Transformational leadership influence

on organizational performance through

organizational learning and innovation

Paper published in
Journal of Business Research

Full citation to this publication:

García-Morales, V., Jiménez-Barrionuevo, M. and Gutierrez-
Gutierrez, Leopoldo (2012): “Transformational leadership
influence on organizational performance through organizational
learning and innovation”. Journal of Business Research, Vol.65,
n.7, pp.1040-1050.
https://doi.org/10.1016/j.jbusres.2011.03.005

Thank you for your interest in this publication.

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Transformational leadership influence on organizational

performance through organizational learning and

innovation

Víctor J García-Morales, M Magdalena Jiménez-Barrionuevo, Leopoldo Gutiérrez-Gutiérrez

Department of Business Administration, Cartuja s/n 18071,

University of Granada, Spain

Abstract

This study analyzes the influences of transformational leadership on organizational

performance through the dynamic capabilities of organizational learning and innovation.
Although these indirect interrelations are very important for improving organizational
performance, previous research has not usually explored them. The study confirms these
influences empirically, basing the analysis on a sample of 168 Spanish firms. The results
reveal that (1) transformational leadership influences organizational performance
positively through organizational learning and innovation; (2) organizational learning
influences organizational performance positively, both directly and indirectly through
organizational innovation; (3) organizational innovation influences organizational
performance positively.

Keywords

 Transformational leadership
 Organizational innovation
 Organizational learning
 Organizational performance

1. Introduction

Transformational leadership can be defined as the style of leadership that heightens

consciousness of collective interest among the organization's members and helps them to
achieve their collective goals. In contrast, transactional leadership focuses on promoting
the individual interests of the leaders and their followers and attaining the satisfaction of
contractual obligations on the part of both by establishing objectives and monitoring and
controlling the results (Bass and Avolio, 2000). Leaders use transactional and
transformational behavior to different degrees (Bass, 1999). This investigation focuses on
transformational leadership. Theories of transformational leadership emphasize

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emotions, values, and the importance of leadership oriented to encouraging creativity in
employees. Employees are a valuable resource in the firm, a resource for which the
transformational leader takes responsibility and whose professional development he or
she promotes (Bass, 1999; Bass and Avolio, 2000; García Morales et al., 2008a, b).

Transformational leadership attempts to create emotional links with its followers and
inspires higher values. Such leadership transmits the importance of having a shared
mission and infusing a sense of purpose, direction and meaning into the followers’ labor
(Bass, 1999). Transformational leadership becomes the motor and transmitter of
innovative culture and of the dissemination of knowledge oriented to seeking the best
possible organizational performance. The example of transformational leadership
committed to the organization's goals and their internalization in its followers seeks to
encourage commitment to results on the part of the organization's members (Bass, 1999;
Bass and Avolio, 2000). Transformational leaders have charisma, provide inspiration and
promote intellectual stimulation (Bass, 1999; Bass and Avolio, 2000; Conger, 1999).
Charisma generates the pride, faith and respect that leaders work to encourage their
employees to have in themselves, their leaders, and their organizations. Transformational
leaders provide inspiration by motivating their followers, largely through communication
of high expectations. Such leaders also promote intellectual stimulation by promoting
employees’ intelligence, knowledge and learning so that employees can be innovative in
their approach to problem solving and solutions. Various studies analyze the influence of
transformational leadership on organizational performance through intermediate
constructs such as culture (e.g., Ogbonna and Harris, 2000), entrepreneurship (e.g.,
García Morales et al., 2006), knowledge management (e.g.,Gowen et al., 2009),
congruence in top management teams (e.g.,Colbert et al., 2008), flexibility (e.g.,
Rodriguez Ponce, 2007), human–capital–enhancing human resource management (Zhu
et al., 2005), competitive strategies (e.g., Menguc et al., 2007), and absorptive capacity
(e.g., García Morales et al., 2008a, b). However, understanding of the processes through
which the leader exerts this influence is still limited and largely speculative (Bass, 1999;
Conger, 1999). This investigation seeks to analyze empirically whether transformational
leadership exerts this influence on organizational performance through the intermediate
influence of organizational learning and innovation.

Organizational learning is the capability “within an organization to maintain or improve

performance based on experience. This activity involves knowledge acquisition (the
development or creation of skills, insights, and relationships), knowledge sharing (the
dissemination to others of what has been acquired by some), and knowledge utilization
(integration of learning so that it is assimilated and broadly available and can be
generalized to new situations)” (DiBella et al., 1996, p. 363). Organizational learning is
the process by which the organization increases the knowledge created by individuals in
an organized way and transforms this knowledge into part of the organization's
knowledge system. The process takes place within a community of interaction in which
the organization creates knowledge, which expands in a constant dynamic between the
tacit and the explicit (Nonaka and Takeuchi, 1995). The development of new abilities and
knowledge and the increase in the organization's capability enable organizational
learning. Organizational learning involves cognitive and behavioral change. More than
ever, organizational learning has become a need rather than a choice. Inability to learn is
the reason most firms disappear before forty years have passed (Argyris and Schön, 1996;
Senge, 1990).

