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Organizational Dynamics, Vol. 38, No. 1, pp. 64–72, 2009 2008 Elsevier Inc. All rights reserved. www.elsevier.com/locate/orgdyn

Organizational Dynamics, Vol. 38, No. 1, pp. 64–72, 2009 2008 Elsevier Inc. All rights reserved. www.elsevier.com/locate/orgdyn10.1016/j.orgdyn.2008.10.005 The Influence of Leadership on Innovation Processes and Activities ADEGOKE OKE NATASHA MUNSHI FRED O. WALUMBWA INTRODUCTION In the August 1, 2005 issue, Business Week magazine reported that due to the emergence of low cost econo- mies of Eastern Europe and Asia as the preferred locations for sourcing knowledge related activities (such as digitized analytic work and manufacturing), the focus of U.S. corporations is shifting from the knowledge economy to what is being referred to as the creativity economy. As a result of the increasing commoditization of knowledge, the creativity econ- omy represents a change in paradigm – where the focus of competition will be on creativity, imagination and innovation. Leading through innovation in a crea- tivity economy appears to be the only way (at least for the moment) that U.S. corporations and western cor- porations as a whole can gain and sustain competitive advantage. In a survey of over 900 senior executives by Boston Consulting Group Inc, innovation was identi- fied as key to driving top-line revenue. This is evi- denced in how different types of innovations have transformed many corporations. For example, the suc- cess of the BlackBerry transformed an otherwise unknown company, Research in Motion. Apple Com- puter Inc.’s iPod, a huge success that integrates tech- nological, business model and branding innovations, became a high revenue earner for Apple. Another example is the process innovation of Southwest Airlines Co. that has enabled it to become a highly successful low cost airline. Procter & Gamble Co.’s focus has been on design innovation, which has helped it to transform itself and outperform its industry competitors. Innovation can be seen as representing a change in the status quo and has been defined as involving the discovery of new things and the commercialization of such discoveries. To be innovative, it is not sufficient to be creative and come up with new possibilities and ideas, implementation is a key aspect of the innovation process. Innovation has also been categorized as the discovery of something completely new (often referred to as radical innovations) and an improve- ment effort of something that already exists (often referred to as incremental innovations). James March referred to the two categories as the ‘‘exploration of new possibilities and the exploitation of old certain- ties,’’ respectively. Organizations are constantly required to monitor both their exploitative and exploratory activities in increasingly uncertain and competitive environments. Having the requisite technological or R&D cap- abilities and complementary assets such as market- ing and distribution capabilities are key enablers of innovation. But of paramount importance is having the right type of leadership to drive the innovation process efficiently and effectively. Unique leadership capabilities are the hallmark of firms that are able to manage different types of innovative activities suc- cessfully. Leaders like A.G. Lafley, Procter & Gamble’s chief executive officer (CEO); J.R. Immelt, General Electric Co.’s CEO; Steve Jobs of Apple, and Richard Branson of Virgin Group Ltd. are constantly pushing their organizations to remain at the forefront of innovation. Immelt noted the role of leadership in fostering innovation at GE as the ability to have ‘‘the courage to fund new ideas, lead teams to discover better ideas, and lead people to take more educated risks.’’ In the automotive industry, for instance, we see firms currently juggling societal demands for greener and more fuel-efficient cars with rising costs of managing R&D projects. Such types of challenges require leaders to skilfully transform their organiza- tions into innovative ones. One example of a leader doing just that is Ratan Tata, the chairman of both the Tata Group and Tata Motors since 1993. Tata recently made news headlines by acquiring U.K. based Jaguar and Landrover from Ford Motor Co. in the U.S. What makes this even more newsworthy is that it marks another foray into international waters by the India- based Tata in an industry that is dominated by wes- tern and Japanese carmakers. This high profile sale was well received by the U.K. stakeholder groups who have perceived Tata’s style as nurturing rather than cost cutting. In public, Tata comes across as being quite understated. Tata is widely admired and well respected in the Indian and international business circles and the effect of his leadership style on inno- vation is evident in the company’s successes. For example, Tata’s recent acquisitions come on the heels of his launch of the Tata Nano – the world’s cheapest 64 " id="pdf-obj-0-6" src="pdf-obj-0-6.jpg">

ISSN 0090-2616/$ – see frontmatter

The Influence of Leadership on Innovation Processes and Activities

ADEGOKE OKE

NATASHA MUNSHI

FRED O. WALUMBWA

INTRODUCTION

In the August 1, 2005 issue, Business Week magazine reported that due to the emergence of low cost econo- mies of Eastern Europe and Asia as the preferred locations for sourcing knowledge related activities (such as digitized analytic work and manufacturing), the focus of U.S. corporations is shifting from the knowledge economy to what is being referred to as the creativity economy. As a result of the increasing commoditization of knowledge, the creativity econ- omy represents a change in paradigm – where the focus of competition will be on creativity, imagination and innovation. Leading through innovation in a crea- tivity economy appears to be the only way (at least for the moment) that U.S. corporations and western cor- porations as a whole can gain and sustain competitive advantage. In a survey of over 900 senior executives by Boston Consulting Group Inc, innovation was identi- fied as key to driving top-line revenue. This is evi- denced in how different types of innovations have transformed many corporations. For example, the suc- cess of the BlackBerry transformed an otherwise unknown company, Research in Motion. Apple Com- puter Inc.’s iPod, a huge success that integrates tech- nological, business model and branding innovations, became a high revenue earner for Apple. Another example is the process innovation of Southwest Airlines Co. that has enabled it to become a highly successful low cost airline. Procter & Gamble Co.’s focus has been on design innovation, which has helped it to transform itself and outperform its industry competitors. Innovation can be seen as representing a change in the status quo and has been defined as involving the discovery of new things and the commercialization of such discoveries. To be innovative, it is not sufficient to be creative and come up with new possibilities and ideas, implementation is a key aspect of the innovation process. Innovation has also been categorized as the discovery of something completely new (often referred to as radical innovations) and an improve- ment effort of something that already exists (often referred to as incremental innovations). James March referred to the two categories as the ‘‘exploration of

