Organizational Dynamics, Vol. 38, No. 1, pp.
6472, 2009 ISSN 0090-2616/$ see frontmatter
2008 Elsevier Inc. All rights reserved.
www.elsevier.com/locate/orgdyn
The Inuence of
Leadership on Innovation Processes
and Activities
ADEGOKE OKE NATASHA MUNSHI
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-
ed 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 dened as involving the
discovery of new things and the commercialization of
such discoveries. To be innovative, it is not sufcient 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
doi:10.1016/j.orgdyn.2008.10.005
FRED O. WALUMBWA
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 efciently and effectively. Unique leadership
capabilities are the hallmark of rms that are able to
manage different types of innovative activities suc-
cessfully. Leaders like A.G. Laey, Procter & Gambles
chief executive ofcer (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 rms currently juggling societal demands for
greener and more fuel-efcient 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 prole sale
was well received by the U.K. stakeholder groups who
have perceived Tatas 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 companys successes. For
example, Tatas recent acquisitions come on the heels
of his launch of the Tata Nano the worlds cheapest
64
car which created waves both in its Indian home
market and at the Geneva auto show in 2007. It is
Tatas 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 worlds 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 specically, 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
inuences his or her followers behaviors so that
desired organizational goals are met. The leaders role
as an inuencer 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 inuence; inspira-
tional motivation; intellectual stimulation; and indi-
vidualized consideration. Idealized inuence involves
the extent to which a leaders followers hold the leader
in high regard and seek to identify with him or her.
Leaders demonstrating idealized inuence 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 leaders 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
mens 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 claries 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 leaderfol-
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-
65
trative coordination tasks, such as organization design,
the integration of disparate activities, and the mar-
shalling of resources.
In general, transactional leadership is dened 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 satised.
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 protable unit by introducing smaller cars more
in line with current demands for greater fuel efciency.
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 prots in
the companys lifetime. Marchionne is an example of a
transactional leader who has positively inuenced
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
Knights 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 ones
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
66 ORGANIZATIONAL DYNAMICS
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 specic 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. Welchs 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 Welchs 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 nding 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 denition 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
Spangler was 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 inventors idea.
Similarly, American inventor Elias Howe was the
rst 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 efcient 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, rening 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 OReilly 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 companys
R&D unit to develop Betamax, the rst 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
67
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-
ecial 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 inuence 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 dened as a product of
imagination. It is where the process of innovation
begins. It may be difcult 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
inuence the creativity of his/her followers and hence
the innovative capability of the organization. A lea-
ders role in the later stages of innovation, on the other
hand, may involve the management of processes and
systems that are required to efciently transform
design ideas into reality.
It will be recalled that we dened innovative activ-
ities as either exploratory (creation of something that is
completely new or radical in nature) or exploitative
(rening 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 inuenced 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-
cic leadership styles to innovation processes and
activities?
68 ORGANIZATIONAL DYNAMICS
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, reexes 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 inuenced by a creators 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 leaders
understanding, support, and encouragement, employ-
ees are more likely to respond to such a leaders change
initiatives even in the face of a turbulent environment.
When leaders demonstrate idealized inuence 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 ONeil, the CEO, demonstrated elements
of transformational leadership in trying to change a
traditionally non-innovative insurance organization to
an innovative one. ONeil 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 companys 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 3Ms 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 Googles 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 inuence 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 nish 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 efciency 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 ONeil
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 efciently 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 rening and improving on existing pro-
ducts and services, due to minimal risk-taking such
69
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 rms in the United Kingdom, Adegoke Oke and
colleagues found that a high proportion of rms 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 rms, Adegoke Oke reported a similar predo-
minant focus of service rms 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 difcult 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 to make 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 protable 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 efciencies 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,
70 ORGANIZATIONAL DYNAMICS
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 rm collaborates with other rms to develop
new things that are exploratory and radical in nature
such as sourcing innovations through collaborative
arrangements. Such inter-rm organizational net-
working or joint innovative efforts may require trans-
actional leadership styles as well as transformational
leadership styles because of the formers ability to
provide structures, formal processes and systems
that are required for such inter-rm 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 Warners
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 inuence
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.,
Googles 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 Shells 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 ts all leadership approach focus more on the transactional aspect of leadership
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 dened 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
rms 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
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.
71
 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. OReilly and M. L. Tush-
man, The Ambidextrous Organization, Harvard Busi-
ness Review, 2004, 82(4), 7481.
For more information on leadership styles, see B.
Bass and B. J. Avolio, Transformational Leadership
and Organizational Culture, Public Administration
Quarterly, 1993, 17(1), 112121; 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: 2949.
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),
272281. 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 rms and service rms 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), 735753; 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), 564587.
Thomas Edisons 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
Craneld 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