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The scientific literature proposes different definitions of innovation. This study uses the
definition of innovation formulated by the Product Development and Management
Association, which analyzes innovation as “a new idea, method, or device. The act of
creating a new product or process. The act includes invention as well as the work required
to bring an idea or concept into final form” (Belliveau et al.,2002, p. 446). Although
research widely prescribes firm innovation as a means of improving organizational
performance, many firms do not or cannot develop innovation properly. Researchers urge
attention to what enables firms to innovate, to search for answers beyond semiautomatic
stimulus–response processes (Zollo and Winter,2002, p.341).

Empirical studies support the relationship between organizational learning and innovation
(Bueno et al., 2010; Cohen and Levinthal, 1990; Glynn, 1996; Hurley and Hult, 1998;
Ireland et al., 2001; Mezias and Glynn, 1993). Different types of learning and innovation
are also related. For example, generative learning is the most advanced form of
organizational learning and occurs when an organization is willing to question long-held
assumptions about its mission, customers, capabilities, and strategy and to generate
changes in its practices, strategies, and values. Such learning forms the necessary
underpinnings for radical innovations in products, processes, and technologies (Argyris
and Schön, 1996; Damanpour, 1991; Glynn, 1996; Senge, 1990; Senge et al., 1994).

The literature also emphasizes the great importance of organizational learning and
innovation for a company's survival and effective performance. Organizational learning
is a major component in any effort to improve organizational performance and strengthen
competitive advantage. The development of new knowledge, derived from organizational
learning, reduces the likelihood that a firm's competencies will become outdated, enabling
the competencies to remain dynamic and thus favoring improvement in performance.
Organizational learning usually has positive connotations, since this form of learning
associates with performance improvements (Argyris and Schön, 1996; Fiol and Lyles,
1985; Inkpen and Crossan, 1995; Ireland et al., 2001; Senge, 1990). Various authors also
show that innovation is essential to improving performance and that innovation comes
into play in order to improve organizational performance (Argyris and Schön, 1996;
Damanpour, 1991; Fiol and Lyles, 1985; Hurley and Hult, 1998; Senge, 1990; Zaltman
et al., 1973).

To summarize, this study analyzes the influence of transformational leadership on

organizational learning and innovation and emphasizes the importance of providing
empirical results that prove these relationships. The model also claims to demonstrate the
existence of a positive and significant link between organizational learning and
innovation and between these dynamic capabilities and organizational performance. The
relatively slight attention paid in practice to these topics contrasts with their importance
for technicians and practitioners.

To achieve the objectives, the article develops as follows. Based on previous research,
the section on hypotheses proposes a series of hypotheses on the influence of
transformational leadership on organizational learning and organizational innovation, the
influence of organizational learning on organizational innovation and the influence of
both organizational learning and organizational innovation on organizational
performance. The method section presents the data and the method used to analyze
empirically the hypotheses developed in Spanish firms. The section on the results presents

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the findings. Finally, the section on conclusions and future research discusses the results
and points out some of the limitations of this study.

2. Hypotheses

2.1. The influence of transformational leadership on organizational learning and

organizational innovation

Prior studies assert association between leadership and organizational learning (McGill
et al., 1992; Senge, 1990; Senge et al., 1994; Tushman and Nadler, 1986).
Transformational leadership builds teams and provides them with direction, energy, and
support for processes of change and organizational learning (Bass, 1999; McDonough,
2000). This style allows organizations to learn through experimentation, exploration,
communication and dialogue (Lei et al., 1999; Menguc et al., 2007; Senge et al., 1994;
Slater and Narver, 1995; Tushman and Nadler, 1986).

More specifically, transformational leadership fuels organizational learning by promoting

intellectual stimulation and providing inspirational motivation and self-confidence among
organization members (Coad and Berry, 1998). The transformational leader will be a
catalyst, a mentor, a facilitator and a trainer in organizational learning. He or she
encourages shared mental models in technological organizations that favor continuous
learning and facilitate technological learning and the use of new technologies (Senge et
al., 1994).

Transformational leadership generates greater consciousness and acceptance of the

purpose and mission of the organization and fosters a shared vision, reorienting the
training and construction of work teams. This leadership style also allows the leader to
commit him- or herself openly to learning, to become its driving force, and to provide
whatever is needed to overcome internal skepticism and external difficulties to establish
learning within the organization (Wick and Leon, 1995).

The influence of transformational leadership on communication and the influence of

communication on organizational learning produce an indirect effect of transformational
leadership on organizational learning through communication (Argyris and Schön, 1996;
Lei et al., 1999; Schein, 1993; Senge et al., 1994). On the basis of these arguments, the
capability for transformational leadership is one of the most important means of
developing organizational learning in organizations (Maani and Benton, 1999; Slater and
Narver, 1995).