new possibilities and the exploitation of old certain- ties,’’ respectively. Organizations are constantly required to monitor both their exploitative and exploratory activities in increasingly uncertain and competitive environments. Having the requisite technological or R&D cap- abilities and complementary assets such as market- ing and distribution capabilities are key enablers of innovation. But of paramount importance is having the right type of leadership to drive the innovation process efficiently and effectively. Unique leadership capabilities are the hallmark of firms that are able to manage different types of innovative activities suc- cessfully. Leaders like A.G. Lafley, Procter & Gamble’s chief executive officer (CEO); J.R. Immelt, General Electric Co.’s CEO; Steve Jobs of Apple, and Richard Branson of Virgin Group Ltd. are constantly pushing their organizations to remain at the forefront of innovation. Immelt noted the role of leadership in fostering innovation at GE as the ability to have ‘‘the courage to fund new ideas, lead teams to discover better ideas, and lead people to take more educated risks.’’ In the automotive industry, for instance, we see firms currently juggling societal demands for greener and more fuel-efficient cars with rising costs of managing R&D projects. Such types of challenges require leaders to skilfully transform their organiza- tions into innovative ones. One example of a leader doing just that is Ratan Tata, the chairman of both the Tata Group and Tata Motors since 1993. Tata recently made news headlines by acquiring U.K. based Jaguar and Landrover from Ford Motor Co. in the U.S. What makes this even more newsworthy is that it marks another foray into international waters by the India- based Tata in an industry that is dominated by wes- tern and Japanese carmakers. This high profile sale was well received by the U.K. stakeholder groups who have perceived Tata’s style as nurturing rather than cost cutting. In public, Tata comes across as being quite understated. Tata is widely admired and well respected in the Indian and international business circles and the effect of his leadership style on inno- vation is evident in the company’s successes. For example, Tata’s recent acquisitions come on the heels of his launch of the Tata Nano – the world’s cheapest

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car – which created waves both in its Indian home market and at the Geneva auto show in 2007. It is Tata’s vision and inspirational leadership style that has changed the way the game is played in the auto- motive industry, and his introduction of the Nano as the world’s cheapest car has all the hallmarks of a radical innovation. In spite of the above examples, leading innovation remains one of the most challenging aspects for con- temporary leaders. There have been many studies on leadership and several bodies of work on innovation. Surprisingly, there has been very little done to address the link between leadership and innovation. In this paper, we investigate two different leadership styles focusing on transformational-transactional leadership theory and the underlying linkages between these leadership styles and different innovation processes and activities. Our goal is to demonstrate that different leadership styles may foster distinct innovative processes such as the creative and the implementation processes as well as distinct innovation activities, such as exploitation and exploration. We will also examine how different organizational contexts can affect this link between leadership styles and innovative processes and activ- ities. For example, the types of cultural, formal and informal processes, systems and products or services within an organization could affect the link between leadership and innovation. We aim to shed light on the crucial role that leadership plays in driving innovation in organizations and specifically, to be able to ascribe different leadership styles to the types of innovation processes and activities observed. One potential orga- nizational implication of this work is to recognize and develop appropriate leadership for innovation in a given organizational context.

TRANSFORMATIONAL AND TRANSACTIONAL APPROACHES TO LEADERSHIP

Leadership has been viewed as a social process that takes place in a group context in which the leader influences his or her followers’ behaviors so that desired organizational goals are met. The leader’s role as an influencer of required behaviors may range from being inspirational, motivational and visionary to a role that involves the design of an appropriate orga- nizational context. Bruce Avolio and Bernard Bass referred to these as transformational and transactional leadership styles.

Transformational Leadership

Transformational leadership consists of four dimensions: charisma, or idealized influence; inspira- tional motivation; intellectual stimulation; and indi-

vidualized consideration. Idealized influence involves the extent to which a leader’s followers hold the leader in high regard and seek to identify with him or her. Leaders demonstrating idealized influence act as role models, are admired, respected and trusted. They also consider the needs of others over their own, are con- sistent, share risks with others, and conduct them- selves ethically. Inspirational motivation refers to the extent to which leaders are able to motivate and inspire their followers by identifying new opportu- nities, providing meaning and challenge, and develop- ing and articulating a strong vision for the future. They are also enthusiastic and optimistic, communicate clear and realistic expectations and demonstrate com- mitment to shared visions. Intellectual stimulation refers to the leader’s ability to challenge followers to re-examine some of their assumptions and encourage innovation and creativity through problem reformula- tion, imagination, intellectual curiosity, and novel approaches. Finally, individualized consideration focuses on followers’ individual needs for achieve- ment, development, growth and support. Such leaders also engage in coaching and mentoring, create new learning opportunities and value diversity in their followers. In general, transformational leadership involves binding people around a common purpose through self-reinforcing behaviors that followers gain from successfully achieving a task and from a reliance on intrinsic rewards. Such leaders have been described by Avolio and Bass as change drivers, actively involved in creating an environment and culture that foster change and growth. Mike Krzyzewski, the legendary men’s basketball coach of Duke University, which competes in the U.S. National Collegiate Athletic Asso- ciation (NCAA) Division 1, is a great example of a transformational leader. His dominant leadership style is characterized as individualized, positive and warm, modest, respectful, personable, caring and challenging. He always openly speaks of the importance of sharing information and caring for one another for the good of the team – the hallmark of transformational leader- ship style.

