It’s often said that business success or failure comes down to successful or unsuccessful leadership. In offering advice, business pundits tend to come down on the side of either transformational leadership or of transactional leadership. But is it really that clear-cut?
Transformational leadership really comes into its own in helping to break an organisation’s administrative heritage, thus creating the capacity for change. By bringing in entrepreneurial outsiders with a radical approach, a company’s Board can unshackle the business from the ball-and-chain constraints of “that’s the way we do things around here (and have done for years)”.
1. Transformational or transactional leadership?
Transformational leadership sits in contrast to transactional leadership. Transactional leaders set goals and develop agreements about what is expected from the organization, whereas transformational leadership is inspirational and helps the organization to reframe the future. The transactional leadership style serves to increase the robustness of the existing organization, whereas transformational leadership seeks to change it. In times of stability, transactional leadership is appropriate for the process of refreshing, reinforcing and refining existing practices, but in the face of environmental turbulence it can result in failure to adapt.
That’s not to say that each approach doesn’t have its place. Once change has been effected through transformational leadership, a more contingent approach to leadership could take over, adjusting the style to the situation and combining:
- Transformational leadership – where it’s still required to motivate change, and
- Transactional leadership – where managers have embraced change and can be relied upon to take accountability and responsibility for implementation.
2. Using transformational leadership effectively
The two strategic interventions where transformational leadership can be particularly effectively used are:
Here, the knowledge achieved by one or more businesses is exploited by another business to achieve best practice; this might be either in an organisation that is conducting business as usual, or in one that is already failing in the context of its environment.
A couple of examples of transformational leadership being used highly effectively in a turnaround capacity are:
- Marks and Spencer, which was able to regain its position in the marketplace by bringing in new leaders from outside the company with a transformational approach (notably Sir Stuart Rose ), focusing on implementing best practice in the supply chain and reconnecting with the consumer. By 2008 the company was able to regain a pre-tax profit of £1,129 million comparable to its peak performance year in 1998, before its dramatic decline to a low of £145 million in 2001.
- Yukos, the Russian oil company, which brought in outsider managers (non-oil men) to its top management team, as well as many Western expatriates who contributed Western expertise. The transformational leadership of Mikhail Khodorkovsky, the former CEO of Yukos, helped the company to establish the basic operational capabilities required for operating in a market economy in a short space of time. As a result Yukos’ oil production doubled between 1996 and 2002 and Yukos was the leading Russian oil company by market value ($21 billion) at the end of 2002. (Unfortunately, Khodorkovsky threatened the status quo of the power elite, and as a result of making this fatal mistake of ignoring the institutional context, he himself was imprisoned and his company went bankrupt. He recently hit the headlines again after having his original 8 year sentence increased to 14)
Both Marks and Spencer and Yukos were effectively exploiting and deploying new learning and implementing best practice in order to catch up with their competitors in the global arena.
Here, a business reinvents itself to secure strategic supremacy. Transformational leadership is important in this situation, to encourage a break with an administrative heritage. Even though the business might currently be extremely successful, its very success may inhibit the search for new ideas due either to the complacency or to the fear of cannibalising existing business.
Transformational leadership can help create a climate that challenges managers to develop new ways of thinking and encourages the implementation of new projects.
So transformational leadership can be seen as a key element in taking both failing and successful businesses forward.
In the current economy you would think that transformational leadership is the obvious choice to invigorate a business and find new opportunities. But in times of great change is it actually a familiar, transactional leader who can reassure the troops and ensure stability in these difficult times?