The Effect of Transformational Leadership on Innovation and Business Performance: A Survey Study Conducted in a Selected Organization in Nicaragua

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(1)The Effect of Transformational Leadership on Innovation and Business Performance: A Survey Study Conducted in a Selected Organization in Nicaragua. by Olga del Carmen Peña Orochena. A Thesis Submitted to the Graduate Faculty in Partial Fulfillment of the Requirements for the Degree of MASTER OF BUSINESS ADMINISTRATION Major: International Human Resource Development. Advisor: Cheng-Ping Shih, Ph. D.. National Taiwan Normal University Taipei, Taiwan May 26th, 2014.

(2) The Effect of Transformational Leadership on Innovation and Business Performance: A Survey Study conducted in a selected organization in Nicaragua by Olga del Carmen Peña Orochena. A Thesis Submitted to the Graduate Faculty in Partial Fulfillment of the Requirements for the Degree of MASTER OF BUSINESS ADMINISTRATION Approved:. ____________________________. Dr. Cheng-Ping Shih In Charge of the Major Work. ____________________________ Dr. Chih-Chien, Lai Committee Member. ____________________________ Dr. Pai-Po, Lee Committee Member. ____________________________ Dr. Wei-Wen, Chang Director of the Graduate Program. Graduate Institute of International Human Resource Development National Taiwan Normal University Taipei, Taiwan May 26th, 2014.

(3) ACKNOWLEDGEMENT First, I would like to thank God for his protection and abundant blessing before and during my stay in Taiwan. I would also like to thank my dear mother, who made my dream of coming to Taiwan possible as well as making my stay easy for me thanks to her help in taking care of my children during this period. Secondly, I would like to thank Mr. Silvio Pellas, without whose approval and support in Casa Pellas, I would not have been able to conduct this study. Thirdly, I would like to express great appreciation towards my advisor Dr. ChengPing Shih and committee members Dr. Chih-Chien Lai and Dr. Pai-Po Lee for their guidance. My warmest thanks go to Dr. Larry Miller, for reading my manuscript and for his knowledgeable and helpful suggestions. Also, I want to thank my cousin Julio Argeñal, for unconditionally helping me and being patient with me during this stage in my life. Likewise, I would like to thank Bomar Mendez, for helping me run and analyzes some statistics and also providing me moral support. Finally, I would like to thank Mariam Jaye Sowe, for helping me as a peer review in this research..

(4) ABSTRACT Among the key factors that have been found to lead to competitive advantage, innovation is one of these factors. Being, in turn, the leadership style identified as one of the more important to affect organizational innovation, with other contextual variables which also could help to enhance innovation, such as empowerment and climate for innovation. Based on literature review, this study proposed four hypotheses about those variables and attempt to present a complete picture on the relationship between transformational leadership behaviors, perceived innovation and the final relationship with business performance. A quantitative approach was used. Two hundred ninety two online questionnaires were received from a private Nicaraguan company. The findings indicate that transformational leadership behaviors do have a positive and highly significant relationship with perceived empowerment and perceived climate for innovation, which in turn climate for innovation does have a positive and highly significant relationship with innovation. Innovation also has a positive and significant relationship with business performance. Since this is a survey of selected company results may not be generalized to all private Nicaraguan companies. Using a modified transformational leadership model this thesis attempted to make private Nicaraguan companies’ aware of the importance of leadership and innovation to business performance.. Keywords: transformational leadership, empowerment, climate for innovation, innovation, business performance, organizational performance. I.

(5) TABLE OF CONTENTS Abstract ............................................................................................................................................ I Table of Contents ............................................................................................................................ II List of Tables ................................................................................................................................ IV List of Figures ................................................................................................................................ V. CHAPTER I INTRODUCTION ............................................................................... 1 Background of Study....................................................................................................................1 Statement of the Problem .............................................................................................................3 Purpose of Study ..........................................................................................................................4 Questions of Study .......................................................................................................................4 Significance of the Study .............................................................................................................5 Delimitations ................................................................................................................................5 Definition of Key Terms ..............................................................................................................5. CHAPTER II LITERATURE REVIEW .................................................................. 8 Leadership Theories .....................................................................................................................8 Empowerment ............................................................................................................................12 Climate for Innovation ...............................................................................................................13 Innovation...................................................................................................................................15 Business Performance ................................................................................................................16 Relationship between the Variables ...........................................................................................17 Organizational Case ...................................................................................................................25. CHAPTER III METHODOLOGY ......................................................................... 28 Research Framework ..................................................................................................................28 Research Procedures ..................................................................................................................30 Data Collection ...........................................................................................................................33 Instrumentation...........................................................................................................................35 Data Analysis .............................................................................................................................45. II.

(6) Pilot Study Results .....................................................................................................................47. CHAPTER IV FINDINGS AND DISCUSSIONS ................................................. 54 Descriptive Statistics ..................................................................................................................54 Common Method Bias (CMB) ...................................................................................................66 Correlations Analysis .................................................................................................................67 Partial Least Square (PLS) Analysis ..........................................................................................69 Discussion ..................................................................................................................................78. CHAPTER V CONCLUSIONS AND RECOMMENDATIONS .......................... 82 Conclusion..................................................................................................................................82 Limitations .................................................................................................................................84 Recommendations for Practitioners ...........................................................................................85 Recommendations for Casa Pellas .............................................................................................85 Recommendations for Future Research .....................................................................................86. REFERENCES......................................................................................................... 88 APPENDIX A: QUESTIONNAIRE USED IN THE MAIN STUDY .................... 94 APPENDIX B: SCATTERPLOT SHOWING LINEARITY ................................ 106 APPENDIX C: RESIDUAL PLOT SHOWING HOMOSCEDASTICY ............. 107 APPENDIX D: HISTOGRAM AND P-P PLOT SHOWING NORMALITY ..... 108. III.