Transactional Leadership

Transactional leadership consists of two broad categories: contingent reward and management by exception. Contingent reward refers to the degree to which the leader clarifies expectations and establishes rewards when followers meet these expectations. Management by exception refers to the degree to which the leader takes corrective immediate or delayed action on the basis of results of leader–fol- lower transactions. In their transactional role, leaders can be seen as organization architects; the focus is on the manner in which leaders undertake key adminis-

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trative coordination tasks, such as organization design, the integration of disparate activities, and the mar- shalling of resources. In general, transactional leadership is defined as emphasizing the transaction or exchange of something of value the leader possesses or controls that the employee wants in return for his/her services. In other words, this leadership style is based on the assumption that followers are motivated through a system of rewards (e.g., quid pro quo) and punishment. For exam- ple, if the employees do something good, they will be rewarded; if employees do something wrong, they will be punished or apprehended. Transactional leaders also operate within the existing culture of the organization to maintain the status quo. Such leaders make sure that employees get the job done and follow the rules of the organization. For example, they give their employees something they want (such as bonuses or resources) in exchange for something the leader desires. Thus, trans- actional leaders are likely to contribute to innovative processes and activities by clarifying what performance standard is required and how needs would be satisfied. Sergio Marchionne has gained prominence as a leader who has created an innovative organizational culture at Fiat. Named European Business Leader of the Year for 2008, Marchionne was responsible for turning Fiat Auto into a profitable unit by introducing smaller cars more in line with current demands for greater fuel efficiency. In a recent Financial Times article, Marchionne was described as a leader who changed the organizational structure and culture of incentives by replacing the old guard with younger blood and setting demanding goals for them. At the same time, he expected the different arms of Fiat to work together to eliminate its debt, thereby leading Fiat to making the highest profits in the company’s lifetime. Marchionne is an example of a transactional leader who has positively influenced innovation performance in his organization. Bob Knight, considered one of the most successful Division 1 college basketball coach in the United States’ NCAA, is a great example of a transactional leader. Indeed, most people would characterize Coach Knight’s leadership style as abrasive, passionately demanding, straightforward, and intimidating – styles often associated with transactional leadership beha- vior. He always openly speaks of his personal values, especially about the importance of respecting one’s elders, or operating within the existing organizational rules or norms. Although transformational and transactional lea- dership are distinct leadership styles, they should be seen as complementary rather than polar opposites. In fact, both are necessary for organizational perfor- mance, and best leaders are both transformational and transactional. Because of the complex nature of organizations and the environments in which organi- zations operate, both styles of leadership may be

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required for positive organization performance. Yet both work in fundamentally different ways to moti- vate employees and are not substitutable. For exam- ple, whereas transactional leadership is likely to be effective in stable and predictable environments, transformational leadership is more likely to focus on change and actions that challenge the status quo and may therefore thrive in a relatively uncertain and unstable environment. In sum, transactional leaders tend to think more about specific goals, work skills and knowledge needed to accomplish those goals, work assignments, and various reward relationships. They do this by deploying people and various kinds of resources and rewards they control to get results. Conversely, transformational leaders place greater emphasis upon intellectual capability and creativity by providing the emotional glue that causes employ- ees to excel. Jack Welch, chairman and CEO of GE between 1981 and 2001, is a good example of the complementary nature of transformational and transactional leader- ship. Welch’s philosophy and charge to his followers to make GE the number one company in every market that the company operated in, was an example of an inspirational motivation. His ‘‘workout’’ program that charged employees to solve problems, the implemen- tation of the six-sigma program and the removal of a nine-layer management hierarchy are some examples of how Welch stimulated his managers intellectually. He demonstrated individualized consideration through his habit of writing personal notes to compli- ment and support employees on special occasions. In addition to being a transformational leader, Jack Welch also demonstrated elements of transactional leadership. For example, he constantly pushed his managers to perform, and he also regularly rewarded the top 20% with bonuses and stock options. Of the two leadership styles, transactional leadership can be said to be the type that is most related to managerial skills, because it involves getting day-to-day routines carried out. No wonder Jack Welch was named the ‘‘Manager of the Century’’ in 1999 by Fortune magazine.

LEADERSHIP AND PERFORMANCE

The importance of leadership to organizational per- formance cannot be over-emphasized. Most survey studies using the Multifactor Leadership Question- naire (MLQ), which measures the behaviors involved in transformational and transactional leadership, posi- tively relate transactional and transformational lea- dership to indicators of leadership effectiveness such as subordinate satisfaction, motivation and perfor- mance. It has been argued that Jack Welch’s leadership strategies and business acumen were instrumental in the success of GE, which had an increase of over $400 billion in its market capitalization during his tenure.

While studies continue to investigate the link between different leadership styles and performance, there has been a dearth of studies on the link between leader- ship styles and innovation. Such a link warrants inves- tigation, given the increasing importance of innovation to organizational competitiveness and survival, and the apparent role that leadership might play in foster- ing or enhancing innovation. In the next section, we discuss two critical aspects of innovation before examining the link between leadership and those innovation aspects.

