring are not only expected leader behaviors but also necessary for today’s effective leaders (Bass &
Riggio, 2005). Bass (1985) labeled this type of effective leadership as transformational leadership. This theory of leadership was initially conceptualized by Burns (1978) before being enhanced by Bass (1985). Transformational leaders are those who stimulate and inspire followers to both achieve extraordinary outcomes and, in the process, develop their own leadership capacity. These leaders help followers grow and develop into leaders by responding to individual followers needs by empowering them and aligning the objectives and goals of the individual followers, the leader, the group, and the larger organization (Bass
& Riggio, 2005). A meta analytic review found that transformational leaders may influence organizational performance not only by affecting individual-level and team-level processes and performance but also by affecting organizational cultures, systems, and strategies (Wang, Oh, Courtright, & Colbert, 2011). Likewise, Jandaghi, Matin and Farjami (2009) found that by comparing successful and less successful companies, one can observe the effect of transformational leadership on organizational success and performance, which is undeniable.
Therefore, the present research focuses in obtaining fully advantage of this effective leadership style, transformational leadership, while investigating its effect on Innovation.
Likewise, investigating the effect innovation has on business performance.
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Statement of the Problem
The relationship between transformational leadership in enhancing innovation (Jung, Chow & Wu, 2003) and unit performance (Howell & Avolio, 1993; Avolio, Waldman &
Einstein, 1988; Elenkov, 2002) has been addressed in other research; however, these research studies have been conducted mainly in countries or setting located in developed countries (e.g., Canada, United States, New Zealand, Russia and Taiwan). Therefore, the present study intents to emphasize the importance of effective leadership linked with innovation. To create awareness and take full advantage of this leadership style and its related behavior on recognized key factors to driving company’s growth, such as innovation.
Simultaneously include in this framework the final outcome business performance, in a context of developing countries such as Nicaragua.
As evidence on the need of creating awareness in those countries about ways to enhance business performance, the researchers examined the most admired ranking developed by Fortune which is a well accepted method for measuring external performance of organizations based on peer review (Rodsutti & Swierczek, 2002). Those companies are the largest US and non US companies with revenues of $10 billion or more, however only 0.56% of these companies ranked as most admired companies are located in Latin America.
Thus, based on this ranking, the researchers could say that, in Latin America exist very few companies that fulfill the attributes of outstanding or superior performance.
Additionally, in Nicaragua, one of the priorities for directors in 2013 was to handle talent management adequately, in such a way that if is not properly managed by those senior managers, the risks around talent can severely affect the performance of the organization, causing lack of talent to support investments and implement business strategies (Arias, 2013).
Another study, which deserves to be analyzed, in order to take the necessary actions, is the study conducted by Deloitte, in March, 2013, across six markets in Latin America on 2000 participants of people born from January 1982 onwards called Generation-Yers; some main conclusions of this study were:
62% of Generation-Yers say innovation is a key ingredient in making an organization an employer of choice.
Poor leadership/Management/Lack of vision, took the third position as a barrier to innovation within the organizations.
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Moreover, only 18% believe that their own organization’s leadership encourages and rewards idea generation and creativity and only 16% perceived strong and inspirational leadership in their organizations.
85% of the participants in Latin America consider that business innovation helps to improve society (Brown, 2013).
Finally, few researchers have attempted to create an integrated model of transformational leadership, organizational climate’s elements, innovation, and business performance. The purpose of this paper is to measure the effect of transformational leadership on Innovation and business performance; while analyzing other work environment variables such as empowerment and climate for innovation.
Purpose of Study
The purpose of this study is to use Structural Equation Modeling (SEM) in order to:
Purpose 1: Measure the relationship of perception of transformational leadership and perception of innovation performance.
Purpose 2: Measure the relationship of perception of transformational leadership and employee’s perceptions of (a) empowerment and (b) climate for innovation.
Purpose 3: Measure the relationship of employee’s perceptions of (a) empowerment and (b) climate for innovation on perception of innovation performance.
Purpose 4: Measure the relationship of perception of innovation performance and perception of business performance.
Questions of Study
Four questions need to be answered:
1. What is the relationship between employee’s perceptions of transformational leadership and employee’s perceptions of innovation performance? The data were obtained from perception of employees in a selected company in Nicaragua.
2. What is the relationship between employee’s perceptions of transformational leadership and employee’s perceptions of (a) empowerment and (b) climate for innovation? The data were obtained from perception of employees in a selected company in Nicaragua.
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3. What is the relationship between employee’s perceptions of (a) empowerment and (b) climate for innovation with employee’s perceptions of innovation performance?
4. What is the relationship between employee’s perceptions of innovation performance with employee’s perceptions of business unit performance?