(7) LIST OF TABLES Table 2.1 Review of Leadership Theory……………………………………………………. 8 Table 2.2 Summary of Approaches to the Formation of Organizational Climate………... 13 Table 3.1 Summary of Instruments………………………………………………………... 36 Table 3.2 Transformational Leadership Construct/Code ………………………………... 37 Table 3.3 Psychological Empowerment Construct/Code ………………………………... 38 Table 3.4 Climate for Innovation Construct/Code ………………………………………... 39 Table 3.5 Innovation Construct/Code ………………………………………………….... 40. Table 3.6 Business Performance Construct/Code ………………………………………... 41 Table 3.7 Previously Established Reliability……………………………………………... 42 Table 3.8 KMO and Barlett’s test of Sphericity values…………………………………... 47 Table 3.9 Factor Loadings EFA…………………………………………………………... 48 Table 3.10 Reliability Test………………………………………………………………... 51 Table 3.11 Reason for Dropping Items…………………………………………………... 52 Table 3.12 Relibility Test Main Study………………………………………………….... 52. Table 4.1 Comparing Sampling and Population Characteristics……………………….... 54. Table 4.2 Sample Characteristics Based on Demographic Variables ………………….... 55. Table 4.3 Transformational Leadership by Mean and Standard Deviation ……………... 57 Table 4.4 Empowerment by Mean and Standard Deviation ……………………………... 60 Table 4.5 Climate for Innovation by Mean and Standard Deviation ……………………... 61 Table 4.6 Innovation by Mean and Standard Deviation ……………………………….... 63. Table 4.7 Business Performance by Mean and Standard Deviation ……………………... 65 Table 4.8 Correlation Analysis …………………………………………………………... 67 Table 4.9 Residuals Statistics ………………………………………………………….... 69. Table 4.10 Measurement Model Results……………………………………………….... 70. Table 4.11 PLS Loadings ………………………………………………………………... 70 Table 4.12 PLS Path Analysis …………………………………………………………... 74 Table 4.13 Research Hypothesis Results ………………………………………………... 76. IV.

(8) LIST OF FIGURES Figure 2.1 Jung, Chow & Wu Model …………………………..………………………. 21. Figure 2.2 Han, Kim & Srivastava Model ……..…………………………………….…. 22. Figure 2.3 Lopez & Meroño Model …….….………………………………………….… 23 Figure 2.4 Howell & Avolio Model …..…..…..…..…………………………………….… 24 Figure 3.1 Integrated new Model of Transformational Leadership Behaviors, Empowerment, Climate for Innovation, Innovation Performance and Business Performance…………….. 27 Figure 3.2 Research Process and Timeline….…………………………………………... 31. Figure 4.1 PLS Structural Model (TECIP Model)……………………………………….. 75. V.

(9) CHAPTER I INTRODUCTION 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 1.

(10) 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.. 2.

(11) 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.. 3.

(12) . 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.. 4.

(13) 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.. 5.

(14) 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, selfdetermination, 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. 6.

(15) “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.. 7.

(16) CHAPTER II LITERATURE REVIEW This chapter presents a brief review of the literature that is relevant to making a case for this thesis. The chapter offers an overview of the definitions used in this research, and then describes the relations between variables, then proceeds to describe previous research that has been done on transformational leadership and innovation. Finally the chapter describes the organizational context in which this study was conducted.. Leadership Theories The old paradigms focus primarily on the more traditional, individualistic views of the leader, based on identifying the key characteristics of successful leaders, the. task-. oriented or relations-oriented leadership, directive or participative leadership, and autocratic or democratic leadership and related exchange theories of leadership ignored effects on leader-follower relations of the sharing of vision, symbolism, imaging, and sacrifice (Bass, 1997). However during 1980s and 1990s a substantial number of leadership researchers shift to studying new types of styles. Bolden, Gosling, Marturano and Dennison (2003) highlight some of the theories of leadership and its approach as shown below: Table 2.1. Review of Leadership Theory Theory Great Man. Approach Based on the belief that leaders are exceptional people, born with innate. Theories. qualities, destined to lead. The use of the term 'man' was intentional since until the latter part of the twentieth century leadership was thought of as a concept which is primarily male, military and Western. This led to the next school of trait.. Trait Theories. The lists of traits or qualities associated with leadership exist in abundance and continue to be produced. They draw on virtually all the adjectives in the dictionary which describe some positive or virtuous human attribute, from ambition to zest for life.. Behaviourist. These concentrate on what leaders actually do rather than on their. Theories. qualities Different patterns of behavior are observed and categorized as 'styles of leadership'. This area has probably attracted most attention from practicing managers. (continued). 8.