Innovation as a process

Innovation is a multi-faceted concept that has been described as the quest for finding new ways of doing things. Joe Tidd and colleagues have referred to innova- tion as ‘change’ that includes the creation and commer- cialization of new knowledge. Such definition is concerned with the process of innovation. In this view, innovation is not limited to creativity or invention. An idea must be fully implemented or commercialized in order to become an innovation. For example, Murray Spanglerwas the creator and the inventor of the vacuum cleaner, but his name is today not associated with the product. Rather it is the name of W.H. ‘‘Boss’’ Hoover, who owned a leather goods manufacturing shop, that is well known and associated with the vacuum cleaner – because he purchased the patent from Murray Spangler and commercialized the inventor’s idea. Similarly, American inventor Elias Howe was the first to obtain a U.S. patent for a sewing machine based on a lockstitch design. However, it is Isaac Singer whose name is today associated with the sewing machine, because he successfully commercialized the idea, although Howe later earned royalties from the venture. Thus, the process of innovating involves distinct stages that may require different skill sets. For instance, Marco Iansiti argued that the earliest stages of product development require creative inputs from diverse sources, tolerance for ambiguity, and scope for unstructured communication. Later stages, such as prototyping, manufacturing and distribution, depend on the existence of formal processes, incentives and systems to enable coordination across various orga- nizational units such as R&D, manufacturing and marketing, and to ensure efficient and timely com- mercialization. Thus, it would appear that organizing for the creativity or invention stage would be different from organizing for the implementation stage, which by extension would require different leadership styles.

Innovation as an activity

Innovation can also be described as an organiza- tional activity that is based on varying degrees of

novelty. According to James March, search, risk-taking, discovery and experimentation of new things involve exploration – a wide-ranging search for technological improvements that include a possible re-evaluation of key design parameters. Exploration may involve the development of something that is fundamentally new and perhaps radical in nature, requiring a highly crea- tive process. However, a differentiation is made between such an activity and one that focuses on improving existing products and services. The latter has been referred to as exploitation, involving product development, refining existing products and services and repositioning offerings to achieve innovation out- comes that are incremental in nature. However, it is pertinent to note that a certain level of creativity may also be required in exploitative activities. While an organization may focus on either explora- tion or exploitation, depending on the competitive drivers that the organization faces, it is without ques- tion that an appropriate balance between the two may be necessary to achieve competitive advantage. How- ever, the capabilities required to be successful in exploration are completely different from the capabil- ities required to be successful in exploitation activities. Charles O’Reilly and Michael Tushman suggested that organizations can simultaneously pursue exploration and exploitation (i.e., achieve ‘‘ambidexterity’’) if these activities are structurally segregated from each other, but integrated at the very top level of management. Leaders may enable ambidexterity through their choices of organization designs and through their role as integrators of different business processes. Thus, the role of leadership in fostering exploration (radical innovation outcomes) activities would appear to be dissimilar from leadership role in enhancing exploita- tion (incremental innovation outcomes) activities.

LINKING LEADERSHIP TO INNOVATION PROCESSES AND ACTIVITIES

It is without question that leadership plays a vital role in fostering innovation processes and activities in organizations. Although some innovations may be a bottom-up activity, arising from the members of an organization who are not necessarily leaders or in top management, generally innovations tend to be the result of a strategic response or initiatives in organiza- tions to compete effectively in the market place. For innovations to succeed in an organization, they require the commitment of key and strategic resources that are controlled by the top management or leadership of organizations. For example, when Akio Morita, the late Chairman of Sony Corp., tasked the company’s R&D unit to develop Betamax, the first successful consumer videocassette recorder, he was setting in motion an innovation activity that was also a stra- tegic initiative for which he provided the required

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resources. His direction and focus led to the develop- ment of the Betamax. Moreover, leaders not only serve as behavioral role models for innovative ideas, they also serve as important means for enhancing innova- tive behaviors and modifying attitudes that are ben- eficial to innovative activities. Thus, the importance of leadership in building an innovative organization is not in question. What is less clear, however, is the process by which leadership relates to or affects inno- vation processes such as creativity and implementa- tion and innovation activities such as exploration and exploitation. One view of how leadership relates to innovation is to examine the influence of leaders on innovation through creating an organizational context or an environment where innovation thrives. As we dis- cussed earlier, innovation processes can be said to consist of different stages. The early stages of the innovation process are typically where creative activ- ities occur (e.g., idea generation, product/concept design, etc.). Creativity is an important aspect of innovation, and it has been defined as a product of imagination. It is where the process of innovation begins. It may be difficult or perhaps impossible for a leader to directly improve the creativity of his/her followers. In special forums undertaken by the authors to discuss the impact of leadership on inno- vation, industry leaders and executives observed that by providing appropriate stimuli – including an appropriate environment and a culture where crea- tivity thrives – a leader may be able to positively influence the creativity of his/her followers and hence the innovative capability of the organization. A lea- der’s role in the later stages of innovation, on the other hand, may involve the management of processes and systems that are required to efficiently transform design ideas into reality. It will be recalled that we defined innovative activ- ities as either exploratory (creation of something that is completely new or radical in nature) or exploitative (refining and improving for example, existing products and services resulting in an incremental outcome). Because of the strategic imperative of innovation, it could be argued that both exploratory and exploitative activities would be influenced by different leadership styles. In order to establish the link between leadership and innovation processes and activities, we draw from the observations of industry leaders in special forums that were formed to address two important questions – what leadership styles would be most appropriate for creativity and implementation inno- vation processes and exploration and exploitation innovation activities in organizations? What organi- zation factors moderate the relationship or link spe- cific leadership styles to innovation processes and activities?

