LEADERSHIP STYLES AND EFFECTIVENESS: A STUDY OF SMALL FIRMS IN CHILE

Liliana Pedraja-Rejas, Emilio Rodríguez-Ponce y Juan Rodríguez-Ponce

Liliana Pedraja-Rejas. M.A. in Marketing and Management and Ph.D. in Management, Universidad Politécnica de Valencia, Spain. Professor, Universidad de Tarapacá (UTA), Chile. Postal Address: Universidad de Tarapacá. Casilla 7-D Arica – Chile. e-mail: lpedraja@uta.cl

Emilio Rodríguez-Ponce. M.S. in Finance, Universidad de Chile. Ph.D. in Strategic Management, Universidad Complutense de Madrid, Spain. Professor, UTA, Chile. e-mail: erodrigu@uta.cl

Juan Rodríguez-Ponce. Doctoral candidate in Strategic Management, Universidad Rey Juan Carlos de Madrid, Spain.

Summary

The purpose of this work is to analyze the relationship between leadership styles and effectiveness in small firms. The work considers a sample of 126 top and medium level managers based in small firms in the north of Chile. The results obtained show that the supportive leadership style is prominent. It was also found that the participative leadership style is present, but to a lesser extent, and that the instrumental leadership style is infrequent. Supportive and participative leadership styles have a positive influence on effectiveness in small organizations. Instrumental leadership has a negative influence on effectiveness in small organizations.

ESTILOS DE LIDERAZGO Y EFICACIA: UN ESTUDIO EN PEQUEÑAS EMPRESAS EN CHILE

RESUMEN

El objetivo principal de este trabajo es explorar y analizar las relaciones entre los estilos de liderazgo y la eficacia en las pequeñas empresas. El trabajo se desarrolla con base a una muestra de 126 gerentes de nivel alto e intermedio pertenecientes a pequeñas empresas en el norte de Chile. Los resultados que se obtienen indican que el estilo de liderazgo colaborativo se encuentra en un grado predominante. A su vez se observa que el estilo de liderazgo participativo está presente en la muestra elegida, mientras que el estilo de liderazgo instrumental es infrecuente en las empresas consultadas. Por su parte los estilos de liderazgo colaborativo y participativo tienen una positiva influencia sobre la eficacia en las pequeñas empresas. Finalmente se observa que el estilo de liderazgo instrumental posee una influencia negativa en la eficacia de las pequeñas empresas bajo estudio.

ESTILOS DE LIDERANÇA E EFICÁCIA: UM ESTUDO EM PEQUENAS EMPRESAS NO CHILE

Resumo

O objetivo principal deste trabalho é explorar e analisar as relações entre os estilos de liderança e a eficácia nas pequenas empresas. O trabalho se desenvolve com base em uma amostra de 126 gerentes de alto nível e intermédio pertencentes a pequenas empresas no norte do Chile. Os resultados que se obtêm indicam que o estilo de liderança colaborativa se encontra num grau predominante. Ao tempo que se observa que o estilo de liderança participativa esta presente na amostra eleita, enquanto que o estilo de liderança instrumental é infreqüente nas empresas consultadas. Por sua parte os estilos de liderança colaborativa e participativa têm uma positiva influência sobre a eficácia nas pequenas empresas. Finalmente se observa que o estilo de liderança instrumental possui uma influência negativa na eficácia das pequenas empresas sob estudo.

Keywords / Leadership / Effectiveness / Small Firms /

Received: 08/05/2005. Modified: 06/09/2006. Accepted: 06/13/2006.

Introduction

There are two positions with respect to the importance of the top management team on strategic decision-making. According to the theory of the Ecology of Organizations the management team does not influence the organization's outcomes; conversely, several studies have shown how the top management team does influence certain aspects of the strategic decision-making process, and therefore, influences the organization's performance or effectiveness.

The theory of the Ecology of Organizations states that there is a natural selection process for the species of organizations, which implies that the environment will determine who survives. The implication is that the top management team is composed of passive agents that have a minimum impact on corporative development (Hannan and Freeman, 1977; Amburgey, 1996; Carroll and Hannan, 2000).

However, Hambrick and Mason (1984) stated in their seminal work that an organization’s outcomes (i.e. strategic decisions and performance) are partially predetermined by the features of those who participate in its administration. The basis of their study is supported by the idea that in a limited rationality context the point of view is limited by the cognitive base and values, thus influencing selective perception, interpretation, management perception, and strategy selection.