(17) Table 2.1. (continued) Theory Situational. Approach This approach sees leadership as specific to the situation in which it is. Leadership. being exercised. For example, whilst some situations may require an autocratic style, others may need a more participative approach. It also proposes that there may be differences in required leadership styles at different levels in the same organization.. Contingency. This is a refinement of the situational viewpoint and focuses on. Theory. identifying the situational variables which best predict the most appropriate or effective leadership style to fit the particular circumstances.. Transactional. This approach emphasizes the importance of the relationship between. Theory. leader and followers, focusing on the mutual benefits derived from a form of 'contract' through which the leader delivers such things as rewards or recognition in return for the commitment or loyalty of the followers.. Transformational. The central concept here is change and the role of leadership in. Theory. envisioning. and. implementing. the. transformation. of. business. performance. Note. Adapted from “A review of leadership theory and competency frameworks,” by R. Bolden, J. Gosling, A. Marturano and P. Dennison. 2003, Centre for Leadership Studies Exeter. Report for Chase Consulting and the Management Standards Centre, Centre for Leadership Studies, University of Exeter, UK.. Due to the purpose of this research is to predict business performance from an effective leadership style, other work environment variables, and innovation; this research chooses to use transformational leadership approach by Bass (1985, 1998) to conduct the study. A central thesis of Bass's (1985) theory is that transformational leadership goes beyond exchanging inducements for desired performance by developing, intellectually stimulating, and inspiring followers to transcend their own self-interests for a higher collective purpose, mission, or vision. Bass (1985) asserted that transformational leadership would result in followers performing beyond expected levels of performance as a consequence of the leader's. 9.

(18) influence. Specifically, followers' level of extra effort may be due, in part, to their commitment to the leader, their intrinsic work motivation, their level of development, or the sense of purpose or mission that drives them to excel beyond the standard limits.. Transformational Leadership The more recent work on leadership emphasized that effective leaders inspire their followers and nurture their ability to contribute to the organization (Eagly, JohannesenSchmidt, & Van Engen, 2003). This paradigm initially emerged in Burns (1978) evolving a type of leadership that he labeled transformational. Subsequently elaborated by Bass (1985, 1998), transformational leadership involves establishing oneself as a role model by gaining the trust and confidence of followers, such leaders state future goals and develop plans to achieve them, skeptical of the status quo, they innovate, even when the organization that they lead is generally successful. Transformational leaders encourage their follower to develop their full potential and thereby to contribute more capably to their organization, by mentoring and empowering them (Eagly, Johannesen, & Van, 2003). Transformational leaders optimize the interaction between members of the organization via setting an example for subordinates and concerns of their subordinates (Xu & Wang, 2008). The transformational leader motivates followers to do more than originally expected. Such a transformation can be achieved by (a) raising an awareness of the importance and value of designated outcomes, (b) getting followers to transcend their own self-interests, or (c) altering or expanding followers' needs on Maslow's hierarchy of needs (Hater & Bass, 1988). In Bass model of leadership, four dimensions comprise transformational leadership behavior (Bass & Avolio, 1993) including Individualized Consideration, Intellectual Stimulation, Inspirational Motivation, and Idealized Influence.. Individualized Consideration Individualized Consideration (IC) is the first of the ‘‘transformational’’ styles. The IC leader demonstrates concern for their followers, treats them as individuals, gets to know them well and listens to both their concerns and ideas, by using individualized consideration, the leaders deal with others as individuals and understand that each individual has different needs, abilities, aspirations and requires personal attention, builds a one-to-one relationship with his or her followers, and understands and considers their differing needs, skills, and aspirations.. 10.

(19) Intellectual Stimulation Intellectual Stimulation (IS) essentially involves the leader stimulating the followers to think through issues and problems for themselves and thus, to develop their own abilities. By using intellectual stimulation, leaders know that creativity, knowledge creation, and continuous improvement, and elevates the interests of his or her employees (Bass, 1990b), and stimulates followers to think about old problems in new ways (Bass, 1985). Intellectual stimulation is generally associated with encouraging subordinates to think about problems in different angles, which should be of particular importance in private organizations seeking competitive advantage (Lowe, Kroeck, & Sivasubramaniam, 1996).. Inspirational Motivation The inspirationally Motivating (IM) leader has the ability to motivate the followers to superior performance. Such leaders tend to be able to articulate, in an exciting and compelling manner, a vision of the future that the followers are able to accept and strive towards. Such leaders can also often succeed in elevating the expectations of followers so that they achieve more then they, or others, thought they could do. By using inspirational motivation, the leader communicates a vision with fluency and confidence in a compelling manner, shows the followers how to achieve the goals, and has the ability to motivate the followers to outstanding performance.. Idealized Influence The final transformational style refers to the leader who has become an idealized influence (II) or ‘‘role model’’ for those around them. Such leaders are regarded as a role model either because they exhibit certain personal characteristics, attitudes or ‘‘charisma’’ or because they demonstrate certain moral behaviors. Such leaders are often seen as being high on morality, trust, integrity, honesty and purpose. By using Idealized Influence, the leader inspires admiration, trust, respect, and loyalty, and emphasizes the importance of having a purpose, commitment, values and collective sense of mission. The idealized influence is divided into idealized attributes and idealized behaviors.. 11.