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THE INFLUENCE OF TRANSFORMATIONAL LEADERSHIP ON CREATIVITY AND EXPLORATORY INNOVATION ACTIVITIES

As discussed, the creative innovation process is primar- ily a product of imagination, including the ability to take risks, deviate from the status quo and connect different matrices of thought, reflexes and skills and apply them in the creative process of coming up with new ideas. Thus, the mental state of the creator is an essential factor in the creativity process activities. Such a mental state can be influenced by a creator’s surroundings, freedom to operate as well as the higher order needs. It would appear that the transformational style of leadership is more likely to encourage such creative behavior. In fact as the name implies, a transformational leader seeks to transform or change, which is a main driver for the creative process. For example, when a leader provides intellectual stimulation, employees are encouraged to re-examine some of their assumptions and old ways of doing things. Such leaders also encou- rage their employees to identify novel approaches to problem solving that may lead to developing something that is completely new and more radical in nature. Under these positive environments, employees are more likely to be engaged in innovative ideas than on worries and concerns that may inhibit such ideas. Simi- larly, transformational leaders are likely to enhance creativity and innovation exploration through the appli- cation of individualized consideration, charisma and inspirational motivation than the transactional leader- ship style. Thus, given a transformational leader’s understanding, support, and encouragement, employ- ees are more likely to respond to such a leader’s change initiatives even in the face of a turbulent environment. When leaders demonstrate idealized influence and inspirational motivation, employees are likely to work harder toward achieving organizational goals and objectives, because they look at such leaders as role models. To illustrate the point discussed above, we draw from the study that Adegoke Oke carried out on the innovation practices at AXA Insurance, Ireland, in which John O’Neil, the CEO, demonstrated elements of transformational leadership in trying to change a traditionally non-innovative insurance organization to an innovative one. O’Neil communicated in an inspir- ing and an effective way the need to change and innovate, given the changes in the economic and the industry competitive landscape. He then introduced the ‘‘MadHouse’’ program that drew employees from different functions and grades from within the orga- nization to work together in a creative way, focusing on organizational goals by generating ideas for new products and services. Intellectual stimulation was encouraged through the allocation of time for creative activities and through physical spaces that were

decorated in fun and stimulating colors. The result after about six months of launching the program was over 150 business ideas for new products and services. Another example that can be used to illustrate the effect of transformational leadership on innovation is the introduction of the 15% rule by the leadership at 3M Company. The 15% rule at 3M encourages employ- ees to spend 15% of their time to develop radical new things, in a sense giving them the freedom to think creatively. This is an example of intellectual stimula- tion that demonstrates how transformational leader- ship enhances or creates a positive environment for creativity and exploratory innovation activities. A number of radical innovations have resulted from this simple display of transformational leadership at 3M. To further illustrate our point, it can be argued that Google inc. founders Sergey Brin and Larry Page and CEO Eric Schmidt have demonstrated transformational leadership in making Google one of the most innova- tive companies in the world by creating a fun envir- onment and a relaxed culture in which creativity thrives. The company’s headquarters (‘‘the Google- plex’’) in Mountain View, California, was designed with a campus feel to it. ‘‘The lobby is decorated with a piano, lava lamps, old server clusters, and a projec- tion of search queries on the wall. The hallways are full of exercise balls and bicycles. Each employee has access to the corporate recreation center. Recreational amenities are scattered throughout the campus and include a workout room with weights and rowing machines, locker rooms, washers and dryers, a mas- sage room, assorted video games, Foosball, a baby grand piano, a pool table, and ping pong. In addition to the recreation room, there are snack rooms stocked with various foods and drinks.’’ (http://en.wikipe- dia.org/wiki/Google#Corporate_affairs_and_culture). Similar to 3M’s 15% rule, ‘‘all Google engineers are encouraged to spend 20% of their work time (one day per week) on projects that interest them. In fact, some of Google’s newer services, such as Gmail, Google News, Orkut, and AdSense originated from these inde- pendent endeavors.’’ (http://en.wikipedia.org/wiki/ Google#Corporate_affairs_and_culture). Because Goo- gle ensured the freedom to take risks, created a relaxed atmosphere and met the higher order needs of employees, their creative productivity increased dra- matically over the years. It resulted in Google being regarded as one of the most innovative companies in the world, as well as being ranked by Fortune magazine in January 2007 as the Number One (of 100) best company to work for. The influence of transformational leadership may be limited where it is required to implement or pro- gress creative ideas, since what is required for this stage of innovation are processes, systems and struc- tures. In his book titled The Wizard of Menlo Park,

Randall Stross ascribed the inability of the great inven- tor Thomas Edison to achieve as much as he could have done to the fact that he did not finish or commercially develop many of the inventions that he made. While Thomas Edison clearly had the skill set of a great inventor, perhaps what he lacked was the transac- tional leadership guidance required to implement and develop his brilliant ideas.

THE INFLUENCE OF TRANSACTIONAL LEADERSHIP ON INNOVATION IMPLEMENTATION PROCESS

When the innovation process involves, for example, the implementation and development of a product concept, the need for ‘‘blue sky thinking’’ is minimized and the need for appropriate systems, processes and structures to achieve efficiency is required. The trans- actional form of leadership – through its focus on management, clear structures, formal systems, reward and discipline – is likely to be more effective in the implementation stage of an innovation than transfor- mational leadership. In the AXA example described above, John O’Neil also displayed some elements of transactional leader- ship by establishing a position of innovation manager. The innovation manager was responsible for putting appropriate formal processes, structures, measures and systems in place to ensure that the output from the creative innovation activity of the MadHouse pro- gram was efficiently translated into commercially viable new products and services. For example, Mad- House teams were required to meet for only two months. During that time, they were to come up with two new ideas and develop a comprehensive business plan for presentation to a committee responsible for selecting the ideas to take forward to the implementa- tion stage. Shell Oil Co.’s GameChanger program, which encourages, supports and funds creative and radical game-changing initiatives, is another good example of how transactional leadership encourages formal processes that ensure implementation. The GameChanger process involves a series of ‘‘gates’’ (including panel reviews, action lab, presentation to the committee of managing directors) that must be passed before an idea is funded. Such processes ensure discipline, focus, timeliness, and reduce the risk of failure of new ideas.