H1. A positive association exists between transformational leadership and organizational

learning.

The strategic literature highlights leadership style as an especially important influence on

organizational innovation (Kanter, 1983; McDonough, 2000; Van de Ven, 1986). Broad
consensus currently affirms that a collaborative and participatory leadership style
(transformational) is more likely to encourage innovation within the organization (Kanter,
1983) than are transactional styles of leadership (Manz et al., 1989). Managers’
perceptions of their role in their organizations strongly influence the capability to promote
such leadership in an organization.

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Several features of transformational leadership are relevant for firm innovation
(Gumusluoglu and İlsev, 2009; Lian Shao, 2006). Transformational leaders have an
interactive vision; they pay maximum attention to fostering effective communication and
sharing values (Adair, 1990) and encouraging an appropriate environment for innovative
teams (Tushman and Nadler, 1986). They support collective processes of organizational
learning (Manz et al., 1989), reciprocal trust between organization members and leaders
(Scott and Bruce, 1994), and favorable attitudes toward proactivity, risk (Lefebvre and
Lefebvre, 1992) and creativity (Tierney et al., 1999). All of these features together enable
a better understanding of the strong relationships between transformational leadership
and the factors positively influencing organizational innovation (Kanter, 1983).

Finally, transformational leaders have charisma, provide inspiration, and promote

intellectual stimulation. These characteristics encourage communication processes and
organizational learning that enable organizations to be more innovative (Bass, 1999; Bass
and Avolio, 2000; Conger, 1999). Transformational leadership thus influences innovation
indirectly through the communication process (García-Morales, 2004; Tushman and
Nadler, 1986) and the process of organizational knowledge creation (Cohen and
Levinthal, 1990; Nonaka and Takeuchi, 1995; Senge et al., 1994). Further,
transformational leadership has an indirect effect on innovation based on the presence of
both strategic factors (communication and organizational learning) and the interrelation
between them (Lei et al., 1999; Schein, 1993; Senge, 1990).

H2. A positive association exists between transformational leadership and organizational

innovation.

2.2. The influence of organizational learning on organizational innovation

The extensive and diverse literature on organizational innovation has received important
contributions from works on organizational learning in the last decade. Much of this
research observes a positive relationship between organizational learning and
organizational innovation (e.g., Calantone et al., 2002; Tushman and Nadler, 1986).
Different types of organizational learning (adaptive/generative) and innovation
(incremental/radical) have a close, positive connection (Forrester, 2000). The deeper
innovation reaches, the greater the degree of learning required.

Thus, the more innovative the products, services or methods, the greater the degree of
critical capacity, skill and new and relevant knowledge necessary (Senge et al., 1994).
The process of creating organizational knowledge, which draws new knowledge from
existing (organizational learning), is the cornerstone of innovative activities.
Organizational knowledge creation is the process that strengthens innovation, not
knowledge in itself (Nonaka and Takeuchi, 1995). Further, organizational innovation
depends on the organization's knowledge base, and organizational learning in turn
promotes this knowledge base (Cohen and Levinthal, 1990).

An increasing number of firms analyze organizational innovation as an organizational

learning process or apply organizational learning models to specific aspects of the
organizational innovation process (MERIT, 1992). Organizational learning supports
creativity (e.g., Sánchez and Mahoney, 1996; Yli-Renko et al., 2001), inspires new

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knowledge and ideas (e.g., Damanpour, 1991), increases ability to understand and apply
these ideas (e.g., Damanpour, 1991), favors organizational intelligence and (with the
organization's culture) forms a background for orientation to organizational innovation.

An organization committed to learning increases its organizational innovative capability

because the organization is less likely to miss the opportunities that emerging market
demand creates. Such organizations have the ability and knowledge to anticipate and
understand customer needs, possess more and better state-of-the art technology, and use
that technology to innovate. They also have a stronger capacity to understand rivals’
strengths and weaknesses and thus to learn from their successes and their failures and to
generate greater innovative capability than competitors (Calantone et al., 2002).

These ideas have recently begun to receive some empirical attention. Hurley and Hult
(1998) focus on a large agency of the U.S. federal government to show a positive
association between organizational innovation and a culture that emphasizes adaptation,
innovation, and learning. Meeus et al. (2001) analyze a sample of innovator firms to show
that more complex innovative activities urge firms to coordinate and exchange
information between users and producers, which implies strong interactive learning.

H3. A positive association exits between organizational learning and organizational

innovation.

2.3. The influence of organizational learning and organizational innovation on

organizational performance

The literature emphasizes the importance of organizational learning for a company's

survival and effective performance (Argyris and Schön, 1996; Fiol and Lyles, 1985;
Inkpen and Crossan, 1995; Senge, 1990). However, empirical analysis of this relationship
has been limited, due to various difficulties, such as ambiguity or the time delay between
the two (today's learning will affect tomorrow's performance) and the possibility that
exogenous factors disguise the results of learning. Research should analyze the influence
of organizational learning on performance in technological firms empirically, but little
knowledge is available concerning the mechanisms that transform organizational learning
into performance (Inkpen and Crossan, 1995; Snyder and Cummings, 1998).