(20) Empowerment Empowerment has been defined by different authors throughout the years and some writers on the concept had similar views on what empowerment is although other explains it slightly different. There are two major approaches of empowerment, one refers to empowerment as behavior of a supervisor who empowers his/her followers and the other refers to the psychological state of a subordinate resulting from his/her supervisor’s empowering as suggested by Lee and Koh (2001). Conger and Kanungo (1988) defined empowerment as a process of enhancing the feelings of self-efficacy among organizational members, which would also include that the employees perceive themselves to be empowered. On the other hand Brymer (1991) defined empowerment as the process of decentralizing decision-making in an organization, by means of which managers give more discretion and autonomy specific employees. Additionally, it is shown that empowering employees involves helping them take ownership of their jobs so that they take personal interest in improving the performance of the organization (Byham & Cox, 1992). Thomas and Velthouse (1990) emphasized that psychological empowerment is multifaceted and cannot be fully explained by one concept like explained by Conger and Kanungo (1988). Thomas and Velthouse (1990) explained empowerment to be influenced by two personality traits and two aspects from the work context. Thomas and Velthouse (1990) defined psychological empowerment as four cognitions reflecting an employee’s orientations towards his/her job namely meaningfulness, competence, impact and self determination. Meaningfulness: Meaningfulness is the value of a work goal or purpose, judged in relation to an individual's own ideals or standards (Thomas & Velthouse, 1990). Competence: Competence, or self-efficacy, is an individual's belief in his or her capability to perform their work and activities with skill (Gist, 1987). Self-determination: Where competence is a mastery of behavior, self-determination is an individual's sense of having choice in initiating and regulating actions (Deci, Connell, & Ryan, 1989). Self-determination reflects autonomy in the initiation and continuation of work behaviors and processes; examples are making decisions about work methods, pace, and effort. Impact: Impact is the degree to which an individual can influence strategic, administrative, or operating outcomes at work (Ashforth, 1989). Ability of employees has to affect organizational outcomes.. 12.

(21) Climate for Innovation Before providing previous definitions of Climate for innovation and in order to obtain a better understanding, it is presented a summary of approaches of organizational climate by Moran and Volkwein (1992) who highlight some of the approaches taken from literature on climate as shown below, they grouped the concept into four general categories, the structural, the perceptual, the interactive and the cultural approach. Table 2.2. Summary of Approaches to the Formation of Organizational Climate Representative researchers and main influences. Approach. Description. Structural. Climate is regarded as an objective manifestation of the organization's structure. It forms because members are exposed to common structural Guion (1973), Indik (1965), characteristics of an organization. As a result of Inkson et al.(1970), Payne this exposure, they have similar perceptions.. and Pugh (1976). These similar perceptions represent their own organization's climate Perceptual. The basis for the formation of climate is within the individual. Acknowledges that individuals respond to situational variables in a manner that is psychologically meaninful to them. Climate is a psychological. processed. description. of. organizational conditions. Interactive Basic contention is that the interaction of. James et al.(1978), James and Jones (1974), Joyce and Slocum (1982, 1984), Scheder and Reichers (1983) Blumer (1969), Joyce and. individuals in responding to their situation brings Slocum (1979), Poole and forth the shared agreement which is the basis of McPhee (1983), Schneider organizational climate.. and Reichers (1983), Terborg (1981). (continued). 13.

(22) Table 2.2. (continued) Approach. Cultural. Description. Representative researchers and main influences Organizational climate is created by a group of Allaire and Firsirotu interacting individuals who share a common, (1984), Ashforth (1985), abstract frame of reference, i.e., the organization's Berger. and. culture as they come to terms with situational (1967),. Clark. contingencies.. Luckman (1972),. Geertz. (1973),. Goodenough. (1971),. Keesing (1974), McPhee (1985), Selznick (1957) Note. Adapted from “The cultural approach to the formation of organizational climate,” by E. Moran and J. Volkwein. 1992, Human relations, 45(1), 19-47.. This study will adopt the cultural approach, because when an organizational culture values initiative and innovative approaches, the tendency of employees to take risks, be creative and obtain satisfaction from their work, is higher. Schneider (1975) suggested that there are many types of climates, and it would be meaningless to speak of organizational climate without attaching a referent. According to Mumford, Scott, Gaddis and Strange (2002), organizational climate and culture represent collective social construction, over which leaders have substantial control and influence. This study will adopt 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". According to Scott and Bruce (1994), the scale to measure climate for innovation has two factors: support for innovation and supply of resources. Support for innovation: the extent to which an organization is open to change, open to diversity, and supportive of innovative ideas. Supply of Resources: this factor examines the adequacy of the resources in the organization.. 14.