Significance of the Study
Few researchers have attempted to create an integrated model of transformational leadership, organizational climate’s elements, innovation and business performance;
therefore, this study is significant for researchers in the sense that it provides a more complete picture on the relationship among transformational leadership and innovation by adding business performance as an outcome variable to the Jung, Chow and Wu (2003) Model.
Also, this study is significant for practitioners, because they may know the magnitude with which these variables relate to the business performance. The decision makers may focus on developing these variables, resulting in better business results, and creating a competitive advantage which will benefit organizations in the long run.
Delimitations
The present study has two delimitations that served to set the scope of this research.
Delimiting the scope is necessary in order to make the research more feasible.
The first delimitation of the study is that it is delimited to Nicaragua. Secondly, the study is delimited to one organization, named Casa Pellas.
Definition of Key Terms
In this section the researchers will give the definitions of the variables used in this study.
Transformational Leadership
The present study adopted the definitions by Bass and Riggio (2005), who define transformational leaders as those who stimulate and inspire followers to both achieve extraordinary outcomes and, in the process, develop their own leadership capacity, additionally transformational leadership involves inspiring followers to commit to a shared vision and goals for an organization or unit, challenging them to be innovative problem solvers, and developing followers’ leadership capacity via coaching, mentoring, and provision of both challenge and support.
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Operational Definition:Transformational leadership is measured using 20-item scale from multifactor leadership questionnaire (MLQ-Form-5x) adapted from Bass and Avolio (1995, 2004). The 20 items are divided into five categories: individualized consideration, intellectual stimulation, inspirational motivation, and idealized influence (behaviors and attributes). Data were obtained from perceptions of employees of their leader’s behavior in a selected company in Nicaragua. Each item was with a 5-point Likert scale with scale anchors ranging from “strongly disagree” (1) to “strongly agree” (5). Each person’s responses to each dimension were summed and a mean calculated to obtain one dimension value per person.
Empowerment
The present study took the approach by Thomas and Velthouse (1990); they defined empowerment as increased intrinsic task motivation manifested in a set of four cognitions reflecting an individual's orientation to his or her work role: meaning, competence, self-determination, and impact.
Operational Definition: Empowerment was measured using 12-item scale adapted from Spreitzer (1995, 1996). The 12 items are divided into four categories, meaningfulness, competence, self determination and impact. Data were obtained from perceptions of employees of their degree of empowerment of their jobs in a selected company in Nicaragua.
Each item was with a 5-point Likert scale with scale anchors ranging from “strongly disagree” (1) to “strongly agree” (5). Each person’s responses to each dimension were summed and a mean calculated to obtain one dimension value per person.
Climate for innovation
The present study adopted the definition by Scott and Bruce (1994); climate is defined as individual cognitive representations of the organizational setting expressed in terms that reflect psychologically meaningful interpretations of the situation. The approach which is taken to this research posits that leadership, work group relations and problem-solving style affect individual innovative behavior directly and indirectly through perceptions of a "climate for innovation".
Operational Definition: Climate for innovation is measured using 22-item scale adapted from Scott and Bruce (1994). The 22 items are divided into two categories, support for innovation and supply of resources. Data are obtained from perceptions of employees of their degree of climate for innovation within a business unit in a selected company in Nicaragua. Each item was with a 5-point Likert scale with scale anchors ranging from
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“strongly disagree” (1) to “strongly agree” (5). Each person’s responses to each dimension were summed and a mean calculated to obtain one dimension value per person.
Innovation Performance
Refers to how well a firm innovatively performed in terms of the extent of new service, process and service development (Simsek, 2002). This study adopted this approach.
Operational Definition: Innovation Performance was measured using 6-item scale adapted from Tzeng and Shih (2009). The 6 items are divided into three categories, Process Innovation, Organization innovation and Technical Innovation. Data are obtained from perceptions of employees of the extent of innovation within a business unit in a selected company in Nicaragua. Each item was with a 5-point Likert scale with scale anchors ranging from “strongly disagree” (1) to “strongly agree” (5). Each person’s responses to each dimension were summed and a mean calculated to obtain one dimension value per person.
Business Performance
The present study will adopt the definition by Elenkov (2002), he defined Business performance represented the degree to which a company achieved its business objectives.
Operational Definition: Business performance was measured by looking at firm market performance and financial performance using 5-item scale adapted from (Zu, Fredendall, & Douglas, 2008). The 5 items were: sales, market share, operating income, profit, and return on assets. To calculate business performance, the researchers created an index of business performance. Each item was with a 5-point Likert scale with scale anchors ranging from “strongly disagree” (1) to “strongly agree” (5). Each person’s responses to all items were summed and a mean calculated to obtain the index of business performance per person.
In summing, this chapter has provided an overview of the research problem and how it was addressed. The research scope has also been established by the stated significance of the study.
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