There are several studies that support this view, demonstrating that diversity (Pelled et al., 1999; Simonds et al., 1999; Carpenter and Fredrickson, 2001), leadership style (Evkall and Ryhammar, 1997; Ogbonna and Harris, 2000; Waldman et al., 2001; Pedraja and Rodríguez, 2005), and top-management team size (Haleblian and Finkelstein, 1993; Amason and Sapienza, 1997) are variables that can influence the decision-making processes, and consequently, the effectiveness of the organization.

This research is focused on discovering whether or not there is any statistically significant relationship between leadership styles and the effectiveness of small firms in the northern region of Chile. The paper begins with a review of the literature on leadership, small firms and effectiveness. This is followed by the hypothesis and methodology adopted, which is a descriptive quantitative research design. A questionnaire was given to 432 top and medium level managers from small organizations in Tarapaca. Finally, using a data of 126 managers it is shown that supportive leadership style is prominent. It was also found that the participative leadership style is present, but to a lesser extent, and that the instrumental leadership style is infrequent. Supportive and participative leadership styles have a positive influence on effectiveness in small firms. Instrumental leadership has a negative influence on effectiveness in small firms.

Framework

The Upper Echelons Theory presents an alternative paradigm to that presented by the Ecology of Organizations theory. In this work we will concentrate our attention on leadership style as a structural determinant of Upper Echelons Theory.

Waldman et al. (2001) proposed the inclusion of leadership style in the Upper Echelons Theory, since this variable has direct effects on the decisional process and results of organizations. Two studies have confirmed that leadership style affects group-work processes, social climate, and results. In the first, Kahai and Sosik (1997) found that participative leadership is more related to making supportive comments to group members than directional leadership. In the second study, Evkall and Ryhammar (1997) established that leadership style influences climate, which in turn influences creativity and productivity. Therefore, leadership has a direct influence on productivity.

Previous studies have produced findings consistent with the idea that different leadership styles have diverse effects on variables such as flexibility, responsibility, standards, rewards, clarity and commitment, and in some cases, on organizational climate (Goleman, 2000). A fundamental fact is that leadership style influences subordinates, as the behavior of the leader produces motivation mechanisms which have effects on the conduct of individuals in the organization (Shamir et al., 1993).

In addition, Park (1996) demonstrated that gender is related with leadership style, which in turn influences decision style. Likewise, organizational performance is influenced by a competitive and innovative culture. Culture is influenced by leadership style and, consequently, leadership style affects organizational performance through its culture (Ogbonna and Harris, 2000).

More recently, Pedraja and Rodríguez (2004, 2005) have shown that leadership styles influence effectiveness in public organizations.

Rahman (2001) has concluded that leadership style, processes, products, services, and individuals and their approach to clients, have an impact on the results of organizations.

Finally, it is appropriate to recognize that whilst different leadership styles exist (Ingress, 1995; Bourantas and Papadakis, 1996; Lowe et al., 1996), it is difficult to establish the supremacy of one specific style over another. As Vroom (2000) has postulated, defining leadership style in any specific decision requires the analysis of several factors, such as the relevance of decisions, the importance of commitment, success probability, leader and group experience, group support to goal achievement, and team competency.

In this research three styles of leadership are considered, participative, instrumental and supportive, which offer a global vision of the different aspects of leadership that can influence performance or effectiveness.

In the preceding discussion it has been argued that leadership style should be considered as a determining factor in the effectiveness of organizations. However, the size of an organization can also have serious implications on its strategic behavior; a small organization has different features to medium and large organizations.

Although there are no strict rules for classifying the size of organizations, the criterion of the Development Corporation of Chile (CORFO-Chile) suggests that companies with 10 to 50 employees can be considered as small companies in Chile.

In general terms, the size of an organization can have economic and financial effects. For example, Eckard E (1994) has proposed that the distribution of different sized organizations in the manufacturing industry in the USA is explained by considering the effectiveness of large and small organizations. The main argument of the author is that large companies are more effective since they generate scales of economies, and that this is a fundamental variable in the explanation of the distribution in the economic sector. Likewise, from an economic and financial point of view, Beedle (1992) demonstrated that smaller companies have higher patrimonial costs due to their greater risk levels and smaller liquidity of shares.