THE INFLUENCE OF TRANSACTIONAL LEADERSHIP ON EXPLOITATIVE INNOVATION ACTIVITIES

We argue that the transactional form of leadership will be appropriate for exploitative innovation activities that involve refining and improving on existing pro- ducts and services, due to minimal risk-taking such

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activities require. Many organizations have a strategy of focusing on exploitative activities to achieve incre- mental outcomes by improving existing products and services. In their study of the innovative practices of small firms in the United Kingdom, Adegoke Oke and colleagues found that a high proportion of firms were focusing their innovative activities on exploitative activities – improving existing products and services, a phenomenon that they referred to as ‘‘sticking to the knitting.’’ In another study of innovative practices of service firms, Adegoke Oke reported a similar predo- minant focus of service firms on improvements and exploitative innovation activities. He argued that one of the reasons for this is the intangible nature of services, which makes them to be difficult to patent and easier to copy than patentable tangible products. Hence there is little incentive to do exploratory activ- ities with radical outcomes. For such organizations, the transactional style of leadership is likely to be more appropriate than the transformational style of leader- ship to achieve the required incremental innovation outcomes. Developments and innovations in the automotive industry have largely been exploitative – including producing faster cars, cars with more comfortable seat- ing, better miles/gallon gas consumption and the like. Companies such as Toyota Motor Co., General Motors Corp. and Ford Motor Co. have had to rely on strong transactional leadership tomake all these improvement efforts happen. Wendelin Wiedeking, CEO of Porsche, the luxury car manufacturing company based in Ger- many, is someone who is widely admired and respected and yet unassuming.Wiedeking, who took over in 1991, is a good example of a transactional leader. He has gained a reputation for turning around Porsche and making it the profitable innovative company it is today. Wiedeking is positioning Porsche to take on larger global players by gaining a majority stake in Volkswa- gen, one of the biggest automobile manufacturing com- panies in the world. His focus on exploitative innovation activities is evidenced by his deliberate strategy of imitating the Japanese style of production in order to gain cost efficiencies in production and keep up with larger rivals like Toyota.

THE INFLUENCE OF TRANSFORMATIONAL LEADERSHIP ON EXPLOITATIVE ACTIVITIES

It is pertinent to note that there are some exploitative activities that involve totally new ways of thinking, risk-taking and other attributes that are better enhanced by transformational leadership than by transactional leadership. For example, repositioning an existing product or service in a new market is an exploitative activity in the sense that it does not involve the creation of a new thing. At the same time,

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such an activity may not only require the use of formal processes and systems that typical exploitative activ- ities require. In addition, such an activity may require thinking ‘‘outside of the box,’’ research, risk-taking and other activities that are synonymous with what is required to carry out exploratory activities. Both trans- actional and transformational leadership behaviors may be appropriate in fostering such an activity. Originally discovered by Felix Hoffmann at Frie- drich Bayer and Company in Germany in 1897, Aspirin was traditionally positioned and used as an analgesic that helped to reduce minor aches and pains. However, it has been remarketed and repositioned as a drug that can prevent heart attacks and reduce blood clot for- mation due to its blood-thinning effect. Such new life given to an ancient and existing medicine could only have come about as a result of the attributes and factors which transformational leadership encourages.

THE INFLUENCE OF TRANSACTIONAL LEADERSHIP ON EXPLORATORY ACTIVITIES

It is also possible that transactional leadership style may be required in some cases to foster exploratory activities to achieve more radical outcomes. This is most likely to occur in a situation where an organiza- tion or a firm collaborates with other firms to develop new things that are exploratory and radical in nature such as sourcing innovations through collaborative arrangements. Such inter-firm organizational net- working or joint innovative efforts may require trans- actional leadership styles as well as transformational leadership styles because of the former’s ability to provide structures, formal processes and systems that are required for such inter-firm activities to succeed. For example, Google acquired a number of compa- nies, including Pyra Labs (creators of weblog publish- ing platform called Blogger) and Upstartle (creator of ‘‘Writely,’’ the online word processor) in order to expand its product portfolio. Google has also partnered with organizations including Sun Microsystems Inc., the National Aeronautics and Space Administration (NASA), Ames Research Center and Time Warner’s AOL to develop new products and services. Such acqui- sitions and partnerships require having formal pro- cesses, structures and systems to make them work for which transactional leadership is key.

MODERATING EFFECTS OF ORGANIZATIONAL CONTEXTS

It is clear from the above discussion that the influence of both transformational and transactional leadership styles on innovation processes and activities can be affected by certain organizational contexts. For exam-

ple, transformational leadership is likely to be more effective in environments where creative processes and exploratory activities thrive. Such environments can come about through appropriate human resource policies that encourage an innovative culture (e.g., Google’s 20% allocated time), and appropriate struc- tural arrangements that facilitate idea generation and cross-fertilization such as the type seen at Googleplex. The presence of such organizational contexts is the foundation upon which creativity and exploratory activities are built. Therefore, we propose that the effect of transformational leadership on innovation processes and activities will be higher where such organizational contexts are present and active than where they are absent or inactive. Transactional leadership, on the other hand, helps to create the organizational contexts that can facilitate the innovation implementation process and exploita- tive activities. Such organizational contexts may include designing standard processes and policies that guide product development efforts within an organi- zation, introducing appropriate incentive systems to reward innovative efforts and setting up structures for product development (e.g., stage-gate systems such as the type used for Shell’s GameChanger program). We propose that the impact of transactional leadership on innovation processes and activities will be higher where such organization contexts are present and actively used than where such organization contexts are absent or inactive.