(23) Innovation In simple terms Neely and Hii (1998) defined innovation as involving the exploitation of new ideas and they classified innovation into product innovation and process innovation. Drucker (1985) recognized that innovation was a particular tool with a purpose to competitive success for companies. Amabile, Conti, Coon, Lazenby and Herron (1996) defined innovation as the successful implementation of creative ideas within an organization. Afuah (2003) defined innovation as being used to practice new knowledge in order to provide new products and services for customers. In this study, innovation is defined as how well a firm innovatively performed in terms of the extent of new service, process and organizational development (Simsek, 2002). Previous studies have categorized innovation from different perspectives. This categorization can be the innovative degree perspective, such as radical or incremental innovation and the administrative angle, such as administrative innovation or technical innovation. Due to the fact that the dominant approach of innovation, within the targeted organization is more related to intangible products, this research chooses to use Chacke’s categorization to conduct the analysis. Discussion of the three different types of innovation based on the decomposition by Chacke (1988) is provided, which are process innovation, organizational innovation, and technical innovation. Process Innovation:. Process innovation can be view as the introduction of a new or. significantly improved method for the production or delivery of output that adds value to the organization. The term process refers to an interrelated set of activities designed to transform inputs into specified output for the customer. It implies a strong emphasis on how work is done within an organization rather than what an organization does (Davenport, 1993). Innovation not only comes from Research and Development department, administration, sales, customer services also have opportunities to innovate in performing their value-adding activities. Process innovation has resulted in organizational improvements such as lower stock levels, faster, more agile manufacturing processes, and more responsive logistics. Organizational Innovation: Organizational innovation is the creation of valuable and useful new services within an organizational context (Woodman, Sawyer, & Griffin, 1993). Organizational innovation is more related to administrative innovation. Organizational innovation was defined as the outcome of the innovation adopting process, in which organizational learning took a significant part (Damanpour, 1991; Lund & Gjerding, 1996).. 15.

(24) Technical Innovation: Technical innovation refers to improve products. According to Damanpour (2001), product innovations are new products or services introduced to meet an external and market need, whereas process innovations are new elements introduced into an organization’s production or service operations, such as input materials, task specifications, work and information flow mechanisms, and equipment used to produce a product or render a service.. Business Performance The fundamental purpose of every business enterprise is to consistently outperform the competition and deliver sustained, superior returns to the owners while satisfying other stakeholders. Various models and evaluation criteria of business performance have been suggested by researcher, such as the goal attainment model (Price, 1972), the system resource model (Yuchtman & Seashore, 1967), 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 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). This study adopted the definition by Elenkov (2002), he defined business performance represented the degree to which a company achieved its business objectives. Due to the complexity of the construct, however, there is no generally accepted model or conclusive evidence for a single best measure or a single set of measures of performance. Consequently business performance may be manifested in multiple components and there are two major ways to measure performance, the subjective measure (based on perceptions) and objectives measures such as sales volume, profitability, return on investment (ROI), stock price, earning per share (EPS), sales or revenue growth, return on sales (ROS) return on assets (ROA) as well as broader operational measures such as market share and number of new products. In this study, business performance was formulated in five components to be assessed: sales, market share, operating income, profit, and return on assets. 16.

(25) Those components (sales, market share, profit, ROA, Operating income) were chosen because they reflect goal attainment and resource acquisition. ROA is the most common measure of firm performance in management research (Gomez, Mejia & Palich,1997).. Relationship between the Variables Transformational Leadership and Innovation Numerous writers have implicated leadership as critical in the innovation process. The results of Howell and Higgins (1990) study demonstrated that transformational leadership can be empirically linked to the promotion of innovation in organizations. Those leaders can affect subordinate creativity and organizational innovation in several ways. By articulating a vision that emphasizes long-term over short-term business outcomes (e.g., growth and value rather than quarterly profit), leaders can direct employees’ individual and joint efforts towards innovative work processes and outcomes (Amabile, 1996). Transformational leaders enhance innovation within the organization and they have a tendency into organizations to innovate, frequently promote creative ideas within their organizations, reflecting their “championing role” of transformational leaders (Howell & Higgins, 1990). Elkin and Keller (2003) identified inspirational motivation and intellectual stimulation as critical for organizational innovation. According to Mouly and Sankaran (2002) leaders may do much to encourage innovation by taking actions that encourage intellectual engagement and role-modeling engagement (Ensor, Cottam, Band, 2001; McGourty, Tarshis, Dominick, 1996).. Transformational Leadership and Empowerment Transformational leaders create a work environment where subordinates feel empowered to seek innovative approaches to perform their job. Avolio and Gibbons (1988) have gone so far as to argue that a major goal of transformational leaders is to develop followers’ self-management and self-development skills by allowing them to make and implement actions without direct supervision or intervention. An effective leader empowers team members by ensuring they have the authority to implement policies and by supporting members' decisions. Empowerment also involves creating a climate oftrust, respect, open communication and cooperation which facilitates a cooperative, participative group climate (Conger & Kanungo, 1988b). Jung (2001), argued that transformational leader’s encouragement for innovative ideas and a participative decision making process through. 17.

(26) empowerment is an important reason for creativity among followers. Moreover, opposite actions to give employees autonomy can be unfavorable, according to Amabile (1996) who found strict control by upper management as one of the main elements that can undermine creativity and in the same study, it was found that autonomy or freedom is an important determinant of organizational creativity because individuals produce more creative work when they perceive more personal control over how to accomplish given tasks.. Transformational Leadership and Climate for Innovation Several studies have provided evidence that an organization’s or group’s climate for innovation is an important determinant of innovation. Researchers believed that innovation competency are connected to organizational culture and leaders’ perceptions (Delmas, 2002). Organizations in which there is a stronger support for innovation and risk taking may be more conducive to transformational leadership and they could show better performance results than organizations that are too orderly and rigidly structured (Elenkov, 2002). Consequently, the level of support for innovation would be expected to moderate the impact of transformational leadership on performance (Howell & Avolio, 1993). The role of transformational leaders in creating a climate for innovation is determinant, by using their behaviors and attributes, and they may serve as a “key filter in the interpretations that provide the basis for subordinates’ climate perceptions” (Kozlowski & Doherty, 1989, p. 547).. Climate for innovation and Innovation Performance According to Scott and Bruce (1994), organizational climate is an important factor for creativity; employees' perceptions of the extent to which creativity is encouraged at the workplace, and the extent to which organizational resources are allocated to support creative performance. Mumford and Gustafon (1988) have suggested that organizational innovation also depends on whether the organization has environmental variables playing critical roles that supports innovation: ‘‘Even when individuals have developed the capacity for innovation, their willingness to undertake productive efforts may be conditioned by beliefs concerning the consequences of such actions in a given environment”. Similarly, Amabile et al. (1996) found strong positive relations between several organizational environmental variables such as organizational encouragement and work-group support for innovation and employees’ creativity. When an organizational culture values initiative and innovative approaches,. 18.