It has been demonstrated that company size does not only generate economic/financial differences, but that it can also influence on the decision-making process. For example, Matlay (1999) used multiple methods over 3 years to study decision-making, and found that in small firms decisions are generally taken by one person (normally the owner), whereas in larger companies decisions are taken by the top management team. Furthermore, management style and relations with employees are more informal in small organizations than in bigger ones.

The centralization of decision-making is another distinguishing feature of small organizations. As Byers and Slack (2001) have suggested from their large study of 16 small organizations, this may be because decision making is limited by time and by the desire of the owner(s) to retain control.

The works of Hart and Banbury (1994) and Dean et al. (1998) have also contributed to the claim that organization size is a determinant in decision-making processes. The former study revealed that there are contingency variables associated with firm size that impact the decision-making process, even to the same extent as the environment, and thus the effectiveness. In the latter study, the authors concluded that the characteristics of the industrial sector are determinants of strategic behavior, although this behavior is also influenced by the company’s size.

Chen and Hambrick (1995) undertook a related study of small and large airlines in the USA. They discovered differences in the strategic reactions of the two types of airlines with regard to the speed of announcement and visibility of the strategic behavior. They also found that the speed with which decisions are made is a relevant determinant of effectiveness in small firms, whereas in large firms the propensity to act or react to strategic answers is relevant.

Small firms have particular problems connected to their size that large firms do not have to confront. For example, Orser et al., (2000) studied a sample of small and medium-sized firms and concluded that the growth of small firms is more dynamic, and not lineal, i.e. they do not systematically generate profits. They also found that the existence of a business plan is positively correlated with economic results, and that the types of problems that management has to deal with are related to the size of the organization.

Wang and Satow (1994) discuss the findings of the survey presented in a previous article in terms of leadership styles and their resulting organizational effectiveness in joint ventures in large corporations with different structural features. Four functional dimensions of leadership style are presented: expectancy, sentiment, informativeness and trustworthiness. These are particularly crucial for international joint ventures where cultural and managerial compatibility is most important in achieving organizational success.

Oakley (2000) studied the differences between female leadership styles and the type of leadership style expected at the top of organizations, feminist explanations for the under-representation of women in top management positions and the possibility that the most talented women often avoid corporate life in favor of entrepreneurial careers.

Differences in strategic behavior that are linked to size have been identified, even within groups of small organizations. Wolff and Pett (2000) demonstrated that the larger small organizations exhibit strategic behavior that is consistent with their resources and capabilities, whereas this is not the case in very small organizations.

The differences in strategies that are linked to size have been expounded by Moen (1999), who showed that while there is no relation between firm size and results in export management, there is a difference in the basis of competitive advantage and the reasons for which companies decide to export.

In conclusion, the set of studies examined confirm that a firm’s size will impact its economic, financial and strategic attributes, and, in particular, its decision-making process. Furthermore, from a theoretical point of view, it must be considered that small firms have several features that distinguish them from large firms, which determine the strength of the relationship between leadership style and effectiveness. To understand the idiosyncratic features of small firms, it is thus essential to measure effectiveness in this type of organization and the impact of leadership style.

This article aims to establish if there is a relationship between leadership styles and performance and will focus on small firms.

Hypotheses

Given that the aim of this paper is to establish whether or not there is a statistical relationship between leadership styles and effectiveness (Figure 1), the following alternative hypotheses are proposed:

Upper Echelons Theory:

H-1A: Participative leadership style has influence on the effectiveness of small firms.

H-2A: Supportive leadership style has influence on the effectiveness of small firms.

H-3A: Instrumental leadership style has influence on the effectiveness of small firms.

Ecology of Organizations:

H-1B: Participative leadership style has no influence on the effectiveness of small firms.

H-2B: Supportive leadership style has no influence on the effectiveness of small firms.

H-3B:Instrumental leadership style has no influence on the effectiveness of small firms.

Methods

Sample

A questionnaire was given to 432 top and medium level managers from small organizations in Tarapaca, in the northernmost region of Chile. In order to encourage the managers to complete the questionnaire, they were contacted up to three times each. The questionnaire was answered by 126 (29.2%) of the managers.

Unit of Analysis

The unit analyzed was the decision-making process. In particular, we asked participants about the last strategic decision taken by their organization.