To assert that an increase in organizational learning always leads to growth in

organizational performance is erroneous, since learning may not always improve an
organization's results (Hoopes and Postrel, 1999; Inkpen and Crossan, 1995; Tsang,
1997). Nonetheless, generally speaking, organizational learning has a positive influence
on performance improvements. This positive influence normally occurs in both
technological companies and manufacturing firms (Argyris and Schön, 1996; Decarolis
and Deeds, 1999; Fiol and Lyles, 1985; Senge, 1990). Firms that show a greater breadth,
depth, and speed of organizational learning have higher performance levels (Hurley and
Hult, 1998). The primary aim of organizational learning is to enhance performance
quality and quantity, allowing the firm to increase and improve sales; to achieve more
support; and to create, maintain and enlarge its customer base. Further, organizations that
learn and learn quickly increase strategic capability, enabling them to sustain a position
of competitive advantage and improve their results. These attitudes, behaviors, and
strategies of organizational learning will guide organizations to superior long-term
performance.

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Organizations that encourage the learning spirit sacrifice (to some extent) immediate
performance to achieve future performance, since immediate performance is due to the
organizational learning drawn from yesterday, while future performance will be the
product of today's learning process (Guns, 1996; Senge, 1990).

H4. A positive association exists between organizational learning and organizational

performance.

Different theories reveal that organizational innovation is essential for better

performance. According to marketing theories, organizations that concentrate on speed
of innovation gain a greater market share, which produces high income and high
profitability. Strategic theories stress that organizations that adopt an innovation first are
able to create isolation mechanisms. Because knowledge of the innovation is not available
to competitors, these mechanisms protect profit margins, enabling the organization to gain
important benefits. Likewise, the theory of resources and capabilities maintains that the
capabilities, resources and technologies needed to adopt the innovation make external
imitation more difficult and allow firms to sustain their competitive advantages and obtain
greater organizational performance (Irwin et al., 1998; Lengnick-Hall, 1992; Lieberman
and Montgomery, 1988).

Thus, a positive link exists between organizational innovation and organizational

performance (Zahra et al., 2000; Zaltman et al., 1973), or between different aspects of
organizational innovation (e.g., innovation design or speed, flexibility) and organizational
performance (Calantone et al., 2002; Capron, 1999; Danneels and Kleinschmidt, 2001;
Gopalakrishnan, 2000; Hall and Bagchi-Sen, 2000). The innovation literature also
includes various empirical studies supporting this relationship, as do various works that
use econometric methods to demonstrate the relationship empirically (Lööf and
Heshmati, 2002).

The more valuable, imperfectly imitable and rare innovations (e.g., technological) are,
the higher performance will be (Irwin et al., 1998). Organizations with greater innovation
will achieve a better response from the environment, obtaining more easily the
capabilities needed to increase organizational performance and consolidate a sustainable
competitive advantage (Calantone et al., 2002; Hurley and Hult, 1998; Zaltman et al.,
1973). Not promoting innovative projects and activities will have a negative effect on
productivity and organizational performance (Lööf and Heshmati, 2002). Innovation as a
dimension of intrapreneurship has a direct influence on organizational performance
(Hudges and Morgan, 2007; Zahra et al., 2000).

H5. A positive association exists between organizational innovation and organizational

performance.

3. Method

This section presents the sample used, the research methodology and the statistical
analysis.

3.1. Sample and procedures

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The population for this study consists of Spanish firms from the automotive and chemical
sectors. The research uses the AMADEUS (2004) database, choosing all Spanish firms
with National Classification of Economic Activities (CNAE-93 Review 1) 24, the
chemical industry, and CNAE 34 and 35, the manufacturing of transportation materials.
The authors then purified the information to eliminate possible duplications caused by the
inclusion of affiliates in the database. The final study population consists of 5163 firms.

The study focuses on the automotive and chemical sectors because they represent a
greater percentage, billing volume and employment volume of the Spanish economy.
Further, use of a sample of firms located in a relatively homogeneous geographic,
economic, political, sociocultural, technological and legal space minimizes the impact of
variables that cannot be controlled in the empirical research (Adler, 1983). The Spanish
market is relatively well developed and wholly integrated in the European Union and has
had a slightly better rate of growth in recent years than the European market overall.
However, Spain is in a geographical area that has received relatively little attention from
organizational researchers.

Drawing on knowledge about key dimensions of this investigation, previous contacts with
interested CEOs and scholars, and new interviews with CEOs and academics interested
in the topic and familiar with the chemical and automotive sectors, the authors developed
a structured questionnaire to investigate how organizations face these issues. The study
omits the responses of the interviewees from this first stage in the subsequent analysis of
the survey data.