(27) employees are more likely to take calculated risks, accept challenging assignments (Jung, Chow, & Wu, 2003).. Innovation Performance and Business Performance Reichheld (2003) identified innovation as an element which plays a role in driving a company’s growth in terms of economic or industry expansion. According to Drucker (1988), innovation can be viewed as purposeful and focused effort to achieve change in (an organization’s) economic or social potential. Bottom line growth can occur in a number of ways, such as better service quality and shorter lead times in nonprofit organization and cost reduction, cost avoidance, and increased turnover in profit focused organizations (O'Sullivan & Dooley, 2008). Subramanian and Nilakanta (1996) found that technical innovativeness would be associated with organizational effectiveness. The results of Subramanian and Nilakanta (1996) indicated that technical innovativeness is directly associated with both return on assets (organizational efficiency) and deposits share (organizational effectiveness). Innovation enhances business performance because the product of innovation increases firm competitiveness and the process of innovation transforms a firm’s internal capabilities making it more adaptive to change (Neely & Hii, 1998). Subramanian and Nilakanta (1996) found that administrative innovativeness leads to significant improvements in organizational efficiency and, on the other hand, technical innovativeness, improves organizational efficiency and effectiveness. Innovation is a concept central to economic growth and can be a source of sustained competitive advantage to firms (Tushman, Anderson, & O’Reilly, 1997). Porter (2008) identified two main generic strategies that companies use to achieve and sustain competitive advantage as differentiation and low cost. Through differentiation the companies provide superior value to customers from sources such as exceptional product quality, unique product features, rapid innovation or high quality service. Through low cost the companies produce their products or services more efficiently than the competitors.. 19.

(28) Previous Empirical Studies of Transformational Leadership and Organizational Innovation In order to look at an integrative model of Transformational Leadership, previous empirical studies first were considered.. Jung, Chow & Wu Model of Transformational Leadership, Innovative Organizational Climate and Firm Innovation In their 2003 paper entitled “The role of transformational leadership in enhancing Organizational innovation: Hypotheses and some preliminary findings” Jung, Chow and Wu (2003), developed one model which examined how transformational leadership is associated with innovative organizational climate and firm innovation from a macrolevel perspective with multisource data collection. Their study proposes hypotheses about how top manager’s leadership styles directly and indirectly (via empowerment and organizational climate) affect their companies innovation (Jung et al., 2003). The researcher will begin this section by outlining the process by which Jung et al., 2003 developed their model for transformational leadership. They began by providing an overview of the relevant literature as the basis for specifying their hypotheses. They proposed relationship between (i) transformational leadership and organizational innovation; (ii) transformational leadership and empowerment; (iii) transformational leadership and support for innovation. Jung et al., (2003) tested their theoretical framework using data collected of thirty two Taiwanese companies from the electronics and telecommunications industry.. 20.

(29) This conceptual model was then turned into the following framework:. Empowerment H2a H3a. Transformational Leadership. Organizational Innovation. H1.  . R & D expenditure Number of patents obtained. H3b H2b. Support for innovation. Figure 2.1. Jung, Chow, & Wu (2003) Model. Adapted from “The role of transformational leadership in enhancing Organizational innovation: Hypotheses and some preliminary findings” by D. Jung, C. Chow, & A. Wu, 2003, The Leadership Quarterly, 14(4), p. 525-544. Copyright 2003 by Elsevier Inc.. In synthesizing, Jung et al., (2003) study found a direct and positive relationship exists between transformational leadership and organizational innovation, they also found that transformational leadership has significant and positive relations with both empowerment and support for innovation, however they found that the link between empowerment and organizational innovation was negative rather than positive, while support for innovation and organizational innovation had a significant and positive relationship. The researcher tried to explain this unexpected finding, by explaining their sample companies had come from Taiwan, where cultural values are relatively high in power distance. Moreover, this research intent to address one limitation stated in this study which said “attention should be devoted to expanding and refining measurement of the dependent variable” (Jung, Chow & Wu, 2003, p.540). This thesis used the instrument developed by Tzeng and Shih (2009). This thesis intent to evaluate a more complete picture, which enhance Jung et al., 2003 Model and present not only the relationship of transformational leadership with Innovation but also the final relationship with business performance. Therefore, after doing the initial investigation on the original model this research investigates in previous studies relationship between innovation performance and business performance as a final outcome.. 21.