CONCLUSIONS

Leadership plays a vital role in fostering innovation outcomes in organizations. However, because of the different processes and activities involved in innova- tion efforts, a ‘‘one size fits all’’ leadership approach may not be appropriate. In this paper, we have explored two different leadership behaviors (e.g., transformational and transactional leadership) and their effects on two areas of innovation efforts (e.g., innovation processes and activities). Innovation pro- cesses involve the conceptualization of an idea (the creative process) and the development of the idea (the implementation process). Innovation can also be said to involve exploratory activities (creation of some- thing new with radical outcomes) and exploitative activities (improving on existing things). The key points of the paper are summarized as follows:

Transformational leadership style will be more appropriate to foster the creative innovation process than the transactional leadership style. On the other hand, we argue that the transactional leadership style will be more appropriate for the implementation stage of the innovation process than the transformational leadership style.

The effect of transformational leadership on innovation processes will be moderated by organiza- tional contexts that include the provision of an envir- onment that encourages risk-taking, innovative culture and the like. On the other hand, the effect of transactional leadership on innovation processes will be moderated by certain organizational contexts that include the design of formal systems, processes and structures to guide development efforts, rewards and incentives. Transformational leadership style will be more appropriate for exploratory innovation activities, while the transactional leadership style will be more appropriate for exploitative innovation activities. Again the effect of both leadership styles on innovation activities will be moderated by the organizational contexts as defined in point two above. Transformational leadership style may be appropriate for certain exploitative activities that involve, for example, repositioning of existing things (e.g., products and services) in a different and entirely new market. Transactional leadership style may be appro- priate for certain exploratory activities that involve firms collaborating or partnering to jointly develop new things with radical outcomes.

MANAGERIAL IMPLICATIONS

This paper has implications for the leadership of inno- vation efforts at different levels within an organiza- tion. An awareness of the need to utilize different leadership styles to lead different innovation pro- cesses and activities is important. For example, a transformational leader must recognize the need to focus more on the transactional aspect of leadership style than the transformational leadership style to direct innovation efforts in the implementation stage. The study also has implications for training, job allo- cation and recruitment and selection in organizations. A transformational leader that is expected to lead innovation efforts at the implementation stage can be exposed to or trained in the transactional leader- ship style. Where this is not practicable, the transfor- mational leader may be supported by a leader who has more of the transactional leadership skills. As James March put it, organizations must strive to achieve a balance between exploratory and exploitative innova- tion activities. Similarly, a right mix of transforma- tional and transactional leadership is required in organizations to achieve successful outcomes in inno- vation processes and activities.

ple, transformational leadership is likely to be more effective in environments where creative processes and exploratory

71

SELECTED BIBLIOGRAPHY This paper builds on an earlier work by N. Munshi, A. Oke, M. Stafylarakis,www.aim- research.org ), 2005. For more information about the research that stu- died innovation processes and activities see M. Iansiti, Technology Integration: Making Critical Choices in a Dynamic World (Harvard, MA: Harvard Business School Press, 1998); J. Tidd, J. Bessant, and K. Pavitt, Managing Innovation: Integrating Technological, Market and Orga- nisational Change , 2nd Ed. (Chicester, England: John Wiley & Sons, 2001); J. March, ‘‘Exploration and Exploitation in Organizational Learning,’’ Organization Science , 1991, 2(1); and C. A. O’Reilly and M. L. Tush- man, ‘‘The Ambidextrous Organization,’’ Harvard Busi- ness Review , 2004, 82(4), 74–81. For more information on leadership styles, see B. Bass and B. J. Avolio, ‘‘Transformational Leadership and Organizational Culture,’’ Public Administration Quarterly , 1993, 17(1), 112–121; and Avolio and Bass, ‘‘Transformational Leadership, Charisma and Beyond,’’ in J. G. Hunt, B. R. Baliga, H. P. Dachler, and C. A. Schriesheim (Eds.), Emerging Leadership Vis- tas (Lexington: DC Heath and Company, 1988), chap- ter 3: 29–49. The use of the multi-factor leadership question- naire to relate leadership with performance outcomes has been demonstrated in Bass, ‘‘Does the Transac- tional – Transformational Leadership Paradigm Trans- cend Organizational and National Boundaries?’’ in American Psychologist , 1997, 52. For more about the AXA Ireland example, see A. Oke, ‘‘Improving the Innovative Capability of a Service Company,’’ Journal of Change Management , 2002, 2(3), 272–281. The description of the Google case example was retrieved on 1/16/08 from ( http://en.wikipe- dia.org/wiki/Google#Corporate_affairs_and_culture ). For more about the survey research that shows small firms and service firms tend to focus more on incremental and exploitative activities than on exploratory and radical innovation activities, see A. Oke, G. Burke, and A. Myers, ‘‘Innovation Types and Performance in growing UK SMEs,’’ International Jour- nal of Operations and Production Management , 2007, 27(7), 735–753; as well as A. Oke, ‘‘Innovation Types and Innovation Management Practices in Service Com- panies,’’ International Journal of Operations and Produc- tion Management , 2007, 27(6), 564–587. Thomas Edison’s story is contained in the book written by Randall Stross, The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World (Crown Publishers, New York, 2007). Adegoke Oke is the associate director of the Center for Productivity, Innovation and Quality at Arizona State University. He obtained his Ph.D. in operations management from Cranfield University, U.K. He is widely published in the areas of innovation management and supply chain management. He is a U.K. Advanced Institute of Management Scholar. Prior to a career in academia, he was a project engineering manager for Shell for 10 years (Tel.: +1602 5436209; fax: +1602 5436221; email: Adegoke.oke@asu.edu ). Natasha Vijay Munshi is an assistant professor in the Department of Management at Wright State University, Ohio. She obtained her Ph.D. in strategic management from the University of Pittsburgh. She teaches, publishes and advises on strategic management, technology strategy, science entrepreneurship, corporate social responsibility and international stakeholder management issues. Fred O. Walumbwa is an associate professor of management at Arizona State University. He received his Ph.D. at the University of Illinois at Urbana-Champaign. His research interests include leadership development, organizational culture/identity, organizational justice, cross-cultural research, business ethics, multilevel issues in research, and social networks. He is also a senior scientist with the Gallup Organization (Tel: +1 602 543 6240; fax: +1 602 543 6221, email: Fred.Walumbwa@asu.edu ). 72 ORGANIZATIONAL DYNAMICS " id="pdf-obj-8-2" src="pdf-obj-8-2.jpg">