The study uses CEOs as the key informants, since they receive information from a wide
range of departments and are therefore a very valuable source for evaluating the different
variables of the organization. CEOs also play a major role in informing and molding the
variables under study by determining the types of behavior that are expected and
supported (Baer and Frese, 2003). Although the management process may involve
numerous actors, the CEO is ultimately responsible for plotting the organization's
direction and plans, as well as for guiding the actions carried out to achieve them (Porac
and Thomas, 1990; Westphal and Fredickson, 2001). This study uses the same types of
informant to maintain the level of influence among the organizations constant, increasing
the validity of the variables’ measurements (Glick, 1985). The cover letter requested that
CEOs not answer the questionnaire unless they could directly observe or had knowledge
of the variables in question (Kozlowski and Klein, 2000). This condition decreased the
percentage of responses but increased the reliability and validity of the questionnaires
received.

Mailed surveys were sent to the CEOs of the 1000 randomly selected organizations with
a cover letter (they did not replace the 36 questionnaires returned due to unknown address
with others). The selection procedure involved stratified random sampling with two levels
of stratification (size and sector). This mailing method reached a greater number of firms
at a lower cost than travelling to the specific firm to perform personal interviews,
exercised less pressure for an immediate response, and provided the interviewees with a
greater feeling of autonomy. The cover letter explained the goal of the study, offered
recipients the option of receiving the results on completion of the study, indicated the
basic ethical principles of the research, and reiterated the necessity that the person chosen
answer the questionnaire, even at the cost of receiving fewer responses.

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To reduce possible desirability bias, the cover letter promised to keep all individual
responses completely confidential, confirmed that the analysis would be restricted to an
aggregate level for the publications that would prevent the identification of any individual
or organization, and arranged for all completed questionnaires to be returned directly by
mail instead of being routed through the organization (Bueno et al., 2010; Lechner et al.,
2010; Tsai and Ghoshal, 1998).

Each CEO who had not yet responded received two reminders by mail. 170 CEOs finally
answered the questionnaire, but because of missing values the research includes only 168
questionnaires. The response rate is 17.43% (Table 1).

To eliminate the possibility of non-response bias, the authors compared the characteristics
of the respondents and of early and late responders in the sample (Armstrong and Overton,
1977). No significant differences exist based on the size or type of business. Furthermore,
since the same survey instrument collected all measures, the study tested for the
possibility of common method bias using Harman's one-factor test (e.g., Konrad and
Linnehan, 1995; Scott and Bruce, 1994). A principal components factor analysis of the
questionnaire measurement items yielded four factors with eigenvalues greater than 1.0,
which account for 70% of the total variance, identifying several factors, as opposed to
one single factor. Since the first factor does not account for the majority of the variance,
a substantial amount of common method variance does not appear to be present
(Podsakoff and Organ, 1986).

3.2. Measures

The use of constructs plays an important role in designing a survey instrument in

management research. In any research concerning behavioral elements, no device using
a single metric unit can measure precisely, and researchers usually employ two or more
measures to gauge a construct or scale. Given that developing new constructs or scales of
measurement is a complex task, wherever possible this study uses pre-tested constructs
from past empirical studies to ensure their validity and reliability.

3.2.1. Transformational leadership

The study uses the scale of four items developed by McColl-Kennedy and Anderson
(2002). These items are duly adapted to the present study. As in other similar studies, the

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CEOs indicated their perceptions about the behavior of transformational leadership in the
organization (e.g., Fein et al., 2010; Sarros et al., 2008). The authors used a confirmatory
factor analysis to validate a Likert-type 7-point scale (1 “totally disagree,” 7 “totally
agree”), which required deletion of Item 1 (χ22=7.23, Normed Fit Index [NFI] =.99, Non-
Normed Fit Index [NNFI]=.99, Goodness of Fit Index [GFI] =.99, Comparative Fit Index
[CFI] =.99, Incremental Fit Index [IFI] =.99). The scale is unidimensional. This procedure
allowed selection of three items (see Appendix A) with high validity and reliability
(α=.91). The study also chose one subordinate in the organization to respond to the
questionnaire to confirm the relationship between the self-reports of the CEOs and those
of their subordinates. The items asked the respondents to evaluate whether their CEO
demonstrated the leadership behavior described. For the responses received, the authors
confirm the absence of significant mean differences between the two groups of
respondents (based on a t test) in the data on transformational leadership used in this
research (t(item2)=1.26 n.s.; t(item3)=0.85 n.s.; t(item4)=0.23 n.s.), and the results from
the correlation analysis show strong relationships between the CEOs’ responses and those
of their subordinates with respect to transformational leadership (ranging from 0.71 to
0.81, pb.01). These results provide an added degree of confidence in the current results.
Since the authors find no significant differences and prefer not to decrease the sample
size, the study uses the CEO's responses.