(30) Han, Kim, Srivastava Model of Market Orientation, Organization Innovation and Organizational Performance In their 1998 paper entitled “Market orientation and organizational performance: is innovation a missing link?” Han, Kim and Srivastava, (1998), examined how three components of market orientation (customer orientation, competitor orientation and interfunctional coordination) affect the two core components of organizational innovativeness (technical versus administrative) and the final impact on corporate performance. This conceptual model was then turned into the following framework:. Figure 2.2. Han, Kim & Srivastava, (1998) Model. Adapted from “Market orientation and organizational performance: is innovation a missing link?” by J. Han, N. Kim and R. Srivastava, 1998, The Journal of Marketing, 62(4), p. 30-45. Copyright 1998 by American Marketing Association.. The study investigated the meditational role of innovation between market oriented corporate culture and organizational performance. They assessed firstly, market orientation on performance and secondly, innovativeness on performance, separately. The results regarding the market orientation on performance were positive but nonsignificant. Since the objective of this research is to evaluate the relationship between organizational innovation and performance, in Han, Kim and Srivastava, (1998) study the findings regarding this relationship were “Technical and administrative innovations have a positive and direct impact on performance” ( p.40).. 22.

(31) López, Meroño Model of Knowledge Management Strategies, Firm Innovation and Corporate Performance In their 2011 paper entitled “Strategic knowledge management, innovation and performance” López and Meroño, (2011), examined the consequences of knowledge management strategies on firm’s innovation and the final impact on corporate performance. This conceptual model was then turned into the following framework:. Figure 2.3. López, & Meroño, (2011) Model. Adapted from “Strategic Knowledge management, innovation and performance” by C. López, and A. Meroño, (2011), International journal of information management, 31(6), p. 502-509. Copyright 2011 by Elsevier Ltd.. The study conducted in 310 organizations, investigated the consequences knowledge management (codification and personalization) has on innovation and corporate performance. Their results showed that both strategies (codification and personalization) impacts on innovation and organizational performance directly and indirectly. Again, since the objective of this research is to evaluate the relationship between organizational innovation and business performance, in López and Meroño (2011) study the findings regarding this relationship were “A positive impact of innovation on performance (financial, process and internal) has been found” (p.507).. 23.

(32) Howell and Avolio Model of Leadership, Locus of Control, Support for Innovation, Consolidated Unit Performance In their 1993 paper entitled “Transformational Leadership, Transactional Leadership, Locus of Control, and Support for Innovation: Key Predictors of Consolidated-Business-Unit Performance” Howell and Avolio (1993), examined the relationship of transformational and transactional leadership to business unit performance over 1-year period, including key personality characteristics of the leader (locus of control) while considering the level of support for innovation in the work unit as moderator. The sample included 78 managers representing the top four levels in a large Canadian financial institution. Their study proposed five hypotheses to test the paths between each leadership style behavior (transformational and transactional) predicted simultaneously unit performance over a 1 year interval. Moderator. Support for innovation(H4) Support for creativity Tolerance of differences Risk taking Mediator. Locus of Control (H5). Transformational Leadership Charisma (H3a) Intellectual Stimulation (H3b) Indiv. Consideration (H3c). Business Unit Performance . Percentage of goals met in the unit.. Transactional Leadership Manag. by exception active (-H1a) Manag. by exception passive (-H1b) Contingent reward (+H2). Figure 2.4. Howell & Avolio (1993) Model. Adapted from “Transformational leadership, Transactional Leadership, Locus of Control, and Support for innovation: Key Predictors of Consolidated-Business-Unit Performance” by J. Howell and B. Avolio, 1993, The American Psychological Association, 78(6), p. 891-902. Copyright 1993 by the American Psychological Association, Inc.. Results of transformational leadership style, which is the focus of our study, revealed that three transformational-leadership measures (individualized consideration, intellectual stimulation and charisma) were associated with a higher internal locus of control and significantly and positively predicted business unit performance over a 1-year interval.. 24.

(33) Likewise, the level of support for innovation moderated the relationship between the three mentioned transformational leadership behaviors and unit performance within the business unit. Additionally, the dimension of transactional leadership (Management by exception active and passive), including contingent reward were negatively to business performance over the same period of time.. Organizational Case Casa Pellas After presenting previous empirical research, now turn our attention to the case organization. Casa Pellas can be described from the following excerpt; Casa Pellas is a solid, diversified and prestigious, business consortium, with more than one hundred years of existence. Currently Casa Pellas is market leader in sales, of most of the products they distribute. Casa Pellas has 15 major lines of Business, is the representative of Toyota, Lexus, Suzuki, Hino, and Yamaha in Nicaragua, they also have rent a car services including, dollar rent a car, thrifty car and Toyota rent a car. Likewise, Casa Pellas has a department of industrial equipment that has the objective to give solutions to the industrial sector of Nicaragua; this department includes equipment for construction as well as different type of heavy equipment that could be utilized in these types of projects. In recent years the group has expanded in different areas by acquiring companies such as Microtec, Alpesa, Capesa and is demonstrating their strategy of integrating innovation in their structure. Casa Pellas has 15 branches in Nicaragua: Plaza Espana, Acahualinca, Altamira, Sucursal Norte, Microtec, Leon, Chinandega, Granada, Rivas, Esteli, Matagalpa, Jinotega, Puerto Cabezas, Bluefields and Taller de Motos. As of January 2014, Casa Pellas comprised was 945 employees, and 83 senior and middle managers at a national level. This organization was selected for this study for two reasons. Firstly, Casa Pellas has been recognized as a leading company in the business and social development in Nicaragua. They develop all necessary initiative to maintain their leadership and further strengthen it to enhance their market share. Casa Pellas is one of the oldest and most successful companies, with more than 100 years of existence, and this suggested that they are fully established with a stable executive leadership structure in place; Casa Pellas’s vision stated “To be the Nicaraguan business group leader in sales, satisfaction and development of our clients, committed to social responsibility.”. 25.