SELECTED BIBLIOGRAPHY

This paper builds on an earlier work by N. Munshi, A. Oke, M. Stafylarakis, P. Puranam, S. Towells, K. Moslein, and A. Neely, ‘‘Leading for Innovation: The Impact of Leadership on Innovation,’’ Advanced Institute of Man- agement Research (AIM research) report (www.aim- research.org), 2005. For more information about the research that stu- died innovation processes and activities see M. Iansiti,

Technology Integration: Making Critical Choices in a

Dynamic World (Harvard, MA: Harvard Business School Press, 1998); J. Tidd, J. Bessant, and K. Pavitt, Managing Innovation: Integrating Technological, Market and Orga- nisational Change, 2nd Ed. (Chicester, England: John Wiley & Sons, 2001); J. March, ‘‘Exploration and Exploitation in Organizational Learning,’’ Organization Science, 1991, 2(1); and C. A. O’Reilly and M. L. Tush- man, ‘‘The Ambidextrous Organization,’’ Harvard Busi- ness Review, 2004, 82(4), 74–81. For more information on leadership styles, see B. Bass and B. J. Avolio, ‘‘Transformational Leadership and Organizational Culture,’’ Public Administration Quarterly , 1993, 17(1), 112–121; and Avolio and Bass, ‘‘Transformational Leadership, Charisma and Beyond,’’ in J. G. Hunt, B. R. Baliga, H. P. Dachler, and C. A. Schriesheim (Eds.), Emerging Leadership Vis- tas (Lexington: DC Heath and Company, 1988), chap- ter 3: 29–49.

The use of the multi-factor leadership question- naire to relate leadership with performance outcomes has been demonstrated in Bass, ‘‘Does the Transac- tional – Transformational Leadership Paradigm Trans- cend Organizational and National Boundaries?’’ in American Psychologist, 1997, 52. For more about the AXA Ireland example, see A. Oke, ‘‘Improving the Innovative Capability of a Service

Company,’’ Journal of Change Management, 2002, 2(3), 272–281. The description of the Google case example was retrieved on 1/16/08 from (http://en.wikipe- dia.org/wiki/Google#Corporate_affairs_and_culture). For more about the survey research that shows small firms and service firms tend to focus more on incremental and exploitative activities than on exploratory and radical innovation activities, see A. Oke, G. Burke, and A. Myers, ‘‘Innovation Types and Performance in growing UK SMEs,’’ International Jour- nal of Operations and Production Management, 2007, 27(7), 735–753; as well as A. Oke, ‘‘Innovation Types and Innovation Management Practices in Service Com- panies,’’ International Journal of Operations and Produc- tion Management, 2007, 27(6), 564–587. Thomas Edison’s story is contained in the book written by Randall Stross, The Wizard of Menlo Park:

How Thomas Alva Edison Invented the Modern World

(Crown Publishers, New York, 2007).

Adegoke Oke is the associate director of the Center for Productivity, Innovation and Quality at Arizona State University. He obtained his Ph.D. in operations management from Cranfield University, U.K. He is widely published in the areas of innovation management and supply chain management. He is a U.K. Advanced Institute of Management Scholar. Prior to a career in academia, he was a project engineering manager for Shell for 10 years (Tel.: +1602 5436209; fax: +1602 5436221; email: Adegoke.oke@asu.edu).

Natasha Vijay Munshi is an assistant professor in the Department of Management at Wright State University, Ohio. She obtained her Ph.D. in strategic management from the University of Pittsburgh. She teaches, publishes and advises on strategic management, technology strategy, science entrepreneurship, corporate social responsibility and international stakeholder management issues.

Fred O. Walumbwa is an associate professor of management at Arizona State University. He received his Ph.D. at the University of Illinois at Urbana-Champaign. His research interests include leadership development, organizational culture/identity, organizational justice, cross-cultural research, business ethics, multilevel issues in research, and social networks. He is also a senior scientist with the Gallup Organization (Tel: +1 602 543 6240; fax: +1 602 543 6221, email: Fred.Walumbwa@asu.edu).

72 ORGANIZATIONAL DYNAMICS