Variables and measures

The following variables and measures were employed:

Participative leadership style. Defined as a style of leadership in which the leader permits subordinates to take part in decision-making and also gives them a considerable degree of autonomy in completing routine work activities. A Likert scale from 1 to 7 was used and 5 items were adapted as follows (Ogbonna and Harris, 2000). The 5 items used referred to whether, in the decision-making process, the leader

- considers the opinion of participants,

- asks participants for their opinions,

- considers suggestions from participants,

- considers ideas, differences and opinions of participants,

- asks all participants for their point of view.

Supportive leadership style. This is a style focused on establishing good relations with subordinates and satisfying their needs, while showing concern for the well-being and needs of employees, being friendly and approachable, and treating workers as equals. A Likert scale from 1 to 7 was used and 4 items were adapted as follows (Ogbonna and Harris, 2000). The 5 items used referred to whether, in the decision-making process, the leader

- is willing to continually collaborate with team members,

- considers the well-being of participants,

- treats participants fairly,

- provides a comfortable environment and work climate for members of the team.

Instrumental leadership style. An approach focused on providing specific guidance and establishing work schedules and rules. A Likert scale from 1 to 7 was used and 4 items were adapted as follows (Ogbonna and Harris, 2000). In the decision-making process the leader decides

- what each team member should do,

- how things should be done within the team,

- the standards to be achieved by the team,

- the outline of the work to be performed by team members.

Effectiveness. In order to define the effectiveness, a set of factors was considered and, subsequently, the level of achievement was evaluated according to each factor, calculating a value for the relative effectiveness on a scale from 1 to 100. The 5 factors considered for determining effectiveness, listed in Table I, were developed and used in previous research (Pérez, 1997; Rodríguez, 2005; Pedraja and Rodríguez, 2005).

Validity and reliability of variables and measures

In order to assess validity, and, in particular, reliability, Cronbach's Alpha was calculated. The resulting values are presented in Table II.

Results

Leadership style dimensions

The analysis of the questionnaires resulted in the mean values presented in Table III. Applying a statistical t-test, it can be stated that:

- Participative leadership style is present to a moderate degree in the small organizations studied (Ho: Mean= 4.0, t= 1.30).

- Supportive leadership style is highly prominent in the small organizations studied (Ho: Mean= 4.0, t= 19.23).

- Instrumental leadership style is relatively infrequent in the small organizations studied (Ho: Mean= 4.0, t= -9.10).

Effectiveness and leadership style

The following multiple linear regression model was used:

Effectiveness = A + B1 × PL + B2 × SL + B3 × IL + Ei

where A: Constant, B1, B2, B3: Non standardized betas, PL: participative leadership, SL: supportive leadership, IL: instrumental leadership, and Ei: Standard error.

Table IV shows the results of the Pearson correlation matrix, while the results from the regression model results are presented in Table V. Consequently, it can be observed that:

- There is a positive and significant correlation between effectiveness, participative leadership, and supportive leadership. There is a negative and significant correlation between effectiveness and instrumental leadership.

- The results show that 17.5% of the variation in effectiveness is explained by the regression model used. There is statistical evidence of omitted variables (constant t= 6.47).

- Participative leadership is a variable that has a positive influence on effectiveness t= 3.24). Supportive leadership is a variable that has a positive influence on effectiveness (t= 2.40), and instrumental leadership is a variable that has a negative influence on effectiveness (t= -2.29).

Conclusions and Implications

Supportive leadership is the most frequent style of leadership in small organizations, followed by the participative leadership style, and then the instrumental leadership style which is relatively infrequent.

The supportive and participative leadership styles positively influence effectiveness in small organizations. Instrumental leadership has a negative influence on effectiveness in small organizations.

Regarding small organizations, it can therefore be proposed that participants are motivated by participation, and by the acceptance of their opinions, suggestions and ideas in the decision-making process. It can be suggested that in small companies the decision-making process leader should collaborate with team members, provide a good work climate, be concerned with the team’s well-being and treat them fairly.

Similarly, it can be suggested that in small firms the leader should avoid making lone decisions regarding what team members should do and how they should do it. Also, leaders should avoid setting the desired achievement standards and a working plan of action without the input of team members.

Obviously, this research is only exploratory and it is necessary to investigate how leadership styles influence decision-making, and how the design and implementation of decisions influence the performance of small organizations, to further contribute to the understanding of best practices in management.

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