3.2.2. Organizational learning

The study uses a scale of four items developed by Aragón et al. (2007) and García
Morales, Lloréns Montes and Verdú Jover (2006, 2008a) to measure organizational
learning (1 “totally disagree”, 7 “totally agree”). These items are duly adapted to the
present study. The authors develop a confirmatory factor analysis to validate the scales
(χ22=3.90, NFI=.99, NNFI=.99, GFI=.99, CFI=.99, IFI =.99) and show that the scale is
unidimensional and has adequate validity and reliability (α=.71).

3.2.3. Organizational innovation

Numerous researchers analyze organizational innovation using reliable valid scales that
enable its measurement. This study takes the scale from Antoncic and Hisrich (2001),
which uses a Likert-type 7-point scale (1 “totally disagree,” 7 “totally agree”), requiring
deletion of Item 8 (χ227=76.63, NFI=.98, NNFI=.99, GFI=.99, CFI =.98, IFI =.99). The
scale is unidimensional. This procedure yields selection of nine items (see Appendix A)
with high validity and reliability (α=.94).

3.2.4. Organizational performance

Based on a review of how different works of strategic research measure performance, the
authors use the scale of five items developed by Murray and Kotabe (1999). The use of
scales to evaluate performance relative to the main competitors is one of the most widely-
accepted practices in recent studies (Choi et al., 2008; Deshpandé et al., 1993; Douglas
and Judge, 2001; Vorhies et al., 1999). Many researchers use managers’ subjective
perceptions to measure beneficial outcomes for firms. Others prefer objective data, such
as return on assets.

A wide range of literature establishes a high correlation and concurrent validity between
objective and subjective data on performance, implying that both are valid when

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calculating a firm's performance (Homburg et al., 1999; Venkatraman and Ramanujam,
1986). This study includes questions involving both types of assessment in the interviews,
but the CEOs were more open to offering general views than precise quantitative data.

When possible, the study estimates the correlation between objective and subjective data,
and these are high and significant. The study includes a confirmatory factor analysis to
validate the scales (χ25=22.32, NFI=.97, NNFI=.96, GFI=.99, CFI =.98, IFI =.98) and
show that the scale is unidimensional and has high reliability (α=.87). A Likert-type 7-
point scale (1 “Much worse than my competitors,” 7 “Much better than my competitors”)
asks about the organization's performance as compared with that of its most direct
competitors.

3.3. Model and analysis

Given the existence of an exogenous latent variable (transformational leadership [ξ]), a

first-grade endogenous latent variable (organizational learning [η1]) and second-grade
endogenous latent variables (organizational innovation [η1] and organizational
performance [η32]), the study analyzes the data using structural equations modeling
(LISREL 8.30 program) to establish causal relationships between these variables. This
procedure translates the theoretical construction into mathematical models in order
subsequently to estimate and evaluate them empirically (Jöreskog and Sörbom, 1996).

Fig. 1 presents the theoretical model. The findings give the hypotheses concrete form.
The study uses a recursive non-saturated model. Structural equation modeling takes into
account errors in measurement, variables with multiple indicators and multiple-group
comparisons (Koufteros et al., 2009).

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4. Results

This section presents the main research results. First, Table 2 shows the means and
standard deviations as well as the inter-factor correlation matrix for the study variables.
Significant and positive correlations exist among transformational leadership,
organizational learning, organizational innovation and organizational performance.
Initially, a series of regressions (Table 3) shows the direct effects analyzed in the research
and uses a series of tests (e.g., tolerance, variance inflation factor) to confirm the non-
presence of multicolinearity (Hair et al., 1999).

Second, the study performs structural equations modeling to estimate direct and indirect
effects using LISREL with the correlation matrix as input. This type of analysis has the
advantage of correcting for unreliability of measures and also provides information on
the direct and indirect paths between multiple constructs after controlling for potentially
confounding variables. Fig. 2 shows the standardized structural coefficients. The
magnitude of the coefficients reflects the relative importance of the variables.

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For the quality of the measurement model for the sample, the constructs display
satisfactory levels of reliability, since the composite reliabilities range from 0.86 to 0.94
and the shared variance coefficients from 0.56 to 0.77 (Table 4). The authors conclude
convergent validity from examination of both the significance of the factor loadings and
the shared variance. The amount of variance shared or captured by a construct should be
greater than the amount of measurement error (shared varianceN0.50).

All multi-item constructs meet this criterion; each loading (λ) is significantly related to
its underlying factor (t-values>12.16) in support of convergent validity. To assess
discriminate validity, the authors perform a series of chi-square difference tests on the
factor correlations among all the constructs (Anderson and Gerbin, 1988). The study
follows this procedure for each pair of latent variables, constraining the estimated
correlation parameter between them to 1.0 and then performing a chi-square difference
test on the values obtained for the constrained and unconstrained models (Anderson and
Gerbin, 1988). The resulting significant differences in chi-square indicate absence of
perfect correlation between the constructs and thus discriminant validity.