(34) Secondly, Casa Pellas strongly believe that innovation is a key to maintain excellence; they have been singled out as ones in which employees are constantly challenged to be creative, and continuously opening to new ideas and encourage sharing them as seen on the website where a link is available to “Propose an Innovation”, also they foster an active innovation program among customer through this website where customers can contribute and vote for new innovations.. 26.

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(36) CHAPTER III METHODOLOGY This chapter outlines the methodology. The chapter contains the Research Framework, Hypothesis, research procedure, data collection, instrumentation, reliability and validity of instruments and data analysis.. Research Framework Based on the literature review, the adopted and subsequently modified framework of perceived transformational leadership behaviors, perceived empowerment of employees, perceived climate for innovation, perceived unit innovation and perceived business performance (TECIP) shown in Figure 3.1 was used to address the purposes of the study. The TECIP model was modified by Cheng-Ping Shih, Ph. D and Olga Peña Orochena. The framework shows the hypothesis being tested and the variables under study. This framework was adopted and represents the modifications made to Jung et al. (2003) Model. Perception of Empowerment H2a. Perception of Transformational Leadership    .    . Meaning Competence Self Determination Impact. Perception of Innovation. H1. Individualized Consideration Intellectual Stimulation Inspirational Motivation Idealized Influence H2b. H3b. Perception of Climate for Innovation  . Perception of. H3a.  . Process Innovation Organizational Innovation. . Technical Innovation. H4     . Business Performance Sales Market Share Operating Income Profit Return on Assets. Support for Innovation Supply for resources. Figure 3.1 Integrated model of transformational leadership, empowerment, climate for innovation, innovation and business performance (TECIP Model). Adapted from “The role of transformational leadership in enhancing organizational innovation: Hypotheses and some preliminary findings” by D. Jung, C. Chow and A. Wu, 2003, The Leadership Quarterly, 14(4), p. 525-544. Copyright 2003 by Elsevier Inc.. Few researchers have attempted to create an integrated model of transformational leadership, organizational climate’s elements, innovation performance and business performance. The major differences between Jung et al. (2003) Model and TECIP model are:. 28.

(37) 1. The TECIP Model proposes the introduction of business performance outcome, into Jung, Chow & Wu’s original framework. Since business performance is the core objective of every firm, the researcher intents to present a more complete picture of interrelationship among these variables. 2. The variable organizational innovation is measured with a different instrument used in Jung, Chow and Wu’s study. Two reasons are presented: firstly, the present research intent to address one limitation stated in their study which was that “attention should be devoted to expanding and refining measurement of the dependent variable” (Jung, Chow & Wu, 2003, p.540); and secondly, because the dominant approach to innovation within the targeted industry, which the organization belongs to, is more related to intangible products, there are no patents obtained.. Hypotheses Based on the framework presented in Figure 3.1 and the research questions, the following hypotheses were posited:. H1: Perceived transformational leadership behaviors are positively related to the three aspects of perceived innovation performance. H2: Perceived transformational leadership behaviors are positively related to employees’ perceptions of (a) empowerment and (b) climate for innovation. H3: Employees’ perceptions of (a) empowerment and (b) climate for innovation have a positive relationship with the three aspects of innovation performance.. H4: Perceived innovation performance is positively related to the five aspects of business performance.. 29.

(38) Research Procedures A research procedure has been outlined in order to have a direction for this study. 1. Review of Literature: A literature review of transformational leadership, empowerment, support for innovation, innovation, and business performance was conducted in order to understand the relationship between these concepts. Literature Jung et al. (2003) model was collected. 2. Identify Research Questions and Hypothesis: Based on the purposes developed for this research and the literature review, four major guiding research questions were identified and four hypotheses based on these research questions were developed. 3. Develop Framework of Study: Based on previous work done by Jung, Chow and Wu (2003) and some limitations of their model, a new model was developed. This model enhanced Jung, Chow and Wu (2003) model by adding the outcome variable, business performance. This model is shown in section research framework of chapter three. 4. Choose Research Method for Study: This research design was based on a non experimental, quantitative, survey approach. Justification for this approach is given in the research approach section of this paper. 5. Instrument Development: The section below Instrument development details each instrument was adopted in this study. 6. Translation of Instrument: The initial instrument was translated by one native speaker of Spanish and then it was back translating into English by two others independent professional who were themselves proficiency in English. 7. Identify Research Subjects: During the course of the development of the major purposes of this study, a suitable research case was sought. 8. Conduct a Pilot Study: A pilot study was conducted using a random sample of 40 participants to determine whether the survey instrument was able to capture the information for which it was designed. 9. Adjust Survey Instrument and conduct main study: The questionnaire was adjusted based on the initial results of the internal consistency and validity of the instrument. The instrument was revised by one expert Human Resource practitioner. 30.

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