The overall fit measures, multiple squared correlation coefficients of the variables (R2s),
and signs and significance levels of the path coefficients indicate that the model fits the
data well (χ =559.88, pN.001; χ2 ratio=3.04; NFI=.97; NNFI=.99; GFI =.98, CFI =.99,
IFI =.99, PGFI=.78). The hypothesized model is a significantly better fit than the null
model (χ2210=5409.25, pN.001; Δ χpN.001). All modification indices for the beta
pathways between major variables are small, suggesting that adding additional paths
would not significantly improve the fit. The residuals of the covariances are also small
and center around zero.

Findings from the standardized parameter estimates (Table 5) show that transformational
leadership is closely related to and affects organizational learning (γ11=.74, pb.001,
R2=.55) and organizational innovation (γ21=.37, p.001), as predicted in Hypotheses 1
and 2, respectively. Furthermore, the results show an indirect effect (.15, pb.01) of
transformational leadership on organizational innovation by organizational learning (.74
×.21; e.g., Bollen, 1989 for calculation rules). The global influence of transformational
leadership on organizational innovation is thus 0.52 (pb.001). Comparing the magnitudes
of these effects indicates that the effect of organizational learning on organizational

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innovation is larger than the total effect of transformational leadership on organizational
innovation. Globally, the model explains organizational innovation well (R (β2=.29).

Organizational learning influences organizational innovation =.21, pb.01), supporting H3.

Finally, the study finds a significant relationship between organizational performance and
both organizational learning (β21=.39, pb.001) and organizational innovation
(β3231=.22, pb.001), supporting H4 and H5, respectively.

Results also show an indirect effect (.04, pb.01) of organizational learning on

organizational performance by organizational innovation (.21×.22). The global influence
of organizational learning on organizational performance is thus .43 (pb.001). Comparing
the magnitudes of these effects indicates that the effect of organizational learning on
organizational performance is larger than the total effect of organizational innovation on
organizational performance. Globally, the model explains organizational innovation well
(R2=.29). In addition to these effects, the study shows indirect effects of transformational
leadership on organizational performance (Table 5).

5. Conclusions and future research

Organizations need transformational leadership to improve their performance in changing

real-life business environments. This research contributes to such performance
improvement by showing the strategic role of organizational learning and organizational
innovation. Management of these variables gives rise to values within the organization
that are difficult to copy. Specifically, the results support all of the hypotheses, showing
that a management style of transformational leadership through organizational learning
and innovation simultaneously influences organizational performance.

First, the research shows a positive relation between transformational leadership and
organizational learning and innovation. This leadership style analyzes, modifies, and
drives systems, designing them to share and transfer knowledge through the process of
organizational learning (Lei et al., 1999; Senge, 1990). Thus, transformational leadership
is committed to and propels organizational learning (Senge, 1990; Swieringa and
Wierdsma, 1992), making available everything necessary to overcome the obstacles that
might impede this learning (Wick and Leon, 1995). Organizational learning seeks to
establish a path for professional development to acquire aptitudes or competencies that
give sustainable advantage through innovation (Senge et al., 1994).

The study also verifies a positive relation between transformational leadership and
innovation directly and indirectly through the construction of competencies focused on
learning to minimize the cost of internal change (Lei et al., 1999; Slater and Narver,
1995). The results support the importance of transformational leadership in generating
innovation (McDonough, 2000), an especially appealing finding that supports

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characterizing transformational leadership as more concerned with collective decisions,
collective goals, and the generation of capabilities than is transactional leadership.

Third, the study demonstrates empirically a positive relation between organizational

learning and innovation. The innovative organization learns and knows how to make and
keep itself competent. Through learning, the organization can change its behavior and
thus renew and reinvent its technology and production to avoid falling into stagnation and
to permit organizational innovation. Different organizations will find themselves in
different states of evolution in learning. Organizational learning prevents stagnation and
encourages continuous innovation (Bessant and Buckingham, 1993; Glynn, 1996;
Thomas et al., 2001).

Fourth and finally, the study verifies empirically a positive relationship between more
organizational learning and innovation and organizational performance. Organizations’
complexes of essential production and technology competences or resources and
capacities sustain the sources for achieving sustainable competitive advantages. Each
organization should analyze all of its production and technological resources, the
resources that enable achievement of a better competitive position on the market. The
organization should also develop specific capacities and essential competences to face the
changes in production and technology in its environment. Thus, the organization acquires
a dynamic and proactive vision that improves organizational performance, generating its
own resources and capacities that are unique, valuable, hard to replace, and difficult to
imitate. Two main variables that determine organizational performance are thus
organizational learning and innovation, both of which have positive causal effects. These
two dynamic capabilities are strategic (Calantone et al., 2002; Danneels and
Kleinschmidt, 2001; Hurley and Hult, 1998; Zahra et al., 2000).

This investigation has several limitations. First, the study measures the variables based
on the CEOs’ managerial perceptions (single respondents), which involve a certain degree
of subjectivity. The respondents are CEOs of firms because their knowledge about these
strategic variables is more comprehensive (e.g., Shortell and Zajac, 1990). In the absence
of published data on these variables and alternative sources of comparative data, the study
follows the methods used in the past by other studies (e.g., Egri and Herman, 2000; García
Morales et al., 2008a,1 b; García Morales et al., 2008b; Nandakumar et al., 2010; Sarros
et al., 2008).

However, the study here includes contrasting some variables with either objective data
(e.g., organizational performance) or the response of the subordinates (e.g.,
transformational leadership) and finds no significant mean differences between the two
types of measures. Further, the results from the correlation analysis show close
relationships.

A second limitation of this study concerns the measures of transformational leadership.

Other investigations also survey CEOs or managers (e.g., Egri and Herman, 2000; Fein
et al., 2010; García Morales et al., 2008a; Sarros et al., 2008). Although existing evidence
suggests that self-reports of leadership are valid measures (e.g., Yukl and Van Fleet,
1991), interviewing and administering questionnaires to all other organizational members
(and not only to subordinates) would have been preferable to verify leaders’ self-report
of their behavior (e.g., Egri and Herman, 2000; Sarros et al., 2008). One could also use
different scales to measure transformational leadership.

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Third, although Harman's one-factor test and other method tests do not identify common
method variance as a problem, this bias may still be present (Konrad and Linnehan, 1995;
Podsakoff and Organ, 1986). While Spector (2006) argues against assuming that the use
of a single method automatically introduces systematic bias, studies recommend that
future research gather measures of independent and dependent variables from varied data
sources (e.g., more subordinates’ ratings of transformational leadership and objective
measures of organizational innovation) to minimize the effects of any response bias
(Podsakoff et al., 2003).

Fourth, the study data are cross-sectional, hindering examination of the evolution of the
variables in this study. This aspect is of particular interest given the dynamic nature of
some variables. Although the authors test the most plausible directions for the pathways
in the study model, only longitudinal research can assess the direction of causality of the
relationship and detect possible reciprocal processes. The authors have tried to temper
this limitation through attention to theoretical arguments by rationalizing the analyzed
relationships and integrating temporal considerations into measurement of the variables
(Hair et al., 1999). Fifth, future studies should analyze a larger sample, preferably in more
than one country and in other sectors.

Finally, the model only analyzes the relation between transformational leadership and
organizational performance through organizational learning and organizational
innovation. Although selected variables explain an acceptable amount of variance in
organizational performance, research could analyze other intermediate constructs, such
as shared vision, teamwork or technology (Senge et al., 1994). Future studies might also
examine other consequences of introducing learning and innovation processes in
organizations (e.g., quality improvement, staff satisfaction, and improvements in
relational capacity). The homogeneous geographical context examined here limits the
influence of external factors, but future research might well explicitly integrate the
influence of external factors (Aragon Correa and Sharma, 2003).

Acknowledgements

The authors gratefully acknowledge the cooperation and financial support provided by the Spanish Ministry of
Education (Project ECO2009-09241) and the Andalusian Regional Government (Excellence Research Project P08-
SEJ-4057). Comments by Matías-Reche, University of Granada and Verdú-Jover, University of Miguel Hernandez
(Elche) on an earlier draft were helpful in revising this paper. The authors alone are responsible for all limitations and
errors that may relate to the study and the paper.

Appendix A

❖ Transformational Leadership

2. Transmits the organization's mission, reason for being, and purpose to all of the employees.

3. Increases employees’ level of enthusiasm.

4. Emphasizes the use of employees’ intelligence.

❖ Organizational Learning

In the last three years:

1. The organization has acquired and shared much new and relevant knowledge that provided competitive advantage.

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2. The organization's members have acquired some critical capacities and skills that provided competitive advantage.

3. Organizational improvements have been influenced fundamentally by new knowledge entering the organization
(knowledge used).

4. The organization is a learning organization.

❖ Organizational Innovation

Indicate the degree of agreement or disagreement with respect to the following statements. In the past three years,
indicate whether the following have grown rapidly:

1. Organization's emphasis on developing new products or services.

2. Rate of introduction of new products or services into the market.

3. Organization's spending on new product or service development activities.

4. Number of new products or services added by the organization and already on the market.

5. Number of new products or services that the organization has introduced for the first time on the market.

6. Investment in developing proprietary technologies.

7. Emphasis on creating proprietary technologies.

9. Organization's emphasis on technological innovation.

10. Organization's emphasis on pioneering technological developments in its industry.

❖ Organizational Performance

Relative to your main competitors, what is your firm's performance in the last three years in the following areas?

1. Organizational performance measured by return on assets (economic profitability or ROA).

2. Organizational performance measured by return on equity (financial profitability or ROE).

3. Organizational performance measured by return on sales (percentage of profits over billing volume).

4. Organization's market share in its main products and markets.

5. Growth of sales in its main products and markets.

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